Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Test Bank
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Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 1 The Manager and Management Accounting Objective 1.1 1) Management accounting: A) focuses on estimating future revenues, costs, and other measures to forecast activities and their results B) provides information about the company as a whole C) reports information that has occurred in the past that is verifiable and reliable D) provides information that is generally available only on a quarterly or annual basis Answer: A Explanation: A) Management accounting has a forward-looking orientation as opposed to financial accounting which has a historical perspective. Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Managers use management accounting information to: A) help external users such as investors, banks, regulators, and suppliers B) communicate, develop, and implement strategies C) communicate a firm's financial position to investors, banks, regulators, and other outside parties D) ensure that financial statements are consistent with the SEC rules Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Financial accounting: A) focuses on the future and includes activities such as preparing next year's operating budget B) must comply with GAAP (generally accepted accounting principles) C) is the process of measuring, analyzing, and reporting financial and nonfinancial information related to the costs of acquiring or using resources in an organization D) is prepared for the use of department heads and other employees Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
4) Which of the following would most likely be the user of financial accounting information? A) factory shift supervisor B) distribution manager C) current shareholder D) department manager Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
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5) The primary user of management accounting information is a(n): A) the controller B) a shareholder evaluating a stock investment C) bondholder D) external regulator Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
6) Financial accounting provides the primary source of information for: A) decision making in the assembly and finishing department B) improving distribution and customer service C) preparing the income statement for shareholders and other external parties D) planning next year's plans and specifically; the operating budget Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
7) Which of the following is true of management accounting information? A) It focuses on documenting past business actions of a firm. B) It is prepared based on SEC rules and FASB accounting principles. C) It is prepared for shareholders. D) It helps with the coordination of elements of the value chain. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Which of the following statements refers to management accounting information? A) There are no regulations governing the reports. B) The reports are generally delayed and historical. C) The audience tends to be stockholders, creditors, and tax authorities. D) It primarily measures manager's compensation on reported financial results. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
9) Which of the following groups would be least likely to receive detailed management accounting reports? A) stockholders B) sales managers C) production supervisors D) distribution managers Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
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10) Management accounting information typically includes: A) tabulated results of customer satisfaction surveys B) the cost of producing a product C) the percentage of units produced that are defective D) All of these answers are correct. Answer: D Diff: 1 Objective: 1 AACSB: Application of knowledge
11) Cost accounting: A) measures the costs of acquiring or using resources in an organization B) measures the financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization C) coordinates product design, production, and marketing decisions and evaluate a company's performance D) communicates information to investors, banks, regulators, and other outside parties Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
12) Which of the following differentiates cost accounting and financial accounting? A) The primary users of cost accounting are the investors, whereas the primary users of financial accounting are the managers. B) Cost accounting deals with product design, production, and marketing strategies, whereas financial accounting deals mainly with pricing of the products. C) Cost accounting measures only the financial information related to the costs of acquiring fixed assets in an organization, whereas financial accounting measures financial and nonfinancial information of a company's business transactions. D) Cost accounting measures information related to the costs of acquiring or using resources in an organization, whereas financial accounting measures a financial position of a company to investors, banks, and external parties. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
13) Which of the following is true of financial accounting information? A) It is prepared based on cost-benefit analysis. B) It is primarily used by managers to make internal business decisions. C) It focuses on the past-oriented financial performance of a company. D) It only measures the cash transactions of a company. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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14) The acronym of a central database system that provides inputs to modules and applications that support activities such planning, purchasing, production, distribution, and sales is called: A) ABC B) CRM C) ERP D) VAT Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
15) Which of the following is true of cost accounting? A) It is a subset of management accounting and therefore its information is used only to meet the needs of managers. B) It is used only by manufacturers. C) It is part of both management and financial accounting systems. D) The distinction between management accounting and cost accounting is clear-cut. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
16) Which of the following deals with management accounting? A) identifying the costs of acquiring the resources of the company B) developing budgets C) preparing the income statement D) preparing the statement of cash flows Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
17) Financial accounting is concerned primarily with: A) external reporting to investors, creditors, and government authorities B) cost planning and cost controls C) product design and marketing strategies D) providing information for strategic and tactical decisions Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
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18) Financial accounting provides a historical perspective, whereas management accounting emphasizes: A) the future B) past transactions C) a current perspective D) reports to shareholders Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
19) Rules for measurement and reporting for management accounting: A) state that information must only be useful to management B) do not need to follow GAAP but must meet the cost-benefit test C) must follow GAAP D) must follow GAAP, IRS rules or government standards Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
20) The approaches and activities of managers in short-run and long-run planning and control decisions that increase value for customers and lower costs of products and services are known as: A) value chain management B) enterprise resource planning C) cost management D) customer value management Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
21) Financial accounting information focuses on internal reporting. Answer: FALSE Explanation: Management accounting information focuses on internal reporting and financial accounting focuses on external reporting. Diff: 1 Objective: 1 AACSB: Analytical thinking
22) Cost accounting provides information for both management accounting and financial accounting professionals. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
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23) Management accounting information and reports do not have to follow set principles or rules such as GAAP but should be useful to its audience and meet the cost/benefit test. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
24) Management accounting ensures communication of an organization's financial position to investors, banks, and regulators. Answer: FALSE Explanation: Financial accounting, not management accounting, ensures communication of an organization's financial position to investors, banks, and regulators. Diff: 1 Objective: 1 AACSB: Analytical thinking
25) The balance sheet and income statement are primarily management accounting reports. Answer: FALSE Explanation: The balance sheet and income statement are primarily financial accounting reports produced for owners, investors, and other external parties that provide capital or regulate the business. Diff: 1 Objective: 1 AACSB: Analytical thinking
26) Financial accounting is broader in scope than management accounting in that financial accounting can include external reporting and reporting that helps managers plan and control operations. Answer: FALSE Explanation: Management accounting is broader in scope than financial accounting as it can encompass some GAAP issues such as inventory valuation and cost of goods sold and it also provides reporting to help managers make decisions and plan and control operations. Diff: 1 Objective: 1 AACSB: Analytical thinking
27) Cost accounting measures and reports short-term, long-term, financial, and non-financial information. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
28) Cost accounting is the process of measuring, analyzing, and reporting financial and nonfinancial information related to the costs of acquiring or using resources in an organization. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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29) Management accounting has to strictly follow the rules of generally accepted accounting principles for the purposes of measurement and reporting. Answer: FALSE Explanation: Internal measures and reports do not have to follow GAAP. Usefulness and the cost/benefit approach are the guiding principles of management accounting. Diff: 2 Objective: 1 AACSB: Analytical thinking
30) For management accounting, internal measurement and reporting are based on cost-benefit analysis. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
31) Management accounting report time spans can vary from one hour to many years, while financial accounting report time periods usually span a quarter or a year. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
32) Financial accounting provides an organization's past-oriented information such as the previous years' financial statements. Answer: TRUE Explanation: Financial accounting provides an organization's past-oriented information such as the previous years' financial statements. Diff: 1 Objective: 1 AACSB: Analytical thinking
33) Cost management not only helps reduce costs but also improve customer satisfaction and the quality of a firm's products. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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34) For each report listed below, identify whether the major purpose of the report is for (1) routine internal reporting, (2) nonroutine internal reporting, or for (3) external reporting to investors and other outside parties. Item: a. study detailing sale information of the top-ten selling products b. weekly report of total sales generated by each store in the metropolitan area c. annual Report sent to shareholders d. monthly report comparing budgeted sales by store to actual sales Answer: a. (2) nonroutine internal reporting b. (1) routine internal reporting c. (3) external reporting to investors and other outside parties d. (1) routine internal reporting Diff: 3 Objective: 1 AACSB: Application of knowledge
35) Describe management accounting and financial accounting. Answer: Management accounting provides information to internal decision makers of the business such as top executives, managers, sales representatives, and production supervisors. Its purpose is to help managers predict and evaluate future results. Reports are generated often and usually broken down into smaller reporting divisions such as department or product line. There are no rules to be complied with since these reports are for internal use only. Management accounting embraces more extensively such topics as the development and implementation of strategies and policies, budgeting, special studies and forecasts, influence on employee behavior, and nonfinancial as well as financial information. Financial accounting, by contrast, provides information to external decision makers such as investors and creditors. Its purpose is to present a fair picture of the financial condition of the company. Reports are generated quarterly or annually and report on the company as a whole. The financial statements must comply with GAAP (generally accepted accounting principles). A CPA audits, or verifies, that GAAP is being followed. Diff: 3 Objective: 1 AACSB: Analytical thinking
36) Cost accounting provides information for both management accounting and financial accounting professionals. Explain. Answer: Cost accounting is the process of measuring, analyzing, and reporting financial and nonfinancial information related to the costs of acquiring or using resources in an organization. For example, calculating the cost of a product is a cost accounting function that meets both the financial accountant's inventory-valuation needs and the management accountant's decision-making needs such as deciding how to price products and choosing which products to promote. Diff: 3 Objective: 1 AACSB: Analytical thinking
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37) There is an overlap or intersection between management accounting and financial accounting. Explain. Answer: Management accounting develops the cost information that is necessary to value inventory for the balance sheet and cost of goods sold for the income statement. GAAP requires absorption costing. Diff: 2 Objective: 1 AACSB: Analytical thinking
38) Describe the major differences between management accounting and financial accounting for the following: 1. Primary users 2. Focus and emphasis 3. Rules of measurement and reporting Answer: 1. The primary users of management accounting information are managers of the organization. The primary users of financial accounting are external users such as investors, banks, regulators, and suppliers. 2. Management accounting is future oriented. Financial accounting is past oriented. 3. Management accounting measurement and reporting does not have to follow GAAP but are based on cost-benefit analysis. Financial accounting measurement and reporting must be prepared in accordance with GAAP and be certified by external, independent auditors. Diff: 3 Objective: 1 AACSB: Analytical thinking
Objective 1.2 1) Which of the following statements concerning an organization's strategy is true? A) Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. B) Cost accountants formulate strategy in an organization since they have more inputs about costs. C) A good strategy will always overcome poor implementation. D) Businesses usually follow one of two broad strategies: offering a quality product at a high price, or offering a unique product or service priced lower than the competition. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Strategy specifies: A) how an organization matches its own capabilities with the opportunities in the marketplace B) standard procedures to ensure quality products C) incremental changes for improved performance D) the demand created for products and services Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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3) Which of the following is NOT a concern for management accountants in formulating a strategy? A) identifying the most important warehouse location for the distribution of goods B) substituting products that exist in the marketplace C) strategizing compliance with GAAP (Generally Accepted Accounting Principles) D) maintaining adequate fixed assets available to implement the strategy Answer: C Explanation: C) This is more of a concern of financial accountants than of management accountants. Diff: 2 Objective: 2 AACSB: Analytical thinking
4) Strategy is formulated: A) by identifying the most important customers B) by forecasting the composition of adequate fixed assets C) based on the qualified opinion of external auditors D) by eliminating sunk costs Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
5) In designing strategy, a company must match its opportunities in the marketplace with: A) environmentally friendly goals B) its resources and capabilities C) branding opportunities D) the requirements of credit rating agencies Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Which of the following statements about customer value is true? A) Customer value is shown in a corporation's balance sheet. B) Creating value for customers is an important part of planning and implementing strategy. C) Customer value is the only focus that helps managers to formulate strategies. D) Customer value is lost with increase in costs of the product. Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
7) A company's strategy specifies how an organization matches its capabilities with the opportunities in the marketplace. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
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8) The two broad strategies that companies follow are cost leadership strategy and product differentiation strategy. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
9) The best-designed strategies are valuable, whether or not they are effectively implemented. Answer: FALSE Explanation: Implementation is essential or the strategy is useless. Diff: 1 Objective: 2 AACSB: Analytical thinking
10) The key to a company's success is creating value for customers while differentiating itself from its competitors. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
11) The key to a company's success is always to be the low cost producer in a particular industry. Answer: FALSE Explanation: The low cost producer in a particular industry will not necessarily be successful. Diff: 2 Objective: 2 AACSB: Analytical thinking
12) Management accountants work closely with managers in various departments to formulate strategies by providing information about the sources of competitive advantage. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
13) Management accountants should have little or no role in deciding on a company's strategy. Answer: FALSE Explanation: Management accountants should play a significant role in deciding on a company's strategy. Diff: 1 Objective: 2 AACSB: Analytical thinking
14) Companies can decide on an appropriate strategy based strictly on internally available information. Answer: FALSE Explanation: Companies must obtain external information as well as internal information to decide on an appropriate strategy. Diff: 2 Objective: 2 AACSB: Analytical thinking
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15) Strategic cost management describes cost management that specifically focuses on strategic issues. Answer: FALSE Explanation: Strategic cost management describes cost management that specifically focuses on strategic issues. Diff: 2 Objective: 2 AACSB: Analytical thinking
16) Identifying a company's most important customers helps to formulate a strategy. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
17) The best-designed strategies and the best-developed capabilities are useless unless they are effectively executed. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
18) In asking questions during the process of strategy formulation, management accounts focused on the bargaining power of both suppliers and customers. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
19) What is strategy? Briefly describe the two broad types of strategies that companies may choose to pursue. Answer: Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. In other words, strategy describes how a company will compete. Companies follow one of two broad strategies. One is provide a quality product or service at low prices. The other is to compete on their ability to offer a unique product or service that is generally offered at a higher price. Diff: 2 Objective: 2 AACSB: Analytical thinking
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20) Briefly describe the list of items that managers undertake to formulate strategies. Answer: ONE: Identifying the most important customers, and how the company can be competitive and deliver value to them. TWO: Identifying the substitute products existing in the marketplace, and how do they differ from our product in terms of features, price, cost, and quality. THREE: Identifying most critical capability-whether it is technology, production or marketing. FOUR: Checking the adequacy of cash available to fund the strategy, or will additional funds need to be raised-through issue of debt or equity. Diff: 3 Objective: 2 AACSB: Analytical thinking
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21) Generally, companies follow one of two broad strategies: offering a quality product at a low price, or offering a unique product or service priced higher than the competition. Assume you are opening a small food outlet across the street from your campus. How might that business be operated under each of the two broad strategies? Consider the following specific operational areas: a. target customers b. products offered c. product pricing d. location choice e. advertising content f. advertising media Answer: The purpose of this question is to explore some of the differences in business operations as a result of a broad strategic choice. Answers will differ from student to student, but you should see some specific themes. Operational Area Low Price Strategy Target customers Target customers might be students on a tight budget.
Differential Strategy Target customers might be more wealthy students, faculty, or perhaps neighbors who live nearby. Products offered Few products, heavy emphasis High quality products, on tight cost control, probably probably a reasonable choice, set up as a high volume restaurant might have a lot of operation. ambience. Product pricing Priced at or lower than the Higher priced products. competition in the area. Location choice Convenient to the target Not as convenient, perhaps in customers. a higher-end shopping or entertainment area. Customers might seek out the high quality and be willing to travel a bit for it. Advertising Advertising would emphasize Advertising would emphasize content the low price of the products quality or ambience. offered. Advertising media Media that would be looked at Media that would be looked at by the target customers, such by the target customer, local as student newspapers. magazines and newspapers. Diff: 3 Objective: 2 AACSB: Application of knowledge
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22) Generally, companies follow one of two broad strategies: offering a quality product at a low price, or offering a unique product or service priced higher than the competition. Is it possible to follow a strategy that is "in the middle"? Answer: There is some dispute about the correct answer to this question. Some will argue that it is not good for companies to get "caught in the middle" because the customer might get confused as to whether or not the company is competing on price or is trying to make some other appeal. If the customer is confused about how the company is giving them value, they might perceive they are getting no value and abandon the product to a competitor with a clearer customer value proposition. The other side of the argument is that cost management is a necessary part of any strategy and even if the company chooses to pursue a differential strategy, management of the company should always be seeking ways to manage costs and increase customer value simultaneously regardless of their strategy. The student should be able to articulate one or the other arguments coherently. Diff: 3 Objective: 2 AACSB: Application of knowledge
23) What competitive advantage could a company obtain from having a successful cost management program? Answer: There are three broad outcomes from a successful cost management program: 1) costs are reduced with no loss in customer value. In this scenario, a company might gain a competitive advantage by lowering its price with no loss in profit, or maintain the same price and increase profit; 2) customer value is increased with no change in costs. This scenario might increase customer satisfaction resulting in increased customer loyalty and perhaps increase the overall demand for the product; 3) customer value might be increased while costs are reduced simultaneously. This scenario would result in the benefits described in both 1) and 2). Diff: 3 Objective: 2 AACSB: Analytical thinking
Objective 1.3 1) R&D, production, and customer service are business functions that are all included as part of: A) the value chain B) benchmarking C) customer relationship management D) the supply chain Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
2) The value chain is the sequence of business functions in which: A) value is deducted from the products or services of an organization B) producing and delivering the product or service is of prime importance C) products and services are evaluated with respect to their value to the supply chain D) usefulness is added to the products or services of an organization Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
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3) ________ is the generation of, and experimentation with, ideas related to new products, services, or processes. A) Research and development B) Design of products, services, or processes C) Production D) Marketing Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
4) ________ is the detailed planning and engineering and testing of products, services, or processes. A) Plan of implementation B) Design C) Production D) Research and development Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
5) Production is the: A) generation of, and experimentation with, ideas related to new products, services, or processes B) processing orders and shipping products or services to customers C) acquisition, coordination, and assembly of resources to produce a product or deliver a service D) detailed planning and engineering of products, services, or processes Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
6) That part of the value chain that includes ordering and shipping the product to retail outlets is: A) customer service B) production C) marketing D) distribution Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
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7) Which of the following differentiates marketing from customer service? A) Marketing is the process of promoting and selling products or services to customers or prospective customers, whereas customer service is the process of providing after-sales service to customers. B) Marketing is the process of processing orders and shipping products or services to customers, whereas customer service is the process of providing additional information to customers about the product. C) Marketing is the process of detailed planning, engineering, and testing of products and processes, whereas customer service concentrates on existing customers. D) Marketing is the process of processing orders and shipping products or services to customers, whereas customer service is concerned with choosing the right customer for the product. Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
8) ________ is an after-sale support provided to customers. A) Distribution B) Customer service C) Production D) Marketing Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
9) ________ is a strategy that integrates people and technology in all business functions to enhance relationships with customers, partners, and distributors. A) Supply-chain analysis B) Customer relationship management C) Value-chain analysis D) Continuous quality improvement Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
10) Customer relationship management initiatives use technology to coordinate all: A) advertising and marketing techniques to attract customers B) research activities C) customer-facing activities D) quality control management activities Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
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11) ________ describes the flow of goods, services, and information from the purchase of materials to the delivery of products to consumers, regardless of whether those activities occur in the same organization or with other organizations. A) Supply chain B) Production process C) Quality control D) Customer relationship management Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
12) Processing orders and shipping products or providing services to customers is known as: A) after-sales services B) distribution C) marketing D) supply chain Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
13) ________ is a philosophy in which management improves operations throughout the value chain to deliver products and services that exceed customer expectations. A) Cost-benefit approach B) Customer focus C) Customer relationship management D) Total quality management Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
14) Which of the following is an area that customers want to see improved levels of performance? A) higher sales margin B) quality of the product C) lower marginal costs D) profit margins Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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15) Which of the following statements about a company's supply chain is true? A) A company's supply chain is always internal to a firm. B) A company's supply chain is always external to a firm. C) A company's supply chain is the same thing as a company's value chain. D) Management accountants provide information to enhance a company's supply chain. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
16) When managers determine whether it is less expensive to buy products from a vendor or make them in house they are performing: A) cost-benefit analysis B) supply-chain analysis C) value-chain analysis D) research and development Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
17) The ________ function supports the six functions of value-chain analysis. A) controlling B) administration C) planning D) direction Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
18) ________ aims to improve operations throughout the value chain and to deliver products and services that exceed customer expectations. A) Total Quality Management B) Innovation C) Customer response time D) Cost and efficiency Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
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19) New-product development time is the time taken to: A) test the prototype and start the large scale production of a product B) design and develop the prototype product C) create new products and bring them to market D) improvise existing products and re-launch them to market Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
20) Customer response time involves: A) the speed it takes a customer to respond to an advertisement and place an order B) the speed at which an organization responds to customer requests C) the speed it takes to develop a new product D) the speed it takes an organization to develop a Total Quality Management (TQM) program Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
21) Sustainability is a strategy to achieve long term: A) cost reductions and efficiency objectives B) financial and quality goals C) financial, social, and environmental goals D) innovation and technology goals Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
22) The supply chain refers to the sequence of business functions in which customer usefulness is added to products or services. Answer: FALSE Explanation: The value chain refers to the sequence of business functions in which customer usefulness is added to products or services. Diff: 2 Objective: 3 AACSB: Analytical thinking
23) An effective way to cut costs is to eliminate activities that do NOT improve the product attributes that customers value. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
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24) For optimal planning success it is best if each business function within the value chain is performed one at a time in sequence. Answer: FALSE Explanation: Optimally, success is achieved when two or more of the individual business functions work concurrently as a team. Diff: 2 Objective: 3 AACSB: Analytical thinking
25) For best results, cost management emphasizes independently coordinating supply chain activities within your company and with other companies that act as suppliers and customers. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
26) Technological innovation has led to shorter product-life cycles and increased the need to bring new products to market more rapidly. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
27) Management accounting information helps managers calculate a target cost for a product by subtracting from the target price the net income per unit of product that the company wants to earn. Answer: FALSE Explanation: Management accounting information helps managers calculate a target cost for a product by subtracting from the target price the operating income per unit of product that the company wants to earn. Diff: 2 Objective: 2 AACSB: Analytical thinking
28) Customer relationship management initiatives use technology to coordinate all customer-facing activities (such as marketing, sales calls, distribution, and after-sales support) and the design and production activities necessary to get products to customers. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
29) The supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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30) The supply chain always occurs within a single organization. Answer: FALSE Explanation: The supply chain can include organizations external to a single organization. Diff: 1 Objective: 3 AACSB: Analytical thinking
31) Distribution refers to promoting and selling products or services to customers or prospective customers. Answer: FALSE Explanation: Marketing refers to promoting and selling products or services to customers or prospective customers. Diff: 1 Objective: 3 AACSB: Analytical thinking
32) The design of products, services, and processes component of the supply chain refers to the detailed planning, engineering, and testing of products and processes. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
33) Management accountants might provide information on decisions on whether to buy a product from outside or manufacture it in-house. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
34) The parts of the value chain associated with producing and delivering a product or service–production and distribution – are referred to as the supply chain. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
35) Value chain refers to its value to the employee. Answer: FALSE Explanation: Value chain refers to its value to the CUSTOMER. Diff: 1 Objective: 3 AACSB: Analytical thinking
36) Managers track the costs incurred in each value-chain category is to reduce costs and to improve efficiency. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
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37) Competitive information serves as a benchmark that managers use to continuously improve their operations. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
38) Increased global competition is placing pressure on companies to reduce costs. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
39) The increasing pace of technological information has resulted in longer product life cycles. Answer: FALSE Explanation: The increasing pace of technological information has resulted in shorter product life cycles. Diff: 2 Objective: 3 AACSB: Application of knowledge
40) Managers rely on management accounting information to evaluate alternative investment and R&D decisions. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
41) In analyzing the value chain of a large manufacturer, a management accountant would become familiar with the Research and Development function by examining the activities of planning, engineering and testing of products and processes. Answer: FALSE Diff: 1 Objective: 3 AACSB: Analytical thinking
42) What are the four business functions and in the order that they appear along the value chain? Answer: Design Production Marketing Customer service Diff: 2 Objective: 3 AACSB: Analytical thinking
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43) Classify each cost item into one of the business functions of the value chain, either (1) R&D, (2) design, (3) production, (4) marketing, (5) distribution, or (6) customer service. Item: a. cost of samples mailed to promote sales of a new product b. labor cost of workers in the manufacturing plant c. bonus paid to a person with a 90% satisfaction rating in handling customers with complaints d. transportation costs for shipping products to retail outlets Answer: a. (4) marketing b. (3) production c. (6) customer service d. (5) distribution Diff: 3 Objective: 3 AACSB: Application of knowledge
44) Classify each cost item of Ripon Printers given below into one of the business functions of the value chain, either (1) R&D, (2) design of products and processes, (3) production, (4) marketing (including sales), (5) distribution, or (6) customer service. Item: a. cost of customer order forms b. cost of paper used in manufacture of books c. cost of paper used in packing cartons to ship books d. cost of paper used in display at national trade show e. depreciation of trucks used to transport books to college bookstores f. cost of the wood used to manufacture paper g. salary of the scientists attempting to find another source of printing ink h. cost of designing the book size so that a standard-sized box is filled to capacity Answer: a. (4) marketing (including sales) b. (3) production c. (5) distribution d. (4) marketing (including sales) e. (5) distribution f. (3) production g. (1) research and development h. (2) design of products and processes Diff: 3 Objective: 3 AACSB: Application of knowledge
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45) Describe the value chain and how it can help organizations become more effective. Answer: A value chain is a sequence of business functions whose objective is to provide a product to a customer or provide an intermediate good or service in a larger value chain. These business functions include R&D, design, production, marketing, distribution, and customer service. An organization can become more effective by focusing on whether each link in the chain adds value from the customer's perspective by focusing on the organization's objectives. Diff: 2 Objective: 3 AACSB: Application of knowledge
46) Value chain and classification of costs, car company. General Motors incurs the following costs: a. Electricity costs for the plant assembling the Chevrolet Camaro b. Transportation costs for shipping the Camaro to dealers c. Payment to Shelby Designs for the design of the Camaro. d. Salary of an engineer working on the next generation of Camaros e. Cost of GM employees' visit to an auto show to demonstrate the Camaro f. Testing the Camaro at the GM track g. Payment to television network for running Camaro advertisements h. Cost of brake pads purchased from outside supplier to be installed on the Camaro Required: Classify each of the cost items (a-h) into one of the business functions of the value chain. 1) Research and development 2) Design of products and processes 3) Production 4) Marketing and sales 5) Distribution 6) Customer service Answer: a. 3) Production b. 5) Distribution c. 2) Design of products and processes d. 1) Research and development e. 4) Marketing and sales f. 2) Design of products and processes g. 4) Marketing and sales h. 3) Production Diff: 3 Objective: 3 AACSB: Application of knowledge
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Objective 1.4 1) Place the five steps in the decision-making process in the correct order: A = Obtain information B = Make decisions by choosing among alternatives C = Identify the problem and uncertainties D = Implement the decision, evaluate performance, and learn E = Make predictions about the future A) C D B E A B) E D A B C C) C A E B D D) A E B D C Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
2) Which of the following is true of planning in decision making? A) It helps an organization to select goals and strategies. B) It improves the quality of products. C) It helps in evaluating performance. D) It helps in the analysis of actual performance. Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
3) Which of the tools shown below would be the most effective planning tool? A) performance evaluation report B) fishbone diagram C) control chart D) budget Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
4) A report showing the actual financial results for a period compared to the budgeted financial results for that same period would most likely be called a: A) strategic plan B) management forecast C) performance report D) revised plan Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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5) A budget: A) is the qualitative expression of a proposed plan of action by management B) is an aid for coordinating what needs to be done to execute a plan C) helps in identifying problems and uncertainties D) promotes production automation Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
6) Management accountants serve as key business partners in the planning process because they understand the key ________ factors that create ________. A) success; value B) accounting; profits C) financial; value D) success; income Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
7) A budget serves as much as a control tool as a planning tool because: A) it aids in the coordination and communication among various business functions B) it helps to evaluate customer needs and feedback C) it is a benchmark against which actual performance can be compared D) it helps to make predictions about the future Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
8) Which of the following is an example of an extrinsic reward? A) receiving a high rating on customer service B) appreciation mail from a customer C) promotions based on performance D) verbal appreciation from CEO Answer: C Diff: 1 Objective: 4 AACSB: Application of knowledge
9) Which of the following is an example of an intrinsic reward? A) bonuses paid to employees B) recognition of job well done C) promotions based on performance D) salaries paid to employees Answer: B Diff: 1 Objective: 4 AACSB: Application of knowledge
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10) Linking rewards to performance: A) helps to motivate managers B) allows companies to charge premium prices C) should only be based on financial information D) enhances agency costs Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
11) Control measures should: A) be set and not changed until the next budget cycle so as to provide an effective benchmark B) be set by excluding nonfinancial information C) be kept confidential from employees so that competitors don't have an opportunity to gain a competitive advantage D) be linked by feedback to help learning and future planning Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
12) A well-conceived plan allows managers the ability to: A) set static goals and still be flexible B) control lower-level managers from implementing change C) conservatively estimate costs so that actual operating results will be favorable when comparisons are made D) take advantage of unforeseen opportunities Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
13) In which of the following activities would evaluation and learning be most prevalent? A) controlling operations B) planning C) organizing and directing resources D) identification of uncertainties and risk Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
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14) Examining past performance and exploring alternative ways to make better informed decisions in the future is: A) control B) planning C) learning D) implementation Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
15) The last step in the decision-making process is to make decisions by choosing among alternatives. Answer: FALSE Explanation: The last step in the decision-making process is to implement the decision, evaluate performance, and learn. Diff: 1 Objective: 4 AACSB: Analytical thinking
16) One of the steps in planning is evaluating the performance and taking corrective measures. Answer: FALSE Explanation: Evaluating the performance and taking corrective measures is a benefit to installing a budgeting system. This is not one of the steps in planning, but a guideline for management.. Diff: 2 Objective: 4 AACSB: Analytical thinking
17) A budget helps to control activities by adhering to the prescribed plan. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
18) To take advantage of changing market opportunities, the annual budget should be strictly enforced. Answer: FALSE Explanation: To take advantage of changing market opportunities, the annual budget should be updated to reflect those changes. Diff: 2 Objective: 4 AACSB: Analytical thinking
19) A budget is a qualitative expression of a plan. Answer: FALSE Explanation: Explanation: A budget is a quantitative expression of a plan. Diff: 1 Objective: 4 AACSB: Analytical thinking
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20) The process of preparing a budget encourages coordination and communication throughout the company. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
21) Linking rewards to performance helps motivate managers and leads to good management performance. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
22) Control comprises taking actions that implement the planning decisions, evaluating past performance, and providing feedback and learning to help future decision making. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
23) A budget can only be used as a planning tool. Answer: FALSE Explanation: A budget may be used as a planning tool and also as a control tool. Diff: 1 Objective: 4 AACSB: Analytical thinking
24) Gathering information before making a decision is not efficient within the decision-making process. Answer: FALSE Explanation: Gathering information before making a decision helps managers gain a better understanding of uncertainties. Diff: 1 Objective: 4 AACSB: Analytical thinking
25) Evaluating actual performance, receiving feedback and learning from that feedback helps in the future decision-making process. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
26) Bonuses given to employees based on performance is an example of extrinsic reward. Answer: TRUE Diff: 2 Objective: 4 AACSB: Application of knowledge
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27) A budget is a benchmark against which actual performance can be compared. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
28) A performance report compares actual performance to the amount budgeted. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
29) Management accounting is playing an increasingly important role by helping managers develop and implement strategy. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
30) In order, list the five steps in the decision-making process. Answer: 1. Identify the problem and uncertainties 2. Obtain information 3. Make predictions about the future 4. Make decisions by choosing among alternatives 5. Implement the decision, evaluate performance, and learn Diff: 2 Objective: 4 AACSB: Analytical thinking
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31) For each type of report listed below, identify one planning decision and one controlling decision for which the information would be helpful. Assume you are a Walgreen Company store. Item: a. annual financial statements for the past three years b. report detailing sales by department by each hour of the day for the past week c. special study regarding increased road traffic due to the construction of a new shopping mall at a near-by intersection Answer: Please note that answers will vary, but may include the following: a.
Planning: Decision by shareholder about whether to purchase more stock in the company. Control: Decision by bank to determine if financial ratios maintained in the line-of-credit (LOC) agreement warrant increasing the LOC amount. b.
Planning: Decisions regarding future staffing needs. Control: Decision regarding whether the recent sales promotion led to an increase in revenue.
c.
Planning: Decision of the store manager about whether to change the types of retail items carried. Control: Decision of the store manager regarding performance of the analyst that prepared the special study. Diff: 3 Objective: 4 AACSB: Application of knowledge
32) Briefly explain the planning and control activities in management accounting. How are these two activities linked to each other? Answer: Planning business operations relates to designing, producing, and marketing a product or service. This includes preparing budgets and determining the prices and cost of products and services. A company must know the cost of each product and service to decide which products to offer and whether to expand or discontinue product lines. Controlling business operations includes comparing actual results to the budgeted results and taking corrective action when needed. Feedback links planning and control. The control function provides information to assist in better future planning. Diff: 3 Objective: 4 AACSB: Analytical thinking
33) Explain how a budget can help management implement strategy. Answer: A budget is a planning tool, a quantitative expression of a plan of action. First, actions are planned and then they are communicated to the entire organization. The budget also helps with coordination. Diff: 1 Objective: 4 AACSB: Analytical thinking
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34) What is planning in decision making? Explain how a budget helps in planning. Answer: Planning consists of selecting an organization's goals and strategies, predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and communicating the goals and how to achieve them to the entire organization. Management accountants serve as business partners in these planning activities because they understand the key success factors and what creates value. The most important planning tool when implementing strategy is a budget. A budget is the quantitative expression of a proposed plan of action by management and is an aid to coordinating what needs to be done to execute that plan. It helps in the production, distribution, and customer-service costs to achieve the company's sales goals; the anticipated cash flows; and the potential financing needs. Diff: 3 Objective: 4 AACSB: Analytical thinking
35) Complete a performance report for the month of May, 2020, for First News Corp, a regional newspaper showing four columns: 1) Actual Result; 2) Budgeted Amount; 3) Difference: Actual Result minus Budgeted Amount; 4) Difference as a Percentage of Budgeted Amount, given the following data: Actual pages sold Budgeted advertising pages Actual Advertising revenue Budgeted Advertising revenue
600 510 $4,200,000 $4,000,000
Does the report indicate any cause for managerial investigation? Answer: The performance report should look something like the following:
Advertising pages sold Average rate per page (Advertising Revenues) / (Advertising pages sold) Advertising revenues
Actual Result (1)
Budgeted Amount (2)
600 pages
510 pages
$7,000
$7,843.14
Difference (Actual Difference as a Result - Budgeted Percentage of Amount) Budgeted Amount (3) = (1) - (2) (4) = (3) / (2) 90 pages Favorable 17.6% Favorable $843.14 Unfavorable
10.75% Unfavorable
$4,200,000 $4,000,000 $200,000 Favorable 5% Favorable
The overall 5% favorable difference in advertising revenue is caused by offsetting differences in advertising pages sold (favorable) and the average rate per page (unfavorable). The performance report highlights the favorable increase in the advertising pages sold. The percentage drop in advertising revenue per page is marginal in comparison with the favorable increase of the pages sold. Diff: 3 Objective: 4 AACSB: Application of knowledge
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Objective 1.5 1) Which of the following is a guideline used by management accountants to assist in strategic and operational decision making? A) employing a cost-benefit approach B) employing a supply chain approach C) employing a six sigma approach D) employing a regression approach Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
2) The scenario that says resources should be spent if the expected benefits to the company exceed the expected costs describes: A) cost-benefit approach B) behavioral and technical considerations C) balanced scorecard D) different costs for different purposes Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
3) Which of the following is true of a budgeting system? A) It compels managers to plan ahead. B) It increases agency costs. C) It is easy to measure the exact benefits of a budgeting system. D) It leads to operational inefficiency. Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
4) In a cost-benefit approach, managers should spend resources if the: A) marginal costs to the company exceed the marginal benefits B) expected benefits to the company exceed the expected costs C) marginal costs to the company equal the marginal benefits D) expected benefits to the company equal the expected costs Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
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5) Which of the following statements about the cost-benefit approach is true? A) Resources should be spent if the expected costs exceed the expected benefits of the company. B) In a cost-benefit analysis, both costs and benefits are not easy to measure. C) Resources should be spent if the costs of a decision outweigh the benefits of the decision. D) A cost-benefit approach would not be appropriate for a decision to install a budgeting system. Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Exact quantification of costs and benefits is not always possible when making a decision. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
7) The technical considerations of budgeting encourage managers and other employees to strive for achieving the goals of the organization. Answer: FALSE Explanation: The behavioral considerations of budgeting encourage managers and other employees to strive for achieving the goals of the organization. Diff: 2 Objective: 5 AACSB: Analytical thinking
8) A cost concept used for the purposes of external reporting will always be appropriate for internal reporting. Answer: FALSE Explanation: A cost concept used for the purposes of external reporting may not be appropriate for internal, routine reporting. For external reporting, GAAP requires costs to be fully expenses in the year they are incurred. However, those costs could be capitalized and then amortized or written off as expenses over several years. Diff: 2 Objective: 5 AACSB: Analytical thinking
9) An experienced cost accountant's advice of: "different costs for different purposes" most likely means that that when providing cost information to managers for decision making, you should explore using alternative ways to compute costs because a cost for financial accounting purposes may not be appropriate for internal decision making purposes. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
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10) Accounting methods for internal reporting purposes are specified by Generally Accepted Accounting Principles (GAAP). Answer: FALSE Explanation: Accounting methods for internal reporting are not specified by Generally Accepted Accounting principles (GAAP). Diff: 2 Objective: 5 AACSB: Analytical thinking
11) Discuss the cost-benefit approach guideline management accountants use to provide value in strategic decision making. Answer: Management accountants continually face resource allocation decisions. The cost-benefit approach should be used in making these decisions. Resources should be spent if the expected benefits to the company exceed the expected costs. The expected benefits and costs may not be easy to quantify, but it is a useful approach for making resource allocation decisions. Companies now use budgeting system that compels managers to plan ahead, compare actual to budgeted information, learn, and take corrective action. Diff: 3 Objective: 5 AACSB: Analytical thinking
12) Discuss the behavioral considerations that provide value to strategic decision making. Answer: Management is primarily a human activity that should focus on encouraging individuals to do their jobs better. Budgets have a behavioral effect by motivating and rewarding employees for achieving an organization's goals. So, when workers underperform, for example, behavioral considerations suggest that managers need to discuss ways to improve their performance with them rather than just sending them a report highlighting their underperformance. Diff: 3 Objective: 5 AACSB: Analytical thinking
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Objective 1.6 1) Which of the following is true of line management? A) It is directly responsible for achieving the goals of the organization. B) It is responsible of management accounting functions. C) It provides advice, support, and assistance to staff management. D) It only includes the top level management. Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
2) Which of the following is true of staff management? A) It plans income taxes, sales taxes, and international taxes. B) It is directly responsible for achieving the goals of the organization. C) It provides advice, support, and assistance to line management. D) It controls the main business functions such as production and marketing. Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
3) ________ includes providing financial information for reports to managers and shareholders, and overseeing the overall operations of the accounting system. A) Risk management B) Treasury management C) Controllership D) Strategic planning Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
4) ________ includes banking and short- and long-term financing, investments, and cash management. A) Risk management B) Strategic planning C) Controllership D) Treasury management Answer: D Diff: 1 Objective: 6 AACSB: Analytical thinking
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5) Line management includes: A) distribution managers B) human-resource managers C) information-technology managers D) management-accounting managers Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
6) Staff management includes: A) manufacturing managers B) management accountants C) purchasing managers D) distribution managers Answer: B Diff: 1 Objective: 6 AACSB: Application of knowledge
7) Which of the following is a responsibility of the CFO? A) budget funds for a plant upgrade B) managing short-term and long-term financing C) investing in new equipment D) conducting internal audit Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
8) Which of the following functions would typically not come under the responsibility of the CFO? A) tax B) treasury C) operations D) investor relations Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
9) Which of the following reports to the CFO? A) external auditor B) distribution manager C) production manager D) treasurer Answer: D Diff: 2 Objective: 6 AACSB: Application of knowledge
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10) Which of the following is a function of a controller? A) operations administration B) controlling the stock price C) communication with the shareholders D) interest-rate risk management Answer: A Explanation: A) Found in exhibit 1-6 Diff: 2 Objective: 6 AACSB: Analytical thinking
11) Arrangement of long-term financing is an integral part of the ________ function in an organization. A) CFO's B) controller's C) auditor's D) president's Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
12) Line management is directly responsible for attaining the goals of the organization. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
13) Staff management, such as management accountants and information technology and human-resources management, provides advice, support, and assistance to line management. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
14) Treasury includes banking and short- and long-term financing, investments, and cash management. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
15) The controller is usually responsible for budgeting. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
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16) The treasurer (also called the chief accounting officer) is the financial executive primarily responsible for both management accounting and financial accounting. Answer: FALSE Explanation: The controller is also called the chief accounting officer. The controller is the financial executive primarily responsible for both management accounting and financial accounting. Diff: 2 Objective: 6 AACSB: Analytical thinking
17) Management accountants must work well in cross-functional teams and as a business partner. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
18) A company's CFO oversees banking and short- and long-term financing, investments, and cash management. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
19) Management accountants must promote fact-based analysis and make tough-minded, critical judgments without being adversarial. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
20) What areas of responsibility does a chief financial officer have in a typical organization? Answer: The responsibilities vary among organizations, but generally include the following areas: controllership, treasury, risk management, taxation, investor relations, and internal audit. Diff: 2 Objective: 6 AACSB: Analytical thinking
21) The successful management accountant possesses several skills and characteristics that reach well beyond basic analytical abilities. Discuss. Answer: The skills required are as follows: Management accountants must work well in cross-functional teams and as a business partner. They must promote fact-based analysis and make tough-minded, critical judgments without being adversarial. They must lead and motivate people to change and be innovative. They must communicate clearly, openly, and candidly. They must have a strong sense of integrity. Diff: 3 Objective: 6 AACSB: Analytical thinking
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Objective 1.7 1) Which of the following issues is addressed by the Sarbanes-Oxley legislation? A) safety aspects of products B) environmental damages caused by industries C) disclosure practices of public corporations D) disclosure practices of private companies Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
2) The IMA's Statement of Ethical Professional Practice for management accountants include concepts related to: A) competence, performance, diligence, and reporting B) competence, confidentiality, integrity, and credibility C) experience, diligence, reporting, and objectivity D) diligence, objectivity, conflicts of interest, and credibility Answer: B Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
3) Which item is an indication of competence under the IMA's Statement of Ethical Professional Practice? A) Maintain an appropriate level of professional expertise by continually developing knowledge and skills. B) Keep information confidential except when disclosure is authorized or legally required. C) Abstain from engaging in or supporting any activity that might discredit the profession. D) Refrain from engaging in any conduct that would prejudice carrying out duties ethically. Answer: A Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
4) Which of the following differentiates confidentiality and credibility under the IMA's Statement of Ethical Professional Practice? A) Credibility deals with refraining from activities that would prejudice carrying duties ethically, while confidentiality deals with communicating information fairly and objectively. B) Confidentiality deals with refraining from the usage of critical information for unethical or illegal advantage, while credibility ensures disclosing the relevant information that would help the intended user's understanding. C) Credibility deals with refraining from the usage of critical information for unethical or illegal advantage, while confidentiality ensures disclosing the relevant information that would help the user's understanding. D) Credibility ensures appropriate level of professional expertise by continually developing knowledge and skills, while confidentiality encourages mitigation of actual conflicts of interest. Answer: B Diff: 3 Objective: 7 AACSB: Ethical understanding and reasoning
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5) Which item is an indication of integrity under the IMA's Statement of Ethical Professional Practice? A) Refrain from engaging in any conduct that would prejudice carrying out duties ethically. B) Communicate information fairly and objectively. C) Keep information confidential except when disclosure is authorized or legally required. D) Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Answer: A Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
6) Which item is an indication of credibility under the IMA's Statement of Ethical Professional Practice? A) Maintain an appropriate level of professional expertise by continually developing knowledge and skills. B) Refrain from using confidential information for unethical or illegal advantage. C) Abstain from engaging in or supporting any activity that might discredit the profession. D) Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law. Answer: D Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
7) Ethical challenges for management accountants include: A) whether to accept gifts from suppliers, knowing it is an effort to indirectly influence decisions B) adhering to the principles of accounting C) whether to file a tax return this year D) whether to accept gifts higher incentives from the company for their performance Answer: A Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
8) Which of the following actions should a management accountant take first in confronting a potential ethical conflict concerning your direct supervisor? A) Inform the Board of Directors of the existence of a potential conflict. B) Clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethics Counselor. C) Consult the attorney as to legal obligations and rights concerning the ethical conflict. D) Follow the organization's procedures concerning resolution of such a conflict. Answer: D Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
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9) If there is an ethical conflict concerning your direct supervisor, you should first contact: A) the local media B) an IMA Ethics Counselor C) an attorney D) the board of directors Answer: D Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
10) If there is an ethical conflict concerning your direct supervisor, when is it appropriate to contact authorities or individuals not employed by the organization? A) when there is a personal conflict B) when your supervisor is about to be promoted C) when there is a clear violation of the law D) when you face injustice from your supervisor Answer: C Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
11) Competence includes maintaining an appropriate level of professional expertise by continually developing knowledge and skills. Answer: TRUE Explanation: Competence includes maintaining an appropriate level of professional expertise by continually developing knowledge and skills. Diff: 1 Objective: 7 AACSB: Ethical understanding and reasoning
12) As part of the Sarbanes-Oxley Act, internal auditors are solely responsible for the fair representation of the business operations in the financial statements. Answer: FALSE Explanation: As part of the Sarbanes-Oxley Act, CEOs and CFOs must certify that the financial statements of their firms fairly represent the results of their operations. Diff: 2 Objective: 7 AACSB: Analytical thinking
13) A management accountant who is not capable of completing a project because her skills, knowledge, and abilities are lacking could be ethically in violation of the competence standard. Answer: TRUE Diff: 1 Objective: 7 AACSB: Ethical understanding and reasoning
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14) As per IMA IMA's Statement of Ethical Professional Practice, integrity refers to disclosing all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations is a responsibility. Answer: FALSE Explanation: As per IMA statement of ethical professional practice, credibility refers to disclosing all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations is a responsibility. Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
15) Performing professional duties in accordance with relevant laws, regulations, and technical standards is a competent responsibility. Answer: TRUE Diff: 1 Objective: 7 AACSB: Ethical understanding and reasoning
16) If a managerial accountant suspected his or her immediate superior of unethical behavior, who happens to be a chief executive officer or equivalent, the managerial accountant should request an immediate meeting with the executive committee or the audit committee. Answer: TRUE Explanation: If a managerial accountant suspected his or her immediate superior of wrongdoing, the managerial accountant should first present the situation to the next higher managerial level. Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
17) The Institute of Management Accountants provides a hotline to discuss ethical issues. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
18) When faced with a potential ethical conflict, the managerial accountant should first consult IMA ethics counselor. Answer: FALSE Explanation: The managerial account should first discuss the issue with their immediate supervisor except when it appears that the supervisor is involved. In that case, present the issue to the next level. Diff: 1 Objective: 7 AACSB: Ethical understanding and reasoning
19) IMA's overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Answer: TRUE Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
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20) Integrity is to abstain from engaging in or supporting any activity that might discredit the profession. Answer: TRUE Diff: 1 Objective: 7 AACSB: Ethical understanding and reasoning
21) List the four standards of ethical conduct for management accountants. For each standard, give an example that demonstrates compliance with that standard. Answer: Please note that answers may vary, but may include the following: 1. Competence: Maintain an appropriate level of professional expertise by continually developing knowledge and skills 2. Confidentiality: Refrain from using confidential information for unethical or illegal advantage 3. Integrity: Abstain from engaging in or supporting any activity that might discredit the profession 4. Credibility: Communicate information fairly and objectively Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
22) You have been employed as an entry-level management accountant for a little under a year. You suspect that your immediate supervisor is involved in a significant fraud involving diverting of company assets to personal use. Briefly describe the steps you might take to resolve this dilemma. Answer: The management accountant should first consult any internal company procedures concerning the resolution of ethical issues, and make sure these procedures are followed as closely as possible. If these policies do not resolve the situation, present the facts to the next higher managerial level. If your immediate superior is the chief executive officer or equivalent, the acceptable reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Clarify the relevant ethical issues with an objective advisor (e.g., Institute of Management Accountants hotline). Consult your own attorney to be aware of your own rights and responsibilities. If all internal review procedures have still not resolved the ethical situation, the managerial accountant might have to resign and write an informative letter to an appropriate representative of the organization, and perhaps notify other parties. Diff: 3 Objective: 7 AACSB: Ethical understanding and reasoning
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23) A company controller, whose responsibilities include evaluating proposals for the acquisition and implementation of a new accounting information system, accepts an offer to attend an all-expense paid 4-day conference at a popular vacation destination. Discuss the ethical implications of attending the conference in light of the IMA's Statement of Professional Practice. Answer: The value of the "gift" must be considered as acceptance of an all-expense paid trip paid for by a potential vendor could be viewed as a real or apparent conflict of interest. The integrity standard states that a management accountant has a responsibility to mitigate actual conflicts of interest. In addition, the same standard (integrity) also states that a management accountant should refrain from engaging in any conduct that would prejudice carrying out duties ethically. The personal benefit enjoyed by the controller by accepting a paid trip to a vacation spot might influence (prejudice) the purchase decision. An important factor would be how necessary is it to travel to evaluate the system and is this a practice (traveling to a conference) necessary to evaluate all alternatives under consideration. Diff: 3 Objective: 7 AACSB: Ethical understanding and reasoning
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Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 2 An Introduction to Cost Terms and Purposes Objective 2.1 1) Which of the following would be considered an actual cost of a current period? A) the $25 of materials in a manufactured chair that is ready to be shipped to the customer B) the $22 of direct material cost per unit assumed in the actual budget of a manufacturer of chairs C) the expected cost of materials for a chair as a result of engineering specifications D) the average of historical material cost data for a chair manufactured in several past accounting periods Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
2) The collection of cost data in an organized way, such as in various categories such as materials, labor, and manufacturing overhead, is called: A) cost application B) cost accumulation C) cost assignment D) cost reporting Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Budgeted costs are: A) the costs incurred this year B) the costs incurred last year C) planned or expected costs D) competitor's costs Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
4) Cost assignment: A) includes future and arbitrary costs B) associates accumulated costs with certain cost objects C) is the same as cost accumulation D) is the difference between budgeted and actual costs Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
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5) A cost system determines the cost of a cost object by: A) accumulating and then assigning costs B) accumulating costs C) assigning and then accumulating costs D) assigning costs Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
6) A cost object is anything for which a cost measurement is desired. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
7) Costs are accounted for in two basic stages: assignment followed by accumulation. Answer: FALSE Explanation: Costs are accounted for in two basic stages: accumulation followed by assignment. Diff: 1 Objective: 1 AACSB: Analytical thinking
8) An actual cost is the cost incurred–a historical or past cost. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
9) Accountants define a cost as the amount of money spent on a resource. Answer: FALSE Explanation: A cost is a resource sacrificed or foregone and the requirement of "spending" or cash expended is not part of the definition. Diff: 1 Objective: 1 AACSB: Analytical thinking
10) A cost is a resource sacrificed or forgone to achieve a specific objective. Answer: TRUE Explanation: A cost object could be anything management wishes to determine the cost of, for example, a department. Diff: 1 Objective: 1 AACSB: Analytical thinking
11) Managers use assigned cost information to make decisions and implement them. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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12) Cost accumulation and cost assignment are synonymous. Answer: FALSE Explanation: Cost accumulation is the collection of cost data while cost assignment is the allocation of accumulated costs to specific cost objects. Diff: 1 Objective: 1 AACSB: Analytical thinking
13) Lucas Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plants. They are: Cost object #1: Cost object #2: Cost object #3:
The physical buildings and equipment The use of buildings and equipment The availability and use of manufacturing labor
The following manufacturing overhead cost categories are found in the accounting records: a. Depreciation on buildings and equipment b. Lubricants for machines c. Property insurance d. Supervisors salaries e. Fringe benefits f. Property taxes g. Utilities Required: Assign each of the above costs to the most appropriate cost object. Answer: Cost object # 1 includes categories a, c, and f. Cost object # 2 includes categories b and g. Cost object # 3 includes categories d and e. Diff: 2 Objective: 1 AACSB: Application of knowledge
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Objective 2.2 1) Which of the following factors affect the direct/indirect classification of a cost? A) the level of budgeted profit for the next year B) the estimation of time required to complete the order C) the ability to execute an order in the most cost-efficient manner D) the design where a particular area is dedicated to a specific cost object Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
2) All of the following are factors affecting direct versus indirect cost classification EXCEPT: A) materiality of the cost B) cost accuracy C) information technology's ability to trace costs in an economically feasible way D) design of operations Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
3) When costs can be traced to a particular cost object in an economically feasible way, the cost is a: A) direct cost B) indirect cost C) allocated cost D) budgeted cost Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
4) Which of the following statements about the direct/indirect cost classification is true? A) Indirect costs are always traced. B) Indirect costs are always allocated. C) The design of sales target affects the direct/indirect classification. D) The direct/indirect classification depends on the cost control measures. Answer: B Diff: 1 Objective: 2 AACSB: Analytical thinking
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5) The assignment of the cost of the leather used to make 100 bicycle seats to a custom order to be shipped to a bike retailer is an example of: A) the cost tracing of direct costs to the chosen cost object B) a function of cost accumulation C) the process of tracking both direct and indirect costs associated with a cost object D) the process of determining the actual cost of the cost object Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
6) Cost allocation is: A) the process of tracking both direct and indirect costs associated with a cost object B) the process of determining the opportunity cost of a cost object chosen C) the assignment of indirect costs to the chosen cost object D) made based on material acquisition document Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
7) The determination of a cost as either direct or indirect depends upon the: A) accounting standards B) tax system chosen C) inventory valuation D) cost object chosen Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
8) Classifying a cost as either direct or indirect depends upon: A) the behavior of the cost in response to volume changes B) whether the cost is expensed in the period in which it is incurred C) whether the cost can be traced to a particular cost object in an economically feasible way D) whether a cost is fixed or variable Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
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9) A manufacturing plant produces two product lines: golf equipment and soccer equipment. An example of a direct cost for the golf equipment line is: A) beverages provided daily in the plant break room for the entire staff B) monthly lease payments for a specialized piece of equipment needed to manufacture the golf driver C) salaries of the clerical staff that work in the company administrative offices D) overheads incurred in producing both golf and soccer equipment Answer: B Diff: 1 Objective: 2 AACSB: Application of knowledge
10) A manufacturing plant produces two product lines: golf equipment and soccer equipment. An example of indirect cost for the soccer equipment line is the: A) material used to make the soccer balls B) labor to shape the leather used to make the soccer ball C) material used to manufacture the soccer studs D) property taxes paid on the land and building (plant) Answer: D Diff: 2 Objective: 2 AACSB: Application of knowledge
11) Which one of the following items is a direct cost? A) Customer-service costs of a multiproduct firm; Product A is the cost object. B) Printing costs incurred for payroll check processing; payroll check processing is the cost object. C) The salary of a maintenance supervisor in a multiproduct manufacturing plant; Product B is the cost object. D) Utility costs of the administrative offices; the accounting department is the cost object. Answer: B Diff: 1 Objective: 2 AACSB: Application of knowledge
12) Indirect manufacturing costs: A) can be traced to the product that created the costs B) can be easily identified with the cost object C) generally include the cost of material and the cost of labor D) may include both variable and fixed costs Answer: D Diff: 1 Objective: 2 AACSB: Application of knowledge
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13) Which of the following is true of indirect costs? A) Indirect costs are always considered sunk costs. B) All indirect costs are included in cost of goods sold. C) Indirect costs always vary in direct proportion to the level of production. D) Indirect costs cannot be traced to a particular cost object in an economically feasible way. Answer: D Diff: 1 Objective: 2 AACSB: Application of knowledge
14) Which of the following statements is true? A) A direct cost of one cost object will always be a direct cost of another cost object. B) Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs. C) All fixed costs are indirect costs. D) All direct costs are variable costs. Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
15) Which of the following statements is true of direct costs? A) A direct cost of one cost object is a true sense of the budgeted costs. B) All variable costs are direct costs. C) A direct cost of one cost object can be an indirect cost of another cost object. D) All fixed costs are direct costs. Answer: C Diff: 1 Objective: 2 AACSB: Application of knowledge
16) A cost may be direct for one cost object and indirect for another cost object. Answer: TRUE Diff: 1 Objective: 2 AACSB: Application of knowledge
17) Assigning indirect costs is easier than assigning direct costs. Answer: FALSE Explanation: Tracing direct costs is quite straightforward, whereas assigning indirect costs to a number of different cost objects can be very challenging. Diff: 1 Objective: 2 AACSB: Application of knowledge
18) Improvements in information-gathering technologies are making it possible to trace more costs as direct. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
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19) The smaller the amount of a cost the more likely it is economically feasible to trace it to a particular cost object. Answer: FALSE Explanation: The smaller the amount of a cost the less likely it is economically feasible to trace it to a particular cost object. Diff: 1 Objective: 2 AACSB: Application of knowledge
20) A direct cost of one cost object cannot be an indirect cost of another cost object. Answer: FALSE Explanation: A direct cost of one cost object can be an indirect cost of another cost object. For example, department A might perform some part of the processing of a product B. The costs incurred in department A would be direct costs of cost object department A but could be an indirect cost of cost object product B. Diff: 1 Objective: 2 AACSB: Analytical thinking
21) The cost of natural gas used to heat a production facility that makes three products (A,B, and C) would be classified as an indirect cost when the cost object is one of the products (either A, B, or C). Answer: TRUE Diff: 1 Objective: 2 AACSB: Application of knowledge
22) The broader the cost object definition (i.e., plant versus product), the more confident the manager will be about the accuracy of the direct cost amounts. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
23) All costs incurred by a company (sacrifice of a resource) are recorded in the accounting system. Answer: FALSE Explanation: A company can incur a cost without it being recorded in the accounting system. Examples include opportunity costs and environmental costs. Diff: 2 Objective: 2 AACSB: Analytical thinking
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24) Cutler Products Company manufactures office furniture. Recently, the company decided to develop a formal cost accounting system and classify all costs into three categories. Categorize each of the following items as being appropriate for (1) cost tracing to the finished furniture, (2) cost allocation of an indirect manufacturing cost to the finished furniture, or (3) as a nonmanufacturing item. A nonmanufacturing item would be an operating cost.
Item
Cost Tracing
Cost Allocation
Nonmanufacturing
Carpenter wages Depreciation - office building Glue for assembly Lathe department supervisor Lathe depreciation Lathe maintenance Lathe operator wages Lumber Samples for trade shows Metal brackets for drawers Factory washroom supplies Answer: Item
________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Cost Tracing
________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Cost Allocation
________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ Nonmanufacturing
Carpenter wages Depreciation - office building Glue for assembly Lathe department supervisor Lathe depreciation Lathe maintenance Lathe operator wages Lumber Samples for trade shows Metal brackets for drawers Factory washroom supplies
X X X X X X X X X X X
Diff: 2 Objective: 2 AACSB: Application of knowledge
25) What are the factors that affect the classification of a cost as direct or indirect? Answer: Several factors affect whether a cost is classified as direct or indirect: The materiality of the cost in question. The smaller the amount of a cost–that is, the more immaterial the cost is–the less likely it is economically feasible to trace it to a particular cost object. Available information-gathering technology. Improvements in information-gathering technology make it possible to consider more and more costs as direct costs. Design of operations. Classifying a cost as direct is easier if a company's facility (or some part of it) is used exclusively for a specific cost object, such as a specific product or a particular customer. Diff: 3 Objective: 2 AACSB: Analytical thinking
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26) What are the differences between direct costs and indirect costs? Give an example of each. Answer: Direct costs are costs that can be traced easily to the product manufactured or the service rendered. Examples of direct costs include direct materials and direct manufacturing labor used in a product. Indirect costs cannot be easily identified with individual products or services rendered, and are usually assigned using allocation formulas. In a plant that manufactures multiple products, examples of indirect costs include the plant supervisor's salary and the cost of machines used to produce more than one type of product. Diff: 2 Objective: 2 AACSB: Analytical thinking
27) Match each of the following descriptions to a specific cost object category for a Miller Systems, a large software publisher of accounting applications for: Product (P), Service (S), Customer (C), Activity (A), Project (Proj) or Department (D). Description The largest manufacturer of golf carts in the United States Development of Miller's Wellness Program for Employees Coding and Programming Fixed Asset Accounting Module for Small Businesses 3-year Subscription to Miller's "Bookkeeping in the Cloud" General Motors Answer: Description The largest manufacturer of golf carts in the United States Development of Miller's Wellness Program for Employees Coding and Programming Fixed Asset Accounting Module for Small Businesses 3-year Subscription to Miller's "Bookkeeping in the Cloud" General Motors
Cost Object (P.S.C. A, or D)
Cost Object (P.S.C. A, or D) C A D P S C
Diff: 2 Objective: 2 AACSB: Analytical thinking
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Objective 2.3 1) Which of the following is true if the volume of sales increases (within a relevant range)? A) total fixed cost increases B) total variable cost decreases C) total variable cost increases D) total fixed cost decreases Answer: C Diff: 1 Objective: 3 AACSB: Application of knowledge
2) Which of the following is a fixed cost with respect to units produced in a factory? A) monthly rent payment for the building B) electricity expenses C) utilities cost of the building D) direct material costs Answer: A Diff: 1 Objective: 3 AACSB: Application of knowledge
3) Cost behavior refers to: A) how costs react to a change in the level of activity B) whether a cost is incurred in a manufacturing, merchandising, or service company C) classifying costs as either perpetual or period costs D) whether a particular expense is expensed in the same or the following period Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
4) Which of the following is true if the production volume decreases? A) fixed cost per unit increases B) average cost per unit decreases C) variable cost per unit increases D) variable cost per unit decreases Answer: A Diff: 1 Objective: 3 AACSB: Application of knowledge
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5) At a plant where a union agreement sets annual salaries and conditions, annual labor costs usually: A) are considered a variable cost B) are considered a fixed cost C) depend on the scheduling of floor workers D) depend on the scheduling of production runs Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
6) Variable costs: A) are always indirect costs B) increase in total when the actual level of activity increases C) include most personnel costs and depreciation on machinery D) are never considered a part of prime cost Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
7) Rally Synthesis Inc. manufactures and sells 100 bottles per day. Fixed costs are $22,000 and the variable costs for manufacturing 100 bottles are $30,000. Each bottle is sold for $1,200. How would the daily profit be affected if the daily volume of sales drop by 10%? A) profits are reduced by $9,000 B) profits are reduced by $3,000 C) profits are reduced by $12,000 D) profits are reduced by $59,000 Answer: A Explanation: A) Variable cost per unit = $30,000 / 100 = $300 Profit for 100 bottles = ($1,200 × 100) - ($22,000 + $30,000 ) = 68,000 Sales after 10% drop = 100 × (1 - 0.1) = 90 Profit for 90 bottles = ($1,200 × 90) - ($22,000 + (90 × 300))= $59,000 Change in profit = $68,000 - $59,000 = $9,000. Hence, the profit has decreased by $9,000. Diff: 3 Objective: 3 AACSB: Application of knowledge
8) Within the certain expected range of production during the next year, which of the following would be true? A) total variable costs decrease as production increases B) total fixed costs remain the same when production increases or decreases C) fixed costs per unit decreases as production decreases D) total variable costs remain the same when production increases or decreases Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
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9) Which one of the following is a variable cost for an insurance company? A) rent of the building B) CEO's salary C) electricity expenses D) property taxes Answer: C Diff: 1 Objective: 3 AACSB: Application of knowledge
10) Which of the following is a fixed cost for an automobile manufacturing plant? A) administrative salaries B) electricity used by assembly-line machines C) sales commissions D) tires Answer: A Diff: 1 Objective: 3 AACSB: Application of knowledge
11) If each motorcycle requires a belt that costs $20 and 2,000 motorcycles are produced for the month, the total cost for belts is: A) considered to be a direct fixed cost B) considered to be a direct variable cost C) considered to be an indirect fixed cost D) considered to be an indirect variable cost Answer: B Diff: 1 Objective: 3 AACSB: Application of knowledge
12) The most likely cost driver of distribution costs is the: A) number of parts within the product B) number of miles driven C) number of products manufactured D) number of production hours Answer: B Diff: 1 Objective: 3 AACSB: Application of knowledge
13) The most likely cost driver of direct labor costs is the: A) number of machine setups for the product B) number of miles driven C) number of production hours D) number of machine hours Answer: C Diff: 1 Objective: 3 AACSB: Application of knowledge
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14) Which of the following statements is true? A) There is a cause-and-effect relationship between the cost driver and the amount of cost. B) Fixed costs have cost drivers over the short run. C) Over the short run all costs have cost drivers. D) Volume of production is a cost driver of distribution costs. Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
15) A band of normal activity or volume in which specific cost-volume relationships are maintained is referred to as the: A) average range B) cost-allocation range C) cost driver range D) relevant range Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
16) Within the relevant range, if there is a change in the level of the cost driver, then: A) total fixed costs and total variable costs will change B) total fixed costs and total variable costs will remain the same C) total fixed costs will remain the same and total variable costs will change D) total fixed costs will change and total variable costs will remain the same Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
17) Outside the relevant range, variable costs, such as direct material costs: A) will decrease proportionately with changes in sales volumes B) will remain the same with changes in production volumes C) will not change proportionately with changes in production volumes D) will increase proportionately with changes in sales volumes Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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18) Which of the following is a cost driver for a company's human resource costs? A) the number of employees in the company B) the number of job applications processed C) the number of units sold D) the square footage of the office space used by the human resource department Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
19) Puritan Apparels is a clothing retailer. Unit costs associated with one of its products, Product AHF 130, are as follows: Direct materials $110 Direct manufacturing labor 90 Variable manufacturing overhead 45 Fixed manufacturing overhead 33 Sales commissions (2% of sales) 10 Administrative salaries 28 Total $316 What are the variable manufacturing costs per unit associated with Product AHF 130? A) $288 B) $200 C) $245 D) $255 Answer: C Explanation: C) Variable manufacturing costs = $110 + $90 + $45 = $245 Diff: 1 Objective: 3 AACSB: Application of knowledge
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20) Puritan Apparels is a clothing retailer. Unit costs associated with one of its products, Product DCF 130, are as follows: Direct materials $120 Direct manufacturing labor 40 Variable manufacturing overhead 15 Fixed manufacturing overhead 33 Sales commissions (2% of sales) 5 Administrative salaries 24 Total $237 What are the indirect nonmanufacturing variable costs per unit associated with Product DCF130? A) $5 B) $29 C) $160 D) $213 Answer: A Explanation: A) Indirect variable costs = Sales commissions = $5 Diff: 1 Objective: 3 AACSB: Application of knowledge
21) The East Company manufactures several different products. Unit costs associated with Product ORD105 are as follows: Direct materials $92 Direct manufacturing labor 32 Variable manufacturing overhead 12 Fixed manufacturing overhead 32 Sales commissions (2% of sales) 26 Administrative salaries 6 Total $200 What is the percentage of the total variable costs per unit associated with Product ORD105 with respect to total cost? A) 81% B) 68% C) 84% D) 71% Answer: A Explanation: A) $92 + $32 + $12 + $26 = $162 ÷ 200 = 81% Diff: 3 Objective: 3 AACSB: Application of knowledge
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22) The East Company manufactures several different products. Unit costs associated with Product ORD105 are as follows: Direct materials $54 Direct manufacturing labor 8 Variable manufacturing overhead 11 Fixed manufacturing overhead 25 Sales commissions (2% of sales) 5 Administrative salaries 12 Total $115 What is the percentage of the total fixed costs per unit associated with Product ORD105 with respect to total cost? A) 37% B) 32% C) 15% D) 26% Answer: B Explanation: B) $25 + 12 = $37/115 = 32% Diff: 3 Objective: 3 AACSB: Application of knowledge
23) Which of the following is a variable cost if the cost object is a product? A) Interest payments on the company's mortgage on the headquarters' building B) Direct materials cost incurred to make products sold by the company C) Property taxes on all real estate owned by the firm D) Insurance premiums paid during the year Answer: B Diff: 2 Objective: 3 AACSB: Application of knowledge
24) A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given time span. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
25) Fixed cost per unit falls with an increase in production volume. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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26) Variable costs per unit vary with the level of production or sales volume. Answer: FALSE Explanation: Variable costs per unit are constant with the level of production or sales volume. Diff: 2 Objective: 3 AACSB: Analytical thinking
27) Wood used to manufacture chairs is considered a direct variable cost when the cost object is the chair. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
28) Cost drivers casually affect total costs of a cost object over a given time span. Answer: TRUE Explanation: Cost drivers are variables , such as the level of activity or volume, that casually affects costs over a given time span. Diff: 1 Objective: 3 AACSB: Analytical thinking
29) A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume of output produced. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
30) A lease for a store calls for a base monthly rent of $1,500 up to $10,000 of sales with a possible additional monthly cost of 2% of sales over $10,000. The rent is a fixed cost for the month for a relevant range of zero to $10,000 sales. Answer: TRUE Diff: 2 Objective: 3 AACSB: Application of knowledge
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31) Butler Hospital wants to estimate the cost for each patient stay. It is a general health care facility offering only basic services and not specialized services such as organ transplants. Required: a. Classify each of the following costs as either direct or indirect with respect to each patient. b. Classify each of the following costs as either fixed or variable with respect to hospital costs per day. Direct
Indirect
Fixed
Variable
Electronic monitoring Meals for patients Nurses' salaries Parking maintenance Security Answer:
________ ________ ________ ________ ________ Direct
________ ________ ________ ________ ________ Indirect
________ ________ ________ ________ ________ Fixed
________ ________ ________ ________ ________ Variable
Electronic monitoring Meals for patients Nurses' salaries Parking maintenance Security
X X
X X X X X
X X X
Diff: 3 Objective: 2, 3 AACSB: Application of knowledge
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32) The list of representative cost drivers in the right column below are randomized with respect to the list of functions in the left column. That is, they do not match.
1. 2. 3. 4. 5. 6.
Function Purchasing Billing Shipping Computer Support Personnel Customer Service
A. B. C. D. E. F.
Representative Cost Driver Number of employees Number of shipments Number of customers Number of invoices Number of desktop computers Number of purchase orders
Required: Match each business function with its representative cost driver.
1. 2. 3. 4. 5. 6.
Function Purchasing Billing Shipping Computer Support Personnel Customer Service
Answer: Function 1. Purchasing 2. Billing 3. Shipping 4. Computer Support 5. Personnel 6. Customer Service
Insert letter of appropriate driver (A through F)
Insert letter of appropriate driver (A through F) F D B E A C
Diff: 3 Objective: 3 AACSB: Application of knowledge
33) Describe both variable and fixed costs. Explain why the distinction between variable and fixed costs is important in cost accounting. Answer: Total variable costs increase with increased production or sales volumes. Fixed costs are not influenced by fluctuations in production or sales volumes. However, variable cost per unit remains the same at all levels of production and fixed cost per unit reduces with increase in production. Without the knowledge of cost behaviors, budgets and other forecasting tools will be inaccurate and unreliable. Understanding whether a cost behaves as a variable or a fixed cost is essential to estimating and planning for business success. Diff: 3 Objective: 3 AACSB: Analytical thinking
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Objective 2.4 1) A unit cost is computed by: A) multiplying total cost by the number of units produced B) dividing total cost by the number of units produced C) dividing variable cost by the number of units produced D) dividing fixed cost by the number of units produced Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
2) In its first year of operation, the Excellent Publishing Company sells 52,000 units and has 1,700 units in stock at year end. The cost of goods sold are $3,100,000. What are the total manufacturing costs for the year if the average unit cost is $8.50? A) $3,114,450 B) $3,100,000 C) $3,085,550 D) $14,450 Answer: A Explanation: A) $3,100,000 + (1,700 × $8.50) = $3,114,450 Diff: 2 Objective: 4 AACSB: Analytical thinking
3) When 25,000 units are produced, fixed costs are $21.00 per unit. Therefore, when 20,000 units are produced, fixed costs will: A) increase to $26.25 per unit B) remain at $21.00 per unit C) decrease to $16.80 per unit D) total $420,000 Answer: A Explanation: A) Fixed costs are $525,000 ($21.00 × 25,000 units). Dividing $525,000 by 20,000 units = $26.25. Diff: 3 Objective: 4 AACSB: Application of knowledge
4) When 24,000 units are produced, variable costs are $12.00 per unit. Therefore, when 18,000 units are produced: A) variable costs will remain at $12.00 per unit B) variable costs will total $288,000 C) variable unit costs will increase to $16.00 per unit D) variable unit costs will decrease to $9.00 per unit Answer: A Diff: 2 Objective: 4 AACSB: Application of knowledge
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5) Wonderful Products Manufacturing Corp. provided the following information for last month: Sales Variable costs Fixed costs Operating income
$43,000 14,000 11,000 $18,000
If sales reduce to half of the amount in the next month, what is the projected operating income? A) $2,000 B) $9,000 C) $18,000 D) $3,500 Answer: D Explanation: D) Projected operating income = ($43,000 / 2) − ($14,000 / 2) − $11,000 = $3,500 Diff: 3 Objective: 4 AACSB: Application of knowledge
6) Rapid Cabinet Makers Inc. provided the following information for last month: Sales Variable costs Fixed costs Operating income
$25,000 10,000 3,000 $12,000
If sales reduce to half the amount in the next month, what is the projected operating income? A) $1,000 B) $6,000 C) $4,500 D) $18,500 Answer: C Explanation: C) Projected operating income = ($25,000 × 0.5) − ($10,000 × 0.5) − $3,000 = $4,500 Diff: 3 Objective: 4 AACSB: Application of knowledge
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7) Swansea Manufacturing currently produces 3,000 tires per month. The following per unit data for 3,000 tires apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$38 14 19 20 $91
The plant has capacity for 5,000 tires and is considering expanding production to 4,000 tires. What is the total cost of producing 4,000 tires? A) $364,000 B) $344,000 C) $209,000 D) $288,000 Answer: B Explanation: B) Total cost of producing 4,000 tires = [($38 + $14 + $19) × 4,000 units] + ($20 × 3,000 units) = $344,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
8) Atlas Manufacturing produces a unique valve, and has the capacity to produce 50,000 valves annually. Currently Atlas produces 40,000 valves and is thinking about increasing production to 45,000 valves next year. What is the most likely behavior of total manufacturing costs and unit manufacturing costs given this change? A) Total manufacturing costs will increase and unit manufacturing costs will stay the same. B) Total manufacturing costs will increase and unit manufacturing costs will decrease. C) Total manufacturing costs will stay the same and unit manufacturing costs will stay the same. D) Total manufacturing costs will increase and unit manufacturing costs will also increase. Answer: B Diff: 2 Objective: 4 AACSB: Application of knowledge
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9) Eaton Manufacturing currently produces 4,000 bicycles per month. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$53 10 12 14 $89
The plant has capacity for 6,000 bicycles and is considering expanding production to 5,000 bicycles. What is the per unit cost of producing 5,000 bicycles? A) $91.80 per unit B) $111.25 per unit C) $69.80 per unit D) $86.20 per unit Answer: D Explanation: D) Cost of producing 5,000 bicycles = [($53 + $10 + $12 ) × 5,000 units] + ($14 × 4,000 units) = 375,000 ÷ 5,000 units = $86.20 Diff: 3 Objective: 4 AACSB: Application of knowledge
10) Eaton Manufacturing currently produces 2,000 tables per month. The following per unit data for 2,000 tables apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$75 20 20 40 $155
The plant has capacity for 4,000 tables and is considering expanding production to 4,000 tables. What is the total cost of producing 4,000 tables? A) $540,000 B) $500,000 C) $390,000 D) $620,000 Answer: A Explanation: A) [($75 + $20 + $20) × 4,000 units] + ($40 × 2,000 units) = $540,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
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11) Eaton Manufacturing currently produces 2,000 tables per month. The following per unit data for 2,000 tables apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$75 20 20 40 $155
What is the per unit cost when producing 4,000 tables? A) $125.00 B) $195.00 C) $135.00 D) $155.00 Answer: C Explanation: C) $540,000 / 4,000 = $135.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
12) Pederson Company reported the following: Manufacturing costs Units manufactured Units sold Beginning inventory
$480,000 8,000 7,500 units sold for $90 per unit 2,000 units
What is the average manufacturing cost per unit? (Round the answer to the nearest dollar.) A) $48.00 B) $80.00 C) $60.00 D) $64.00 Answer: C Explanation: C) $480,000 / 8,000 = $60.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
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13) Pederson Company reported the following: Manufacturing costs Units manufactured Units sold Beginning inventory
$360,000 9,000 7,500 1,000
units sold for $90 per unit units
What is the manufacturing cost for the ending finished goods inventory? A) $100,000 B) $60,000 C) $744,000 D) $54,000 Answer: A Explanation: A) (1,000 + 9,000 - 7,500 ) × 40 = $100,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
14) Pederson Company reported the following: Manufacturing costs Units manufactured Units sold Beginning inventory
$187,000 17,000 8,500 3,400
units sold for $50 per unit units
What is the average manufacturing cost per unit? A) $11.20 B) $11.00 C) $22.00 D) $22.40 Answer: B Explanation: B) $187,000 / 17,000 = $11.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
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15) Pederson Company reported the following: Manufacturing costs Units manufactured Units sold Beginning inventory
$187,000 17,000 8,500 3,400
units sold for $20 per unit units
What is the manufacturing cost for the ending finished goods inventory? A) $238,000 B) $37,400 C) $93,500 D) $130,900 Answer: D Explanation: D) Ending finished inventory = 3,400 + (17,000 - 8,500) × $11 = $130,900 Diff: 3 Objective: 4 AACSB: Application of knowledge
16) When making decisions for product mix and pricing, the focus should be on total costs and not unit costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
17) Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for making decisions. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
18) A unit cost is computed by dividing total cost by the number of units. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
19) A unit cost is also called an average cost. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
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20) Universal Works Inc., reports the following information for September sales: Sales Variable costs Fixed costs Operating income
$90,000 (14,000) (16,000) $ 60,000
Promotional expenses for September were $1,000. Required: If sales double in October, what is the impact on the variable costs? Answer: The variable costs also double up to $14,000 × 2 = $28,000. Promotional expenses are variable costs and are already included in $14,000. Diff: 2 Objective: 4 AACSB: Analytical thinking
21) Denver City Manufacturing currently produces 2,000 glasses per month. The following per unit data apply for sales to regular customers and is based on 1,000 units produced. Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$200 40 70 50 $360
The plant has capacity for 3,000 glasses. Plant supervisor's salary is $15,000. Required: a. What is the total cost of producing 2,000 glasses? b. What is the total cost of producing 1,600 glasses? c. What is the per unit cost when producing 1,500 glasses? Answer: a. [($200 + $40 + $70) × 2,000 units] + ($50 × 1,000 units) = $670,000 Plant supervisor's salary is already included in fixed manufacturing overhead hence not added. b. [($200 + $40 + $70) × 1,600 units] + $50,000 = $546,000 c. $546,000/ 1,600 = $341.25 per unit Diff: 2 Objective: 4 AACSB: Application of knowledge
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22) During 2020, Get There Corporation incurred manufacturing expenses of $200,000 to produce 40,000 finished units. It was determined that 35,000 units were sold by the end of November while 5,000 units remained in ending inventory. The storage cost for December is $0.5 per unit. Required: a. What is the cost of producing one unit? b. What is the amount that will be reported on the income statement for cost of goods sold? c. What is the cost incurred for storing the inventory? Answer: a. $2000,000 / 40,000 = $5 b. 35,000 units × $5 = $175,000 c. 5,000 units × $0.5 = $2,500 Diff: 2 Objective: 4 AACSB: Application of knowledge
23) For the year just ended, the unit cost of product A (materials, labor, and overhead), your best-selling item, was $100. With zero very likely for the cost of all the inputs for Product A, explain why using a cost assumption of $100 per unit in this year's budget may be an unwise decision. Answer: Even if inflation with regards to the inputs for Product A is nonexistent in the upcoming year, the determination of a unit's cost is impacted by volume. For example, if last year's volume for product A was 100,000 units but next year's volume is expected to be 110,000, the budgeted total costs for variable expense items will be higher for next year and the budget should reflect that. Diff: 2 Objective: 4 AACSB: Analytical thinking
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Objective 2.5 1) Pederson Company reported the following: Manufacturing costs Units manufactured Units sold Beginning inventory
$2,385,000 53,000 40,000 units sold for $100 per unit 0 units
What is the amount of gross profit margin? A) $2,915,000 B) $4,000,000 C) $1,615,000 D) $2,200,000 Answer: D Explanation: D) 40,000 × ($100 - ($2,385,000 / 53,000)) = $2,200,000 Diff: 3 Objective: 5 AACSB: Application of knowledge
2) ________ sector companies purchase materials and components and convert them into finished goods. A) Merchandising B) Service C) Manufacturing D) Professional Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
3) Merchandising-sectors: A) purchase and then sell tangible products without changing their basic form B) provide intangible products C) purchase materials and components and convert them into finished goods D) purchase and then sell tangible products by changing their basic form Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
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4) Service-sector companies: A) do not produce tangible products but cost accounting is still utilized in service firms B) do not manufacture a product and therefore do not apply or adapt cost accounting to their operations C) purchase and then sell tangible products by changing their basic form and therefore need cost accounting D) purchase merchandise then sell it without changing its basic form and therefor do not need cost accounting systems Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
5) Wages paid to machine operators on an assembly line are classified as a: A) direct material cost B) direct manufacturing labor cost C) manufacturing overhead cost D) period cost Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
6) The following information pertains to Alleigh's Mannequins: Manufacturing costs Units manufactured Units sold Beginning inventory
$2,240,000 32,000 29,500 units sold for $110 per unit 0 units
What is the amount of gross margin? A) $2,065,000 B) $1,005,000 C) $3,245,000 D) $1,180,000 Answer: D Explanation: D) 29,500 × ($110 - ($2,240,000 / 32,000)) = $1,180,000 Diff: 3 Objective: 5 AACSB: Analytical thinking
7) Which of the following companies is part of the service sector of our economy? A) Macy's B) KPMG C) Apple Inc. D) Amazon.com Answer: B Diff: 1 Objective: 5 AACSB: Application of knowledge
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8) Which of the following companies is part of the merchandising sector of our economy? A) Jaguar B) Hewlett Packard C) Whole Foods Market D) KPMG Answer: C Diff: 1 Objective: 5 AACSB: Application of knowledge
9) Which of the following companies is part of the manufacturing sector of our economy? A) Nike B) Barnes & Noble C) Smith and Jones Law Firm D) Target Answer: A Diff: 1 Objective: 5 AACSB: Application of knowledge
10) Marriott International, would be classified as a(n): A) manufacturing-sector company B) merchandising-sector company C) service-sector company D) financial services firm Answer: C Diff: 1 Objective: 5 AACSB: Application of knowledge
11) The balance sheet of a service-sector companies would show: A) work-in-process inventory, and finished goods inventory accounts B) only finished goods inventory C) direct materials inventory, work-in-process inventory, and finished goods inventory accounts D) no inventory accounts Answer: D Diff: 1 Objective: 5 AACSB: Analytical thinking
12) The balance sheet of a manufacturing-sector companies would report: A) only merchandise inventory B) only finished goods inventory C) direct materials inventory, work-in-process inventory, and finished goods inventory accounts D) direct materials inventory and finished goods inventory accounts only Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
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13) For a manufacturing company, direct material costs may be included in: A) only the direct materials inventory account B) only in the merchandise inventory account reflecting the inventory on hand C) only in both work-in-process inventory and finished goods inventory D) direct materials inventory, work-in-process inventory, and finished goods inventory accounts Answer: D Diff: 1 Objective: 5 AACSB: Analytical thinking
14) For a manufacturing company, direct labor costs would be included in: A) only the direct materials inventory to reflect the cost of labor that has worked using those materials B) only in the merchandise inventory to reflect the value added in the production process C) only in both work-in-process inventory and finished goods inventory D) direct materials inventory, work-in-process inventory, and finished goods inventory accounts Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
15) For a manufacturing company, indirect manufacturing costs would be included in: A) direct materials inventory only B) merchandise inventory only C) both work-in-process inventory and finished goods inventory D) direct materials inventory, work-in-process inventory, and finished goods inventory accounts Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
16) For a manufacturing-sector company, the cost of factory depreciation is classified as a: A) direct material cost B) direct manufacturing labor cost C) manufacturing overhead cost D) period cost Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
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17) Which of the following cost is included in cost of goods sold? A) customer service cost B) manufacturing labor cost C) distribution cost D) marketing cost Answer: B Explanation: A) This is a period cost and is not included in cost of goods sold. B) This is a direct cost and is included in cost of goods sold along with direct material and overhead costs (in the case of a production facility) C) This is a period cost and is not included in cost of goods sold. D) This is a period cost and is not included in cost of goods sold. Diff: 1 Objective: 5 AACSB: Application of knowledge
18) Manufacturing overhead costs in an automobile manufacturing plant most likely include: A) labor costs of the painting department B) indirect material costs such as lubricants C) leather seat costs D) tire costs Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
19) Manufacturing overhead costs are also referred to as: A) indirect manufacturing costs B) prime costs C) direct manufacturing costs D) direct material Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
20) The only type of inventory that Macy's, a major U.S. department store chain would report on its balance sheet is: A) merchandise inventory B) finished goods inventory C) direct materials inventory, work-in-process inventory, and finished goods inventory accounts D) no inventory accounts as Macy's is a service-sector company Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
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21) Direct materials inventory costs would normally include: A) the cost of materials in stock are part of the cost object (product) and can be traced to that cost object in an economically feasible way B) the cost of goods partially worked on but not yet fully completed C) the cost of goods fully completed but not yet sold D) the cost of products in their original form intended to be sold without changing their basic form Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
22) Work-in-process inventory would normally include: A) direct materials in stock and awaiting use in the manufacturing process B) goods partially worked on but not yet fully completed C) goods fully completed but not yet sold D) goods returned after being sold to be re-worked on further improvements and quality Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
23) Finished goods inventory would normally include: A) direct materials in stock and awaiting use in the manufacturing process B) goods partially worked on but not yet fully completed C) goods fully completed but not yet sold D) goods returned after being sold to be re-worked on further improvements and quality Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
24) Which of the following is a period cost? A) costs incurred to provide customer service such as the operation of an 800 phone line to trouble shoot product problems and to answer questions about product warranties B) the cost of materials used to make a product when those materials are an insignificant part of the finished product C) the cost of direct labor D) the amount of depreciation expense recognized because of the use of plant assets such as building and equipment Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
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25) Which of the following is NOT an inventoriable cost of a manufacturer? A) sales commissions paid to sales representatives who sell the products made by the manufacturer B) wages paid to assembly-line workers C) plant depreciation incurred D) property taxes on plant Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
26) Which of the following is a direct manufacturing cost? A) plant maintenance B) plant rent C) fringe benefits paid to machine operators D) property taxes on plant Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
27) ________ are all manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way. A) Indirect manufacturing costs B) Marketing costs incurred C) Variable manufacturing costs D) Custom duties paid for the materials Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
28) Which of the following is NOT reported on the income statement of a manufacturing firm? A) cost of goods sold B) administrative and selling expenses C) work in progress D) marketing and distribution costs Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
29) The income statement of a service-sector firm reports: A) period costs only B) cost of goods sold C) both period costs and cost of goods sold D) direct labor costs Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
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30) Which of the following is an inventoriable cost? A) manufacturing overhead cost B) customer service costs C) distribution costs D) marketing costs Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
31) Inventoriable costs: A) include administrative and marketing costs B) are expensed in the accounting period in which the products are sold C) are expensed in the accounting period in which the products are manufactured D) are also referred to as nonmanufacturing costs Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
32) Inventoriable costs are expensed on the income statement: A) when direct materials for the product are purchased B) when the direct materials are used in production C) when the products are sold D) when the goods move from work-in process to finished goods account Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
33) Costs that are initially recorded as assets and expensed when goods sold are called: A) period costs B) inventoriable costs C) irrelevant costs D) research and development costs Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
34) For merchandising companies, inventoriable costs include: A) selling expenses B) shipping (incoming) costs to acquire merchandise C) distribution costs D) outgoing freight and handling costs Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
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35) For manufacturing firms, inventoriable costs include: A) plant supervisor salaries B) advertising costs to promote the sale of finished goods C) costs of dealing with customer questions about warranties after the sale D) distribution costs such the cost of operating a fleet of delivery vehicles Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
36) A plant manufactures several different products. If a particular product is the cost object, then the wages of the plant supervisor can be classified as a(n): A) direct cost because it occurs in the production facility B) indirect manufacturing cost and therefore is an inventoriable cost C) variable cost as it will vary on a per unit basis depending on volume D) period cost Answer: B Diff: 1 Objective: 5 AACSB: Application of knowledge
37) R&D costs are treated as period costs because: A) these costs may increase revenues in the current period B) these costs may increase revenues in the future period C) these costs may decrease revenues in the current period D) these costs are expensed when the goods are sold Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
38) For an automobile manufacturer, period costs include the cost of: A) the dashboard B) labor used for assembly C) advertising D) assembly-line equipment Answer: C Diff: 1 Objective: 5 AACSB: Application of knowledge
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39) Period costs: A) include only fixed costs B) seldom influence financial success or failure C) include the cost of selling, delivering, and after-sales support for customers D) should be treated as an indirect cost rather than as a direct manufacturing cost Answer: C Diff: 1 Objective: 5 AACSB: Application of knowledge
40) Period costs: A) are treated as expenses in the period they are incurred B) are directly traceable to products C) are treated as expenses in the following period they are incurred D) are also referred to as manufacturing overhead costs Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
41) Inventoriable costs are costs of a product that are considered: A) assets in a company's balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold B) liabilities in a company's balance sheet when the costs are incurred and that are expensed only when the product is sold C) assets in a company's income statement when the costs are capitalized and that are expensed as cost of goods sold only when the product is sold D) liabilities in a company's income statement when the costs are capitalized and that are expensed only when the product is sold Answer: A Diff: 3 Objective: 5 AACSB: Analytical thinking
42) Costs expensed on the income statement in the accounting period incurred are called: A) direct costs B) indirect costs C) period costs D) inventoriable costs Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
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43) In the cost classification system used by manufacturing firms, assembly workers' wages would be included in: A) irrelevant cost B) direct manufacturing costs C) indirect manufacturing costs D) period cost Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
44) Total manufacturing costs are comprised of: A) direct materials costs and period costs B) direct materials costs, direct manufacturing labor costs, and manufacturing overhead costs C) indirect materials costs, indirect manufacturing labor costs, and manufacturing overhead costs D) prime costs and period costs Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
45) Puritan Apparels is a clothing manufacturer. Unit costs associated with one of its products, Product FGS1156 are as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$80 40 45 31 7 20 $223
What are the inventoriable costs per unit associated with Product FGS1156? A) $196 B) $165 C) $178 D) $143 Answer: A Explanation: A) $80 + $40 + $45 + $31 = $196 Diff: 2 Objective: 5 AACSB: Application of knowledge
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46) Campus Apparels is a clothing maker. Unit costs associated with one of its products, Product DCT121, are as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$160 50 55 32 13 17 $327
What are the period costs per unit associated with Product DCT121? A) $33 B) $17 C) $30 D) $100 Answer: C Explanation: C) $13 + 17 = $30 Diff: 2 Objective: 5 AACSB: Application of knowledge
47) The American West Company manufactures several different products. Unit costs associated with Product ORD210 are as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$90 24 20 10 18 38 $200
What are the inventoriable costs per unit associated with Product ORD210? A) $134 B) $124 C) $144 D) $114 Answer: C Explanation: C) $90 + $24 + $20 + $10 = $144 Diff: 2 Objective: 5 AACSB: Application of knowledge
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48) The American West Company manufactures several different products. Unit costs associated with Product ORD210 are as follows: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$90 24 20 10 18 38 $200
What are the period costs per unit associated with Product ORD210? A) $18 B) $38 C) $56 D) $66 Answer: C Explanation: C) $18 + 38 = $56 Diff: 2 Objective: 5 AACSB: Application of knowledge
49) Expert Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1, 2015 Purchases of direct materials Ending inventory of direct materials, December 31, 2015 Direct manufacturing labor Indirect manufacturing costs Beginning inventory of finished goods, January 1, 2015 Cost of goods manufactured Ending inventory of finished goods, December 31, 2015 Operating costs
$450,000 24,000 151,000 18,000 27,000 50,000 43,000 234,000 48,000 152,000
How much of the above would be considered period costs for Expert Manufacturing? A) $229,000 B) $279,000 C) $152,000 D) $284,000 Answer: C Explanation: C) $152,000 of operating costs are period costs. Diff: 3 Objective: 5 AACSB: Application of knowledge
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50) Banks provide services or what some might call "intangible products" to their customers. Answer: TRUE Diff: 1 Objective: 5 AACSB: Application of knowledge
51) Department stores, such as Macy's and Kohl's, are examples of a merchandising company. Answer: TRUE Diff: 1 Objective: 5 AACSB: Application of knowledge
52) Merchandising companies purchase products and sell them to customers without changing their basic form. Answer: TRUE Diff: 1 Objective: 5 AACSB: Application of knowledge
53) Manufacturing companies hold only one type of inventory: direct material. Answer: FALSE Explanation: Manufacturing companies normally hold three types of inventory: Materials, WIP, and Finished Goods. Diff: 1 Objective: 5 AACSB: Analytical thinking
54) Manufacturing sector firms normally hold three types of inventory: direct materials inventory, work-in-process inventory, and finished goods inventory. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
55) Work-in-process inventory are goods partially worked on but not yet completed. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
56) Direct material costs are the acquisition costs of all materials that eventually become part of the cost object and cannot be traced to the cost object in an economically feasible way. Answer: FALSE Explanation: Direct material costs can be traced to the cost object. Diff: 2 Objective: 5 AACSB: Analytical thinking
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57) Acquisition costs of direct materials include freight-in charges, sales taxes, and custom duties. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
58) Indirect manufacturing costs include the compensation of all manufacturing labor that can be traced to the cost object in an economically feasible way. Answer: FALSE Explanation: Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object. Diff: 2 Objective: 5 AACSB: Analytical thinking
59) Direct manufacturing cost labor includes plant rent and salaries paid to plant supervisors. Answer: FALSE Explanation: Plant rent and salaries paid to plant supervisors are classified as indirect manufacturing costs. Diff: 2 Objective: 5 AACSB: Application of knowledge
60) Inventoriable costs are reported as a liability on the balance sheet when incurred and expensed on the income statement when the product is sold. Answer: FALSE Explanation: Inventoriable costs are reported as an asset when incurred and expensed on the income statement when the product is sold. Diff: 2 Objective: 5 AACSB: Application of knowledge
61) All manufacturing costs are period costs. Answer: FALSE Explanation: Manufacturing costs - materials, labor and manufacturing overhead are initially part of inventory cost and do not become expensed until the product is sold (cost of goods sold) Diff: 2 Objective: 5 AACSB: Analytical thinking
62) All costs reported on the income statement of a service-sector company are inventoriable costs. Answer: FALSE Explanation: None of the costs reported on the income statement of a service-sector company are inventoriable costs. All costs shown on the income statement for a service business are period costs. Diff: 1 Objective: 5 AACSB: Analytical thinking
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63) Period costs are included in the cost of goods sold. Answer: FALSE Explanation: Period costs are expensed as incurred and are not part of inventory costs. Inventoriable costs become expensed (cost of goods sold) when goods are sold. Diff: 2 Objective: 5 AACSB: Analytical thinking
64) Once product costs are defined, all other costs are period costs. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
65) Indirect manufacturing costs are also referred to as manufacturing overhead costs or factory overhead costs. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
66) Whippany manufacturing wants to estimate costs for each product they produce at its Troy plant. The Troy plant produces three products at this plant, and runs two flexible assembly lines. Each assembly line can produce all three products. Required: a. Classify each of the following costs as either direct or indirect for each product. b. Classify each of the following costs as either fixed or variable with respect to the number of units produced of each product. Direct
Indirect
Fixed
Variable
Assembly line labor wages ________ ________ ________ ________ Plant manager's wages ________ ________ ________ ________ Depreciation on the assembly line equipment ________ ________ ________ ________ Component parts for the product ________ ________ ________ ________ Wages of security personnel for the factory ________ ________ ________ ________ Answer: Direct Indirect Fixed Variable Assembly line labor wages X Plant manager's wages Depreciation on the assembly line equipment Component parts for the product X Wages of security personnel for the factory
X X X X
Diff: 2 Objective: 2, 4, 5 AACSB: Application of knowledge
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X X X X
67) What are the three types of manufacturing cost? Answer: Direct materials costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way. Examples of direct materials costs include steel used to manufacture cars, wood used in furniture, and semiconductor chips used in laptops. Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. Examples of direct manufacturing labor include wages paid to assembly-line workers. Indirect manufacturing costs are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way. Examples of indirect manufacturing costs include plant insurance paid, plant rent, property taxes on plant. Diff: 3 Objective: 5 AACSB: Analytical thinking
68) Explain the difference between an inventoriable cost and a period cost. What potential problems does an inaccurate classification of product and period costs cause? Answer: Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and which become cost of goods sold only when the product is sold. Period costs are treated as expenses of the accounting period in which they are incurred. Note that the cost of goods sold includes all manufacturing costs (direct materials, direct manufacturing labor, and manufacturing overhead costs) that are inventoriable costs incurred to produce them. Period costs are all costs in the income statement other than cost of goods sold. An inaccurate classification of inventoriable and period costs could lead to violations of the matching principle, which states that costs used in producing revenue should be matched on the income statement when the revenue is recognized. In extreme cases, net income for a given period might be significantly misstated. Diff: 2 Objective: 5 AACSB: Analytical thinking
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Objective 2.6 1) Which of the following formulas determine cost of goods sold in a merchandising entity? A) Beginning inventory + Purchases + Ending inventory = Cost of goods sold B) Beginning inventory + Purchases - Ending inventory = Costs of goods sold C) Beginning inventory - Purchases + Ending inventory = Cost of goods sold D) Beginning inventory - Ending inventory - Purchases = Cost of goods sold Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
2) Which of the following formulas determine cost of goods sold in a manufacturing entity? A) Beginning work-in-process inventory + Cost of goods manufactured - Ending work-in-process inventory = Cost of goods sold B) Beginning work-in-process inventory + Cost of goods manufactured + Ending work-in-process inventory = Cost of goods sold C) Cost of goods manufactured - Beginning finished goods inventory - Ending finished goods inventory = Cost of goods sold D) Cost of goods manufactured + Beginning finished goods inventory - Ending finished goods inventory = Cost of goods sold Answer: D Diff: 1 Objective: 6 AACSB: Analytical thinking
3) A company reported revenues of $377,000, cost of goods sold of $122,000, selling expenses of $12,000, and total operating costs of $72,000. Gross margin for the year is: A) $255,000 B) $243,000 C) $171,000 D) $293,000 Answer: A Explanation: A) $377,000 − $122,000 = $255,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
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4) All Rite Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1, 2015 Purchases of direct materials Ending inventory of direct materials, December 31, 2015 Direct manufacturing labor Indirect manufacturing costs Beginning inventory of finished goods, January 1, 2015 Cost of goods manufactured Ending inventory of finished goods, December 31, 2015 Operating costs
$460,000 26,000 156,000 14,000 30,000 41,000 46,000 239,000 45,000 150,000
What is All Rite Manufacturing's cost of goods sold? A) $390,000 B) $240,000 C) $239,000 D) $389,000 Answer: B Explanation: B) $46,000 + $239,000 − $45,000 = $240,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
5) All Rite Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1, 2015 Purchases of direct materials Ending inventory of direct materials, December 31, 2015 Direct manufacturing labor Indirect manufacturing costs Beginning inventory of finished goods, January 1, 2015 Cost of goods manufactured Ending inventory of finished goods, December 31, 2015 Operating costs What is All Rite's gross margin (or gross profit)? A) $54,000 B) $217,000 C) $211,000 D) $60,000 Answer: C Explanation: C) $450,000 − ($47,000 + $233,000 − $41,000) = $211,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
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$450,000 30,000 153,000 18,000 26,000 42,000 47,000 233,000 41,000 157,000
6) Cost of goods sold for a manufacturer is calculated as follows: beginning finished goods + cost of goods manufacturered - ending finished goods. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
7) Cost of goods sold refers to the products brought to completion, whether they were started before or during the current accounting period. Answer: FALSE Explanation: Cost of goods MANUFACTURED refers to the products brought to completion, whether they were started before or during the current accounting period. Diff: 2 Objective: 6 AACSB: Application of knowledge
8) Worcester Manufacturing produces electronic storage devices, and uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labor, and indirect manufacturing costs. Total indirect manufacturing costs for January were $300 million, and were allocated to each product on the basis of direct manufacturing labor costs of each line. Summary data (in millions) for January for the most popular electronic storage device, the Big Brain, was:
Direct manufacturing costs Direct manufacturing labor costs Indirect manufacturing costs Units produced
Big Brain $4,600,000 $1,700,000 $4,750,000 40,000
Required: a. Compute the manufacturing cost per unit for each product produced in January. b. Suppose production will be reduced to 30,000 units in February. Speculate as to whether the unit costs in February will most likely be higher or lower than unit costs in January; it is not necessary to calculate the exact February unit cost. Briefly explain your reasoning. Answer: a. Unit costs for January were: ($4,600,000 + $1,700,000 + $4,750,000) / 40,000 = $276.25 per unit b. Unit costs should be higher in February if only 30,000 units are to be produced. Indirect manufacturing costs most likely include both fixed and variable components. Since fewer units are expected to be produced in February, total fixed costs will be spread over fewer units. This will result in an increase in total cost per unit since variable costs per unit will most likely not change with the decreased production. Diff: 2 Objective: 6 AACSB: Application of knowledge
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9) Millworks Company manufactured 100,000 units in 2020 and reported the following costs: Sandpaper $ 32,000 Materials handling 320,000 Coolants & lubricants 22,400 Indirect manufacturing labor 275,200 Direct manufacturing labor 2,176,000 Direct materials, 1/1/18 348,000 Finished goods, 1/1/18 672,000 Finished goods, 12/31/18 1,280,000 Work-in-process, 1/1/18 96,000 Work-in-process, 12/31/18 64,000
Leasing costs-plant $ 384,000 Depreciation-equipment 224,000 Property taxes-equipment 32,000 Fire insurance-equipment 16,000 Direct material purchases 3,140,000 Direct materials, 12/31/18 280,000 Sales revenue 12,800,000 Sales commissions 640,000 Sales salaries 576,000 Advertising costs 480,000 Administration costs 800,000
Required: a. What is the amount of direct materials used during 2020? b. What manufacturing costs were added to WIP during 2020? c. What is cost of goods manufactured for 2020? d. What is cost of goods sold for 2020? Answer: a. $348,000 + $3,140,000 - $280,000 = $3,208,000 b. $3,208,000 + $2,176,000 + $32,000 + $320,000 + $22,400 + $275,200 + $384,000 + $224,000 + $32,000 + $16,000 = $6,689,600 c. $6,,689,600 + $96,000 - $64,000 = $6,529,600 d. $6,529,600 + $672,000 - $1,280,000 = $5,921,600 Diff: 3 Objective: 6 AACSB: Application of knowledge
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10) Howard Manufacturing Company had the following account balances for the quarter ending March 31, unless otherwise noted: Work-in-process inventory (January 1) Work-in-process inventory (March 31) Finished goods inventory (January 1) Finished goods inventory (March 31) Direct materials used Indirect materials used Direct manufacturing labor Indirect manufacturing labor Property taxes on manufacturing plant building Salespersons' company vehicle costs Depreciation of manufacturing equipment Depreciation of office equipment Miscellaneous plant overhead Plant utilities General office expenses Marketing distribution costs
$ 140,400 171,000 540,000 510,000 420,000 84,000 480,000 186,000 28,800 12,000 264,000 123,600 135,000 92,400 305,400 30,000
Required: a. Prepare a cost of goods manufactured schedule for the quarter. b. Prepare a cost of goods sold schedule for the quarter.
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Answer: a.
Howard Manufacturing Company Cost of Goods Manufactured Schedule For quarter ending March 31
Direct materials used Direct manufacturing labor Manufacturing overhead Depreciation of manufacturing equipment Indirect manufacturing labor Indirect materials Miscellaneous plant overhead Plant utilities Property taxes on building Manufacturing costs incurred Add beginning work-in-process inventory Total manufacturing costs Less ending work-in-process inventory Cost of goods manufactured b.
$ 420,000 480,000 $264,000 186,000 84,000 135,000 92,400 28,800
Howard Manufacturing Company Cost of Goods Sold Schedule For the quarter ending March 31 Beginning finished goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory Cost of goods sold
$ 540,000 1,659,600 2,199,600 (510,000) $1,689,600
Diff: 3 Objective: 6 AACSB: Application of knowledge
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790,200 $1,690,200 140,400 $1,830,600 (171,000) $1,659,600
11) Using the following information find the unknown amounts. Assume each set of information is an independent case. a.
Merchandise Inventory
Purchases Cost of goods sold Beginning balance Ending balance
$210,000 223,000 41,000 ?
b.
Direct Materials
Beginning balance Ending balance Purchases Direct materials used
$ 7,000 14,000 48,000 ?
c.
Work-in-process Inventory
Ending balance Cost of goods manufactured Beginning balance Current manufacturing costs
$ 22,000 21,000 8,000 ?
d. Finished Goods Inventory
Cost of goods manufactured Ending balance Cost of goods sold Beginning balance
$62,000 20,000 61,000 ?
Answer: a. Ending balance of merchandise inventory: $41,000 + $210,000 - $223,000 = 28,000 b.
Direct materials used: $7,000 + $48,000 - $14,000 = $41,000
c.
Current manufacturing costs: $21,000 + $22,000 - $8,000 = $35,000
d. Beginning balance of finished goods inventory: $20,000 + $61,000 - $62,000 = $19,000 Diff: 3 Objective: 6 AACSB: Analytical thinking
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12) Each of the following items pertains to one of these companies: Bedell Electronics (a manufacturing company), Gregory Food Retailers (a merchandising company), and Larson Real Estate (a service sector company). Classify each item as either inventoriable (I) costs or period (P) costs. inventoriable (I) costs or period (P) costs a. b.
Salary of Bedell Electronics president Depreciation on Bedell Electronics assembly equipment c. Salaries of Bedell's assembly line workers d. Purchase of frozen food for sale to customers by Gregory Food Retailers e. Salaries of frozen food personnel at Gregory Food Retailing f. Depreciation on freezers at Gregory Food Retailing g. Salary of a receptionist at Larson Real Estate h. Depreciation on a computer at Larson Real Estate i. Salary of a real estate agent at Larson Real Estate Answer:
a. b.
Salary of Bedell Electronics president Depreciation on Bedell Electronics assembly equipment c. Salaries of Bedell's assembly line workers d. Purchase of frozen food for sale to customers by Gregory Food Retailers e. Salaries of frozen food personnel at Gregory Food Retailing f. Depreciation on freezers at Gregory Food Retailing g. Salary of a receptionist at Larson Real Estate h. Depreciation on a computer at Larson Real Estate i. Salary of a real estate agent at Larson Real Estate
inventoriable (I) costs or period (P) costs P I
Diff: 3 Objective: 6 AACSB: Analytical thinking
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I I I P P P P
13) For last year, Watson Limited reported revenues of $420,000, cost of goods sold of $118,000, cost of goods manufactured of $105,000, and total operating costs of $60,000. Operating income for that year was: A) $315,000 B) $302,000 C) $255,000 D) $242,000 Answer: D Explanation: D) $420,000 - $118,000 - $60,000 = $242,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
14) Prime costs include: A) direct materials and direct manufacturing labor costs B) direct manufacturing labor and manufacturing overhead costs C) direct materials and manufacturing overhead costs D) only direct materials Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
15) Expert Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1, 2015 Purchases of direct materials Ending inventory of direct materials, December 31, 2015 Direct manufacturing labor Indirect manufacturing costs Beginning inventory of finished goods, January 1, 2015 Cost of goods manufactured Ending inventory of finished goods, December 31, 2015 Operating costs
$460,000 30,000 15,800 16,000 26,000 42,000 45,000 97,800 41,000 158,000
What is Expert's operating income? A) $346,400 B) $218,200 C) $204,200 D) $200,200 Answer: D Explanation: D) $460,000 − ($45,000 + $97,800 − $41,000) − $158,000 = $200,200 Diff: 3 Objective: 6 AACSB: Application of knowledge
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16) Conversion costs include: A) direct materials and direct manufacturing labor costs B) direct manufacturing labor and manufacturing overhead costs C) direct materials and manufacturing overhead costs D) only direct materials Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
17) Total manufacturing costs equal: A) direct materials plus prime costs B) direct materials plus conversion costs C) direct manufacturing labor costs plus sunk costs D) direct manufacturing labor costs plus conversion costs Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
18) The following information pertains to the Ruby Corp: Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory Cost of goods manufactured
$74,000 82,000 172,000 209,000 1,202,000
What is cost of goods sold? A) $1,210,000 B) $1,165,000 C) $1,157,000 D) $1,239,000 Answer: B Explanation: B) Cost of goods sold = $172,000 + $1,202,000 − $209,000 = $1,165,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
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19) The following information pertains to Expert System Corporation: Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory Cost of goods manufactured Sales
$18,000 25,000 36,000 31,000 241,000 302,000
What is the gross profit margin earned by the company? A) $56,000 B) $63,000 C) $68,000 D) $66,000 Answer: A Explanation: A) $36,000 + $241,000 − $31,000 = $246,000 Sales = $302,000 Profit = $302,000 - 246,000 = $56,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
20) What is the cost of goods manufactured for 2020? Beginning finished goods, 1/1/2020 Ending finished goods, 12/31/2020 Cost of goods sold Sales revenue Operating expenses
$84,000 79,000 306,000 450,000 98,000
A) $404,000 B) $399,000 C) $301,000 D) $311,000 Answer: C Explanation: C) $306,000 + $79,000 − $84,000 = $301,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
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21) What is the gross margin for 2020? Beginning finished goods, 1/1/2020 Ending finished goods, 12/31/2020 Cost of goods sold Sales revenue Operating expenses
$91,000 77,000 310,000 459,000 103,000
A) $135,000 B) $46,000 C) $163,000 D) $149,000 Answer: D Explanation: D) $459,000 − $310,000 = $149,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
22) What is the operating income for 2020? Beginning finished goods, 1/1/2020 Ending finished goods, 12/31/2020 Cost of goods sold Sales revenue Operating expenses
$90,000 77,000 306,000 456,000 101,000
A) $73,000 B) $49,000 C) $36,000 D) $62,000 Answer: B Explanation: B) $456,000 − $306,000 − $101,000 = $49,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
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23) What is the cost of goods manufactured for 2020? Beginning finished goods, 1/1/2020 Ending finished goods, 12/31/2020 Cost of goods sold Sales revenue Operating expenses
$47,000 36,000 259,000 488,000 110,000
A) $248,000 B) $369,000 C) $270,000 D) $259,000 Answer: A Explanation: A) $259,000 + $36,000 − $47,000 = $248,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
24) What is gross margin for 2020? Beginning finished goods, 1/1/2020 Ending finished goods, 12/31/2020 Cost of goods sold Sales revenue Operating expenses
$53,000 37,000 256,000 484,000 106,000
A) $212,000 B) $228,000 C) $244,000 D) $122,000 Answer: B Explanation: B) $484,000 − $256,000 = $228,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
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25) What is operating income for 2020? Beginning finished goods, 1/1/2020 Ending finished goods, 12/31/2020 Cost of goods sold Sales revenue Operating expenses
$50,000 35,000 251,000 485,000 109,000
A) $199,000 B) $110,000 C) $125,000 D) $140,000 Answer: C Explanation: C) $485,000 − $251,000 − $109,000 = $125,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
26) A company reported revenues of $382,000, cost of goods sold of $125,000, selling expenses of $16,000, and total operating costs of $74,000. Gross margin for the year is: A) $257,000 B) $241,000 C) $167,000 D) $292,000 Answer: A Explanation: A) $382,000 − $125,000 = $257,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
27) Operating income is sales revenue minus operating expenses. Answer: FALSE Explanation: Operating income = sales revenue - cost of goods sold - operating expenses Diff: 1 Objective: 6 AACSB: Analytical thinking
28) Conversion costs include all direct manufacturing costs and some of the period costs including research and development costs and customer service. Answer: FALSE Explanation: Conversion costs are production costs necessary to convert materials to finished goods which include direct labor and manufacturing overhead (indirect production costs). Diff: 1 Objective: 6 AACSB: Analytical thinking
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29) Designing, marketing, customer services, research and development expenses are all examples of operating costs. Answer: TRUE Diff: 2 Objective: 6 AACSB: Application of knowledge
30) Since costs that are inventoried are not expensed until the units associated with them are sold, a manager can produce more units than are expected to be sold in a period without reducing a firm's net income. Answer: TRUE Diff: 3 Objective: 6 AACSB: Analytical thinking
31) Indirect manufacturing costs such as rent, factory supervisor salary, and depreciation on production equipment are always costs of the period in which they are incurred and are not associated with inventories. Answer: FALSE Explanation: When indirect costs are incurred in marketing or in corporate headquarters, they are period costs. However, when these costs are incurred in manufacturing, they are manufacturing overhead costs and are inventoriable. Diff: 3 Objective: 6 AACSB: Analytical thinking
32) Design costs incurred in a manufacturing company flow through the accounting system from work-in-process to finished goods and when the products are sold, the design costs are part of cost of goods sold. Answer: FALSE Explanation: Design costs along with the costs of R&D, marketing, distribution, and customer service are period costs and therefore when incurred are operating expenses and not inventoriable costs. Diff: 2 Objective: 6 AACSB: Analytical thinking
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Objective 2.7 1) Which of the following is a manufacturing overhead cost? A) the use of direct materials in the making of a finished good B) labor cost of plant workers that can be traced accurately and easily to a particular product C) cost of materials that can be traced to individual products in an economically feasible manner D) overtime premiums paid to plant workers Answer: D Diff: 1 Objective: 6 AACSB: Application of knowledge
2) U.S. Systems Inc., had the following activities during 2020: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labor Manufacturing overhead Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory
$ 24,000 61,600 11,000 18,000 11,500 1,000 3,500 25,000 19,000
Required: a. What is the cost of direct materials used during 2020? b. What is cost of goods manufactured for 2020? c. What is cost of goods sold for 2020? d. What amount of prime costs was added to production during 2020? e. What amount of conversion costs was added to production during 2020? Answer: a. Cost of direct materials = $24,000 + $61,600 − $11,000 = $74,600 b. Cost of goods manufactured = $74,600 + $18,000 + $11,500 + $1,000 − $3,500 = $101,600 c. Cost of goods sold = $101,600 + $25,000 − $19,000 = $107,600 d. Amount of prime costs added to production = $72,800 + $18,000 = $92,600 e. Amount of conversion costs was added to production = $18,000 + $11,500 = $29,500 Diff: 2 Objective: 7 AACSB: Application of knowledge
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3) Many government agency contracts exclude all but which of the following costs from reimbursement under cost-plus agreements? A) marketing costs B) design costs C) production costs D) part of the research and development costs Answer: D Diff: 1 Objective: 7 AACSB: Application of knowledge
4) On the assembly floor, Jennifer is paid a regular rate of $25 an hour for straight-time assuming 8 working hours a day and five working days in a week. She is paid 1.5 times her regular rate for overtime hours. One week she worked 48 hours. Required: a. What is Jennifer's total compensation for the week? b. What amount of compensation would be reported as direct manufacturing labor? c. What amount of compensation would be reported as manufacturing overhead? Answer: a. Total compensation = Direct labor (40 hours × $25) + Overtime premium (8 hrs × $37.50) = $1,300 b. Direct manufacturing labor (48 hours × $25) = $1,200 c. Manufacturing overhead costs = Overtime premium (8 hrs × $12.50) = $100 Diff: 3 Objective: 7 AACSB: Application of knowledge
5) In the manufacturing plant, Alex is paid $40 an hour for straight-time and $60 an hour for overtime. One week she worked 54 hours, which included 8 hours of overtime, and 6 hours of idle time caused by material shortages. Required: a. What is Alex's total compensation for the week? b. What amount of compensation would be reported as direct manufacturing labor? c. What amount of compensation would be reported as manufacturing overhead? Answer: a. Total compensation (48 hours × $40) + Idle time (6 hrs × $40) + Overtime premium (8 hrs × $20) = $2,320 b. Direct manufacturing labor (48 hours × $40) = $1,920 c. Manufacturing overhead costs = Idle time (6 hrs × $40) + Overtime premium (8 hrs × $20) = $400 Diff: 3 Objective: 7 AACSB: Application of knowledge
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6) Exceptional Manufacturing Co. wants to classify costs for the product produced at its facility. The company produces only one product at the facility and operates continually. The cost categories are: Product cost Prime cost Conversion cost Period cost The following costs are found in the accounting records: a. b. c. d. e.
Quality control inspection wages Raw material purchases Sales commissions Factory depreciation Assembly wages
Required: Assign each of the above costs to the most appropriate cost categories. Answer: Product cost includes a, b, d, e. Prime cost includes a, b, e. Conversion cost includes a, d, e. Period cost includes c. Diff: 3 Objective: 7 AACSB: Analytical thinking
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7) A publisher employs authors and editors at their office to write accounting textbooks. They also utilize subcontractors, who are accounting faculty, to proofread and provide feedback on manuscripts. In the table below, classify each of the publishers' costs of producing textbooks. Fixed or Variable with Direct or Indirect (Cost regards to sales of object = textbook) books)
Costs
Explanation:
Costs Authors' salaries Editors' salaries Social Security paid on employers' portion) Cost of paper bound in hardcopy texts Life insurance premiums paid on the lives of the authors' and editors Wages paid to office staff Security staff wages
Fixed or Variable with Direct or Indirect (Cost regards to sales of object = textbook) books) Direct Fixed Direct Fixed Indirect Direct
Fixed Variable
Indirect Indirect Indirect
Fixed Fixed Fixed
Diff: 3 Objective: 7 AACSB: Analytical thinking
8) Which of the following is included in product cost for pricing and product-mix decisions? A) marketing costs B) sunk costs C) opportunity costs D) cost of capital Answer: A Diff: 2 Objective: 7 AACSB: Application of knowledge
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9) Under GAAP, only ________ can be assigned to inventories in the financial statements. A) manufacturing costs B) period costs C) cost of goods sold D) historical costs Answer: A Diff: 2 Objective: 7 AACSB: Application of knowledge
10) Product costs for financial statements are: A) inventoriable costs for external reporting purposes B) exchange costs incurred during transportation C) only the costs incurred along the supply chain D) opportunity costs incurred for the decisions forgone Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
11) Under GAAP, for the purposes of calculating inventory costs, product costs include: A) all costs incurred along the value chain B) design costs C) only inventoriable costs D) only research and development costs Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
12) Product costs used for government contracts generally include: A) marketing costs, and customer service costs B) design costs and production costs C) all the costs for pricing and product-mix decisions D) production costs, distribution costs, marketing costs, and customer service costs Answer: B Diff: 1 Objective: 7 AACSB: Analytical thinking
13) A common classification of costs is by business function. Which of the following classifications is NOT by business function? A) cost object B) research and development C) distribution D) production Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
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14) Which of the following might explain why one manager might assign certain costs to a cost object while a different manager might assign some different costs to that same cost object? A) One manager might classify one cost as direct while another might classify that same cost as indirect. B) For financial statement purposes, one manager might include all the costs of the value chain while the other might only include GAAP cost. C) One manager might value an inventory item for the balance sheet as the sum of all the value chain costs while another manager might choose to only recognize variable costs as inventoriable costs for GAAP purposes. D) One manager might be pricing a cost object while the other manager might be seeking the inventoriable cost. Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
15) For external reporting: A) costs are classified as either inventoriable or period costs B) costs reflect current values C) there are no prescribed rules since no one is exactly sure how investors and creditors will use these numbers D) costs include amounts that reflect both current and future benefits Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
16) Which of the following statements is true? A) Product costs and design costs are interchangeable terms. B) Inventoriable costs are assigned to inventories under GAAP. C) Manufacturing costs are a special case of period costs. D) Intangible costs refer to a particular cost of a product. Answer: B Diff: 1 Objective: 7 AACSB: Analytical thinking
17) One possible item that some companies include as direct manufacturing labor include: A) fringe benefits B) overtime C) idle time D) plant supervisor's salary Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
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18) Francis Kenney is paid $19 an hour for straight-time and $29 an hour for overtime. One week she worked 44 hours, which included 4 hours of overtime. What is the overtime premium incurred to the company? A) $116 B) $440 C) $40 D) $876 Answer: A Explanation: D) Overtime premium (4 hrs × $29) = $116 Diff: 2 Objective: 7 AACSB: Analytical thinking
19) Ralph Johnson is paid $30 an hour for straight-time and $40 an hour for overtime. One week he worked 39 hours, which included 9 hours of overtime, and 4 hours of idle time caused by material shortages. What is the direct labor cost incurred to the company? A) $1,050 B) $1,260 C) $1,140 D) $1,100 Answer: A Explanation: A) Direct labor (39 - 4 = 35 hours × $30) = $1,050 Diff: 3 Objective: 7 AACSB: Analytical thinking
20) Andy worked 60 hours last week for Bread Works Manufacturing. Of the 60 hours 10 hours were considered overtime, and also Tony was idle for 8 of the 60 hours due to an equipment malfunction. Andy makes $90 per hour and is paid $135 an hour (time and a half) for overtime. Andy's total compensation for that week would be ________, and assuming Bread Works charges overtime premium and idle time to indirect labor, the amount of this compensation credited to indirect labor would be ________. A) $5,850; $1,170 B) $6,300; $2,070 C) $5,130; $2,430 D) $5,400; $1,620 Answer: A Explanation: A) total compensation (50 × $90) + (10 × $135) = $5,850; indirect labor (8 × $90) + (10 × $45) = $1,170 Diff: 3 Objective: 7 AACSB: Analytical thinking
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21) Idle time wages consists of the wages paid to all workers (for both direct labor and indirect labor) in excess of their straight-time wage rates. Answer: FALSE Explanation: Overtime premium consists of the wages paid to all workers (for both direct labor and indirect labor) in excess of their straight-time wage rates. Idle time wages refers to the wages paid for unproductive time caused by lack of orders, machine or computer breakdowns, work delays, etc. Diff: 1 Objective: 7 AACSB: Analytical thinking
22) Rework labor time is considered an overhead cost and not a direct labor cost. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
23) For external reporting purposes, indirect manufacturing costs must be allocated to individual units. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
24) Overtime premium is normally considered as a component of direct labor. Answer: FALSE Explanation: Overtime premium is normally considered as part of indirect labor since it is usually not associated with a particular job. Diff: 1 Objective: 7 AACSB: Analytical thinking
25) It is common for fringe benefit costs, such as the portion of social security premiums paid by the employer and the costs incurred by the company for its portion of premiums for health and disability insurance, to be classified as an indirect (overhead) cost. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
26) If a worker is paid for 40 hours, but is idle for 5 of those 40 hours, the 5 hours of idle time would be considered a component of direct labor. Answer: FALSE Explanation: Idle time is normally considered a component of indirect labor since it is usually not associated with a particular job. Diff: 1 Objective: 7 AACSB: Analytical thinking
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27) When should an overtime premium of direct manufacturing labor be considered an indirect manufacturing cost? A direct manufacturing cost? Answer: The overtime premium of direct manufacturing labor should be considered an indirect manufacturing cost when it is attributable to the overall volume of work, and a direct manufacturing cost when a "rush job" is the sole source of the overtime. Diff: 1 Objective: 7 AACSB: Analytical thinking
28) In determining product cost, what concerns does a manufacturing firm have when contracting with a government agency? Answer: Government contracts often reimburse on the basis of "cost of a product" plus a pre specified profit margin. Government agencies provide detailed guidelines on the cost items they allow and disallow when calculating the cost of a product. For example, expenses such as marketing, distribution, and customer service costs may be prohibited but research and development costs are sometimes partially allowed as part of the cost. Diff: 1 Objective: 7 AACSB: Analytical thinking
Objective 2.8 1) Which of the following influences the make or buy decision to the company? A) opportunity cost B) sunk cost C) historical cost D) plant depreciation Answer: A Diff: 2 Objective: 8 AACSB: Analytical thinking
2) Since budgeting is a financial function and mostly an analytical and quantitative exercise, it generally has no impact on human behavior, motivation and decision making. Answer: FALSE Explanation: Budgeting can impact the way people work. Budgeted goals can help people focus on the activities that will help assure achievement of the goals. Financial rewards, promotions, and recognition tied to budgetary performance can also alter behaviors. Diff: 2 Objective: 8 AACSB: Analytical thinking
3) Cost accounting and cost management include calculating various costs, obtaining financial and nonfinancial information, and analyzing relevant information for decision making. Answer: TRUE Diff: 1 Objective: 8 AACSB: Analytical thinking
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4) Cost accounting helps to aids managers in formulating strategies, setting prices for products and services and making decisions about the mix of products and services to be offered to customers. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
5) Management accountants help managers identify what information is relevant and what information is irrelevant that help in decision making. Answer: TRUE Diff: 1 Objective: 8 AACSB: Analytical thinking
6) The capability of most state-of-the-art cost accounting systems are limited to calculating the cost of products, and services. Answer: FALSE Explanation: A cost accounting system should support calculations of the cost of products, services, and other cost objects, provide useful information for planning and control and performance evaluation, and for analyzing the relevant information for making decisions. Diff: 2 Objective: 8 AACSB: Analytical thinking
7) The cost system of Charlton Fabricators indicates that a product cost $30 to make in house. Of that $30 cost, $7 consists of plant costs that have already been paid for. A supplier proposes to make the same product for $26 but Charlton's plant will have idle time and because of budgetary constraints, will not be retooled to take advantage of that idle time. Should the product be outsourced to the supplier? A) No because the relevant cost for making the product is only $23 . B) Yes, because the Supplier can produce the product for $4.00 less per unit than Charlton can. C) Yes, because the Supplier can produce the product for $11.00 less per unit than Charlton can. D) No because the plant can be utilized for other purposes and either save the company even more money or produce additional revenue. Answer: A Explanation: A) The relevant cost of making the product is $23 because the $7 is a sunk cost. Diff: 2 Objective: 8 AACSB: Analytical thinking
8) A company is considering buying a product at $15 per unit, the in-house manufacturing of the same product is $17. The fixed cost per unit is $3 is included in the $17 in-house product manufacturing cost. What should the company do in this scenario? Answer: If the company purchases the product from the vendor it will incur a cost of $15 + $3 = $18, whereas it manufactures the product in-house for $17. Thus, the company saves $1 per unit by manufacturing in-house. Hence, it should manufacture the product in-house. Diff: 2 Objective: 8 AACSB: Application of knowledge
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Chapter 3
Cost-Volume-Profit Analysis
Objective 3.1 1) Managers use cost-volume-profit (CVP) analysis to: A) forecast the cost of capital for a given period of time B) to study the behavior of and relationship among the elements such as total revenues, total costs, and income C) estimate the risks associated with a given job D) analyze a firm's profitability and help to decide wealth distribution among its stakeholders Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
2) One of the first steps to take when using CVP analysis to help make decisions is: A) calculating the break-even point B) identifying the variable and fixed costs C) calculation of the degree of operating leverage for the company D) estimating the volume of sales to make a good profit Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Which of the following is true of cost-volume-profit analysis? A) The theory assumes that all costs are variable. B) The theory assumes that units manufactured equal units sold. C) The theory states that total variable costs remain the same over a relevant range. D) The theory states that total costs remain the same over the relevant range. Answer: B Diff: 2 Objective: 1 AACSB: Application of knowledge
4) The selling price per unit less the variable cost per unit is the: A) fixed cost per unit B) gross margin C) margin of safety D) contribution margin per unit Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
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5) In the graph method of CVP analysis: A) the total revenue line starts at the origin and the total costs line starts at the fixed intercept B) the operating income line starts at the origin and the total costs line starts at the fixed intercept C) the breakeven point is at the fixed intercept where the total revenues line intersects D) the operating income area is the section where the total costs line is above the total revenues line Answer: A Explanation: B) Incorrect. There is no operating income "line." C) Incorrect. The breakeven point is where the TOTAL COSTS LINE and total revenues intersect. D) Incorrect. The operating income area is the section where the total costs line is BELOW the total revenues line. Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Which of the following is an assumption of CVP analysis? A) Total costs can be divided into a fixed component and a component that is variable with respect to the level of output. B) When graphed, total costs curve upward. C) The unit-selling price is variable as it is subject to demand and supply. D) Total costs can be divided into inventoriable and period costs with respect to the level of output. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Which of the following would most likely not be useful inputs to a system that helps managers forecast sales using data analytics and machine learning? A) details about the company's existing customers B) details about new management techniques to be implemented next month C) details about potential customers D) details surrounding last month's disappointing sales volume Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
8) A revenue driver is defined as: A) any factor that affects costs and revenues B) any factor that affects revenues C) the only factor that can influence a change in selling price D) the only factor that can influence a change in demand Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
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9) The contribution margin per unit equals: A) fixed cost - contribution margin ratio B) selling price - fixed costs per unit C) selling price - variable costs per unit D) selling price - costs of good sold Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
10) Which of the following is true about the assumptions underlying basic CVP analysis? A) Selling price varies with demand and supply of the product. B) Only selling price and variable cost per unit are known and constant. C) Only selling price, variable cost per unit, and total fixed costs are known and constant. D) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant. Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
11) The contribution margin income statement: A) reports gross margin B) is allowed for external reporting to shareholders C) categorizes costs as either direct or indirect D) can be used to predict operating income at different levels of activity Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
12) Contribution margin equals: A) revenues minus period costs B) revenues minus product costs C) revenues minus variable costs D) revenues minus fixed costs Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
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13) Generation X Fashions Inc. sells 400 units resulting in $8,000 of sales revenue, $4,000 of variable costs, and $1,500 of fixed costs. Contribution margin per unit is: (Round the final answer to the nearest cent.) A) $23.75 B) $20.00 C) $10.00 D) $6.25 Answer: C Explanation: C) ($8,000 − $4,000) / 400 units = $10.00 per unit Diff: 2 Objective: 1 AACSB: Application of knowledge
14) Generation X Fashions Inc. sells 600 units resulting in $7,000 of sales revenue, $3,000 of variable costs, and $1,500 of fixed costs. Calculate the variable cost per unit. (Round the final answer to the nearest cent.) A) $6.67 B) $3.33 C) $1.67 D) $5.00 Answer: D Explanation: D) $3,000 / 600 = $5.00 Diff: 2 Objective: 1 AACSB: Application of knowledge
15) Tally Corp. sells software during the recruiting seasons. During the current year, 12,000 software packages were sold resulting in $470,000 of sales revenue, $110,000 of variable costs, and $48,000 of fixed costs. Contribution margin per software is: A) $39.17 B) $30.00 C) $35.17 D) $9.17 Answer: B Explanation: B) ($470,000 − $110,000) / 12,000 = $30.00 per software Diff: 2 Objective: 1 AACSB: Application of knowledge
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16) Tally Corp. sells software during the recruiting seasons. During the current year, 11,000 software packages were sold resulting in $440,000 of sales revenue, $120,000 of variable costs, and $52,000 of fixed costs. If sales increase by $100,000, operating income will increase by: (Round interim calculations to two decimal places and the final answer to the nearest whole dollar.) A) $37,504 B) $48,000 C) $52,000 D) $72,725 Answer: D Explanation: D) Price = $440,000 / 11,000 = $40.00 Sales in software packages = $100,000 / $40.00 = 2,500.00 software packages Operating income increase = 2,500.00 software packages × $29.09 per = $72,725 Diff: 2 Objective: 1 AACSB: Application of knowledge
17) Pacific Company sells only one product for $15 per unit, variable production costs are $3 per unit, and selling and administrative costs are $1.50 per unit. Fixed costs for 11,000 units are $5,000. The operating income is ________ when 11,000 units are sold. A) $11.55 per unit B) $10.05 per unit C) $10.50 per unit D) $4.50 per unit Answer: B Explanation: B) Operating income = $15 − $3 − $1.50 - ($5,000 / 11,000) = $10.05 Diff: 2 Objective: 1 AACSB: Application of knowledge
18) The contribution income statement highlights: A) gross margin B) the segregation of costs into period costs and inventoriable costs C) different product lines D) variable and fixed costs Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
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19) Fixed costs equal $18,000, unit contribution margin equals $35, and the number of units sold equal 1,300. Operating income is: A) $45,500 B) $27,500 C) $18,000 D) $63,500 Answer: B Explanation: B) (1,300 × $35) − $18,000 = $27,500 Diff: 2 Objective: 1 AACSB: Application of knowledge
20) Orion Company sells several products. Information of average revenue and costs is as follows: Selling price per unit $25 Variable costs per unit: Direct material $4 Direct manufacturing labor $1.70 Manufacturing overhead $0.50 Selling costs $2.10 Annual fixed costs $100,000 The company sells 12,000 units at the end of the year. The contribution margin per unit is: A) $18.40 B) $16.70 C) $20.50 D) $21.00 Answer: B Explanation: B) Contribution margin per unit = ($25 − $4 − $1.70 − $0.50 − $2.10) = $16.70 Diff: 2 Objective: 1 AACSB: Application of knowledge
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21) Orion Company sells several products. Information of average revenue and costs is as follows: Selling price per unit $21 Variable costs per unit: Direct material $6 Direct manufacturing labor $1.80 Manufacturing overhead $0.50 Selling costs $2 Annual fixed costs $96,000 The company sells 12,000 units at the end of the year. If direct labor and direct material costs increase by $1 each, contribution margin: A) increases by $24,000 B) increases by $12,000 C) decreases by $24,000 D) decreases by $12,000 Answer: C Explanation: C) Contribution margin = ($21 − $7 − $2.80 − $0.50 − $2) × 12,000 = $104,400. The previous contribution margin was $128,400 which means it decreased by $24,000 Diff: 3 Objective: 1 AACSB: Application of knowledge
22) Bell Company sells several products. Information of average revenue and costs is as follows: Selling price per unit Variable costs per unit: Direct material Direct manufacturing labor Manufacturing overhead Selling costs Annual fixed costs The company sells 11,000 units.
$32.00 $5.25 $2.50 $0.30 $2.25 $115,000
The contribution margin per unit is: A) $11.25 B) $21.70 C) $23.95 D) $24.25 Answer: B Explanation: B) Contribution margin per unit = $32.00 − $5.25 − $2.50 −$0.30 − $2.25 = $21.70 Diff: 2 Objective: 1 AACSB: Application of knowledge
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23) Bell Company sells several products. Information of average revenue and costs is as follows: Selling price per unit Variable costs per unit: Direct material Direct manufacturing labor Manufacturing overhead Selling costs Annual fixed costs The company sells 14,000 units.
$30 $6 $1.75 $0.3 $1.9 $111,000
What is the proportion of variable costs to total costs? A) 45.03% B) 43.08% C) 79.1% D) 55.65% Answer: D Explanation: D) Total variable costs = $6 + $$1.75 + $0.3 + $1.9 = $9.95 × 14,000 = $139,300 Total costs = $139,300 + $111,000 = $250,300. Variable cost proportion = $139,300 / $250,300 = 55.65% Diff: 2 Objective: 1 AACSB: Application of knowledge
24) Family Furniture sells a table for $1,000. Its fixed costs are $35,000, while its variable costs are $600 per table. It currently plans to sell 190 tables this month. What is the budgeted revenue for the month assuming that Family Furniture sells 190 tables? A) $76,000 B) $190,000 C) $155,000 D) $114,000 Answer: B Explanation: B) Budgeted revenue = 190 × $1,000 = $190,000 Diff: 2 Objective: 1 AACSB: Application of knowledge
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25) Family Furniture sells a table for $1,000. Its fixed costs are $35,000, while its variable costs are $700 per table. It currently plans to sell 180 tables this month. What is the budgeted operating income for the month assuming that Family Furniture sells 180 tables? A) $145,000 B) $54,000 C) $19,000 D) $180,000 Answer: C Explanation: C) Budgeted operating income = $180,000 − [(180 × $700) + $35,000] = $180,000 − $161,000 = $19,000 Diff: 2 Objective: 1 AACSB: Application of knowledge
26) SaleCo sells 8,200 units resulting in $100,000 of sales revenue, $35,000 of variable costs, and $55,000 of fixed costs. The contribution margin percentage is: A) 45% B) 65% C) 10% D) 35% Answer: B Explanation: B) ($100,000 − $35,000) / $100,000 = 65% Diff: 2 Objective: 1 AACSB: Application of knowledge
27) Which of the following is the mathematical expression of contribution margin ratio? A) Contribution margin ratio = Contribution margin percentage × Revenues (in dollars) B) Contribution margin ratio = Contribution margin percentage × Fixed costs (in dollars) C) Contribution margin ratio = Contribution margin percentage × Variable costs (in dollars) D) Contribution margin ratio = Contribution margin percentage × Operating leverage Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
28) Contribution Margin = Total revenues - Total variable costs Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
29) Contribution margin = Total revenues - Total manufacturing costs Answer: FALSE Explanation: GROSS MARGIN = Total revenues - Total manufacturing costs OR Contribution Margin = Total Revenue - TOTAL VARIABLE COSTS Diff: 1 Objective: 1 AACSB: Analytical thinking
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30) Contribution margin percentage = Selling price - Variable cost per unit Answer: FALSE Explanation: Contribution margin percentage = CONTRIBUTION MARGIN / REVENUES OR CONTRIBUTION MARGIN PER UNIT = Selling price - Variable cost per unit Diff: 1 Objective: 1 AACSB: Analytical thinking
31) Contribution margin per unit equals contribution margin divided by number of units sold. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
32) In CVP analysis, the graph of total revenues versus total costs is linear in nature relation to units sold within a relevant range and time period. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
33) The difference between total revenues and total variable costs is called profit margin. Answer: FALSE Explanation: The difference between total revenues and total variable costs is called CONTRIBUTION MARGIN. Diff: 2 Objective: 1 AACSB: Analytical thinking
34) The shorter the time horizon, the lower the percentage of total costs considered fixed. Answer: FALSE Explanation: The shorter the time horizon, the HIGHER the percentage of total costs considered fixed. Diff: 2 Objective: 1 AACSB: Analytical thinking
35) The three methods used to study CVP analysis are graph method, contribution method, and equation method. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
36) Contribution margin = Contribution margin percentage × Revenues (in dollars). Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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37) A revenue driver is a variable, such as volume, that causally affects revenues. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
38) Operating income plus total fixed costs equals the contribution margin. Answer: TRUE Explanation: Total revenues less total variable costs equal the CONTRIBUTION MARGIN. Diff: 2 Objective: 1 AACSB: Analytical thinking
39) Contribution margin percentage equals the unit contribution margin divided by the selling price. Answer: TRUE Explanation: Contribution margin per unit divided by selling price per unit equals contribution margin percentage. Diff: 1 Objective: 1 AACSB: Analytical thinking
40) The classification of costs as variable and fixed depends on the relevant range, the length of the time horizon, and the specific decision situation. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
41) The difference between total revenues and total variable costs is called contribution margin. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
42) Only variable production costs are used when calculating contribution margin. Answer: FALSE Explanation: False because all variable costs, production and selling/admin, are subtracted from revenue to determine contribution margin. Diff: 2 Objective: 1 AACSB: Analytical thinking
43) A contribution margin income statement is an income statement that groups costs into their variable and fixed components. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
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44) Arthur's Plumbing reported the following: Revenues Variable manufacturing costs Variable nonmanufacturing costs Fixed manufacturing costs Fixed nonmanufacturing costs
$4,500 $ 900 $ 810 $ 630 $ 545
Required: a. Compute contribution margin. b. Compute contribution margin percentage. c. Compute gross margin. d. Compute gross margin percentage. e. Compute operating income. Answer: a. Contribution margin $4,500 - $900 - $810 = $2,790 b. Contribution margin percentage = ($2,790/$4,500) × 100 = 62% c. Gross margin $4,500 - $900 - $630 = $2,970 d. Gross margin percentage = ($2,970/$4,500) × 100 = 66% e. Operating income $4,500 - $900 - $810 - $630 - $545 = $1,615 Diff: 3 Objective: 1 AACSB: Application of knowledge
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Objective 3.2 1) SaleCo sells 10,000 units resulting in $100,000 of sales revenue, $40,000 of variable costs, and $45,000 of fixed costs. To achieve $170,000 in operating income, sales must total: (Round intermediate calculations to two decimal places and the final answer to the nearest dollar.) A) $255,000 B) $309,091 C) $140,000 D) $358,333 Answer: D Explanation: D) ((100,000 - 40,000) / 100,000) = 60% ($170,000 + $45,000) / 60% = $358,333 in sales Diff: 2 Objective: 2 AACSB: Application of knowledge
2) Sparkle Jewelry sells 500 units resulting in $80,000 of sales revenue, $30,000 of variable costs, and $26,000 of fixed costs. Breakeven point in units is: (Round intermediary calculations to the nearest cent, and the final answer to the nearest whole unit.) A) 300 units B) 540 units C) 560 units D) 260 units Answer: D Explanation: D) Contribution margin per unit = ($80,000 − $30,000) / 500 = $100.00 Breakeven point = $26,000 / $100.00 = 260 units. Diff: 2 Objective: 2 AACSB: Application of knowledge
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3) Sparkle Jewelry sells 500 units resulting in $75,000 of sales revenue, $32,000 of variable costs, and $20,000 of fixed costs. The number of units that must be sold to achieve $41,000 of operating income is: (Round intermediary calculations to two decimal places, and your final answer up to the nearest whole number.) A) 555 units B) 233 units C) 710 units D) 477 units Answer: C Explanation: A) Incorrect. Forgot to include fixed costs in calculation. B) Incorrect. This is the breakeven in units. C) ($75,000 − $32,000) / 500 = $86.00 The number of units that must be sold to achieve $41,000 of operating income = ($20,000 + $41,000) / $86.00 = 710 units D) Incorrect. Divided by selling price - unit CM - unit FC. Diff: 2 Objective: 2 AACSB: Application of knowledge
4) Sky High sells helicopters. During the current year, 100 helicopters were sold resulting in $860,000 of sales revenue, $260,000 of variable costs, and $350,000 of fixed costs. Breakeven point in units is: (Round intermediary calculations to two decimal places, and your final answer up to the nearest whole number.) A) 69 units B) 44 units C) 59 units D) 41 units Answer: C Explanation: C) Explanation: Contribution margin per unit = ($860,000 - $260,000) / 100 = $600,000 / 100 = $6,000.00 per unit. Breakeven point = $350,000 / $6,000.00 = 59 units Diff: 2 Objective: 2 AACSB: Application of knowledge
5) Sky High sells helicopters. During the current year, 150 helicopters were sold resulting in $840,000 of sales revenue, $250,000 of variable costs, and $350,000 of fixed costs. The number of helicopters that must be sold to achieve $310,000 of operating income is: (Round intermediary calculations to two decimal places, and your final answer up to the nearest whole number.) A) 168 units B) 118 units C) 89 units D) 150 units Answer: A Explanation: A) Number of helicopters to be sold to achieve an operating income of $310,000 = ($350,000 + $310,000) / $3,933.33 = 168 units Diff: 2 Objective: 2 AACSB: Application of knowledge
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6) The controller at TellCo is examining her books. She determines that at the breakeven point of 5,000 units, variable costs total $5,000 and fixed costs total $6,000. Therefore, 5,001st unit sold will contribute ________ to profits. (Round the final answer to the nearest cent.) A) $1.00 B) $0.20 C) $1.20 D) $2.20 Answer: C Explanation: C) Fixed costs of $6,000/5,000 units = Contribution Margin of $1.20 per unit. Diff: 2 Objective: 2 AACSB: Application of knowledge
7) The breakeven point is the activity level where: A) revenues equal fixed costs B) revenues equal variable costs C) contribution margin equals total costs D) revenues equal the sum of variable and fixed costs Answer: D Explanation: D) Revenue - Variable Costs - Fixed Costs = Operating income, thus; Revenue = Variable Costs + Fixed Costs Diff: 1 Objective: 2 AACSB: Analytical thinking
8) Breakeven point in units is: A) total costs divided by profit margin per unit B) contribution margin per unit divided by total cost per unit C) fixed costs divided by contribution margin per unit D) the sum of fixed and variable costs divided by contribution margin per unit Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
9) Sales total $430,000 when variable costs total $300,000 and fixed costs total $90,000. The breakeven point in sales dollars is: (Round interim calculations to two decimal places and the final answer to the nearest dollar.) A) $300,000 B) $433,333 C) $1,000,000 D) $621,111 Answer: A Explanation: A) Contribution margin percentage = ($430,000 − $300,000) / $430,000 = 30%; BE sales = $90,000 / 0.30 = $300,000 Diff: 3 Objective: 2 AACSB: Application of knowledge
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10) The breakeven point revenues is calculated by dividing: A) fixed costs by total revenues B) fixed costs by contribution margin percentage C) total revenues by fixed costs D) contribution margin percentage by fixed costs Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
11) At breakeven point: A) operating income is equal to zero B) contribution margin minus fixed costs is equal to profits earned C) revenues equal fixed costs minus variable costs D) breakeven revenues equal fixed costs divided by the variable cost per unit Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
12) The breakeven point decreases if: A) the variable cost per unit increases B) the total fixed costs decrease C) the contribution margin per unit decreases D) the selling price per unit decreases Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
13) Assume only the specified parameters change in a CVP analysis. The contribution margin percentage increases when: A) total fixed costs increase B) total fixed costs decrease C) variable costs per unit increase D) variable costs per unit decrease Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
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14) What is the breakeven point in units, assuming a product's selling price is $400, fixed costs are $22,000, unit variable costs are $100, and operating income is $5,200? (Do not round intermediary calculations, and round the final calculation up to the next whole number.) A) 134 units B) 91 units C) 55 units D) 74 units Answer: D Explanation: D) Unit contribution margin = $400 − $100 = $300. Breakeven point in units = $22,000 / $300 = 74 units Diff: 2 Objective: 2 AACSB: Application of knowledge
15) Rosewood company sells wooden carvings for $390 each. The direct materials cost per unit is $150 and the direct labor is 2 hours at a rate of $30 per hour. Manufacturing overhead is applied on the basis of labor hours at a rate of $38 per hour. Rosewood makes and sells 1,900 units per period. How many units must Rosewood sell to breakeven? A) 402 units B) 963 units C) 371 units D) 803 units Answer: D Explanation: A) Incorrect. Fixed costs are $144,400, not $741,000. B) Incorrect. The unit fixed costs should not be subtracted from CM in the denominator. C) Incorrect. FC should be divided by CM, not by the selling price. D) Correct. Unit Contribution Margin 390 - 150 - (2 × $30) = $180 Fixed cost per period = (2 × $38) × 1,900 units = $144,400 Breakeven = FC / CM = $144,400 / $180 = 803 units Diff: 3 Objective: 2 AACSB: Application of knowledge
16) If unit outputs exceed the breakeven point: A) there will be an increase in fixed costs B) total sales revenue will exceed fixed costs C) total sales revenue will exceed variable costs D) there will be a profit Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
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17) Firebird Ltd. sells packaged birdseed for $5.50 per package. Variable product costs are $4.50 per package. Fixed costs are $12,000 per period. How many packages must Firebird sell to earn a target operating income of $7,700? A) 12,000 packages B) 7,700 packages C) 19,700 packages D) 3,582 packages Answer: C Explanation: A) Incorrect. Fixed costs need to be included in the numerator. B) Incorrect. This is the breakeven quantity. C) Correct. Quantity required = (fixed costs + target Operating Income) / Contribution margin per unit Q = ($12,000 + $7,700) / ($5.50 - $4.50) = 19,700 units. D) Incorrect. Should divide by CM per unit, not selling price. Diff: 3 Objective: 2 AACSB: Application of knowledge
18) How many units would have to be sold to yield a target operating income of $24,000, assuming variable costs are $26 per unit, total fixed costs are $4,000, and the unit selling price is $31? A) 800 units B) 1,077 units C) 5,600 units D) 1,334 units Answer: C Explanation: C) Desired sales = ($4,000 + $24,000) / ($31 − $26) = 5,600 units Diff: 3 Objective: 2 AACSB: Application of knowledge
19) If the breakeven point is 1,300 units and each unit sells for $70, then: A) selling 1,360 units will result in a loss B) selling $111,000 will result in a loss C) selling $91,000 will result in zero profit D) selling $85,000 will result in profit Answer: C Explanation: C) 1,300 × $70 = $91,000 of BE sales Diff: 2 Objective: 2 AACSB: Application of knowledge
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20) Slickware sells porcelain cups. The breakeven point is 5,000 units. The variable cost per unit is $18 and the fixed costs are $20,000. What is the contribution margin at 5,000 units? A) 20,000 B) 90,000 C) 110,000 D) 40,000 Answer: A Explanation: A) Correct. The contribution margin equals fixed costs at breakeven. B) Incorrect. This is the variable cost at the breakeven point. C) Incorrect. This is the revenue at the breakeven point. D) Incorrect. Diff: 3 Objective: 2 AACSB: Application of knowledge
21) Slickware sells porcelain cups. The breakeven point is 5,000 units. The variable cost per unit is $21 and the fixed costs are $20,000. What is the selling price? A) $25 B) $42 C) $46 D) $29 Answer: A Explanation: A) Correct. The contribution margin equals fixed costs at breakeven. Therefore $20,000/5,000 units = $4 CM per unit. VC = $21 so selling price must be $25. B) Incorrect. This would be the selling price if CM were $105,000. C) Incorrect. This would be the selling price if CM were $125,000. D) Incorrect. This would be the selling price if CM were $40,000. Diff: 3 Objective: 2 AACSB: Application of knowledge
22) If breakeven point is 1,100 units, each unit sells for $32, and fixed costs are $20,000, then on a graph the: A) total revenue line and the total cost line will intersect at $35,200 of revenue B) total cost line will be zero at zero units sold C) revenue line will start at $20,000 D) total revenue line and the total cost line will intersect at $55,200 of revenue Answer: A Explanation: A) $(1,100 × 32) = $35,200 Diff: 3 Objective: 2 AACSB: Application of knowledge
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23) When fixed costs are $90,000 and variable costs are 70% of the selling price, then breakeven sales are: (Round the final answer to the nearest dollar.) A) $128,571 B) $300,000 C) $153,000 D) $117,000 Answer: B Explanation: B) $90,000 / (1 − 0.7) = $300,000 in BE sales Diff: 2 Objective: 2 AACSB: Application of knowledge
24) Ruben is a travel agent. He intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline for $150 each. The round-trip tickets will be sold for $240 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,100 in advertising costs. What is the contribution margin per ticket package? A) $90 B) $390 C) $150 D) $240 Answer: A Explanation: A) $240 - $150 = $90 Diff: 2 Objective: 2 AACSB: Application of knowledge
25) Ruben is a travel agent. He intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline for $160 each. The round-trip tickets will be sold for $240 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,500 in advertising costs. How many ticket packages will Ruben need to sell to break even? (Round the final calculation up to the next whole number.) A) 23 packages B) 80 packages C) 69 packages D) 160 packages Answer: C Explanation: C) $240X - $160X - $5,500 = 0; X = 69 Diff: 2 Objective: 2 AACSB: Application of knowledge
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26) Ruben is a travel agent. He intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline for $170 each. The round-trip tickets will be sold for $240 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,500 in advertising costs. How many ticket packages will Ruben need to sell in order to achieve $80,000 of operating income? (Round the final calculation up to the next whole number.) A) 79 packages B) 1,143 packages C) 357 packages D) 1,222 packages Answer: D Explanation: D) $240X - $170X - $5,500 = $80,000; X = 1,222 Diff: 2 Objective: 2 AACSB: Application of knowledge
27) Ruben intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $140 each. The round-trip tickets will be sold for $210 each and the airline intends to reimburse Ruben for any unsold ticket packages. Fixed costs include $5,255 in advertising costs. For every $28,000 of ticket packages sold, operating income will increase by: (Do not round intermediary calculations and round the final calculation to the nearest whole number.) A) $9,333 B) $29,400 C) $18,667 D) $28,000 Answer: A Explanation: A) $28,000 × [($210 - $140 / $210)] = $9,333 Diff: 3 Objective: 2 AACSB: Application of knowledge
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28) Quality Stores, Inc., sells several products. Information of average revenue and costs is as follows: Selling price per unit Variable costs per unit: Direct material Direct manufacturing labor Manufacturing overhead Selling costs Annual fixed costs
$20 $6 $1.80 $0.5 $3 $98,000
What is the contribution margin percentage? (Round your answer to the nearest whole percent.) A) 44% B) 59% C) 34% D) 38% Answer: A Explanation: A) Contribution margin percentage = ($20 − $6 − $1.80 − $0.5 − $3) / 20 = 44% Diff: 2 Objective: 2 AACSB: Application of knowledge
29) Quality Stores, Inc., sells several products. Information of average revenue and costs is as follows: Selling price per unit Variable costs per unit: Direct material Direct manufacturing labor Manufacturing overhead Selling costs Annual fixed costs
$22 $5 $1.90 $0.40 $3 $100,000
The revenues that the company must earn annually to make a profit of $145,000 are: (Round the final answer to the nearest dollar.) A) $366,667 B) $356,954 C) $460,684 D) $317,059 Answer: C Explanation: C) Desired sales = ($100,000 + $145,000) / 0.53 = $460,684 Diff: 2 Objective: 2 AACSB: Application of knowledge
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30) Frazer Corp sells several products. Information of average revenue and costs is as follows: Selling price per unit $33 Variable costs per unit: Direct material $7.00 Direct manufacturing labor $1.50 Manufacturing overhead $0.95 Selling costs $2.70 Annual fixed costs $130,000 What is the operating income earned if the company sells 20,000 units? A) $341,000 B) $360,000 C) $390,000 D) $287,000 Answer: D Explanation: D) Contribution = $33 - $7.00 − $1.50 − $0.95 - $2.70 = $20.85 × 20,000 = $417,000 Operating income = $417,000 - $130,000 = $287,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
31) Frazer Corp sells several products. Information of average revenue and costs is as follows: Selling price per unit $31.00 Variable costs per unit: Direct material $7.00 Direct manufacturing labor $1.35 Manufacturing overhead $0.95 Selling costs $2.60 Annual fixed costs $140,000 If the company decides to lower its selling price by 15.00%, but continues to sell 17,000 units, the operating income is reduced by: A) $79,050 B) $140,000 C) $44,700 D) $17,000 Answer: A Explanation: A) $31.00 × 15.00% = 4.65. Therefore the new selling price is $26.35 ($31.00 - $4.65). Contribution = ($26.35 - $7.00 − $1.35 − $0.95 - $2.60) × 17,000 = $245,650 Operating income = $245,650 - $140,000 = $105,650. Diff: 3 Objective: 2 AACSB: Application of knowledge
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32) The following information is for High Corp: Selling price Variable costs Total fixed costs
$90 per unit $38 per unit $140,000
The number of units that High Corp must sell to reach targeted operating income of $25,000 is: (Round up to the nearest unit.) A) 2,693 units B) 3,174 units C) 481 units D) 1,834 units Answer: B Explanation: B) ($140,000 + $25,000)/($90 − $38) = 3,174 units Diff: 2 Objective: 2 AACSB: Application of knowledge
33) The following information is for High Corp: Selling price Variable costs Total fixed costs
$90 per unit $37 per unit $135,000
If targeted operating income is $50,000, then targeted sales revenue is: (Round the final answer to the nearest dollar.) A) $314,151 B) $229,245 C) $84,906 D) $185,000 Answer: A Explanation: A) ($135,000 + $50,000) / [($90 − $37) / $90] = $314,151 Diff: 2 Objective: 2 AACSB: Application of knowledge
34) Katrina's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,300, variable costs are $600, and fixed costs are $100,000. What is Katrina's operating income when 500 dresses are sold? A) $250,000 B) $650,000 C) $300,000 D) $550,000 Answer: A Explanation: A) 500($1,300) - 500($600) - $100,000 = $250,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
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35) Katrina's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,500, variable costs are $400, and fixed costs are $110,000. How many dresses are sold when operating income is zero? (Round the final calculation up to the next whole number.) A) 275 dresses B) 100 dresses C) 427 dresses D) 74 dresses Answer: B Explanation: B) $1,500N - $400N - $110,000 = 0; $1,100N = $110,000; N = 100 dresses Diff: 3 Objective: 2 AACSB: Application of knowledge
36) Dr. Charles Hunter, MD, performs a certain outpatient procedure for $1,100. His fixed costs are $26,000 per month and his variable costs are $500 per procedure. Dr. Hunter currently plans to perform 200 procedures this month. What is the breakeven point for the month assuming that Dr. Hunter plans to perform the procedure 200 times? (Round the final calculation up to the next whole number.) A) 44 times B) 24 times C) 36 times D) 12 times Answer: A Explanation: A) $1,100N - $500N - $26,000 = 0; $500N = $26,000; N = 44 times Diff: 3 Objective: 2 AACSB: Application of knowledge
37) Zirconia Fantasy sells only necklaces. 9,000 units were sold resulting in $280,000 of sales revenue, $60,000 of variable costs, and $40,000 of fixed costs. The breakeven point in total sales dollars is: (Do not round intermediary calculations and round the final calculation up to the nearest dollar.) A) $40,000 B) $50,910 C) $100,000 D) $62,223 Answer: B Explanation: B) $40,000 / ($280,000 - 60,000) × 280,000 = $50,910 (rounded up) Diff: 2 Objective: 2 AACSB: Application of knowledge
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38) Burgandy Manufacturing produces a single product that sells for $100. Variable costs per unit equal $40. The company expects total fixed costs to be $80,000 for the next month at the projected sales level of 2,300 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. What is the current breakeven point in terms of number of units? (Round the final calculation up to the next whole number.) A) 1,334 units B) 800 units C) 2,000 units D) 1,227 units Answer: A Explanation: A) $100X − $40X − $80,000 = 0; X = 1,334 units Diff: 2 Objective: 2 AACSB: Application of knowledge
39) Lights Manufacturing produces a single product that sells for $140. Variable costs per unit equal $60. The company expects total fixed costs to be $90,000 for the next month at the projected sales level of 1,000 units. What is the current breakeven point in terms of number of units? (Round the final calculation up to the next whole number.) A) 643 units B) 1,500 units C) 450 units D) 1,125 units Answer: D Explanation: D) $90,000/($140 − $60) = 1,125 units Diff: 2 Objective: 2 AACSB: Application of knowledge
40) Which of the following will increase a company's breakeven point? A) increasing variable cost per unit B) increasing contribution margin per unit C) reducing its total fixed costs D) increasing the selling price per unit Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
41) The breakeven point is: A) where selling one more unit will not increase income B) where contribution margin equals fixed costs C) where total revenues equal contribution margin D) fixed costs divided by revenues equals zero Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
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42) You can find the breakeven revenues using total revenues, total variable costs, and total fixed costs; you don't need unit prices and costs. Answer: TRUE Explanation: Revenues needed to earn target operating income = (Fixed costs + Target Operating Income) / Contribution Margin Percentage Diff: 2 Objective: 2 AACSB: Analytical thinking
43) In the graph method of CVP analysis, the horizontal line above the x-axis represents the total cost line. Answer: FALSE Explanation: In the graph method of CVP analysis, the horizontal line above the x-axis represents the fixed cost line. Diff: 2 Objective: 2 AACSB: Analytical thinking
44) A profit-volume graph shows the impact on operating income from changes in the output level. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
45) In the profit-volume graph the point at which the profit-volume line and x-axis intersect is the breakeven point. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
46) If the fixed costs are $50,000, targeted operating profits is $10, 000, selling price per unit is $4, and the variable cost per unit is $1.00, then the required sales volume is 80,000 units. Answer: FALSE Explanation: This statement is False. The sales volume needed to achieve a $10,000 operating profit is $80,000 in dollars but is only 20,000 in units ($50,000 + 10,000)/($4 - $1) = 20,000 units. If 20,000 units are sold, the sales in dollars would be $80,000 (20,000 × $4). Diff: 2 Objective: 2 AACSB: Analytical thinking
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47) MyArt sells framed art prints for $100. The unit variable cost per phone is $50 plus a selling commission of 10%. Fixed manufacturing costs total $1,250 per month, while fixed selling and administrative costs total $2,500. Required: a. What is the contribution margin per print? b. What is the breakeven point in prints? c. How many prints must be sold to earn pretax income of $7,500? Answer: a. CM per print = $100 - $50 - 0.1($100) = $40 b. N = Breakeven in prints $100N - $50N - $10N - $1,250 - $2,500 = 0 $40N - $3,750 = 0 N = $3,750 / $40 = 93.75 prints Breakeven is 94 prints c.
N = Prints to be sold $100N - $50N - $10N - $1,250 - $2,500 = $7,500 $40N = $11,250 N = $11,250 / $40 = 281.25 prints 282 prints must be sold
Diff: 3 Objective: 2 AACSB: Application of knowledge
48) What is meant by the term breakeven point? Why should a manager be concerned about the breakeven point and what helps them study the breakeven analysis? Answer: The breakeven point is the level of production and sales at which total revenues equal total costs. Managers should be concerned about the breakeven point because it helps determine when a business venture will be profitable. Breakeven point shows a company how far sales can decline before a net loss will be incurred. It helps to assess the risk of loss. The graph method helps managers visualize the relationships between total revenues and total costs. The graph shows each relationship as a line. Diff: 2 Objective: 2 AACSB: Analytical thinking
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Objective 3.3 1) Stephanie's Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1,000, variable costs are $500, and fixed costs are $120,000. How many dresses must the Bridal Shoppe sell to yield after-tax net income of $20,000, assuming the tax rate is 40%? (Round the final calculation up to the next whole number.) A) 307 dresses B) 280 dresses C) 240 dresses D) 467 dresses Answer: A Explanation: A) 1,000N - $500N - $120,000 = $20,000 / (1 - 0.4); $500N - $120,000 = $33,333; N = 307 units Diff: 3 Objective: 3 AACSB: Analytical thinking
2) Anglico's most recent income statement is given below. Sales (8,000 units) Less variable expenses Contribution margin Less fixed expenses Net income
$160,000 (68,000) 92,000 (50,000) $42,000
Required: a. Contribution margin per unit is $ ________ per unit b. If sales are doubled total variable costs will equal $ ________ c. If sales are doubled total fixed costs will equal $ ________ d. If 20 more units are sold, profits will increase by $ ________ e. Compute how many units must be sold to break even. # ________ f. Compute how many units must be sold to achieve operating income of $60,000. # ________ g. Compute the revenue needed to achieve an after tax income of $30,000 given a tax rate of 30%. $ ________ Answer: a. Contribution margin per unit is $92,000 / 8,000 = $11.5 b. Variable cost = $68,000 × 2 = $136,000 c. Fixed cost = $50,000 d. Contribution margin of $11.50 × 20 units = $230 e. Breakeven point in units = Fixed costs of $50,000 / Contribution margin per unit $11.50 = 4,348 units (rounded up) f. Desired sales = (Fixed costs of $50,000 + Desired operating income $60,000) / $11.50 = 9,566 units (rounded up) g. After tax income of $35,000 / (1-30%) = operating income of $50,000. Contribution margin ratio = $92,000 / $160,000 = 56.25%. Desired sales = (fixed costs of $50,000 + desired operating income of $50,000) / 56.25% = $177,778 (rounded up) Diff: 3 Objective: 3 AACSB: Application of knowledge
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3) Black Pearl, Inc., sells a single product. The company's most recent income statement is given below. Sales Less variable expenses Contribution margin Less fixed expenses Net income
$50,000 (30,000) $20,000 (12,500) $ 7,500
Required: a.
Contribution margin ratio is
________%
b.
Breakeven point in total sales dollars is
$ ________
c.
To achieve $40,000 in operating income, sales must total
$ ________
d. If sales increase by $50,000, operating income will increase by $ ________ e.
To achieve a $40,000 after tax income, given a tax rate of 20%, sales must total $________ Answer: a. Contribution margin ratio is $20,000 / $50,000 = 40% b. Fixed costs $12,500 / 0.40 CM% = $31,250 in sales c. [Fixed costs $12,500 + operating income $40,000] / 0.40 CM% = $131,250 in sales d. $50,000 × 0.40 CM% = $20,000 increase in net income e. After tax income of $40,000 / (1-20%) = operating income of $50,000. Desired sales = (fixed costs of $12,500 + desired operating income of $50,000) / CM% of 40% = $156,250) Diff: 3 Objective: 3 AACSB: Application of knowledge
4) The selling price per unit is $25, variable cost per unit $15, and fixed cost per unit is $4 when sales are 10,000 units. If one more unit is sold, operating income will increase by $6. Answer: FALSE Explanation: The sale of one more unit will increase net income by $10, ($25 - $15 = $10). Diff: 2 Objective: 3 AACSB: Application of knowledge
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5) A company with sales of $50,000, a contribution margin ratio of 30%, and fixed costs of $25,000 will earn a net income of $10,000. Answer: FALSE Explanation: Net income = $50,000 - $35,000 - $25,000 = ($10,000) Diff: 2 Objective: 3 AACSB: Application of knowledge
6) Which of the following statements about net income (NI) is true? A) NI = operating income plus nonoperating revenue. B) NI = operating income plus operating costs. C) NI = operating income less income taxes. D) NI = operating income less cost of goods sold. Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
7) Assume the following cost information for Fernandez Company: Selling price Variable costs Total fixed costs Tax rate
$190 per unit $80 per unit $95,000 35%
What minimum volume of sales dollars is required to earn an after-tax net income of $40,000? (Do not round interim calculations and round the final answer to the nearest dollar.) A) $164,091 B) $106,294 C) $270,385 D) $252,448 Answer: C Explanation: C) Minimum volume of sales dollars is required = [$95,000 + ($40,000 / 0.65)] / [($190 - $80) / $190] = $270,385 Diff: 3 Objective: 3 AACSB: Application of knowledge
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8) Assume the following cost information for Fernandez Company: Selling price Variable costs Total fixed costs Tax rate
$190 per unit $80 per unit $95,000 35%
What is the number of units that must be sold to earn an after-tax net income of $30,000? (Do not round interim calculations and round the final answer to the nearest unit.) A) 1,284 units B) 1,137 units C) 658 units D) 1,329 units Answer: A Explanation: A) Required number of units = [$95,000 + ($30,000 / 0.65)] / ($190 - $80) = 1,284 units Diff: 3 Objective: 3 AACSB: Application of knowledge
9) In CVP analysis, focusing on target net income rather than operating income: A) will increase the breakeven point B) will decrease the breakeven point C) will not change the breakeven point D) will help managers construct a better capital policy Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
10) Which of the following is true of net income? A) Net income is operating income divided by income tax rate. B) Net income is operating income plus operating revenues minus operating costs minus income taxes. C) Net income is operating income plus nonoperating revenues minus nonoperating costs minus income taxes. D) Net income is operating income minus nonoperating revenues minus nonoperating costs minus sales taxes. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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11) If selling price per unit is $40, variable costs per unit are $26, total fixed costs are $24,000, the tax rate is 30%, and the company sells 8,000 units, net income is: A) $88,000 B) $16,000 C) $78,400 D) $61,600 Answer: D Explanation: D) Net income = [(($40 − $26) × 8,000) − $24,000] × (1.0 − 0.3) = $61,600 Diff: 2 Objective: 3 AACSB: Application of knowledge
12) The planned operating income is calculated by: A) dividing net income by tax rate B) dividing net income by 1 − tax rate C) multiplying net income by tax rate D) multiplying net income by 1 − tax rate Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
13) If Beta Corp's net income is $240,000 and the tax rate is 40%, then the company's planned operating income is: A) $336,000 B) $400,000 C) $201,600 D) $576,000 Answer: B Explanation: A) Incorrect because this is net income × tax rate. B) Operating income = $240,000 / (0.6) = $400,000 C) Incorrect because this is net income × (1 - tax rate). D) Incorrect because this is net income / 0.30. Diff: 2 Objective: 3 AACSB: Application of knowledge
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14) The Marietta Company has fixed costs of $75,000 and variable costs are 75% of the selling price. To realize operating income of $14,000 from sales of 70,000 units, the selling price per unit: (Round the answer to the nearest cent.) A) must be $1.27 B) must be $1.70 C) must be $5.09 D) must be $4.29 Answer: C Explanation: A) Incorrect because this is dividing by the variable cost ratio instead of the contribution margin ratio. B) Incorrect because operating income should be added to fixed costs, not subtracted C) Breakeven sales = ($75,000 + $14,000) / 0.25 = $356,000 Selling price = $356,000 / 70,000 units = $5.09 per unit D) Incorrect because desired operating income was not included in a numerator. Diff: 3 Objective: 3 AACSB: Application of knowledge
15) If a company's target net income is $1,600,000 and the tax rate is 28%, what is the target operating income? A) $1,152,000 B) $1,600,000 C) $2,222,222 D) $2,048,000 Answer: C Explanation: C) Target Net Income/(1 — Tax Rate) = Target Operating Income. $1,600,000/(1 - 0.28) = $2,222,222. Diff: 2 Objective: 3 AACSB: Application of knowledge
16) An increase in the tax rate will increase the breakeven point. Answer: FALSE Explanation: A change in the tax rate will not change the breakeven point. Diff: 2 Objective: 3 AACSB: Application of knowledge
17) A firm operating at breakeven point will pay an income tax of 10%. Answer: FALSE Explanation: A firm operating at breakeven point will not pay income tax as operating income is $0. Diff: 2 Objective: 3 AACSB: Analytical thinking
18) All else being constant, an increase in operating income will result in an increase in net income. Answer: TRUE Diff: 1 Objective: 3 AACSB: Application of knowledge
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19) If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $39,000. Answer: FALSE Explanation: If planned net income is $30,000 and the tax rate is 30%, then planned operating income would be $42,857, [$30,000 / (1.0 − 0.3) = $42,857]. Diff: 1 Objective: 3 AACSB: Application of knowledge
20) CVP analysis ignores the impact of income taxes. Answer: FALSE Explanation: Using CVP to determine the impact of decisions on net income the CVP model can be used to state results in terms of target net income rather than target operating income and therefore, income taxes must be taken into account. Diff: 2 Objective: 3 AACSB: Application of knowledge
21) The Holiday Card Company, a producer of specialty cards, has asked you to complete several calculations based upon the following information: Income tax rate Selling price per unit Variable cost per unit Total fixed costs
30% $6.60 $5.28 $46,200.00
Required: a. What is the breakeven point in cards? b. What sales volume is needed to earn an after-tax net income of $13,028.40? c. How many cards must be sold to earn an after-tax net income of $18,480? Answer: a. Breakeven point in units = $46,200/($6.60 − $5.28) = 35,000 units b.
Operating income = $13,028.40 / 0.70 = $18,612 $18,612 + $46,200 = $64,812 Contribution per unit = $6.60 − $5.28 = $1.32 Breakeven sales in units = $64,812 / $1.32 = 49,100 units Breakeven sales = 49,100 units × $6.60 = $324,060
c.
Operating income = $18,480/0.70 = $26,400 $26,400 + $46,200 = $72,600 Breakeven sales in units = $72,600 / $1.32 = 55,000 units
Diff: 2 Objective: 3 AACSB: Application of knowledge
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22) James Corporation gathered the following information: Variable costs Income tax rate Contribution-margin ratio
$550,000 40% 30%
Required: a. Calculate the fixed costs, assuming breakeven revenue is $2,000,000. b. Calculate sales volume in dollars to produce an after-tax net income of $150,000. Answer: a. $2,000,000 revenue × CM% 30% = CM of $600,000 so FC must be $600,000 for operating income to be zero. b. $150,000 / (1- 0.40) = $250,000 desired operating income. $250,000 + $600,000 FC / 0.30 = $2,833,333 (rounded). Diff: 3 Objective: 3 AACSB: Application of knowledge
23) Explain what net income and what taxes can have on a manager's decision? Answer: Net income is operating income plus nonoperating revenues such as interest revenue minus nonoperating costs such as interest cost minus income taxes. Some decisions might not result in a large operating income, but their tax consequences make them attractive because they have a positive effect on net income–the measure that drives shareholders' dividends and returns. Diff: 2 Objective: 3 AACSB: Analytical thinking
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Objective 3.4 1) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution margin increases by $6 per unit, then: A) fixed costs increases by $6 per unit B) operating income decreases by $6 per unit C) fixed costs decreases by $6 per unit D) operating income increases by $6 per unit Answer: D Diff: 2 Objective: 4 AACSB: Application of knowledge
2) If a company is planning to reduce the selling price per unit but not reduce expectations of revenues, they must believe that: A) variable costs will decline as well B) the fixed costs will cover the lower sales price C) more units will be sold D) increased collections will increase income Answer: C Explanation: A) Incorrect because changing the selling price doesn't affect variable costs. B) Incorrect because fixed costs reduce income. C) Correct - management must believe a lower price will increase demand. D) Incorrect because a lower sales price doesn't imply anything about collections. Diff: 1 Objective: 4 AACSB: Analytical thinking
3) All else being equal, a reduction in selling price will: A) increase contribution margin B) reduce fixed costs C) increase variable costs D) reduce operating income Answer: D Diff: 2 Objective: 4 AACSB: Application of knowledge
4) All else being equal, an increase in advertising expenditures will: A) reduce operating income B) reduce contribution margin C) increase variable costs D) increase selling price Answer: A Diff: 2 Objective: 4 AACSB: Application of knowledge
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5) Blistre Company operates on a contribution margin of 40% and currently has fixed costs of $510,000. Next year, sales are projected to be $3,100,000. An advertising campaign is being evaluated that costs an additional $110,000. How much would sales have to increase to justify the additional expenditure? A) $165,000 B) $1,240,000 C) $275,000 D) $510,000 Answer: C Explanation: C) Required sales = $110,000 / 0.4 = $275,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
6) Tony Manufacturing produces a single product that sells for $100. Variable costs per unit equal $35. The company expects total fixed costs to be $82,000 for the next month at the projected sales level of 2,800 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose management believes that a $90,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure? (Round the final answer up to nearest whole unit.) A) 900 units B) 1,385 units C) 1,256 units D) 1,262 units Answer: B Explanation: B) $100X − $35X − $90,000 = 0; X = 1,385 units to cover the expenditures Diff: 3 Objective: 4 AACSB: Application of knowledge
7) Tony Manufacturing produces a single product that sells for $80. Variable costs per unit equal $40. The company expects total fixed costs to be $82,000 for the next month at the projected sales level of 2,700 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a 11% reduction in the selling price will result in a 11% increase in sales. If this proposed reduction in selling price is implemented: (Do not round intermediary calculations and round the final answer to the nearest whole number.) A) operating income will decrease by $14,494 B) operating income will increase by $9,266 C) operating income will decrease by $23,760 D) operating income will increase by $14,494 Answer: A Explanation: A) Reduction in revenues = $80 × 11% = $8.8 × 2,700 units = ($23,760) Increase in contribution = 2,700 units × 11% = 297 units × ($71.2 − $40) = $14,494 Change in operating income ($9,266) Diff: 3 Objective: 4 AACSB: Application of knowledge
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8) Craylon Manufacturing produces a single product that sells for $140. Variable costs per unit equal $25. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,300 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. Suppose that management believes that a $12,000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by ________ to justify this additional expenditure. (Round the final answer up to the nearest whole unit.) A) 86 units B) 105 units C) 480 units D) 1,068 units Answer: B Explanation: B) $12,000/($140 − $25) = 105 units to cover the expenditure Diff: 2 Objective: 4 AACSB: Application of knowledge
9) Craylon Manufacturing produces a single product that sells for $140. Variable costs per unit equal $35. The company expects total fixed costs to be $60,000 for the next month at the projected sales level of 1,300 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. One alternative is to increase advertising expenses by $14,000. What is the effect on operating income with the increase of advertising expenses? A) Operating income will decrease by $14,000. B) Operating income will increase by $14,000. C) Operating income will decrease by $62,500. D) Operating income will increase by $62,500. Answer: A Explanation: A) Operating income without advertising expenses = $140 - 35 = $105 × 1,300 = 136,500 - 60,000 = $76,500 Operating income with advertising expenses = 136,500 - (60,000 + 14,000) = $62,500 Diff: 3 Objective: 4 AACSB: Application of knowledge
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10) Kmax Inc. wants to make a $1,500,000 operating income during the upcoming period. The forecast is for sales of 15,000 units. The variable cost per unit is $55 and the total fixed costs are $1,875,000. What is the target selling price per unit? A) $280 B) $273 C) $225 D) $325 Answer: A Explanation: A) Target Operating Income $1,500,000 Plus: Fixed Costs 1,875,000 Equals: Target $3,375,000 Contribution Margin Divided by: Units to be sold 15,000 Target contribution margin per unit $225 Plus: Variable cost per unit 55 Target selling price per unit $280 Diff: 3 Objective: 4 AACSB: Application of knowledge
11) If contribution margin decreases by $1 per unit, then operating profits will increase by $1 per unit. Answer: FALSE Explanation: If contribution margin decreases by $1 per unit, then operating profits will decrease by $1 per unit. Diff: 1 Objective: 4 AACSB: Application of knowledge
12) If variable costs per unit increase, then the breakeven point will decrease. Answer: FALSE Explanation: If variable costs per unit increase, then the breakeven point will also increase. Diff: 2 Objective: 4 AACSB: Application of knowledge
13) A planned increase in advertising would be considered an increase in variable costs in CVP analysis. Answer: FALSE Explanation: A planned increase in advertising would be considered an increase in fixed costs in CVP analysis. Diff: 1 Objective: 4 AACSB: Analytical thinking
14) A planned decrease in selling price would be expected to cause an increase in the quantity sold. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
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15) In 2020, Craylon Company has sales of $1,000,000, variable costs of $250,000, and fixed costs of $200,000. In 2020, the company expects annual property taxes to decrease by $15,000. Required: a. Calculate operating income and the breakeven point for 2020. b. Calculate the breakeven point for 2020. Answer: a. In 2020, operating income is $1,000,000 sales revenue − $250,000 variable costs − $200,000 fixed costs = $550,000. The breakeven point for 2020 is $266,667 in total sales dollars. Contribution margin ratio = ($1,000,000 - $250,000) / $1,000,000 = 0.75. Breakeven sales = $200,000 / 0.75 = $266,667. b. The breakeven point for 2020 is $246,667 in total sales dollars. Estimated fixed costs for 2020 = $200,000 − $15,000 = $185,000. Breakeven sales = $185,000 total fixed costs / 75% CM ratio = $246,667. Diff: 3 Objective: 4 AACSB: Application of knowledge
16) Furniture, Inc., sells lamps for $30. The unit variable cost per lamp is $22. Fixed costs total $9,600. Required: a. What is the contribution margin per lamp? b. What is the breakeven point in lamps? c. How many lamps must be sold to earn a pretax income of $8,000? d. What is the margin of safety, assuming 1,500 lamps are sold? Answer: a. Contribution margin per lamp = $30 - $22 = $8 b.
N = Breakeven point in lamps $30N - $22N - $9,600 = 0 $8N - $9,600 = 0 N = $9,600/$8 = 1,200 lamps
c.
N = Target sales in lamps $30N - $22N - $9,600 - $8,000 = 0 $8N - $17,600 = 0 N = $17,600/$8 = 2,200 lamps
d. Margin of safety = Sales - Breakeven sales = ($30.00 × 1,500) - $36,000 = $9,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
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17) Tom's Tire Tower, Inc., sells tires for $110. The unit variable cost per tire is $85. Fixed costs total $475,000. Required: a. What is the contribution margin per tire? b. What is the breakeven point in tires? c. How many tires must be sold to earn a pretax income of $450,000? d. What is the margin of safety, assuming 33,000 tires are sold? Answer: a. Contribution margin per tire = $110 - $85 = $25 b.
N = Breakeven point in tires $110N - $85N - $475,000 = 0 $25N - $475,000 = 0 N = $475,000/$25 = 19,000 tires
c.
N = Target sales in tires $110N - $85N - $450,000 -$ 475,000 = 0 $25N - $925,000 = 0 N = $925,000/$25 = 37,000 tires
d. Margin of safety = Sales - Breakeven sales = ($110 × 33,000) - ($110 × 19,000) = $1,540,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
Objective 3.5 1) The margin of safety is the difference between: A) budgeted expenses and breakeven expenses B) budgeted revenues and breakeven revenues C) actual operating income and budgeted operating income D) actual sales margin and budgeted sales margin Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
2) Sensitivity analysis is: A) a way of determining what will happen if assumptions change B) a way of seeing how employees will be affected by changes C) a way of determining how customers will react to new products D) a way of seeing how far from budget actual results are Answer: A Diff: 2 Objective: 5 AACSB: Application of knowledge
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3) Stones Manufacturing sells a marble slab for $1,100. Fixed costs are $34,000, while the variable costs are $500 per slab. The company currently plans to sell 240 slabs this month. What is the margin of safety assuming 80 slabs are actually sold? (Round all unit calculations UP to the nearest whole number.) A) $201,300 B) $81,300 C) $25,300 D) $34,000 Answer: C Explanation: C) Breakeven in number of slabs = $34,000 / ($1,100 − $500) = 57 slabs Actual sales 80 slabs × $1,100 = $88,000 Breakeven sales 57 slabs × $1,100 = $62,700 Margin of safety 23 slabs $25,300 Diff: 3 Objective: 5 AACSB: Application of knowledge
4) Globus Autos sells a single product. 8,300 units were sold resulting in $83,000 of sales revenue, $20,000 of variable costs, and $14,000 of fixed costs. If variable costs decrease by $1.00 per unit, the new margin of safety is: (Round intermediate calculations to the nearest cent.) A) $83,000 B) $20,000 C) $66,721 D) $69,000 Answer: C Explanation: C) Variable cost per unit = $20,000 / 8,300 = $2.41 Contribution margin percentage = [$10.00 − ($2.41 − $1.00)] / $10.00 = 0.86 New breakeven point = [$10.00 − ($2.41 − $1.00)] / $10.00 = 0.86; $14,000 / 0.86 = $16,279 Old breakeven point = $10.00 - 2.41 = $8 / $10.00 = 1; $14,000 / 1 = $14,000 Margin of safety = $83,000 - $16,279 = $66,721 Diff: 3 Objective: 5 AACSB: Application of knowledge
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5) Globus Autos sells a single product. 8,100 units were sold resulting in $84,000 of sales revenue, $25,000 of variable costs, and $14,000 of fixed costs. If Globus reduces the selling price by $1.10 per unit, the new margin of safety is: (Round any intermediary calculations to the nearest cent.) A) 5,835 units B) 2,621 units C) 5,479 units D) 8,100 units Answer: A Explanation: A) Correct. New contribution margin = $9.27 - $3.09 = $6.18 New breakeven = $14,000/ $6.18 = 2,265 (rounded) 8,100 units sold - 2,265 breakeven units = 5,835 MOS units (rounded) B) Incorrect because only the selling price changes; variable costs do not. C) Incorrect because this is the MOS in units if variable cost decreases OR sales price increases by $1. D) Incorrect because this is the breakeven number of units. Diff: 1 Objective: 5 AACSB: Analytical thinking
6) The margin of safety refers to how many more sales are needed in order to breakeven, Answer: FALSE Explanation: Margin of safety refers to how many sales are IN EXCESS of breakeven. Diff: 1 Objective: 5 AACSB: Analytical thinking
7) If a company's breakeven revenue is $1,000 and its budgeted revenue is $1,250, then its margin of safety percentage is 20%. Answer: TRUE Explanation: The margin of safety percentage is 20% as the denominator of the ratio is the budgeted level and not the breakeven level. 1,250 - 1,000 = $250 / $1,250 = 20% Diff: 2 Objective: 5 AACSB: Analytical thinking
8) Sensitivity analysis is a simple approach to recognizing uncertainty. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
9) The margin of safety may be expressed in units, dollars, or as a percentage. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
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10) The margin of safety measures of how much sales can decline and still meet a target net income. Answer: FALSE Explanation: The margin of safety measures of how much sales can decline and have the company remain profitable. Diff: 2 Objective: 5 AACSB: Analytical thinking
11) Dental Comfort Services provides dental cleanings to its patients. The selling price of a cleaning is $150 and the variable costs associated are $85. The monthly relevant fixed costs are $10,000. Required: a. What is the breakeven point in cleanings? b. What is the margin of safety in dollars, assuming sales total $30,000? c. What is the breakeven level in cleanings, assuming variable costs decrease by 20%? d. What is the breakeven level in dollars, assuming the selling price goes down by 10% and fixed costs increase $1,000 per month? Answer: a. N = Breakeven units $150N - $85N - $10,000 = 0 $65N = $10,000 N = $10,000/$65 = 153.8 or 154 cleanings. b.
Margin of safety = $30,000 - ($150 × 154) = $6,900
c.
N = Breakeven units $150N - ($85N × 80%) - $10,000 = 0 $150N - $68N = $10,000 N = $10,000/$68 = 147.06 or 148 (rounded up) cleanings.
d. N = Breakeven dollars CM% = [($150 × 90%) - 85] / ($150 × 90%) = 35.04% N = ($10,000 + $1,000) / 35.04% N = $31,393 (rounded) Diff: 3 Objective: 5 AACSB: Application of knowledge
12) Explain sensitivity analysis and how do managers use sensitivity analysis to evaluate its implications? Answer: Sensitivity analysis is a "what-if" technique managers use to examine how an outcome will change if the original predicted data are not achieved or if an underlying assumption changes. The analysis answers questions such as "What will operating income be if the quantity of units sold decreases by 5% from the original prediction?" and "What will operating income be if variable cost per unit increases by 10%?" This helps visualize the possible outcomes that might occur before the company commits to funding a project. Diff: 2 Objective: 5 AACSB: Analytical thinking
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13) ________ is the process of varying key estimates to identify those estimates that are the most critical to a decision. A) The graph method B) A sensitivity analysis C) The degree of operating leverage D) Sales mix Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
14) What is sensitivity analysis and how is the CVP model used to examine how actions by management can impact results of operations? Answer: Sensitivity analysis is a "what if" technique that managers can use to examine how results of operations (i.e., operating income) will change if the original assumptions (data) are not achieved as facts.. With the CVP model, analysis can show operating income (or the breakeven point) how much it can change if the predicted data for selling price, variable cost per unit, fixed costs, or units sold are not achieved. The sensitivity to various possible outcomes informs managers and broadens their perspectives as to what might actually occur before final commitments and decisions are made. Managers can use software tools such as MS Excel to conduct CVP-based sensitivity analyses in a systematic and efficient manner. Diff: 2 Objective: 5 AACSB: Analytical thinking
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Objective 3.6 Answer the following questions using the information below: Southwestern College is planning to hold a fund raising banquet at one of the local country clubs. It has two options for the banquet: OPTION one: Crestview Country Club a. Fixed rental cost of $1,000 b. $12 per person for food OPTION two: Tallgrass Country Club a. Fixed rental cost of $3,000 b. $8.00 per person for food Southwestern College has budgeted $1,800 for administrative and marketing expenses. It plans to hire a band which will cost another $800. Tickets are expected to be $30 per person. Local business supporters will donate any other items required for the event. 1) Which option provides the least amount of risk? A) Option one. B) Option two. C) Both options provide the same amount of risk. D) It depends on how many donations it receives. Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
2) Which option has the lowest breakeven point? A) Option one. B) Option two. C) Both options have the same breakeven point. D) The lowest breakeven point cannot be determined. Answer: A Explanation: A) Option one: $30X - $12X - $1,000 - $1,800 - $800 = 0; X = $200 Option two: $30X - $8X - $3,000 - $1,800 - $800 = 0; X = $255 Diff: 2 Objective: 6 AACSB: Analytical thinking
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3) Which option provides the greatest operating income if 600 people attend? A) Option one. B) Option two. C) Operating incomes are identical. D) It depends on how many donations it receives. Answer: B Explanation: B) Option one: $18 × 600 - $3,600 = $7,200; Option two: $22 × 600 - $5,600 = $7,600 Diff: 3 Objective: 6 AACSB: Application of knowledge
4) Which option provides the greatest degree of operating leverage if 600 people attend? A) Option one. B) Option two. C) Both options provide equal degrees of operating leverage. D) Operating leverage is indeterminable. Answer: B Explanation: B) Option one: $18 × 600 / $7,200 = 1.50; Option two: $22 × 600 / $7,600 = 1.74 Diff: 3 Objective: 6 AACSB: Application of knowledge
5) Kanga Company is considering two different production plans. Option one: Fixed costs of $10,000 and a breakeven point of 500 units. Option two: Fixed costs of $20,000 and a breakeven point of 700 units. Which option should Kanga choose if it is expecting to produce 600 units? A) Option one. B) Option two. C) Both options are equally good. D) It isn't possible to determine from the information given. Answer: A Explanation: A) Option one will result in operating income while Option 2 will result in an operating loss. Diff: 2 Objective: 6 AACSB: Application of knowledge
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6) Sales of Blistre Autos are 400,000, variable cost is 230,000, fixed cost is 90,000 tax rate is 40%. Calculate the operating leverage of the company. A) 1.13 times B) 3.54 times C) 1.35 times D) 2.13 times Answer: D Explanation: D) Operating income $400,000 - $230,000 - $90,000 = $80,000 Operating leverage ($400,000 - $230,000)/$80,000 = 2.13 times Diff: 2 Objective: 6 AACSB: Application of knowledge
7) In a company with low operating leverage: A) fixed costs are more than the contribution margin B) contribution margin and operating income are inversely related C) there is a higher possibility of net loss than a higher-leveraged firm D) less risk is assumed than in a highly leveraged firm Answer: D Diff: 1 Objective: 6 AACSB: Analytical thinking
8) If the contribution margin ratio is 0.55, targeted operating income is $100,000, and targeted sales volume in dollars is $500,000, then the degree of operating leverage is: A) 0.36 times B) 0.82 times C) 2.75 times D) 2.25 times Answer: C Explanation: C) 0.55 = X / $500,000 = $275,000 contribution. Operating leverage = $275,000 / $100,000 = 2.75 Diff: 3 Objective: 6 AACSB: Application of knowledge
9) If the contribution margin ratio is 0.55, targeted operating income is $55,000, and fixed costs are $90,000, then sales volume in dollars is: (Round the final answer to the nearest dollar.) A) $322,222 B) $263,636 C) $163,636 D) $100,000 Answer: B Explanation: B) X = (55,000 + 90,000)/ 0.55; X = $263,636 Diff: 2 Objective: 6 AACSB: Application of knowledge
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10) If the contribution margin ratio is 0.3, targeted operating income is $65,000, and targeted sales volume in dollars is $300,000, then total fixed costs are: A) $40,000 B) $235,000 C) $164,500 D) $25,000 Answer: D Explanation: D) (X + $65,000)/0.3 = $300,000; X = 25,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
11) Which of the following statements is true? A) Managers can lower operating risk by changing fixed costs to variable costs in the long-term. B) Managers can lower operating risk by changing variable costs to fixed costs in the long-term. C) Managers can lower operating risk by reducing the selling price and increasing volume. D) Managers can lower operating risk by increasing the selling price and reducing volume. Answer: A Explanation: A) Correct. Eliminating fixed costs reduces risk. B) Incorrect. Increasing fixed costs increases risk. C) Incorrect. Changing selling price and volume does not directly affect risk. D) Incorrect. Changing selling price and volume does not directly affect risk. Diff: 2 Objective: 6 AACSB: Analytical thinking
12) When a greater proportion of costs are fixed costs, then: A) a small increase in sales results in a small decrease in operating income B) when demand is low the risk of loss is high C) a decrease in sales reduces the total fixed cost per unit D) a decrease in sales reduces the cost per unit Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
13) Companies with a greater proportion of direct costs have a greater risk of loss than companies with a greater proportion of indirect costs. Answer: FALSE Explanation: Companies with a greater proportion of fixed costs have a greater risk of loss than companies with a greater proportion of variable costs. Diff: 2 Objective: 6 AACSB: Analytical thinking
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14) The degree of operating leverage at a specific level of sales helps the managers calculate the effect that potential changes in sales will have on operating income. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
15) If a company increases fixed costs, then the breakeven point will be lower. Answer: FALSE Explanation: If a company increases fixed costs, then the breakeven point will be higher. Diff: 2 Objective: 6 AACSB: Analytical thinking
16) Companies that are substituting variable costs for fixed costs receive a greater per unit return above the breakeven point. Answer: FALSE Explanation: Companies that are substituting fixed costs for variable costs receive a greater per unit return above the breakeven point. Diff: 2 Objective: 6 AACSB: Analytical thinking
17) A company with a higher degree of operating leverage is at greater risk during economic downturns because of its higher fixed costs. Answer: TRUE Explanation: A company with a low degree of operating leverage is at lesser risk during downturns in the economy. Diff: 2 Objective: 6 AACSB: Analytical thinking
18) The risk-return tradeoff across alternative cost structures can be measured as operating leverage. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
19) If a company has a degree of operating leverage of 4.0, that means a 10% increase in sales will result in a 40% increase in operating income. Answer: TRUE Explanation: If a company has a degree of operating leverage of 2.0, that means a 20% increase in sales will result in a 40% increase in operating income. Diff: 2 Objective: 6 AACSB: Application of knowledge
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20) When a company has the least fixed costs, the company is operating at a very high operating leverage. Answer: FALSE Explanation: When a company has the least fixed costs, the company is operating at a low operating leverage. Diff: 1 Objective: 6 AACSB: Analytical thinking
21) Query Company sells pillows for $25.00 each. The manufacturing cost, all variable, is $10 per pillow. The company is planning on renting an exhibition booth for both display and selling purposes at the annual crafts and art convention. The convention coordinator allows three options for each participating company. They are: 1. paying a fixed booth fee of $5,010, or 2. paying an $4,000 fee plus 10% of revenue made at the convention, or 3. paying 20% of revenue made at the convention. Required: a. Compute the breakeven sales in pillows of each option. b. Which option should Query Company choose, assuming sales are expected to be 800 pillows? Answer: a. Option 1 N = Breakeven in pillows $25N - $10N - $5,010 = 0 $15N - $5,010 = 0 N = $5,010/$15 = 334 pillows Option 2 N = Breakeven in pillows $25N - $10N - 0.10($25N) - $4,000 = 0 $12.5N - $4,000 = 0 N = $4,000/$12.5 = 320 pillows Option 3 N = Breakeven in pillows $25N - $10N - 0.20($25N) = 0 $10N - $0 = 0 N = $0/$10 = 0 pillows b.
Option 1 profit for 800 pillows = $15 × 800 - $5,010 = $6,990 Option 2 profit for 800 pillows = $12.5 × 800 - 4,000 = $6,000 Option 3 profit for 800 pillows = $10 × 800 = $8,000 Option 3 is the best choice.
Diff: 3 Objective: 6 AACSB: Application of knowledge
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22) Auto Tires has been in the tire business for four years. It rents a building but owns all of its equipment. All employees are paid a fixed salary except for the busy season (April-June), when temporary help is hired by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season. Selling prices per tire average $75 except during the busy season. Because a large number of customers buy tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two tires are purchased at one time. During the busy months, selling prices per tire average $60. The president of Auto Tires is somewhat displeased with the company's management accounting system because the cost behavior patterns displayed by the monthly breakeven charts are inconsistent; the busy months' charts are different from the other months of the year. The president is never sure if the company has a satisfactory margin of safety or if it is just above the breakeven point. Required: a. Why might it be difficult to use CVP in this situation? b. How can the information be presented in a better format for the president? Answer: a. The accounting system includes some assumptions about the CVP model that does not hold for Auto Tire. The CVP model requires cost and revenue to be linear. During the busy months, the company has costs and revenues which behave differently than during the other months of the year. The revenue line turns down (less slope) with the average selling price per tire decreasing from $75 to $60. The variable costs line probably turns upward (increasing slope) with the additional hourly workers being added to the work force. b. The accountant may want to present two sets of information regarding the revenue and cost behaviors of the company: one for the busy season and one for the other months of the year. It would show that while the breakeven point actually increases during the busy months (a negative), the marginal income increases because of increased sales (a positive). Diff: 3 Objective: 6 AACSB: Analytical thinking
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23) Dolph and Evan started the DE Restaurant in 2018. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month. During the past two years, the business has grown with average sales increasing 1% a month. This situation pleases both Dolph and Evan, but they do not understand how sales can grow by 1% a month while profits are increasing at an even faster pace. They are afraid that one day they will wake up to increasing sales but decreasing profits. Required: Explain why the profits have increased at a faster rate than sales. Use the terms variable costs and fixed costs in your response. Answer: The fixed cost per meal served is decreasing with increased volumes, while the contribution margin per meal served remains constant. Apparently, most of the restaurant's expenses are fixed. Therefore, as sales pass the breakeven point the profit will increase even faster because the fixed expenses have already been covered. This allows sales to cover only variable expenses before contributing to the profit margin, thereby causing it to increase at a faster rate. Diff: 3 Objective: 6 AACSB: Analytical thinking
24) Freddie's Company has mostly fixed costs and Valerie's Company has mostly variable costs. Which company has the greatest risk of a net loss? Explain why. Answer: Freddie's Company has the greatest risk of net loss because more units are required to reach breakeven point than for Valerie. Freddie's Company is operating at a higher operating leverage than Valerie's Company and hence faces a larger risk of loss during economic downturn. Diff: 2 Objective: 6 AACSB: Analytical thinking
25) Suppose a company decided to automate a production line. Explain what effects this would have on a company's cost structure using CVP terminology. Could these changes have any possible negative effect on the firm? Answer: An automated production line would increase fixed costs through extra depreciation on the new machinery and also decrease variable costs due to the elimination of direct labor as a result of automation. This would increase the breakeven point. This could possibly have a negative effect on the firm if demand for the product produced by this production line is expected to decline in the future. With high fixed costs and low demand, a decline in profits might be more severe due to the presence of unchanging fixed costs as volume drops. Diff: 2 Objective: 6 AACSB: Analytical thinking
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26) If a company has a degree of operating leverage of 4 and sales increase by 25%, then: A) total fixed costs will increase by 100% B) total costs will increase by 100% C) profit will increase by 75% D) profit will increase by 100% Answer: D Explanation: D) 4 × 25% = 100% Diff: 3 Objective: 6 AACSB: Application of knowledge
27) If a company would like to increase its degree of operating leverage it should: A) increase its sales relative to its fixed costs B) increase its sales relative to its variable costs C) increase its variable costs relative to its fixed costs D) increase its fixed costs relative to its variable costs Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
28) The risk/return tradeoff across alternative cost structures can be measured as: A) sensitivity analysis B) operating leverage C) break-even point D) margin of safety Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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Objective 3.7 1) The following information is for Alex Corp: Product X: Revenue Variable Cost
$25.00 $5.00
Product Y: Revenue Variable Cost
$20.00 $10.00
Total fixed costs
$57,500
What is the breakeven point assuming the sales mix consists of two units of Product X and one unit of Product Y? A) 1,437.5 units of Y and 2,875 units of X B) 2,300 units of Y and 1,150 units of X C) 1 units of Y and 2,875 units of X D) 1,150 units of Y and 2,300 units of X Answer: D Explanation: D) D) N = units of product Y; and 2N = units of product X; ($25.00 − $5.00) × 2N + ($20.00 − $10.00) × N − $57,500 = 0 $40.00N + $10.00N = $57,500 $50N = $57,500 N = 1,150 units Product Y = 1,150 units; Product X = 2,300 units Diff: 3 Objective: 7 AACSB: Application of knowledge
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2) The following information is for Alex Corp: Product X: Revenue Variable Cost
$17.50 $5.00
Product Y: Revenue Variable Cost
$36.50 $11.50
Total fixed costs
$67,500
What is the operating income, assuming actual sales total 60,000 units, and the sales mix is two units of Product X and one unit of Product Y? A) $932,500 B) $1,000,000 C) $1,430,000 D) $1,067,500 Answer: A Explanation: A) Product X Product Y Total Sales units 40,000 20,000 60,000 Revenue Var. costs
$700,000 200,000
CM
$730,000 230,000
$1,430,000 430,000 1,000,000
Fixed costs
67,500 $932,500
Diff: 3 Objective: 7 AACSB: Application of knowledge
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Answer the following questions using the information below: The following information is for Alex Corp: Product X: Revenue Variable Cost
$15.00 $2.50
Product Y: Revenue Variable Cost
$25.00 $10.00
Total fixed costs
$50,000
3) Assume the sales mix consists of one unit of Product X and one unit of Product Y. If the sales mix shifts to one unit of Product X and two units of Product Y, then the weighted-average contribution margin will: A) increase per unit B) stay the same C) decrease per unit D) decrease by $0.50 per unit Answer: A Diff: 3 Objective: 7 AACSB: Application of knowledge
4) Assume the sales mix consists of one unit of Product X and one unit of Product Y. If the sales mix shifts to one unit of Product X and two units of Product Y, then the breakeven point will: A) increase B) stay the same C) decrease D) will be greater than the original breakeven point Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
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5) The following information is for the Jeffries Corporation: Product A: Selling price per unit Variable cost per unit
$17.00 $12.00
Product B: Selling price per unit Variable cost per unit
$42.00 $17.00
Total fixed costs
$554,000
What is the breakeven point, assuming the sales mix consists of three units of Product A and one unit of A) 13,190 units of A and 4,397 units of B B) 41,550 units of A and 13,850 units of B C) 110,800 units of A and 0 units of B D) 13,850 units of A and 41,550 units of B Answer: B Explanation: B) N = units of product B; and 3N = units of product A; ($17.00 - $12.00) × 3N + ($42.00 - $17.00) × N - $554,000 = 0 $15.00N + $25.00N = $554,000 $40N = $554,000 N = 13,850 units Product A = 41,550 units; Product B = 13,850 units Diff: 3 Objective: 7 AACSB: Application of knowledge
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6) The following information is for the Jeffries Corporation: Product A: Revenue Variable Cost
$12.00 $8.00
Product B: Revenue Variable Cost
$36.00 $18.00
Total fixed costs
$226,500
What is the operating income of Jeffries Corporation, assuming actual sales total 33,000 units, and the sales mix is three units of Product A and one unit of Product B? A) $21,000 B) $247,500 C) $594,000 D) $474,000 Answer: A Explanation: A) Product A Product B Total Sales units 24,750 8,250 33,000 Revenue Var. costs
$297,000 198,000
$297,000 148,500
$594,000 346,500
CM
$247,500
Fixed costs
226,500 $21,000
Diff: 3 Objective: 7 AACSB: Application of knowledge
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Answer the following questions using the information below: The following information is for the Jeffries Corporation: Product A: Revenue Variable Cost
$16.00 $12.00
Product B: Revenue Variable Cost
$24.00 $16.00
Total fixed costs
$75,000
7) Assume the sales mix consists of three units of Product A and one unit of Product B. If the sales mix shifts to four units of Product A and one unit of Product B, then the weighted-average contribution margin will: A) increase per unit B) stay the same C) decrease per unit D) cannot be determined from this information Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
8) Assume the sales mix consists of three units of Product A and one unit of Product B. If the sales mix shifts to four units of Product A and one unit of Product B, then the breakeven point will: A) increase B) stay the same C) decrease D) cannot be determined from this information Answer: A Diff: 2 Objective: 7 AACSB: Application of knowledge
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9) Assuming a constant mix of 3 units of X for every 1 unit of Y.
Sales VC Total fixed costs
X $25 19
Y $44 24
Total
$82,000
The breakeven point in units would be: A) 6,474 units of X and 2,158 units of Y B) 2,158 units of X and 2,158 units of Y C) 4,316 units of X and 12,948 units of Y D) 2,158 units of X and 6,474 units of Y Answer: A Explanation: A) X Sales $25 Variable costs 19 Contribution margin $6 Sales mix ×3 Contribution margin per mix $18
Y $44 24 $20 × 1 $20
Total contribution margin per mix = $18 + $20 = $38 Breakeven point in composite units = $82,000 / $38 = 2,158 X: Y:
2,158 × 3 = 6,474 units 2,158 × 1 = 2,158 units
Diff: 3 Objective: 7 AACSB: Application of knowledge
10) In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin then: A) total revenues will increase B) interest cost will decrease C) total contribution margin will increase D) operating income will decrease Answer: D Diff: 3 Objective: 7 AACSB: Analytical thinking
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11) The quantity or number of units of different types of products that together make up total sales or the projected total sales of a company is called: A) sales mix B) product mix C) unit mix D) quantity mix Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
12) Sales mix is the quantities or proportion of various products or services that constitute a company's total unit sales. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
13) If the sales mix shifts toward the lower-contribution-margin product, the breakeven quantity will decrease. Answer: FALSE Explanation: If the sales mix shifts toward the lower-contribution-margin product the breakeven quantity will increase. Diff: 1 Objective: 7 AACSB: Application of knowledge
14) In multiproduct situations, when sales mix shifts toward the product with the lowest contribution margin, the operating income will be lower. Answer: TRUE Diff: 1 Objective: 7 AACSB: Application of knowledge
15) In most multiproduct situations when sales mix shifts toward the product with the highest contribution margin, operating income will be higher. Answer: TRUE Diff: 2 Objective: 7 AACSB: Application of knowledge
16) To calculate the breakeven point in a multiproduct situation, one must assume that the sales mix of the various products remains constant. Answer: TRUE Diff: 2 Objective: 7 AACSB: Application of knowledge
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17) If a company's sales mix is 2 units of product A for every 3 units of product B, and the company sells 3,000 units in total of both products, only 2,000 units of product A will be sold. Answer: FALSE Explanation: If a company's sales mix is 2 units of product A for every 3 units of product B, and the company sells 3,000 units in total of both products, 1,200 units of product A will be sold and 1,800 units of product B will be sold. Diff: 2 Objective: 7 AACSB: Analytical thinking
18) Ken's Beer Emporium sells beer and ale in both pint and quart sizes. If Ken's sells twice as many pints as it sells quarts, and sells 2,400 items total, it will sell 800 quarts of ale. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
19) All other factors being equal, for any given total quantity of units sold, the breakeven point increases and operating income increases if the sales mix shifts toward products with higher contribution margins. Answer: FALSE Explanation: For any given total quantity of units sold, the breakeven point decreases and operating income increases if the sales mix shifts toward products with higher contribution margins. Diff: 2 Objective: 7 AACSB: Analytical thinking
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20) Karen Hefner, a florist, operates retail stores in several shopping malls. The average selling price of an arrangement is $30 and the average cost of each sale is $18. A new mall is opening where Karen wants to locate a store, but the location manager is not sure about the rent method to accept. The mall operator offers the following three options for its retail store rentals: 1. paying a fixed rent of $15,000 a month, or 2. paying a base rent of $9,000 plus 10% of revenue received, or 3. paying a base rent of $4,800 plus 20% of revenue received up to a maximum rent of $25,000. Required: a. For each option, compute the breakeven sales and the monthly rent paid at break-even. b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5,000 units. Answer: a. Option 1 N = Breakeven units $30N - $18N - $15,000 = 0 $12N - $15,000 = 0 N = $15,000/$12 = 1,250 units Rent at breakeven = $15,000 Option 2 N = Breakeven units $30N - $18N - 0.10($30N) - $9,000 = 0 $9N - $9,000 = 0 N = $9,000/$9 = 1,000 units Rent at breakeven = $9,000 + (0.10 × $30 × 1,000) = $12,000 Option 3 N = Breakeven units $30N - $18N - 0.20($30N) - $4,800 = 0 $6N - $4,800 = 0 N = $4,800/$6 = 800 units Rent at breakeven = $4,800 + (0.20 × $30 × 800) = $9,600 b.
Option 3 from 0 to 1,400 units for $4,800 plus $6 per unit. Option 2 from 1,401 to 2,000 for $9,000 plus $3 per unit. Option 1 above 2,000 for $15,000. Option 1 equals Option 2 when sales are 2,000 and favors Option 1 above 2,000 units. $15,000 = $9,000 + 0.10($30N); $6,000 = $3N; N = 2,000 Option 1 equals Option 3 when sales are 1,700 and favors Option 1 above 1,700 units. $15,000 = $4,800 + 0.20($30N); $10,200 = $6N; N = 1,700 units
Diff: 3 Objective: 7 AACSB: Application of knowledge
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21) Carylon Manufacturing Company produces two products, X and Y. The following information is presented for both products: X Y Selling price per unit $40 $25 Variable cost per unit 25 15 Total fixed costs are $275,000. Required: a. Calculate the contribution margin for each product. b. Calculate breakeven point in units of both X and Y if the sales mix is 3 units of X for every unit of Y. c. Calculate breakeven volume in total dollars if the sales mix is 2 units of X for every 3 units of Y. Answer: a. X: Contribution margin $40 − $25 = $15 Y: Contribution margin $25 − $15 = $10 b.
Contribution margin (3 × $15) + (1 × $10) = $55 Breakeven point in units $275,000 / $55 = 5,000 units X: 5,000 × 3 = 15,000 units Y: 5,000 × 1 = 5,000 units
c.
Contribution margin (2 × $15) + (3 × $10) = $60 Breakeven point in units $275,000 / $60 = 4,583.33 units X: Dollar sales = 4,583.33 × 2 = 9,167 × $40 = $366,680 (rounded) Y: Dollar sales = 4,583 × 3 = 13,750 × $25 = $343,750 Total dollar sales = $710,430
Diff: 3 Objective: 7 AACSB: Application of knowledge
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22) Stadium EATS Inc. currently sells hot dogs. During a typical month, the stand reports a profit of $9,000 with sales of $50,000, fixed costs of $21,000, and variable costs of $0.64 per hot dog. Next year, the company plans to start selling nachos for $3 per unit. Nachos will have a variable cost of $0.72 and new equipment and personnel to produce nachos will increase monthly fixed costs by $8,808. Initial sales of nachos should total 5,000 units. Most of the nacho sales are anticipated to come from current hot dog purchasers, therefore, monthly sales of hot dogs are expected to decline to $20,000. After the first year of nacho sales, the company president believes that hot dog sales will increase to $33,750 a month and nacho sales will increase to 7,500 units a month. Required: a. Determine the monthly breakeven sales in dollars before adding nachos. b. Determine the monthly breakeven sales during the first year of nachos sales, assuming a constant sales mix of 1 hotdog and 2 units of nachos. Answer: a. Contribution margin = Fixed costs + Profit = $21,000 + $9,000 = $30,000 Variable costs
= Sales - Contribution margin = $50,000 - $30,000 = $20,000
Units sold = $20,000/$0.64 = 31,250 units Selling price = $50,000/31,250 = $1.60 per unit Unit Variable costs = $20,000/31,250= $0.64 N = Breakeven units $1.60N - $0.64N - $21,000 = 0 $0.96N - $21,000 = 0 N = $21,000/$0.96 = 21,875 units b.
Ratio equal to 1 hot dog to 2 units of nachos. N = Breakeven number of units of hot dogs 2N = Breakeven number of units of nachos $3(2)N + $1.60N - $0.72(2N) - $0.64N - $29,808 = 0 $7.60N - $2.08N - $29,808 = 0 N = $29,808/$5.52 = 5,400 hot dogs Therefore, 5,400 hot dogs and 10,800 units of nachos need to be sold to break even.
Diff: 3 Objective: 7 AACSB: Application of knowledge
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23) Fine Suiting Company sells shirts for men and boys. The average selling price and variable cost for each product are as follows:
Selling Price Variable Cost
Men's $25.00 $15.40
Selling Price Variable Cost
Boys' $24.00 $16.00
Fixed costs are $35,200. Required: a. What is the breakeven point in units for each type of shirt, assuming the sales mix is 1:1? b. What is the operating leverage, assuming the sales mix is 2:1 in favor of men's shirts, and sales total 5,000 shirts? Answer: a. N = breakeven in boys' shirts N = breakeven in men's shirts Contribution for men = $25 - $15.40 = $9.60 Contribution for boys = $24 - $16.00 = $8.00. Total = $9.60 + $8.00 = $17.60 B.E.P = $35,200 / $17.60 = 2,000 units. b. Total sales = 6,000 units in 2:1 ratio gives $4,000 units for men and 2,000 units for boys. $148,000 Contribution for men = 4,000 × $9.60 = $38,400; Contribution for boys = 2,000 × $8.00 = $16,000. Total contribution = $54,400 Operating leverage = 454,400 / $148,000 = 0.368 Diff: 3 Objective: 7 AACSB: Application of knowledge
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24) Mount Carmel Company sells only two products, Product A and Product B.
Selling price Variable cost per unit Total fixed costs
Product A Product B $40 $50 $24 $40
Total
$840,000
Mount Carmel sells two units of Product A for each unit it sells of Product B. Mount Carmel faces a tax rate of 30%. Required: a. What is the breakeven point in units for each product assuming the sales mix is 2 units of Product A for each unit of Product B? b. What is the breakeven point if Mount Carmel's tax rate is reduced to 25%, assuming the sales mix is 2 units of Product A for each unit of Product B? c. How many units of each product would be sold if Mount Carmel desired an after-tax net income of $73,500, facing a tax rate of 30%? Answer: a. N = breakeven in product B 2N = breakeven in product A ($40 × 2N) + ($50 × N) - ($24 × 2N) - ($40 × N) - $840,000 = 0 ($130 × N) - ($88 × N) - $840,000 = 0 $42N - $840,000 = 0 N = $840,000 / $42 = 20,000 Therefore, to break even, 40,000 units of Product A and 20,000 units of Product B need to be sold. b. The breakeven point would be the same. At the breakeven point there is no pre-tax income, so the tax rate change is irrelevant in this situation. c.
N = number of units of product B
2N = number of units of product A
($40 × 2N) + ($50 × N) - ($24 × 2N) - ($40 × N) - $840,000 = $73,500 / (1 - .3) ($130 × N) - ($88 × N) - $840,000 = $105,000 $42N - $945,000 = 0 N = $945,000 / $42 =22,500 Therefore, to meet the profit goal, 2 × N = 45,000 units of Product A and N = 22,500 units of Product B need to be sold. Diff: 3 Objective: 7 AACSB: Application of knowledge
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25) Atlanta Radio Supply sells only two products, Product X and Product Y.
Selling price Variable cost per unit Total fixed costs
Product X Product Y $25 $45 $20 $35
Total
$350,000
Atlanta Radio Supply sells three units of Product X for each two units it sells of Product Y. Atlanta Radio Supply has a tax rate of 25%. Required: a. What is the breakeven point in units for each product, assuming the sales mix is 3 units of Product X for each two units of Product Y? b. How many units of each product would be sold if Atlanta Radio Supply desired an after-tax net income of $210,000, using its tax rate of 25%? Answer: a. 3N = breakeven in product X 2N = breakeven in product Y ($25 - $20) × 3N + ($45 - $35) × 2N - $350,000 = 0 $15N + $20N- $350,000 = 0 $35N - $350,000 = 0 N = $350,000 / $35 = 10,000 Therefore, to break even, 30,000 (10,000 × 3) units of Product X and 20,000 (10,000 × 2) units of Product Y need to be sold. b.
3N = number of units of product X
2N = number of units of product Y
($25 - $20) × 3N + ($45 - $35) × 2N - $350,000 = $210,000 / (1 - .25) $15N + $20N- $350,000 = $280,000 $35N- $350,000 = $280,000 $35N - $630,000 = 0 N = $630000 / $35 = 18,000 Therefore, to meet the profit goal, 3 × N = 54,000 units of Product X and 2 × N = 36,000 units of Product Y need to be sold. Diff: 3 Objective: 7 AACSB: Application of knowledge
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26) What is sales mix? How do companies choose their sales mix? Answer: Sales mix is the quantities or proportion of various products or services that constitute a company's total unit sales. Managers adjust their mix to respond to demand changes. Assume there are two Products A and B. If there is a shift in production to Product A due to high demand, then this increases the breakeven point because the sales mix has shifted toward a lower-contribution-margin product and under no circumstances the manager should change the sales mix to lower the breakeven point without taking into account customer preferences and demand. Diff: 2 Objective: 7 AACSB: Analytical thinking
27) Stella Company sells only two products, Product A and Product B.
Selling price Variable cost per unit Total fixed costs
Product A $50 $17
Product B $20 $4
Total
$2,042,000
Stella sells two units of Product A for each unit it sells of Product B. Stella faces a tax rate of 30%. Stella desires a net after-tax income of $63,000. The breakeven point in units would be: A) 23,805 units of Product A and 47,610 units of Product B B) 26,000 units of Product A and 52,000 units of product B C) 47,610 units of Product A and 23,805 units of Product B D) 52,000 units of Product A and 26,000 units of Product B Answer: D Explanation: D) Desired pre-tax net income $63,000 / (1.0 - 0.3) = $90,000 Weighted contribution margin [2 × ($50 - $17)] + [1 × ($20 - $4)] = $82 Breakeven point in composite units is ($90,000 + $2,042,000) / $82 = 26,000 26,000 composite units is (2 × 26,000) = 52,000 units of A and (1 × 26,000) = 26,000 units of B Diff: 3 Objective: 7 AACSB: Application of knowledge
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Objective 3.8 1) Service companies and not-for-profit organizations: A) cannot use CVP because they don't manufacture a product B) cannot use CVP because there is no way to distinguish fixed and variable costs C) can use CVP by focusing on measuring the organization's output D) can use CVP by treating all costs as variable Answer: C Diff: 2 Objective: 8 AACSB: Analytical thinking
2) While-You-Train is a not-for-profit organization that aids the unemployed by supplementing their incomes by $7,000 annually, while they seek new employment skills. The organization has fixed costs of $230,000 and the budgeted appropriation for the year totals $720,000. How many individuals can receive financial assistance this year? A) 33 people B) 103 people C) 70 people D) 136 people Answer: C Explanation: C) $720,000 − $7,000N − $230,000 = 0; $490,000 = $7,000N; N = 70 people Diff: 2 Objective: 8 AACSB: Application of knowledge
3) Helping Hands is a nonprofit organization that supplies electric fans during summer for individuals in need. Fixed costs are $225,000. The fans cost $28 each. The organization has a budgeted appropriation of $690,000. How many people can receive a fan during summer? A) 8,036 people B) 16,608 people C) 24,643 people D) 32,679 people Answer: B Explanation: B) $690,000 − $28N − $225,000 = 0; $465,000 = $28N; N = 16,608 people Diff: 2 Objective: 8 AACSB: Application of knowledge
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4) To apply CVP analysis in a not-for profit organization: A) managers need to focus on the customer base rather than the cost drivers B) managers need to focus on measuring their output, which is the same as tangible units sold by manufacturing and merchandising companies C) managers need to focus on measuring their input, which is different from the tangible units consumed by manufacturing and merchandising companies D) managers need to focus on measuring their output, which is different from the tangible units sold by manufacturing and merchandising companies Answer: D Diff: 2 Objective: 8 AACSB: Analytical thinking
5) Which of the following is an output measure for a hospital? A) number of doctors needed to cater to patients B) number of patients admitted every day in a hospital C) number of days spent by a patient in a hospital D) charges applicable on the number of days spent by a patient in a hospital Answer: C Diff: 2 Objective: 8 AACSB: Analytical thinking
6) A manager of government agency uses CVP to analyze a proposed reduction in an appropriation and most likely arrives at all of the following conclusions EXCEPT: A) other factors remain unchanged, maintaining current services levels will be difficult B) a reduction in variable costs per output (services) might help maintain service levels C) a reduction in fixed costs might help maintain service levels D) an improvement in the contribution margin will help maintain service levels Answer: D Diff: 1 Objective: 8 AACSB: Analytical thinking
7) The CVP for a not-for-profit organization most likely focuses on outputs related to programs that serve as opposed to tangible outputs. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
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8) Helping Hands is a nonprofit organization that supplies electric fans during summer for individuals in need. Fixed costs are $290,000. The fans cost $26 each. The organization has a budgeted appropriation of $675,000 however, there is an opportunity to write a grant and receive an additional $50,000 of funding without an increase in fixed costs. How many more people can receive a fan during summer if the grant is received? Answer: Before the grant, Helping Hands can provide fans to 14,808 people ($675,000 - $26N - $290,000 = ($675,000 - $290,000)/$26 = 14,808.) However, if the grant is received, 25,962 people will get fans (($675,000 + $50,000) - $26N - $290,000 = ($965,000 - $290,000)/$26 = 25,962. Therefore, another 11,154 more fans can be distributed. Diff: 2 Objective: 8 AACSB: Analytical thinking
Objective 3.9 1) Gross margin is: A) sales revenue less variable costs B) sales revenue less cost of goods sold C) contribution margin less fixed costs D) contribution margin less variable costs Answer: B Diff: 1 Objective: 9 AACSB: Analytical thinking
2) In the merchandising sector: A) only variable costs are subtracted to determine gross margin B) fixed overhead costs are subtracted to determine gross margin C) fixed overhead costs are subtracted to determine contribution margin D) all operating costs are subtracted to determine contribution margin Answer: A Diff: 1 Objective: 9 AACSB: Analytical thinking
3) In the manufacturing sector: A) only variable costs are subtracted to determine gross margin B) fixed overhead costs are subtracted to determine gross margin C) fixed overhead costs are subtracted to determine contribution margin D) all operating costs are subtracted to determine contribution margin Answer: B Diff: 2 Objective: 9 AACSB: Analytical thinking
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4) Contribution margin is: A) sales revenue less cost of goods sold B) sales revenue less variable costs C) contribution margin less fixed costs D) contribution margin less variable costs Answer: B Diff: 1 Objective: 9 AACSB: Analytical thinking
5) Contribution margin and gross margin are terms that can be used interchangeably. Answer: FALSE Explanation: Contribution margin and gross margin refer to different amounts. Revenues - all variable costs = contribution margin; Revenues - COGS = gross margin Diff: 1 Objective: 9 AACSB: Analytical thinking
6) Gross Margin will always be greater than contribution margin. Answer: FALSE Explanation: If variable costs are low and/or manufacturing fixed costs are high, then contribution margin can easily be greater than gross margin. Revenues - all variable costs = contribution margin; Revenues - COGS = gross margin Diff: 1 Objective: 9 AACSB: Analytical thinking
7) Jacob's Manufacturing sales is equal to production.If Jacob's Manufacturing presented a Financial Accounting Income Statement emphasizing gross margin showing operating income of $180,000. A Contribution Income Statement emphasizing contribution margin would show a different operating income. Answer: FALSE Explanation: If Jacob's Manufacturing presented a Financial Accounting Income Statement emphasizing gross margin showing operating income of $180,000, a Contribution Income Statement emphasizing contribution margin would show the same operating income. Diff: 2 Objective: 9 AACSB: Analytical thinking
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8) Beta Corp reported the following: Revenues Variable manufacturing costs Variable nonmanufacturing costs Fixed manufacturing costs Fixed nonmanufacturing costs
$2,500 $ 300 $ 480 $ 350 $ 270
Required: a. Compute contribution margin. b. Compute gross margin. c. Compute operating income. Answer: a. Contribution margin $2,500 − $300 − $480 = $1,720 b. Gross margin $2,500 − $300 − $350 = $1,850 c. Operating income $2,500 − $300 − $480 − $350 − $270 = $1,100 Diff: 3 Objective: 9 AACSB: Application of knowledge
194 richard@qwconsultancy.com
Objective 3.A 1) What would be the expected monetary value for Avalia Corp using the probability method? Probability 0.20 0.30 0.15 0.35
Cash Inflows $260,000 $190,000 $140,000 $65,000
A) $655,000 B) $163,750 C) $152,750 D) $52,000 Answer: C Explanation: C) Monetary value = 0.20 ($260,000) + 0.30 ($190,000) + 0.15 ($140,000) + 0.35 ($65,000) = $152,750 Diff: 2 Objective: Appendix AACSB: Analytical thinking
2) Lobster Liquidators will make $520,000 if the fishing season weather is good, $230,000 if the weather is fair, and would actually lose $50,000 if the weather is poor during the season. If the weather service gives a 45% probability of good weather, a 20% probability of fair weather, and a 35% probability of poor weather, what is the expected monetary value for Lobster Liquidators? A) $234,000 B) $262,500 C) $700,000 D) $233,333 Answer: B Explanation: B) 0.45 ($520,000) + 0.2 ($230,000) + 0.35 (-$50,000) = $262,500 Diff: 2 Objective: Appendix AACSB: Application of knowledge
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Answer the following questions using the information below: Patrick Ross has three booth rental options at the county fair where he plans to sell his new product. The booth rental options are: Option 1: Option 2: Option 3:
$1,000 fixed fee, or $750 fixed fee + 5% of all revenues generated at the fair, or 20% of all revenues generated at the fair.
The product sells for $37.50 per unit. He is able to purchase the units for $12.50 each. 3) How many actions and events will a decision table contain? A) 1 action and 3 events B) 1 action and 6 events C) 2 actions and 3 events D) 3 actions and 6 events Answer: D Diff: 2 Objective: Appendix AACSB: Application of knowledge
4) Which option should Patrick choose to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold? A) Option 1 B) Option 2 C) Option 3 D) All options maximize income equally. Answer: C Explanation: C) Expected revenues = 0.4(70 × $37.50) + 0.6(40 × $37.50) = $1,950 Expected CM before options = 0.4(70 × $25) + 0.6(40 × $25) = $1,300 Option 1: $1,300 - $1,000 = $300 Option 2: $1,300 - $750 - 0.05($1,950) = $452.50 Option 3: $1,300 - 0.2($1,950) = $910* * = maximization of income Diff: 3 Objective: Appendix AACSB: Application of knowledge
5) When there are multiple cost drivers the simple CVP formula of Q = (FC + OI)/CMU can still be used. Answer: FALSE Explanation: When there are multiple cost drivers the simple CVP formula no longer applies. Diff: 1 Objective: Appendix AACSB: Analytical thinking
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6) There is a difference between a good decision and a good outcome and one can exist without the other. Answer: TRUE Diff: 1 Objective: Appendix AACSB: Analytical thinking
7) A decision table is a summary of the alternative actions, events, outcomes, and probabilities of events. Answer: TRUE Diff: 1 Objective: Appendix AACSB: Analytical thinking
8) Maria makes tortillas and sells them from her house. She is concerned about purchasing too many ingredients and having to throw away unsold tortillas at the end of the day. It costs her $5.00 to make 100 tortillas and she sells them for $20.00 per 100. She has kept track of sales and discovered that she can sell 1,500 tortillas about 25% of the time, 1,000 tortillas about 50% of the time and only 500 tortillas the rest of the time. What is the minimum number of tortillas should she make daily to maximize profit? Round to the nearest 100 tortillas. Answer: 1,000 tortillas. She cannot sell more than she makes, so if she makes 500 she has a 100% probability of selling them all for a profit of $75. If she makes 600, she is likely to sell 575 (500 × 25% + 600 × 50% + 600 × 25%) and so her revenue is $115 (575 × 20/100) and costs are $30 (600 × 5/100) yielding a profit of $85. Following this logic, at 1,000 tortillas, she is likely to sell 875 with revenue of $175 and costs of $50. This is the minimum number of tortillas she can make to earn $125 profit. At any level above this, up to 1,500 tortillas, her profit will remain $125. Above 1,500 tortillas, her profit will decline due to production exceeding maximum likely sales. Diff: 3 Objective: Appendix AACSB: Application of knowledge
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9) Lauren had been a manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Lauren was offered the opportunity to purchase a hotel near a vacation area she had often visited. It was a great place surrounded by mountains and known for its scenic beauty. After obtaining a lawyer and an accountant to assist her, Lauren did an analysis of the business and evaluated several contingencies relating to various scenarios. Since the expected monetary value of the various scenarios was much higher than the price of the hotel, she decided to purchase the hotel. She resigned her position, obtained a loan, and purchased the hotel. The following year, there was a severe economic downturn and also a very bad weather season that reduced the number of guests and also caused a resulting mold situation in the hotel building that required expensive repair work. Lauren ran short of cash, became emotionally distraught, and eventually had to sell the hotel at a significant loss. Was it a bad decision for her to purchase the hotel instead of keeping her other managerial position? Explain. Answer: A decision made has its own ups and downs. Decisions were made based on information that was available at the time of evaluating and making the decision. Since she used to visit the place often for her vacation, she should have known about the occupancy level of the hotel and should have known on the area's climatic conditions and its implications. However, a downturn in the market is unpredictable. She should have made an alternative plan in the event of an economic downturn. Thus, it is a case of misfortune and carelessness in evaluating the project completely. Diff: 3 Objective: Appendix AACSB: Application of knowledge
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 4 Job Costing Objective 4.1 1) A cost is considered direct if it can be traced to a particular cost object: A) easily with the aid of technology B) in a manner that is accurate C) in an economically feasible way D) in an accurate way with an investment in hardware and software Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
2) A ________ is anything for which a measurement of costs is desired. A) cost-allocation base B) cost pool C) cost object D) cost-application base Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
3) A ________ is a grouping of individual indirect cost items. A) cost-allocation base B) cost assignment
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C) cost pool D) job-costing system Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
4) A manufacturer utilizes three separate indirect cost pools. Which of the following is true? A) Each indirect cost pool utilizes a separate cost-allocation rate. B) Each indirect cost pool is a subset of total direct costs. C) Each indirect cost pool relates to multiple cost centers. D) Each indirect cost pool utilizes the same cost-allocation rate for all costs incurred. Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
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5) Direct costs: A) are anything for which a measurement of costs is desired B) are costs related to a particular cost object that can be traced to that cost object in an economically feasible manner C) focus specifically on the costing needs of the CFO D) are costs related to a particular cost object that cannot be traced to that cost object in a cost-effective manner Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
6) In a costing system: A) cost tracing allocates indirect costs B) cost allocation assigns direct costs C) a cost-allocation base can be either financial or nonfinancial D) a cost object should be a product and not a department or a geographic territory Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Assigning direct costs to a cost object is called: A) cost allocation B) cost assignment C) cost pooling D) cost tracing Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
8) ________ is the process of assigning indirect costs to products. A) Cost allocation B) Job cost recording C) Cost pooling D) Cost tracing Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
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9) Allocating indirect costs to departments based on the relative revenue earned by those departments is done based on which of the following criterion? A) direct hours utilized B) benefits received C) material resources used D) cause-and-effect relationships Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
10) Which of the following includes both traced direct costs and allocated indirect costs? A) cost tracing B) cost pools C) cost assignments D) cost allocations Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
11) The cost allocation base: A) is a grouping of individual indirect cost items B) are costs related to a particular cost object that cannot be traced to that cost object in an economically feasible way C) is anything for which a measurement of costs is desired D) is a systematic way to link an indirect cost or group of indirect costs to cost objects Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
12) Direct costs are allocated to the cost object using a cost-allocation method. Answer: FALSE Explanation: Indirect costs are allocated to the cost object using a cost-allocation method. Diff: 1 Objective: 1 AACSB: Analytical thinking
13) A cost object is anything for which a measurement of costs is desired. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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14) Direct costs of a cost object are costs related to a particular cost object that can be allocated to that cost object in an economically feasible (cost-effective) way. Answer: FALSE Explanation: Direct costs of a cost object — costs related to a particular cost object that can be traced to that cost object in an economically feasible (cost-effective) way. Diff: 1 Objective: 1 AACSB: Analytical thinking
15) The cost-allocation base is a systematic way to link an indirect cost or group of indirect costs to cost objects. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
16) Cost objects may be jobs, products, or customers. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
17) When an organization allocated indirect costs to departments by relative size of the budgets, it is based on the criterion of benefits received. Answer: FALSE Explanation: When an organization allocated indirect costs to departments by relative size of the budgets, it is based on the criterion of ability to bear costs. Diff: 1 Objective: 1 AACSB: Analytical thinking
18) Cost pools can range from broad, such as all manufacturing-plant costs, to narrow, such as the costs of operating the sewing machines in a factory. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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19) For each item below indicate the source documents that would most likely authorize the journal entry in a job-costing system. Required: a. direct materials purchased b. direct materials used c. direct manufacturing labor d. indirect manufacturing labor e. finished goods control f. cost of goods sold Answer: a. purchase invoice b. materials requisition record c. labor time card/record d. labor time card e. job-cost record f. sales invoice Diff: 2 Objective: 1 AACSB: Analytical thinking
20) Differentiate between a cost pool and a cost-allocation base. Answer: A cost pool is a grouping of individual indirect cost items. The cost-allocation base (number of machine-hours) is a systematic way to link an indirect cost or group of indirect costs (operating costs of all metal-cutting machines) to cost objects (different products). Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 4.2
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1) Process costing is: A) used to enhance employees' job satisfaction B) used by businesses to price unique products or identical products produced in batches C) used by businesses to price identical products D) used by businesses when manufacturing goods above normal capacity Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
2) Process costing: A) allocates all product costs, including materials, and labor resulting in an average unit cost B) results in different costs for different units produced to take into account nonuniformity C) is commonly used by general contractors who construct custom-built homes D) is used exclusively in manufacturing Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Job costing is: A) used by businesses to price identical products B) used by businesses to price unique products for different jobs C) used to calculate equivalent units D) used to calculate the percentage of work completed Answer: B Diff: 1 Objective: 2 AACSB: Analytical thinking
4) Job costing: A) cannot be used by the service industry B) records the flow of costs for each product or service C) allocates an equal amount of cost to each unit made during a time period D) is used when each unit of output is identical Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
5) Job-costing is likely to be used by: A) oil refining companies B) advertising agencies C) mortgage payment processors D) breakfast cereal producers Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
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6) Which of the following differentiates job costing from process costing? A) Job costing is used when each unit of output is identical, and process costing deals with unique products. B) Job costing is used when each unit of output is identical and not produced in batches, and process costing deals with unique products produced on large scale. C) Process costing is used when each unit of output is identical, and job costing deals with unique products not produced in batches. D) Job costing is used by manufacturing industries, and process costing is used by service industries. Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
7) Which of the following companies will use a process costing system? A) an oil refining company B) a manufacturer of ships C) a custom kitchen cabinet company D) an advertising firm Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
8) Which of the following products would be "costed" using a job costing system? A) the restoration of 15 various antique Ford Motor cars B) boxes of Kellogg's' corn flakes C) hundreds of boxes of Expo Dry Erase Markers (low odor) D) dozens of donuts to be sold in a local coffee shop franchise Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
9) A company may use job costing to assign costs to different product lines and then use process costing to calculate unit costs within each product line. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
10) In each period, job costing divides the total cost of producing an identical or similar product produced in batches by the total number of units produced to obtain a per-unit cost. Answer: FALSE Explanation: Job costing is used to accumulate costs separately for each product or service. Diff: 2 Objective: 2 AACSB: Analytical thinking
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11) Oil refining companies primarily use job costing to estimate costs. Answer: FALSE Explanation: Process costing is used to estimate costs in oil refining companies as the same process is used to extract oil. Diff: 1 Objective: 2 AACSB: Analytical thinking
12) In a job-costing system the cost object is an individual unit, batch, or lot of a distinct product or service. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
13) Process-costing systems divide the total costs of producing product or services by the total number of units produced to obtain a per-unit cost thereby deriving a per-unit average cost. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
14) Process costing is used to assign manufacturing costs to unique batches of a product. Answer: FALSE Explanation: Job costing is used to assign manufacturing costs to unique batches of a product. Diff: 1 Objective: 2 AACSB: Analytical thinking
15) Using job costing would not be appropriate in the shipping industry. Answer: FALSE Explanation: Since each package or item shipped is unique or has different demand on resources such as packaging, methods of shipping, etc., job costing would be more appropriate than process costing. Diff: 1 Objective: 2 AACSB: Analytical thinking
16) Whether a company chooses to use either a job costing system or process costing system depends on the nature of the product or service - whether the products or services are heterogeneous or homogeneous. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
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17) Describe job-costing and process-costing systems. Explain when it would be appropriate to use each. Answer: Job costing accumulates costs for different jobs required by specific customers. Process costing computes and allocates an equal amount of cost to each product. Job costing is the logical choice when the production process has many distinct products or many heterogeneous jobs, while process costing is typically used when it is not necessary to keep separate cost records for individual jobs and the products are relatively homogeneous. Diff: 2 Objective: 2 AACSB: Analytical thinking
Objective 4.3 1) Which of the following are reasons for using longer periods, such as a year, to calculate indirect cost rates? A) shorter the period, the greater is the influence of seasonal patterns on the amount of costs B) longer the period, the greater is the influence of seasonal patterns on the amount of costs C) shorter the period, the smaller is the influence of seasonal patterns on the amount of opportunity costs D) longer the period, the smaller is the influence of seasonal patterns on the amount of opportunity costs Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
2) The actual indirect-cost rate is calculated by: A) dividing actual total indirect costs by the actual total quantity of the cost-allocation base B) multiplying actual total indirect costs by the actual total quantity of the cost-allocation base C) dividing the actual total quantity of the cost allocation base by actual total indirect costs D) multiplying the actual total quantity of the cost allocation base by actual total indirect costs Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
3) Actual costing is a costing system that traces direct costs to a cost object by: A) using the budgeted direct cost rates times the budgeted quantities of direct-cost inputs B) using the actual direct costs rates times the budgeted quantities of the direct-cost inputs C) using the actual direct cost rates times the actual quantities of the direct-cost inputs D) using the budgeted direct cost rates times the actual quantities of the direct cost inputs Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
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4) An example of a numerator reason for calculating annual indirect-cost rates includes: A) fewer production workdays in a month B) cost of raw materials purchased C) higher snow-removal costs during the winter D) the number of units produced Answer: D Diff: 3 Objective: 3 AACSB: Analytical thinking
5) An example of a denominator reason for calculating annual indirect-cost rates includes: A) budgeted annual indirect costs divided by actual quantity of cost-allocation base B) semi-annual insurance payments in March and September C) higher levels of output demanded during the fall months D) prepaid rent in January for the months January through June Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
6) When calculating indirect cost rates, the longer the time period, the greater the influence of seasonal patterns on the amount of costs. Answer: FALSE Explanation: The shorter the time period, the greater the influence of seasonal patterns on the amount of costs. Diff: 1 Objective: 3 AACSB: Analytical thinking
7) The formula for the predetermined indirect cost rate is: A) budgeted annual indirect costs divided by actual quantity of cost-allocation base B) budgeted annual indirect costs divided by budgeted annual quantity of cost-allocation base C) actual annual indirect costs divided by budgeted annual quantity of cost-allocation base D) actual annual indirect costs divided by actual annual quantity of cost-allocation base Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
8) The actual indirect-cost rate is calculated by dividing actual total indirect costs by the budgeted total quantity of the cost-allocation base. Answer: FALSE Explanation: Actual indirect cost rate = Actual annual indirect costs / Actual annual quantity of the cost-allocation base. Diff: 1 Objective: 3 AACSB: Analytical thinking
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9) A manufacturer estimates that it will incur variable indirect costs for the month of October of $70,000 and $30,000 of fixed costs. The company uses direct labor hours to calculate the predetermined overhead rate and predicted that 3,000 direct labor hours would be used in October. Actual direct labor hours amounted to 3,200. Required: A) What is the variable predetermined indirect rate for October? B) What is the fixed predetermined indirect cost rate for October? C) What is the total allocation rate per direct labor hour for October? Answer: A) $70,000/3,000 = $23.33 per direct labor hour B) $30,000/3000 - $10.00 per direct labor hour C) $23.33 + $10.00 = $33.33 per direct labor hour Diff: 2 Objective: 3 AACSB: Analytical thinking
10) Define normal costing and explain the various ways it is used to not only track costs but to make other decisions in a company that manufactures custom-made products. Answer: Normal costing is a costing system that (1) traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of the direct-cost inputs and (2) allocates indirect costs based on the budgeted indirect-cost rates times the actual quantities of the cost allocation bases. Managers need timely manufacturing costs (and other costs, such as marketing costs) to price jobs, monitor and manage costs, evaluate the success of jobs, learn about what did and did not work, bid on new jobs, and prepare interim financial statements. In order to facilitate immediate job cost approximations, a predetermined or budgeted indirect-cost rate is calculated for each cost pool at the beginning of a fiscal year and used to allocate overhead costs to jobs as they are being completed. Diff: 2 Objective: 3 AACSB: Analytical thinking
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Objective 4.4 1) A job that shows low profitability may be the result of: A) excessive usage of direct materials B) inefficient direct manufacturing labor C) overpricing the job D) insurance claim of the damaged goods Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
2) For a given job the direct costs associated with the job are: A) actual overhead that has been applied to the job B) raw materials that can be traced to the job in an economically feasible way C) All sunk costs that can be traced to the job in an economically feasible way D) all fixed costs Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
3) Place the following steps in the order suggested by the seven steps used to assign costs to individual jobs: A. B. C. D.
Identify indirect costs Compute the total cost of the job Select cost-allocation bases Compute the indirect cost rate
A) ACDB B) CADB C) BACD D) DCAB Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
4) The basic source document for direct manufacturing labor is the: A) job-cost record B) materials-requisition record C) labor-time record D) labor-requisition record Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking
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5) Problems with costing occur when: A) incorrect job numbers are recorded on source documents B) bar coding is used to record materials used on the job C) a computer screen requests an employee number before that employee is able to work on information related to a specific job D) incorrect product delivery forms are entered into the system Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
6) The budgeted indirect-cost rate for each cost pool is computed as: A) budgeted annual indirect costs divided by budgeted annual quantity of cost allocation base B) budgeted annual quantity of cost allocation base divided by budgeted annual indirect costs C) actual annual indirect costs divided by budgeted annual quantity of cost allocation base D) budgeted annual indirect costs divided by budgeted actual quantity of cost allocation base Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
7) If indirect-cost rates are calculated monthly, distortions might occur because of: A) rental costs paid monthly B) property tax payments made in July and December C) routine monthly preventive-maintenance costs that benefit future months D) salary hikes at the beginning of the financial year Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
8) Smith Office Equipment Company's budgeted manufacturing overhead is $4,200,000. Overhead is allocated on the basis of direct labor hours. The budgeted direct labor hours for the period are 40,000. What is the manufacturing overhead rate? A) $8.75 B) $42.00 C) $113.75 D) $105.00 Answer: D Explanation: D) $4,200,000 / 40,000 hours = $105.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
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9) X-Industries manufactures 3-D printers. For each unit, $3,100 of direct material is used and there is $2,500 of direct manufacturing labor at $25 per hour. Manufacturing overhead is applied at $30 per direct manufacturing labor hour. Calculate the profit earned on 45 units if each unit sells for $10,000. A) $104,250 B) $81,750 C) $63,000 D) $3,000 Answer: C Explanation: C) $3,100 + $2,500 + (($2,500 / $25) × $30) = $8,600 Profit earned on 45 units = ($10,000 − $8,600) × 45 units = $63,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
10) In a job-costing system, a manufacturing firm typically uses an indirect-cost rate to estimate the ________ allocated to a job. A) direct materials B) direct labor C) manufacturing overhead costs D) total costs Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
11) A job-cost sheet details the: A) direct materials purchased and paid B) direct labor costs incurred C) indirect labor costs incurred D) actual indirect overhead costs incurred Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
12) A job-cost record uses information from: A) a materials-requisition record to record raw material purchases from suppliers B) a materials-requisition report to record the type and quantity of item received in an order from a supplier C) a labor-time card to record an employee's wage rate and hours spent on a particular job D) the bill of materials to ensure the goods are of the prescribed quality Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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13) ________ is used to record and accumulate all the costs assigned to a specific job. A) Job-cost record B) Materials-requisition record C) Cost-allocation base D) Labor-requisition record Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
14) An increase in direct labor cost per unit: A) increases the fixed cost B) increases profits C) increases the variable cost D) increases overhead costs Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
15) Fixed costs remain constant at $400,000 per month. During high-output months variable costs are $320,000, and during low-output months variable costs are $80,000. What are the respective high and low indirect-cost rates if budgeted professional labor-hours are 16,000 for high-output months and 4,000 for low-output months? A) $45.00 per hour; $120.00 per hour B) $45.00 per hour; $45.00 per hour C) $25.00 per hour; $20.00 per hour D) $20.00 per hour; $120.00 per hour Answer: A Explanation: A) $400,000 / 16,000 = $25.00 $400,000 / 4,000 = $100.00 $320,000 / 16,000 = 20.00 $80,000 / 4,000 = 20.00 High Month = $45.00 Low Month = $120.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
16) Managers and accountants collect most of the cost information that goes into their systems through: A) an information data bank B) computer programs C) source documents D) time surveys Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking
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17) For 2020, Rest-Well Bedding uses machine-hours as the only overhead cost-allocation base. The direct cost rate is $3.00 per unit. The selling price of the product is $18.00. The estimated manufacturing overhead costs are $240,000 and estimated 40,000 machine hours. The actual manufacturing overhead costs are $300,000 and actual machine hours are 50,000. Using job costing, the 2020 actual indirect-cost rate is: A) $6.00 per machine-hour B) $4.80 per machine-hour C) $7.50 per machine-hour D) $7.20 per machine-hour Answer: A Explanation: A) $300,000 / 50,000 mh = $6.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
18) For 2020, Winters Manufacturing uses machine-hours as the only overhead cost-allocation base. The direct cost rate is $3.00 per unit. The selling price of the product is $18.00. The estimated manufacturing overhead costs are $240,000 and estimated 40,000 machine hours. The actual manufacturing overhead costs are $300,000 and actual machine hours are 50,000. What is the profit margin earned if each unit requires two machine-hours? A) 40.00% B) 16.67% C) 50.00% D) 80.00% Answer: B Explanation: B) $300,000/50,000 = $6.00 $18.00 − $3.00 − ($6.00 × 2) = $3; $3 / $18 = 16.67% *already there/no change to this Diff: 2 Objective: 4 AACSB: Application of knowledge
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19) Better Products Company manufactures insulation and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $19 per direct labor-hour. The following data are obtained from the accounting records for October 2020: Direct materials Direct labor (3,400 hours @ $12/hour) Indirect labor Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$410,000 40,800 21,000 51,000 42,000 18,000 25,000
The actual amount of manufacturing overhead costs incurred in October 2020 totals: A) $262,400 B) $114,000 C) $157,000 D) $118,000 Answer: B Explanation: B) $21,000 + $51,000 + $42,000 = $114,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
20) Smith and Jones CPA firm employs 12 accountants and 10 paraprofessionals. Direct and indirect costs are applied on a professional labor-hour basis that includes both accountant and paraprofessional hours. Following is information for 2020: Budget Indirect costs $320,000 Annual salary of each accountant $120,000 Annual salary of each paraprofessional $35,000 Total professional labor-hours 40,000 dlh
Actual $330,000 $130,000 $36,000 50,000 dlh
What are the actual direct-cost rate and the actual indirect-cost rate, respectively, per professional labor-hour? A) $38.40; $6.40 B) $44.75; $8.00 C) $48.00; $6.60 D) $38.40; $6.60 Answer: D Explanation: D) [($130,000 × 12) + ($36,000 × 10)] / 50,000 = $38.40 actual direct rate $330,000 / 50,000 = $6.60 actual indirect rate Diff: 2 Objective: 4 AACSB: Application of knowledge
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21) Francis and Hartley Law Office employs 12 full-time attorneys and 10 paraprofessionals. Direct and indirect costs are applied on a professional labor-hour basis that includes both attorney and paraprofessional hours. Following is information for 2020: Budget Indirect costs $290,000 Annual salary of each attorney $90,000 Annual salary of each paraprofessional $32,000 Total professional labor-hours 20,000 dlh
Actual $310,000 $105,000 $33,000 25,000 dlh
How much should the client be billed in an actual costing system if 220 professional labor-hours are used? A) $13,992 B) $18,590 C) $20,218 D) $16,720 Answer: D Explanation: D) [($105,000 × 12) + ($33,000 × 10)] / 25,000 × 220 = $13,992 + $310,000 / 25,000 × 220 = $2,728 = 16,720 Diff: 3 Objective: 4 AACSB: Application of knowledge
22) Which of the following is NOT a characteristic of an Electronic Data Interchange? A) Relies on the internet or a private network for communications B) Replaces paper documents associated with business transactions C) Uses a dedicated communication system between the computer systems of customers and vendors D) Eliminates the need for an operator on the production floor to request materials Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
23) If indirect-cost rates were based on actual short-term usage, periods of lower demand would result in lower costs per unit. Answer: FALSE Explanation: If indirect-cost rates were based on actual short-term usage, periods of lower demand would result in higher costs per unit. Diff: 2 Objective: 4 AACSB: Analytical thinking
24) In job costing, only direct costs are used to determine the cost of a job. Answer: FALSE Explanation: Both direct and indirect costs are used to determine the cost of a job. Diff: 1 Objective: 4 AACSB: Analytical thinking
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25) Indirect manufacturing costs should be allocated equally to each job. Answer: FALSE Explanation: Not equally to each job, but according to the use of indirect resources by individual jobs. Diff: 2 Objective: 4 AACSB: Analytical thinking
26) Each cost pool will have one cost-allocation base. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
27) Rally Company manufactures garage storage systems for homeowners. It uses a normal costing system with two direct cost categories - direct materials and direct labor - an one indirect-cost pool, manufacturing overhead costs. For 2020: Budgeted manufacturing overhead costs $1,000,000 Budgeted manufacturing labor-hours 20,000 hours Actual manufacturing overhead costs $1,100,000 Actual direct manufacturing labor-hours 22,000 Actual direct material costs $10,000 Actual direct manufacturing labor hours 200 Actual direct manufacturing labor rate $20 per hour Required: Calculate the total manufacturing costs using normal costing. Answer: $24,000 = $10,000 + (200 × $20) + (200 × $50) Diff: 2 Objective: 4 AACSB: Application of knowledge
28) Companies often use multiple cost-allocation bases to allocate indirect costs because different indirect costs have different cost drivers. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
29) A materials-requisition record is an example of a source document. Answer: TRUE Diff: 2 Objective: 4 AACSB: Application of knowledge
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30) All costs other than direct materials and direct manufacturing labor are classified as indirect costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
31) To smooth fluctuating levels of output, separate indirect-cost rates should be calculated for each month. Answer: FALSE Explanation: To smooth seasonal costs and fluctuating levels of output, indirect-cost rates should be calculated on an annual basis. Diff: 2 Objective: 4 AACSB: Analytical thinking
32) Grounds-maintenance costs incurred during the summer months will distort indirect-cost rates that are computed monthly. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
33) One reason for using longer time periods to calculate indirect-cost rates is seasonal cost fluctuations. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
34) What are the direct costs of a job and in which source documents are they recorded? Answer: The direct costs of a job are direct materials and direct labor. Direct materials are recorded in a basic source document called a materials-requisition record, which contains information about the cost of direct materials used on a specific job and in a specific department. Direct manufacturing labor is recorded in a labor-time sheet, which contains information about the amount of labor time used for a specific job in a specific department. Diff: 2 Objective: 4 AACSB: Analytical thinking
35) What is the difference between an actual cost system and a normal cost system? Answer: An actual cost system is one that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of direct-cost inputs, and allocates indirect costs based on the actual indirect cost rates times the actual quantities of the cost-allocation bases. A normal cost system is one that traces direct costs to a cost object by using the actual direct-cost rates times the actual quantities of direct-cost inputs, and allocates indirect costs based on the budgeted indirect cost rates times the actual quantities of the cost-allocation bases. Both systems trace direct costs to jobs the same way. An actual cost system traces indirect costs to jobs using actual indirect cost rates, but a normal cost system uses budgeted indirect cost rates to trace indirect costs to jobs. Diff: 2 Objective: 4 AACSB: Analytical thinking
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36) For each item below indicate the source documents that would most likely authorize the journal entry in a job-costing system. Required: a. direct materials purchased b. direct materials used c. direct manufacturing labor d. indirect manufacturing labor e. finished goods control f. cost of goods sold Answer: a. purchase invoice b. Materials requisition record c. labor time card/record d. labor time card e. job-cost record f. sales invoice Diff: 2 Objective: 4 AACSB: Analytical thinking
37) Normal costing is a method of job costing that allocates an indirect cost based on the actual indirect-cost rate times the actual quantity of the cost-allocation base. Answer: FALSE Explanation: Actual costing is a method of job costing that allocates an indirect cost based on the actual indirect-cost rate times the actual quantity of the cost-allocation base. Diff: 2 Objective: 4 AACSB: Analytical thinking
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Objective 4.5 1) The budgeted indirect-cost rate is calculated: A) at the beginning of the year B) during the year C) at the end of each quarter D) at the end of the year Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
2) The difference between actual costing and normal costing is: A) normal costing uses actual quantities of direct-costs B) actual costing uses actual quantities of direct-costs C) normal costing uses budgeted indirect-costs D) actual costing uses actual quantities of cost-allocation bases Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
3) Which of the following statements about normal costing is true? A) Direct costs and indirect costs are traced using an actual rate. B) Direct costs and indirect costs are traced using budgeted rates. C) Direct costs are traced using a budgeted rate, and indirect costs are allocated using an actual rate. D) Direct costs are traced using an actual rate, and indirect costs are allocated using a budgeted rate. Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
4) When using a normal costing system, manufacturing overhead is allocated using the ________ manufacturing overhead rate and the ________ quantity of the allocation base. A) budgeted; actual B) budgeted; budgeted C) actual; budgeted D) actual; actual Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
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5) Which of the following statements about actual costing is true? A) Manufacturing costs of a job are available earlier under actual costing. B) Corrective actions can be implemented sooner under actual costing. C) Actual costing uses budgeted indirect-cost rates calculated annually. D) Actual costing uses actual indirect-cost rates calculated annually. Answer: D Diff: 1 Objective: 5 AACSB: Analytical thinking
6) For 2020, Franklin Manufacturing uses machine-hours as the only overhead cost-allocation base. The estimated manufacturing overhead costs are $220,000 and estimated machine hours are 25,000. The actual manufacturing overhead costs are $360,000 and actual machine hours are 40,000. Using job costing, the 2020 budgeted manufacturing overhead rate is: (Round the final answer to the nearest cent.) A) $14.40 per machine-hour B) $5.50 per machine-hour C) $9.00 per machine-hour D) $8.80 per machine-hour Answer: D Explanation: D) $220,000 / 25,000 mh = $8.80 per machine-hour Diff: 2 Objective: 5 AACSB: Application of knowledge
7) For 2020, Franklin Manufacturing uses machine-hours as the only overhead cost-allocation base. The estimated manufacturing overhead costs are $210,000 and estimated machine hours are 20,000. The actual manufacturing overhead costs are $330,000 and actual machine hours are 30,000. What is the difference between the budgeted and the actual manufacturing overhead using job costing? (Round interim and the final answer to the nearest cent.) A) $6.00 B) $4.00 C) $0.50 D) $5.50 Answer: C Explanation: C) Budgeted manufacturing overhead rate: $210,000 / 20,000 mh = $10.50 per machine-hour Actual manufacturing overhead is $330,000 / 30,000 = $11.00 per machine hour. Difference is $11.00 - $10.50 = $0.50 Diff: 2 Objective: 5 AACSB: Application of knowledge
221 richard@qwconsultancy.com
8) Sky High Company has two departments, X and Y. The following estimates are for the coming year:
Direct manufacturing labor-hours Machine-hours Manufacturing overhead
X 50,000 70,000 $350,000
Y 70,000 50,000 $490,000
A single indirect-cost rate based on direct manufacturing labor-hours for the entire plant is: A) $12.00 per direct labor-hour B) $7.00 per direct labor-hour C) $16.80 per direct labor-hour D) $9.80 per direct labor-hour Answer: B Explanation: B) $840,000 / 120,000 dlh = $7.00 Diff: 2 Objective: 5 AACSB: Application of knowledge
9) Sky High Company has two departments, X and Y. The following estimates are for the coming year:
Direct manufacturing labor-hours Machine-hours Manufacturing overhead
X 30,000 50,000 $180,000
Y 50,000 30,000 $360,000
The budgeted indirect-cost driver rate for Y based on the number of machine-hours is in excess of X by: (Round interim and the final answer to the nearest cent.) A) $8.40 per machine-hour B) $14.40 per machine-hour C) $6.00 per machine-hour D) $12.00 per machine-hour Answer: A Explanation: A) X = $180,000 / 50,000 mh = $3.60 Y = $360,000 / 30,000 mh = $12.00; Excess = $12.00 − $3.60 = $8.40 Diff: 2 Objective: 5 AACSB: Application of knowledge
222 richard@qwconsultancy.com
10) Manton Manufacturing applies manufacturing overhead costs to products at a budgeted indirect-cost rate of $55 per direct manufacturing labor-hour. A retail outlet has requested a bid on a special order of the Toy Bear product. Estimates for this order include: Direct materials of $65,000; 610 direct manufacturing labor-hours at $35 per hour; and a 35% markup rate on total manufacturing costs. Manufacturing overhead cost estimates for this special-order total: A) $56,300 B) $54,900 C) $33,550 D) $42,250 Answer: C Explanation: C) $55 × 610 dlh = $33,550 Diff: 2 Objective: 5 AACSB: Application of knowledge
11) Lancelot Manufacturing is a small textile manufacturer using machine-hours as the single indirect-cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Case High School band jacket job.
Direct materials Direct labor Manufacturing overhead costs Machine-hours
Company $53,000 $15,000 $40,000 80,000 mh
Case High School Job $2,100 $500 800 mh
For Lancelot Manufacturing, what is the annual manufacturing overhead cost-allocation rate? A) $0.85 B) $1.35 C) $0.50 D) $50.00 Answer: C Explanation: C) $40,000 / 80,000 mh = $0.50 per mh Diff: 2 Objective: 5 AACSB: Application of knowledge
223 richard@qwconsultancy.com
12) Lancelot Manufacturing is a small textile manufacturer using machine-hours as the single indirect-cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Case High School band jacket job.
Direct materials Direct labor Manufacturing overhead costs Machine-hours
Company $67,000 $32,000 $55,000 100,000 mh
Case High School Job $2,400 $800 800 mh
What amount of manufacturing overhead costs will be allocated to this job? A) $440 B) $1,232 C) $280 D) $696 Answer: A Explanation: A) 800 mh × $55,000 / 100,000 mh = $440 Diff: 2 Objective: 5 AACSB: Application of knowledge
13) Lancelot Manufacturing is a small textile manufacturer using machine-hours as the single indirect-cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Case High School band jacket job.
Direct materials Direct labor Manufacturing overhead costs Machine-hours
Company $67,000 $32,000 $55,000 100,000 mh
Case High School Job $2,400 $800 800 mh
What are the total manufacturing costs of this job? A) $3,200 B) $3,640 C) $3,896 D) $2,760 Answer: B Explanation: B) DM $2,400 + DML $800 + MOH $440 = $3,640 Diff: 3 Objective: 5 AACSB: Application of knowledge
224 richard@qwconsultancy.com
14) Lancelot Manufacturing is a small textile manufacturer using machine-hours as the single indirect-cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Case High School band jacket job.
Direct materials Direct labor Manufacturing overhead costs Machine-hours
Company $55,000 $22,000 $49,000 70,000 mh
Case High School Job $2,300 $600 700 mh
What is the bid price for the Case High School job if the company uses a 40% markup of total manufacturing costs? A) $4,060 B) $1,356 C) $1,160 D) $4,746 Answer: D Explanation: D) (DM $2,300 + DML $600 + MOH $490) × (1 + 40/100) = $4,746 Diff: 3 Objective: 5 AACSB: Application of knowledge
225 richard@qwconsultancy.com
15) Apple Valley Corporation uses a job cost system and has two production departments, A and B. Budgeted manufacturing costs for the year are:
Direct materials Direct manufacturing labor Manufacturing overhead
Department A $800,000 $200,000 $400,000
Department B $120,000 $200,000 $500,000
The actual material and labor costs charged to Job #432 were as follows:
Direct materials: Direct labor: Department A Department B
Total $21,000 $11,000 $7,000 $18,000
Apple Valley applies manufacturing overhead costs to jobs on the basis of direct manufacturing labor cost using departmental rates determined at the beginning of the year. For Department A, the manufacturing overhead allocation rate is: A) 50.0% B) 250.0% C) 200.0% D) 225.0% Answer: C Explanation: C) $400,000 / $200,000 = 200.0% Diff: 2 Objective: 5 AACSB: Application of knowledge
226 richard@qwconsultancy.com
16) Apple Valley Corporation uses a job cost system and has two production departments, A and B. Budgeted manufacturing costs for the year are:
Direct materials Direct manufacturing labor Manufacturing overhead
Department A $750,000 $500,000 $1,000,000
Department B $100,000 $500,000 $800,000
The actual material and labor costs charged to Job #432 were as follows:
Direct materials: Direct labor: Department A Department B
Total $24,000 $7,000 $9,000 $16,000
Apple Valley applies manufacturing overhead costs to jobs on the basis of direct manufacturing labor cost using departmental rates determined at the beginning of the year. For Department B, the manufacturing overhead allocation rate is: A) 160.0% B) 180.0 % C) 62.5% D) 200.0% Answer: A Explanation: A) $800,000 / $500,000 = 160.0% Diff: 2 Objective: 5 AACSB: Application of knowledge
227 richard@qwconsultancy.com
17) Apple Valley Corporation uses a job cost system and has two production departments, A and B. Budgeted manufacturing costs for the year are:
Direct materials Direct manufacturing labor Manufacturing overhead
Department A $650,000 $100,000 $400,000
Department B $150,000 $900,000 $450,000
The actual material and labor costs charged to Job #432 were as follows:
Direct materials: Direct labor: Department A Department B
Total $20,000 $9,000 $11,000 $20,000
Apple Valley applies manufacturing overhead costs to jobs on the basis of direct manufacturing labor cost using departmental rates determined at the beginning of the year. Manufacturing overhead costs allocated to Job #432 total: A) $41,500 B) $4,000 C) $49,500 D) $44,000 Answer: A Explanation: A) [($9,000 × $400,000 / $100,000)] + [$11,000 × $450,000 / $900,000] = $41,500 Diff: 3 Objective: 5 AACSB: Application of knowledge
228 richard@qwconsultancy.com
18) Elite Stationary Inc. employs 20 full-time employees and 10 trainees. Direct and indirect costs are applied on a professional labor-hour basis that includes both employee and trainee hours. Following is information for 2020:
Indirect costs Annual salary of each employee Annual salary of each trainee Total professional labor-hours
Budget $200,000 $100,000 $25,000 50,000 dlh
Actual $300,000 $110,000 $30,000 60,000 dlh
What are the budgeted direct-cost rate and the budgeted indirect-cost rate, respectively, per professional labor-hour? (Round the final answers to the nearest cent.) A) $40.00; $4.50 B) $45.00; $4.00 C) $41.67; $5.00 D) $30.00; $5.00 Answer: B Explanation: B) [($100,000 × 20) + ($25,000 × 10)] / 50,000 = $45.00 budgeted direct rate $200,000 / 50,000 = $4.00 budgeted indirect rate Diff: 2 Objective: 5 AACSB: Application of knowledge
19) Elite Stationary employs 20 full-time employees and 10 trainees. Direct and indirect costs are applied on a professional labor-hour basis that includes both employee and trainee hours. Following is information for 2020:
Indirect costs Annual salary of each employee Annual salary of each trainee Total professional labor-hours
Budget $200,000 $100,000 $25,000 50,000 dlh
Actual $300,000 $110,000 $30,000 60,000 dlh
How much should a client be billed in a normal costing system when 1,400 professional labor-hours are used? A) $61,600 B) $65,333.333,3 C) $63,933.333,3 D) $49,000 Answer: C Explanation: C) [($110,000 × 20) + ($30,000 × 10)] / 60,000 × 1,400 = $58,333.333,3 + $200,000 / 50,000 × 1,400 = 5,600 $63,933.333,3 Diff: 3 Objective: 5 AACSB: Application of knowledge
229 richard@qwconsultancy.com
20) Elite Stationary employs 20 full-time employees and 10 trainees. Direct and indirect costs are applied on a professional labor-hour basis that includes both employee and trainee hours. Following is information for 2020:
Indirect costs Annual salary of each employee Annual salary of each trainee Total professional labor-hours
Budget $300,000 $200,000 $35,000 20,000 dlh
Actual $400,000 $210,000 $40,000 40,000 dlh
When a normal costing system is used, clients using proportionately more full-time employees than trainees will: A) be over billed for actual resources used B) be under billed for actual resources used C) be billed accurately for actual resources used D) result in an under allocation of direct costs Answer: B Diff: 3 Objective: 5 AACSB: Application of knowledge
21) In calculating the cost of a landscaping rake produced in a factory, the actual hours worked by a machine operator are multiplied by the actual hours the machine operator worked to derive: A) cost of direct labor under actual costing only B) cost of direct labor under normal costing and actual costing C) cost of indirect labor under normal costing and actual costing D) cost of indirect labor under normal costing only Answer: B Diff: 3 Objective: 5 AACSB: Application of knowledge
22) Actual costing helps managers get information earlier and take corrective measures to improve labor efficiency. Answer: FALSE Explanation: Normal costing helps managers get information earlier and take corrective measures to improve labor efficiency. Diff: 2 Objective: 5 AACSB: Analytical thinking
23) The budgeted indirect cost rate is actual indirect costs divided by budgeted quantity of the cost allocation base. Answer: FALSE Explanation: The budgeted indirect cost rate is budgeted indirect costs divided by budgeted quantity of the cost allocation base. Diff: 2 Objective: 5 AACSB: Analytical thinking
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24) Direct costs are traced the same way for actual costing and normal costing. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
25) Normal costing assigns indirect costs based on an actual indirect-cost rate. Answer: FALSE Explanation: Normal costing assigns indirect costs based on a budgeted rate. Diff: 1 Objective: 5 AACSB: Analytical thinking
26) A budgeted indirect-cost rate is computed for each cost pool using budgeted indirect costs and the budgeted quantity of the cost-allocation base. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
27) For normal costing, even though the indirect-cost rate is based on actual, indirect costs are allocated to products based on the normal capacity of the cost-allocation base. Answer: FALSE Explanation: For normal costing, even though the indirect-cost rate is based on estimates, indirect costs are allocated to products based on the actual quantity of the cost-allocation base. Diff: 2 Objective: 5 AACSB: Analytical thinking
231 richard@qwconsultancy.com
28) Chief Manufacturing is a small textile manufacturer using machine-hours as the single indirect-cost rate to allocate manufacturing overhead costs to the various jobs contracted during the year. The following estimates are provided for the coming year for the company and for the Somerset High School Science Olympiad Jacket job.
Direct materials Direct manufacturing labor Manufacturing overhead costs Machine-hours
Company $25,000 $5,000 $20,000 40,000 mh
Somerset High School Job $600 $200 800 mh
Required: a. For Chief Manufacturing, determine the annual manufacturing overhead cost-allocation rate. b. Determine the amount of manufacturing overhead costs allocated to the Somerset High School job. c. Determine the estimated total manufacturing costs for the Somerset High School job. Answer: a. Manufacturing overhead cost-allocation rate = $0.50 per mh = $20,000/40,000 mh b.
$400 estimated manufacturing overhead costs = 800 mh × $0.50 per mh
c.
Direct materials Direct manufacturing labor Manufacturing overhead costs Estimated total manufacturing costs
$500 $200 $400 $1,100
Diff: 2 Objective: 4, 5 AACSB: Analytical thinking
232 richard@qwconsultancy.com
29) Hill Manufacturing uses departmental cost driver rates to apply manufacturing overhead costs to products. Manufacturing overhead costs are applied on the basis of machine-hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 2020, the following estimates were provided for the coming year:
Direct labor-hours Machine-hours Direct labor cost Manufacturing overhead costs
Machining 10,000 dlh 100,000 mh $ 80,000 $250,000
Assembly 90,000 dlh 5,000 mh $720,000 $360,000
The accounting records of the company show the following data for Job #846:
Direct labor-hours Machine-hours Direct material cost Direct labor cost
Machining 50 dlh 170 mh $2,700 $ 400
Assembly 120 dlh 10 mh $1,600 $ 900
Required: a. Compute the manufacturing overhead allocation rate for each department. b. Compute the total cost of Job #846. c. Provide possible reasons why Hill Manufacturing uses two different cost allocation rates. Answer: a. Machining Department cost-allocation rate: $2.50 / mh = $250,000/100,000 mh Assembly Department cost-allocation rate: $4.00 / dlh = $360,000/90,000 dlh b. Total cost of Job #846 is $6,505 = Direct materials $4,300 + Direct labor $1,300 + Manufacturing overhead costs $905 (Machining $425 + Assembly $480). c. Ideally, the cost-allocation base should reflect the factors that cause manufacturing overhead costs to increase. Apparently, Hill regards the use of machines as the principal cause of manufacturing overhead costs (such as depreciation and repairs) in the Machining Department. In contrast, Hill regards direct labor-hours as the principal cause of manufacturing overhead costs (such as indirect labor) in the Assembly Department. Diff: 2 Objective: 4, 5 AACSB: Analytical thinking
233 richard@qwconsultancy.com
Objective 4.6 1) In a normal costing system, the Manufacturing Overhead Control account: A) is increased by allocated manufacturing overhead B) is credited with amounts transferred to Work-in-Process C) is decreased by allocated manufacturing overhead D) is debited with actual overhead costs Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
2) The Materials Control account is increased when: A) direct materials are purchased B) indirect materials are sold C) materials are requisitioned for production D) materials are converted to finished goods Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
3) Which of the following is true of the Work-in-Process Control account? A) It tracks all direct material purchases. B) Its balance is the sum of amounts from all in-process individual job-cost records. C) It is an expense account. D) It tracks overhead costs in-process from beginning through completion. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
4) Which of the following general ledger accounts will have a subsidiary ledger account? A) Cost of Goods Sold account B) Work-in-Process Control account C) Joe's Accounts Receivable subsidiary account D) Operating Expenses account Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
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5) Which of the following increases (are debited to) the Work-in-Process Control account? A) actual plant insurance costs B) customer services costs C) marketing expenses D) direct manufacturing labor costs Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
6) When $10,0000 direct materials are requisitioned, which of the following would be the correct journal entry? A) Manufacturing Overhead Control $10,000 Materials Control $10,000 B) Work-in-Process Control $10,000 Materials Control $10,000 C) Materials Control $10,000 Work-in-Process Control $10,000 D) Accounts Payable Control $10,000 Materials Control $10,000 Answer: B Diff: 2 Objective: 6 AACSB: Application of knowledge
7) Payment of the factory rent would require debits and credits to which accounts? A) Debit: Work-in-Process Control account Credit: Cash B) Debit: Manufacturing Overhead Control account Credit: Cash C) Debit: Cost of Goods Sold account Credit: Prepaid Rent D) Debit: Factory Depreciation account Credit: Accumulated Depreciation Control Answer: B Diff: 2 Objective: 6 AACSB: Application of knowledge
8) Which of the following is true of plant utility costs? A) It increases the Materials Control account. B) It increases the Manufacturing Overhead Control account. C) It increases the Work-in-Process Control account. D) It is a direct cost. Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
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9) Actual (rather than allocated) manufacturing overhead costs are first recorded in the: A) Work-in-Process Control account B) Finished Goods Control account C) Manufacturing Overhead Control account D) Cost of Goods Sold account Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
10) The ending balance in the Work-in-Process Control account represents the costs of all jobs that: A) have not been completed B) have been completed but not sold C) have been completed and sold to customers D) are reported on the income statement Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
11) For externally reported inventory costs, the Work-in-Process Control account is increased (debited) by: A) marketing costs B) allocated plant utility costs C) the purchase costs of direct and indirect materials D) customer-service costs Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
12) Which account is debited if materials costing $100,000 are sold? A) Revenues account B) Work-in-Process Control account C) Materials Control account D) Cost of Goods Sold account Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
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13) Which account is credited if direct materials of $29,000 and indirect materials of $7,000 are sent to the manufacturing plant floor? A) Manufacturing Overhead Control for $36,000 B) Work-in-Process Control for $36,000 C) Accounts Payable Control for $22,000 D) Materials Control for $36,000 Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
14) Which of the following items is debited to the Work-in-Process account? A) allocated manufacturing overhead B) completed goods transferred out of the plant C) accumulated depreciation on fixed assets D) accounts receivable Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
15) Which account would be credited if the following labor wages were incurred in a furniture manufacturing company? Assembly workers Janitors
$30,000 $9,000
A) Work-in-Process Control, 39,000 B) Manufacturing Overhead Control, 39,000 C) Wages Payable Control, 39,000 D) Accounts Payable Control, 39,000 Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
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16) Manufacturing overhead costs incurred for the month are: Utilities Depreciation on equipment Repairs
$37,000 $29,500 $14,500
Which account is debited assuming utilities and repairs were on account? A) Manufacturing Overhead Control, 81,000 B) Utilities Overhead Control, 37,000 C) Accumulated Depreciation Control, 29,500 D) Accounts Payable Control, 51,500 Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
17) Which of the following statements regarding manufacturing overhead allocation is true? A) It includes all manufacturing costs that cannot be directly traced to a product or service. B) The costs can be grouped only as a single indirect-cost pool. C) Total costs are unknown at the end of the accounting period. D) Allocated amounts are debited to Manufacturing Overhead Control. Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
18) When a job is complete: A) actual indirect manufacturing labor is excluded from the total cost of the job B) Finished Goods Control is debited C) the cost of the job is transferred to Manufacturing Overhead Control D) it is reduced from Manufacturing Overhead Control account Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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19) A company has $25,000 of depreciation on plant assets and paid $12,000 for repairs also to plant assets. Which of the following journal entries would be required? A) Depreciation Expense $25,000 Repairs Expense $12,000 Cash $37,000 B) Manufacturing overhead control $37,000 Accumulated Depreciation Control $25,000 Cash $12,000 C) Depreciation Expense $25,000 Repairs Expense $12,000 Accumulated Depreciation Control $37,000 D) Depreciation Expense $25,000 Repairs Expense $12,000 Manufacturing Overhead Control $37,000 Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
20) The advantage of using normal costing instead of actual costing is: A) indirect costs are assigned at the end of the year when they are known B) the job cost is more accurate under normal costing C) indirect costs are assigned to a job on a timely basis D) normal costing provides a higher gross profit margin Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
21) Crandle Corp. applies manufacturing overhead costs to products at a budgeted indirect-cost rate of $75 per direct manufacturing labor-hour. A retail outlet has requested a bid on a special order of a necklace. Estimates for this order include: Direct materials of $39,000; 300 direct manufacturing labor-hours at $10 per hour; and a 20% markup rate on total manufacturing costs. Estimated total product costs for this special order equal: A) $77,400 B) $61,500 C) $42,000 D) $64,500 Answer: D Explanation: D) DM $39,000 + DML (300 × $10) + MOH $22,500 (300 × 75) = $64,500 Diff: 2 Objective: 6 AACSB: Application of knowledge
239 richard@qwconsultancy.com
22) Candle Corp. applies manufacturing overhead costs to products at a budgeted indirect-cost rate of $90 per direct manufacturing labor-hour. A retail outlet has requested a bid on a special order of a necklace. Estimates for this order include: Direct materials of $47,000; 350 direct manufacturing labor-hours at $15 per hour; and a 30% markup rate on total manufacturing costs. The bid price for this special order is: A) $73,250 B) $108,875 C) $102,050 D) $67,925 Answer: B Explanation: B) (DU $47,000 + DML (350 × $15) + MOH 31,500) × 130% = $108,875 Diff: 2 Objective: 6 AACSB: Application of knowledge
23) Franklin Inc. manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $17 per direct labor-hour. The following data are obtained from the accounting records for June 2020: Direct materials Direct labor (4,500 hours @ $13/hour) Indirect labor Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$200,000 58,500 11,000 28,000 26,500 28,000 39,000
The amount of manufacturing overhead allocated to all jobs during June 2020 totals: A) $104,500 B) $76,500 C) $97,500 D) $65,500 Answer: B Explanation: B) 4,500 × $17 per dlh = $76,500 Diff: 2 Objective: 6 AACSB: Application of knowledge
240 richard@qwconsultancy.com
24) Franklin Inc. manufactures pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $15 per direct labor-hour. The following data are obtained from the accounting records for June 2020: Direct materials Direct labor (4,700 hours @ $12/hour) Indirect labor Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$100,000 56,400 10,000 26,000 25,000 20,000 39,000
For June 2020, manufacturing overhead is: A) overallocated by $9,500 B) underallocated by $29,500 C) overallocated by $29,500 D) underallocated by $9,500 Answer: A Explanation: A) Overallocated by $9,500; Allocated $70,500 (4,700 × $15 per dlh) when actual overhead is $61,000 (10,000 + 26,000 + 25,000). Diff: 2 Objective: 6 AACSB: Application of knowledge
241 richard@qwconsultancy.com
25) Bauer Manufacturing uses departmental cost driver rates to allocate manufacturing overhead costs to products. Manufacturing overhead costs are allocated on the basis of machine-hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 2020, the following estimates were provided for the coming year:
Direct labor-hours Machine-hours Direct labor cost Manufacturing overhead costs
Machining 60,000 20,000 $575,000 $300,000
Assembly 70,000 30,000 $800,000 $210,000
The accounting records of the company show the following data for Job #316:
Direct labor-hours Machine-hours Direct material cost Direct labor cost
Machining 120 50 $250 $250
Assembly 95 5 $225 $300
For Bauer Manufacturing, what is the annual manufacturing overhead cost-allocation rate for the Machining Department? A) $3.00 B) $6.00 C) $5.00 D) $15.00 Answer: D Explanation: D) $300,000 / 20,000 mh = $15.00 per mh Diff: 2 Objective: 6 AACSB: Application of knowledge
242 richard@qwconsultancy.com
26) Bauer Manufacturing uses departmental cost driver rates to allocate manufacturing overhead costs to products. Manufacturing overhead costs are allocated on the basis of machine-hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 2020, the following estimates were provided for the coming year:
Direct labor-hours Machine-hours Direct labor cost Manufacturing overhead costs
Machining 40,000 20,000 $475,000 $450,000
Assembly 50,000 25,000 $875,000 $250,000
The accounting records of the company show the following data for Job #316:
Direct labor-hours Machine-hours Direct material cost Direct labor cost
Machining 120 85 $425 $200
Assembly 95 5 $150 $400
What amount of manufacturing overhead costs will be allocated to Job #316? A) $2,862.50 B) $1,906.25 C) $2,387.50 D) $1,325.00 Answer: C Explanation: C) ($450,000 / 20,000 mh × 85 mh) + [($250,000 / 50,000) × 95 dlh] = $2,387.50 Diff: 3 Objective: 6 AACSB: Application of knowledge
243 richard@qwconsultancy.com
27) Bauer Manufacturing uses departmental cost driver rates to allocate manufacturing overhead costs to products. Manufacturing overhead costs are allocated on the basis of machine-hours in the Machining Department and on the basis of direct labor-hours in the Assembly Department. At the beginning of 2020, the following estimates were provided for the coming year:
Direct labor-hours Machine-hours Direct labor cost Manufacturing overhead costs
Machining 30,000 80,000 $625,000 $420,000
Assembly 60,000 20,000 $775,000 $240,000
The accounting records of the company show the following data for Job #316:
Direct labor-hours Machine-hours Direct material cost Direct labor cost
Machining 120 85 $350 $250
Assembly 100 5 $275 $475
What are the total manufacturing costs of Job #316? A) $2,107.00 B) $1,571.25 C) $2,196.25 D) $1,350.00 Answer: C Explanation: C) DM $625 + DML $725 + MOH $846.25 = $2,196.25 Diff: 3 Objective: 6 AACSB: Application of knowledge
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28) River Falls Manufacturing uses a normal cost system and had the following data available for 2020: Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred
$157,000 88,000 135,000
Factory overhead incurred Cost of goods completed Cost of goods sold
147,000 291,000 260,000
Beginning direct materials inventory Beginning WIP inventory Beginning finished goods inventory Overhead application rate, as a percent of direct-labor costs
28,000 62,000 60,000 150 percent
The journal entry to record the materials placed into production would include a: A) credit to Direct Materials Inventory for $88,000 B) debit to Direct Materials Inventory for $157,000 C) credit to WIP Inventory for $88,000 D) debit to WIP Inventory for $157,000 Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
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29) River Falls Manufacturing uses a normal cost system and had the following data available for 2020: Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred
$154,000 90,000 134,000
Factory overhead incurred Cost of goods completed Cost of goods sold
142,000 299,000 251,000
Beginning direct materials inventory Beginning WIP inventory Beginning finished goods inventory Overhead application rate, as a percent of direct-labor costs
27,000 67,000 53,000 105 percent
The ending balance of direct materials inventory is: A) $91,000 B) $181,000 C) $90,000 D) $117,000 Answer: A Explanation: A) $27,000 + $154,000 - $90,000 = $91,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
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30) River Falls Manufacturing uses a normal cost system and had the following data available for 2020: Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred
$159,000 81,000 129,000
Factory overhead incurred Cost of goods completed Cost of goods sold
142,000 289,000 260,000
Beginning direct materials inventory Beginning WIP inventory Beginning finished goods inventory Overhead application rate, as a percent of direct-labor costs
26,000 66,000 55,000 140 percent
The ending balance of work-in-process inventory is: A) $456,600 B) $167,600 C) $129,000 D) $418,000 Answer: B Explanation: B) $66,000 + $81,000 + $129,000 + 1.4 ($129,000) - 289,000 = $167,600 Diff: 3 Objective: 6 AACSB: Application of knowledge
247 richard@qwconsultancy.com
31) River Falls Manufacturing uses a normal cost system and had the following data available for 2020: Direct materials purchased on account Direct materials requisitioned Direct labor cost incurred
$153,000 87,000 129,000
Factory overhead incurred Cost of goods completed Cost of goods sold
140,000 289,000 251,000
Beginning direct materials inventory Beginning WIP inventory Beginning finished goods inventory Overhead application rate, as a percent of direct-labor costs
33,000 63,000 56,000 120 percent
The ending balance of finished goods inventory is: A) $56,000 B) $38,000 C) $94,000 D) $289,000 Answer: C Explanation: C) $56,000 + $289,000 - $251,000 = $94,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
248 richard@qwconsultancy.com
32) Beta Corporation uses a job cost system and has two production departments, A and B. Budgeted manufacturing costs for the year are:
Direct materials Direct manufacturing labor Manufacturing overhead
Department A $790,000 $200,000 $520,000
Department B $190,000 $800,000 $410,000
The actual material and labor costs charged to Job #432 were as follows:
Direct materials: Direct labor: Department A Department B
Total $27,000 $13,000 $12,000 $25,000
Beta applies manufacturing overhead costs to jobs on the basis of direct manufacturing labor cost using departmental rates determined at the beginning of the year. Proportion of manufacturing overhead with respect to the total cost of the job is: (Round your final answer to two decimal places.) A) 43.45% B) 29.36% C) 27.19% D) 42.13% Answer: A Explanation: A) DM $27,000 + DML $25,000 + MOH $39,950 [($13,000 × $520,000 / $200,000)] + [$12,000 × $410,000 / $800,000] = $91,950 $39,950 / $91,950 = 43.45% Diff: 3 Objective: 6 AACSB: Application of knowledge
33) Work-in-Process Control will be decreased (credited) for the amount of direct-labor costs incurred. Answer: FALSE Explanation: Work-in-Process Control will be increased (debited) for the amount of direct-labor costs incurred. Diff: 1 Objective: 6 AACSB: Analytical thinking
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34) The Cost of Goods Sold account tracks job costs from the time jobs are started until they are completed. Answer: FALSE Explanation: The Work-in-Process Control account tracks job costs from the time jobs are started until they are completed. Diff: 2 Objective: 6 AACSB: Analytical thinking
35) Purchases of materials are credited to materials control. Answer: FALSE Explanation: Purchases of materials are debited to materials control. Diff: 1 Objective: 6 AACSB: Analytical thinking
36) The Salaries Payable Control account has underlying subsidiary ledgers. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
37) The sum of all entries in underlying subsidiary ledgers equals the total amount in the corresponding general ledger control accounts. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
38) When manufacturing overhead is allocated to jobs, the Manufacturing Overhead Allocated account is debited. Answer: FALSE Explanation: The debit is to Work-in-Process Control and the credit is Manufacturing Overhead Allocated. Diff: 2 Objective: 6 AACSB: Application of knowledge
39) Indirect manufacturing costs are credited to Manufacturing Overhead Control. Answer: FALSE Explanation: Indirect manufacturing costs are debited to Manufacturing Overhead Control. Diff: 1 Objective: 6 AACSB: Analytical thinking
40) When goods are finished, the Finished Goods Control account is debited while the Work-in-Process Control account is credited. Answer: FALSE Diff: 2 Objective: 6 AACSB: Application of knowledge
250 richard@qwconsultancy.com
41) The ending balance in Work-in-Process Control represents the total costs of all jobs that have NOT yet been completed. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
42) Direct materials and direct manufacturing labor become a part of work-in-process inventory on the balance sheet because the direct manufacturing labor transforms the direct materials to another asset, work-in-process inventory. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
43) When goods are sold, the Cost of Goods Sold account is debited while the Finished Goods Control account is credited. Answer: TRUE Diff: 2 Objective: 6 AACSB: Application of knowledge
44) Direct materials and direct manufacturing labor can be easily traced to jobs as they become initially become part of the finished goods inventory asset entry on the balance sheet. Answer: FALSE Explanation: Direct materials and direct labor are initially added to work-in-process and work-in-process is an asset reported on the balance sheet. Diff: 2 Objective: 6 AACSB: Application of knowledge
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45) Jordan Company has two departments, Assembly and Machining. Overhead is applied based on direct labor cost in Department Assembly and machine-hours in Department Machining. The following additional information is available: Budgeted Amounts Direct labor cost Factory overhead Machine-hours
Assembly $200,000 $300,000 51,000 mh
Machining $165,000 $180,000 30,000 mh
Actual data for Job #10 Direct materials requisitioned Direct labor cost Machine-hours
Assembly $10,000 $11,000 5,000 mh
Machining $16,000 $14,000 3,000 mh
Required: a. Compute the budgeted factory overhead rate for Assembly. b. Compute the budgeted factory overhead rate for Machining. c. What is the total overhead cost of Job 10? d. If Job 10 consists of 50 units of product, what is the unit cost of this job? Answer: a. $300,000/$200,000 = 150% b. $180,000/30,000 hrs. = $6.00 per hour c. ($11,000 × 150 percent) + ($6.00 × 3,000 hrs.) = $34,500 d. $10,000 + $16,000 + $11,000 + $14,000 + $34,500 = $85,500/50 units = $1,710 per unit Diff: 2 Objective: 4, 6 AACSB: Application of knowledge
252 richard@qwconsultancy.com
46) Job-cost records for Boucher Company contained the following data:
Job No. 220 221 222 223 224
Date Started May 18 May 20 June 7 June 10 June 19
Date Finished June 12 June 19 July 5 June 28 July 16
Date Sold June 20 June 21 July 12 July 1 July 25
Total Cost of Job at June 30 $6,000 4,000 7,000 6,500 8,000
Required: a. Compute WIP inventory at June 30. b. Compute finished goods inventory at June 30. c. Compute cost of goods sold for June. Answer: a. $7,000 + $8,000 = $15,000 b. $6,500 c. $6,000 + $4,000 = $10,000 Diff: 2 Objective: 4, 6 AACSB: Analytical thinking
47) Benny Industries allocates manufacturing overhead at a predetermined rate of 160% of direct labor cost. Any overallocated or underallocated overhead is closed to the cost of goods sold at the end of the month. Below is information on job 205 that was in process at the end of the month of October Direct materials $4,000 Direct labor $3,000 Allocated manufacturing overhead $4,800 Jobs 206, 207, and 208 were started in November. Direct materials that were used in November were $26,000 and direct labor costs were $21,000. For the month of November, actual manufacturing overhead was $32,000. The only job still in process on the last day of November was job 104 with the following costs: $3,000 for direct materials and $1,500 for direct labor. Required: Calculate the cost of goods manufacturered for November. Answer: Beginning work-in-process $11,800 (Job 205 in process at the end of October) + Direct labor for the month of November $21,000 + Allocated manufacturing overhead $33,600 ($21,000 × 1.6) + Direct materials $26,000 - Ending work-in-process $6,900 ($3,000 + $1,500 + ($1,500 × 1.6) = Cost of goods manufactured $99,300 Diff: 3 Objective: 4, 6 AACSB: Application of knowledge
253 richard@qwconsultancy.com
48) Cowley County Hospital uses a job-costing system for all patients who have surgery. In March, the pre-operating room (PRE-OP) and operating room (OR) had budgeted allocation bases of 4,000 nursing hours and 2,000 nursing hours, respectively. The budgeted nursing overhead charges for each department for the month were $168,000 and $132,000, respectively. The hospital floor for surgery patients had budgeted overhead costs of $1,200,000 and 15,000 nursing hours for the month. For patient Fred Adams, actual hours incurred were eight and four hours, respectively, in the PRE-OP and OR rooms. He was in the hospital for 4 days (96 hours). Other costs related to Adams were: PRE-OP Costs $ 200 $1,000
Patient medicine Direct nursing time
OR Costs $ 500 $2,000
In-room Costs $2,400 $3,000
The hospital uses a budgeted overhead rate for applying overhead to patient stays. Required: What is the total cost of the stay of patient Fred Adams? Answer: Nursing overhead rate PRE-OP = $168,000/4,000 hrs. = $42 per hr. Nursing overhead rate OR
= $132,000/2,000 hrs. = $66 per hr.
Overhead rate for surgery floor = $1,200,000/15,000 hrs. = $80 per hr. Patient Fred Adams: PRE-OP $ 200 1,000
Patient medicine Direct nursing time Nursing overhead: PRE-OP ($42 × 8) 336 OR ($66 × 4) In-room ($80 × 96) 0 Total $1,536
OR $ 500 2,000
264 0 $2,764
In-room $2,400 3,000
Totals $3,100 6,000
7,680 $13,080
336 264 7,680 $17,380
Diff: 3 Objective: 4, 6 AACSB: Analytical thinking
254 richard@qwconsultancy.com
49) The Dougherty Furniture Company manufactures tables. In March, the two production departments had budgeted allocation bases of 4,000 machine-hours in Department 100 and 8,000 direct manufacturing labor-hours in Department 200. The budgeted manufacturing overheads for the month were $57,500 and $62,500, respectively. For Job A, the actual costs incurred in the two departments were as follows:
Direct materials purchased on account Direct materials used Direct manufacturing labor Indirect manufacturing labor Indirect materials used Lease on equipment Utilities
Department 100 $110,000 32,500 52,500 11,000 7,500 16,250 1,000
Department 200 $177,500 13,500 53,500 9,000 4,750 3,750 1,250
Job A incurred 800 machine-hours in Department 100 and 300 manufacturing labor-hours in Department 200. The company uses a budgeted overhead rate for applying overhead to production. Required: a. Determine the budgeted manufacturing overhead rate for each department. b. Prepare the necessary journal entries to summarize the March transactions for Department 100. c. What is the total cost of Job A?
255 richard@qwconsultancy.com
Answer: a. Manufacturing overhead rate Department 100
Manufacturing overhead rate Department 200
b.
= $57,500/4,000 hours = $14.375 per machine-hour = $62,500/8,000 hours = $7.8125 per labor-hour
Materials Control Department 100 Accounts Payable Control
110,000
Work-in-Process Control Department 100 Manufacturing Overhead Control Department 100 Materials Control Department 100
32,500 7,500
Work-in-Process Control Department 100 Manufacturing Overhead Control Department 100 Wages Payable Control
52,500 11,000
Manufacturing Overhead Control Department 100 Leaseholds Payable Control Utilities Payable Control
17,250
110,000
40,000
63,500
Work-in-Process Control Dept. 100 ($14.375 × 800 hrs) 11,500 Manufacturing Overhead Allocated c.
Job A: Direct materials Dept. 100 Direct materials Dept. 200 Direct manufacturing labor Dept. 100 Direct manufacturing labor Dept. 200 Manufacturing overhead Dept. 100 ($14.375 × 800) Manufacturing overhead Dept. 200 ($7.8125 × 300) Total
16,250 1,000
11,500
$ 32,500 13,500 52,500 53,500 11,500 2,344 $165,844
Diff: 3 Objective: 6 AACSB: Analytical thinking
50) Explain the procedure how overhead indirect costs become a part of work-in process inventory. Answer: The overhead (indirect) costs cannot be easily traced to individual jobs. Manufacturing overhead costs, therefore, are first accumulated in a manufacturing overhead account and then allocated to individual jobs. As manufacturing overhead costs are allocated, they become part of work-in-process inventory. Diff: 2 Objective: 6 AACSB: Analytical thinking
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51) Explain how the following statement be true: Often the manufacturing overhead control account (debit) does not equal the manufacturing overhead allocated account (credit). Answer: If these accounts do not equal, then overhead has either been overallocated or underallocated. Keep in mind that the manufacturing overhead control account contains the actual overhead for the period while the allocated account contains the estimated overhead that was applied to WIP during period as jobs were worked on. In any event, when the two accounts are not equal it means that the cost of the cost object has not been correctly estimated during the period and the underallocated amount or overallocated amount is disposed of via adjusting entries. Diff: 2 Objective: 6 AACSB: Analytical thinking
52) What are three possible ways to dispose of underallocated or overallocated overhead costs at the end of a fiscal year? Briefly comment on the theoretical correctness or incorrectness of each method. Answer: One way to dispose of underallocated or overallocated overhead costs at the end of a fiscal year would be to prorate the underallocated or overallocated overhead costs to the work-in-process control account, the finished goods control account, and to the cost of goods sold account based on the relative amounts in each account. This is a theoretically correct method since it is reasonable to believe that the underallocated or overallocated overhead costs should attach themselves to the goods as they are produced. A second way to dispose of the underallocated or overallocated overhead costs at the end of a fiscal year would be to adjust the allocation rate based on the actual amounts and reallocate the overhead to completed jobs. This is also a theoretically correct method. A third way is to clear all underallocated or overallocated overhead to the cost of goods sold account. This is not theoretically valid but it is practical if the amount of underallocated or overallocated overhead is not material. Diff: 3 Objective: 6 AACSB: Analytical thinking
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Objective 4.7 1) The spreading of underallocated or overallocated overhead among ending work-in-process, finished goods, and cost of goods sold is called: A) the adjusted allocation rate approach B) the proration approach C) the write-off of cost of goods sold approach D) the weighted-average cost approach Answer: B Diff: 1 Objective: 7 AACSB: Analytical thinking
2) The method that restates all overhead entries in the general ledger and subsidiary ledgers using actual cost rates rather than budgeted cost rates is called: A) the adjusted allocation rate approach B) the proration approach C) the write-off of cost of goods sold approach D) the weighted-average cost approach Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
3) ABC Manufacturing Inc. ends the month with two jobs still in progress. Job 5 has $10,000 of materials, $2,000 of direct labor and $8,000 of manufacturing overhead allocated. Job 6 has $30,000 of materials, $2,000 of direct labor and $12,000 of manufacturing overhead allocated. The cost of goods sold for the month was $40,000 and there was no finished goods in stock as the month ended. If the manufacturing overhead was underallocated by $10,000, which of the following choices would be the correct way to prorate it based on ending balances before proration? (Round any allocation percentages to one decimal place, X.X%.) A) The entire $10,000 of underallocated manufacturing overhead should be allocated to cost of goods sold. B) $6,150 of the underallocated manufacturing overhead should be allocated to work-in-process. C) $6,150 of the underallocated manufacturing overhead should be split between Job 6 and cost of goods sold. D) The entire $10,000 of underallocated manufacturing overhead should be added to operating expenses for the month. Answer: B Diff: 2 Objective: 7 AACSB: Application of knowledge
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4) Global Manufacturing Inc. uses normal costing during the year to allocate manufacturing overhead to jobs in a job costing system. At year end, it uses the adjusted allocation rate approach to account for underallocated or overallocated overhead. During 2020, Global's manufacturing overhead was underallocated by 10%. Job 117 had the following costs: Direct materials $1,500 Direct labor $3,300 Manufacturing overhead allocated $1,600 Which of the following would be the after adjustment cost of Job 117? A) $6,730 B) $6,560 C) $7,040 D) $5,760 Answer: B Explanation: B) DM $1,500 + DL $3,300 + MOH Allocated ($1,600 × 1.1) = $6,560 Diff: 3 Objective: 7 AACSB: Application of knowledge
5) The ________ adjusts individual job-cost records to account for underallocated or overallocated overhead. A) adjusted allocation-rate B) proration approach C) write-off to cost of goods sold approach D) weighted-average cost approach Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
6) The adjusted allocation approach yields the benefits of: A) timeliness and convenience of normal costing B) allocating budgeted manufacturing overhead costs at the end of the year C) write-off to the cost of goods sold approach D) the proration approach Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
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7) The approach often used when dealing with small amounts of underallocated or overallocated overhead is the: A) adjusted allocation-rate approach B) proration approach C) write-off to cost of goods sold approach D) adjusted write-off approach Answer: C Diff: 1 Objective: 7 AACSB: Analytical thinking
8) The Robinson Corporation manufactures automobile parts. During the year, the company sold $5,100,000 of parts that had a cost of $3,600,000. At year end, these are the balances for cost of goods sold and its manufacturing overhead accounts: Cost of goods sold $3,600,000 Manufacturing overhead allocated $1,000,000 Manufacturing overhead control $1,495,000 What would be the correct journal entry to close out the overhead accounts assuming that the write-off to cost of goods sold approach is used? A) Manufacturing overhead control $1,495,000 Cost of goods sold $495,000 Manufacturing overhead allocated $1,000,000 B) Sales $5,100,000 Cost of goods sold $3,600,000 Gross profit $1,500,000 C) Finished goods $495,000 Manufacturing overhead allocated $1,000,000 Manufacturing overhead control $1,495,000 D) Cost of goods sold $495,000 Manufacturing overhead allocated $1,000,000 Manufacturing overhead control $1,495,000 Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
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9) A company would use multiple cost-allocation bases: A) if managers believed the benefits exceeded the additional costs of that costing system B) because there is more than one way to allocate overhead C) because this is a simpler approach than using one cost allocation base D) if managers believe that using multiple cost-allocation bases is the only acceptable method Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
Filippucci Company used a budgeted indirect-cost rate for its manufacturing operations, the amount allocated ($200,000) is different from the actual amount incurred ($225,000). Ending balances in the relevant accounts are: Work-in-Process $ 10,000 Finished Goods 20,000 Cost of Goods Sold 170,000 10) Under the write-off approach, the difference between Manufacturing Overhead Control and Manufacturing Overhead Allocated is adjusted in the: A) Cost of Goods Sold account B) Work-in Process account C) Manufacturing Overhead account D) Miscellaneous Expenses account Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
11) Which account is credited to write off the difference between allocated and actual overhead using the proration approach? A) Work-in Process Control B) Manufacturing Overhead Allocated C) Finished Goods Control D) Manufacturing Overhead Control Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
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12) Financial Planning Partners Inc., employs 12 full-time CPAs and 10 paraprofessionals. Direct and indirect costs are applied on a professional labor-hour basis that includes both attorney and paraprofessional hours. Following is information for 2020:
Indirect costs Annual salary of each attorney Annual salary of each paraprofessional Total professional labor-hours
Budget $250,000 $109,000 $25,000 40,000 dlh
Actual $311,000 $119,000 $26,000 54,000 dlh
When using a normal costing system, year-end accounting records will show that indirect costs are: A) perfectly allocated B) underallocated C) within budget D) overallocated Answer: D Explanation: D) Overallocated; allocated is $337,500 ($250,000 / 40,000 × 54,000 dlh), when actual is only $311,000. Diff: 3 Objective: 7 AACSB: Application of knowledge
13) Overhead costs allocated each month are expected to equal actual overhead costs incurred each month. Answer: FALSE Explanation: Seasonal fluctuations and lump-sum payments for items such as property taxes are not expected to be incurred evenly throughout the year. The allocation base (activity such as direct labor hours, machine hours, direct labor costs etc.) can fluctuate (seasonal fluctuations) and can end up being more or less than was expected meaning more of less overhead is applied. Diff: 2 Objective: 7 AACSB: Analytical thinking
14) ABC Manufacturing Inc. ends the month with two jobs still in progress. Job 5 has $10,000 of materials, $2,000 of direct labor and $8,000 of manufacturing overhead allocated. Job 6 was $30,000 of materials, $2,000 of direct labor and $10,000 of manufacturing overhead allocated. The cost of goods sold for the month was $40,000 and of that 30% was overhead. There were no finished goods in stock as the month ends. If the manufacturing overhead is underallocated by $10,000, which of the following choices would be the correct way to prorate it, assuming the proration is based on the allocated overhead in the ending balances of work-in-process, finished goods, and cost of goods sold? (Round any allocation percentages to one decimal place, X.X%.) A) Job 5 should be allocated another $6,000 of cost B) Job 6 should be allocated another $6,000 of cost C) Cost of goods sold should be reduced by $4,000 D) Cost of goods sold should be increased by $4,000 Answer: D Diff: 1 Objective: 7 AACSB: Application of knowledge
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15) Management wants to prepare a profitability analysis of the company's customers and therefore the most accurate choice of disposing of underallocated or overallocated manufacturing overhead at year-end is the proration based on final balances of work-in-process, finished goods, and cost of goods sold. Answer: FALSE Explanation: The adjusted allocation-rate method would be more accurate as it would adjust individual jobs based on the actual overhead cost rate, calculated when actual overhead costs are known at the end of the period. Diff: 2 Objective: 7 AACSB: Analytical thinking
16) The proration approach to allocating overapplied or underapplied overhead adjusts individual job-cost records. Answer: FALSE Explanation: The proration approach to allocating overapplied or underapplied overhead adjusts only general ledger accounts and not subsidiary ledgers or individual job-cost records. Diff: 2 Objective: 7 AACSB: Analytical thinking
17) For financial accounting purposes, companies are allowed under Generally Accepted Accounting Principles to report results in the financial statements based on applied overhead costs. Answer: FALSE Explanation: For financial accounting purposes, companies are required under Generally Accepted Accounting Principles to report results in the financial statements based on actual costs. Applied costs are estimated costs. Diff: 2 Objective: 7 AACSB: Analytical thinking
18) The adjusted-allocation rate approach offers the benefit of a costing system that provides overhead cost data during the year so that pricing, budgeting, and interim reporting can occur and a year-end adjustment to manufacturing overhead allocations to individual jobs that are better aligned with actual manufacturing overhead costs that are known at year-end. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
19) Under the proration approach, the sum of the amounts shown in the subsidiary ledgers will not match the amounts shown in the general ledger because no adjustments from budgeted to actual manufacturing overhead rates are made in the individual job-cost records. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
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20) The actual costs of all individual overhead categories are recorded in the Manufacturing Overhead Control account. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
21) Proration is the spreading of underallocated or overallocated overhead among ending work in process, finished goods, and costs of goods sold. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
22) It is appropriate for service organizations such as public accounting firms to use job costing. Answer: TRUE Explanation: Accounting firms, law firms, and other firms in the service industry can use Job costing. Diff: 1 Objective: 7 AACSB: Analytical thinking
23) Innovative Metal Products Company manufactures pipes and applies manufacturing costs to production at a budgeted indirect-cost rate of $12 per direct labor-hour. The following data are obtained from the accounting records for June 2020: Direct materials Direct labor (16,000 hours @ $11/hour) Indirect labor Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$400,000 $ 240,000 $ 25,000 $ 100,000 $ 42,000 $ 30,000 $ 40,000
Required: a. What actual amount of manufacturing overhead costs was incurred during June 2020? b. What amount of manufacturing overhead was allocated to all jobs during June 2020? c. For June 2020, was manufacturing overhead underallocated or overallocated? Explain. Answer: a. $25,000 + $100,000 + $42,000 = $167,000 b. 16,000 × $12 per dlh = $192,000 c. Underallocated by $25,000: Only allocated $192,000 of the $167,000 of actual overhead Diff: 2 Objective: 7 AACSB: Application of knowledge
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24) Moira Company has just finished its first year of operations and must decide which method to use for adjusting cost of goods sold. Because the company used a budgeted indirect-cost rate for its manufacturing operations, the amount that was allocated ($435,000) to cost of goods sold was different from the actual amount incurred ($425,000). Ending balances in the relevant accounts were: Work-in-Process Finished Goods Cost of Goods Sold
$ 40,000 80,000 680,000
Required: a. Prepare a journal entry to write off the difference between allocated and actual overhead directly to Cost of Goods Sold. Be sure your journal entry closes the related overhead accounts. b. Prepare a journal entry that prorates the write-off of the difference between allocated and actual overhead using ending account balances. Be sure your journal entry closes the related overhead accounts. Answer: a. Manufacturing Overhead Allocated 435,000 Cost of Goods Sold 10,000 Manufacturing Overhead Control 425,000 b. Work-in-process $ 40,000 Finished goods 80,000 Cost of goods sold 680,000 Total $800,000
5% 10 85 100 %
× $10,000 × $10,000 × $10,000
Manufacturing Overhead Allocated Work-in-Process Finished Goods Cost of Goods Sold Manufacturing Overhead Control
435,000
= $500 = 1,000 = 8,500
500 1,000 8,500 425,000
Diff: 3 Objective: 7 AACSB: Analytical thinking
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25) Jacobs Company manufactures refrigerators. The company uses a budgeted indirect-cost rate for its manufacturing operations and during 2020 allocated $1,000,000 to work-in-process inventory. Actual overhead incurred was $1,100,000. Ending balances in the following accounts are: Work-in-Process $ 100,000 Finished Goods 750,000 Cost of Goods Sold 4,150,000 Required: a. Prepare a journal entry to write off the difference between allocated and actual overhead directly to Cost of Goods Sold. Be sure your journal entry closes the related overhead accounts. b. Prepare a journal entry that prorates the write-off of the difference between allocated and actual overhead using ending account balances. Be sure your journal entry closes the related overhead accounts. Answer: a. Manufacturing Overhead Allocated 1,000,000 Cost of Goods Sold 100,000 Manufacturing Overhead Control 1,100,000 b. Work-in-process $100,000 Finished goods 750,000 Cost of goods sold 4,150,000 Total $5,000,000
2.0% 15.0 83.0 100.0%
Manufacturing Overhead Allocated Work-in-Process Finished Goods Cost of Goods Sold Manufacturing Overhead Control
× $100,000 × $100,000 × $100,000
= $2,000 = $15,000 = $83,000
1,000,000 2,000 15,000 83,000 1,100,000
Diff: 3 Objective: 7 AACSB: Application of knowledge
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26) The following information was gathered for Longview Company for the year ended December 31, 2020:
Direct labor-hours Factory overhead
Budgeted 75,000 dlh $600,000
Actual 80,000 dlh $625,000
Assume that direct labor-hours are the cost-allocation base. Required: a. Compute the budgeted factory overhead rate. b. Compute the factory overhead applied. c. Compute the amount of over/underapplied overhead. Answer: a. $600,000/75,000 hrs. = $8.00 per hour b. $8.00 × 80,000 hrs. = $640,000 c. $640,000 - $625,000 = $15,000 overapplied Diff: 2 Objective: 7 AACSB: Application of knowledge
27) Excellent Products, Inc., uses a budgeted factory overhead rate to apply overhead to production. The following data are available for the year ended December 31, 2020.
Factory overhead Direct labor costs Direct labor-hours
Budgeted $675,000 $450,000 12,500 dlh
Actual $716,000 $432,000 13,325 dlh
Required: a. Determine the budgeted factory overhead rate based on direct labor-hours. b. What is the applied overhead based on direct labor-hours? c. Is overhead overapplied or underapplied? Explain. Answer: a. $675,000/12,500 hrs. = $54.00 per hour b. $54.00 × 13,325 hrs. = $719,550 c. $716,000 - $719,550 = $3,550 overapplied Diff: 2 Objective: 7 AACSB: Application of knowledge
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28) Schulz Corporation applies overhead based upon machine-hours. Budgeted factory overhead was $266,400 and budgeted machine-hours were 18,500. Actual factory overhead was $287,920 and actual machine-hours were 19,050. Before disposition of under/overapplied overhead, the cost of goods sold was $560,000 and ending inventories were as follows: Direct materials WIP Finished goods Total
$ 60,000 190,000 250,000 $500,000
Required: a. Determine the budgeted factory overhead rate per machine-hour. b. Compute the over/underapplied overhead. c. Prepare the journal entry to dispose of the variance using the write-off to cost of goods sold approach. d. Prepare the journal entry to dispose of the variance using the proration approach. Answer: a. $266,400/18,500 hrs. = $14.40 per hour b.
$14.40 × 19,050 hours = $274,320 - $287,920 = $13,600 underapplied overhead
c.
Cost of Goods Sold Factory Department Overhead Control
13,600 13,600
d. $560,000 + $190,000 + $250,000 = $1,000,000 Cost of Goods Sold: $560,000/$1,000,000 = 56% × $13,600 = $7,616 WIP: $190,000/$1,000,000 = 19% × $13,600 = $2,584 Finished Goods: $250,000/$1,000,000 = 25% × $13,600 = $3,400 Cost of Goods Sold WIP Inventory Finished Goods Inventory Factory Department Overhead Control
7,616 2,584 3,400 13,600
Diff: 3 Objective: 7 AACSB: Application of knowledge
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29) Sedgwick County Hospital uses an indirect job-costing system for all patients. In June, the budgeted nursing care charges for each department and budgeted allocation bases of nursing days are as follows: June Budgeted nursing costs Budgeted nursing days
Critical Care $2,480,000 5,000
Special Care $1,644,000 4,000
General Care $1,280,400 8,000
Patient Ms. Graves spent six days in critical care and eight days in special care during June. The remainder of the 30-day month was spent in the general care area. Required: a. Determine the budgeted overhead rate for each department. b. What are the total charges to Ms. Graves if she was in the facility the entire month? Answer: a. Overhead rate critical care = $2,480,000/5,000 nursing days = $496.00 per day. Overhead rate special care= $1,644,000/4,000 nursing days = $411.00 per day Overhead rate general = $1,280,400/8,000 nursing days = $160.05 per day b.
Ms. Graves: Critical care Special care General care Total overhead charges
$496.00 × 6 days = $411.00 × 8 days = $160.05 × 16 days =
$2,976.00 3,288.00 2,560.80 $8,824.80
Diff: 2 Objective: 7 AACSB: Application of knowledge
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30) Hammond and Jarrett provide tax consulting for estates and trusts. Their job-costing system has a single direct-cost category (professional labor) and a single indirect-cost pool (research support). The indirect-cost pool contains all the costs except direct personnel costs. All budgeted indirect costs are allocated to individual jobs using actual professional labor-hours. Required: a. Discuss the reasons a consulting firm might use a normal costing system rather than an actual costing system. b. What might be some reasons for the firm to change from a one-pool to a multiple-pool allocation concept? Answer: a. Budget rates are normally used because actual costs may not be available until sometime after a job is completed. Decisions about billing a client for services rendered generally must be made immediately after the job is completed. Also, actual costs may reflect short-run changes in the environment that may distort the billing process. Budgeted costs are affected by weekly or monthly fluctuations and, therefore, offer a stable comparison and assignment of costs throughout the accounting cycle. b. Having separate professional labor-hour rates assists in assigning the personnel costs to jobs closest to their real values. This helps to maintain different costs for jobs that have the same number of hours but a different mix of professionals doing the job. Seldom is there only one cause-and-effect relationship between a job and the tasks performed on the job; therefore, it may also be a good idea to develop multiple indirect-cost assignments (i.e., one for staff support and others for such items as computer support or general administrative support). Diff: 3 Objective: 7 AACSB: Analytical thinking
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31) Benny Industries allocates manufacturing overhead at a predetermined rate of 160% of direct labor cost. Any overallocated or underallocated overhead is closed to the cost of goods sold at the end of the month. Below is information on job 205 that was in process at the end of the month of October Direct materials $4,000 Direct labor $3,000 Allocated manufacturing overhead $4,800 Jobs 206, 207, and 208 were started in November. Direct materials that were used in November were $26,000 and direct labor costs were $21,000. For the month of November, actual manufacturing overhead was $32,000. The only job still in process on the last day of November was job 104 with the following costs: $3,000 for direct materials and $1,500 for direct labor. Required: a. Calculate the cost of goods manufacturered for November. b. Calculate the amount of overallocated or underallocated manufacturing overhead that should be closed to cost of goods sold on November 30. Be sure to label the answer as either overallocated or underallocated. c. What are the accounting entries to close the overallocated or underallocated manufacturing overhead on November 30? Answer: a. Beginning work-in-process $11,800 (Job 205 in process at the end of October) + Direct labor for the month of November $21,000 + Allocated manufacturing overhead $33,600 ($21,000 × 1.6) + Direct materials $26,000 - Ending work-in-process $6,900 ($3,000 + $1,500 + ($1,500 × 1.6) = Cost of goods manufactured $99,300 b. The amount of allocated overhead was $33,600 while the actual manufacturing overhead was $32,000. The difference is $1,600 which is overallocated. c.
Manufacturing Overhead Allocated Cost of goods sold
$1,600 $1,600
Diff: 3 Objective: 7 AACSB: Application of knowledge
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32) What are three possible ways to dispose of underallocated or overallocated overhead costs at the end of a fiscal year? Briefly comment on the theoretical correctness or incorrectness of each method. Answer: One way to dispose of underallocated or overallocated overhead costs at the end of a fiscal year would be to prorate the underallocated or overallocated overhead costs to the work-in-process control account, the finished goods control account, and to the cost of goods sold account based on the relative amounts in each account. This is a theoretically correct method since it is reasonable to believe that the underallocated or overallocated overhead costs should attach themselves to the goods as they are produced. A second way to dispose of the underallocated or overallocated overhead costs at the end of a fiscal year would be to adjust the allocation rate based on the actual amounts and reallocate the overhead to completed jobs. This is also a theoretically correct method. A third way is to clear all underallocated or overallocated overhead to the cost of goods sold account. This is not theoretically valid but it is practical if the amount of underallocated or overallocated overhead is not material. Diff: 3 Objective: 7 AACSB: Analytical thinking
Objective 4.8 1) In the service sector: A) direct labor costs are always easy to trace to jobs B) a budgeted direct-labor cost rate may be used to apply direct labor to jobs C) normal costing may not be used D) overhead is generally applied using an actual cost-allocation rate Answer: B Diff: 2 Objective: 8 AACSB: Analytical thinking
2) In the service sector, to achieve timely reporting on the profitability of an engagement, a company will use: A) budgeted rates for all direct costs B) budgeted rates for indirect costs C) actual costing D) budgeted rates for some direct costs and indirect costs Answer: D Diff: 2 Objective: 8 AACSB: Analytical thinking
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3) Advantage Inc. employs 22 professional cleaners. Budgeted costs total $1,856,400 of which $1,606,500 is direct costs. Budgeted indirect costs are $809,200 and actual indirect costs were $797,200. Budgeted professional labor-hours are 1,190,000 and actual hours were 1,326,000. What is the budgeted direct cost-allocation rate? (Round the final answer to the nearest cent.) A) $1.56 per hour B) $1.40 per hour C) $0.68 per hour D) $1.35 per hour Answer: D Explanation: D) $1,606,500 / 1,190,000 = $1.35 Diff: 2 Objective: 8 AACSB: Application of knowledge
4) The budgeted direct-labor cost rate includes: A) budgeted total costs in indirect cost pool B) budgeted total direct-labor costs in the denominator C) budgeted total direct-labor costs in the numerator D) budgeted total direct-labor hours in the numerator Answer: C Diff: 2 Objective: 8 AACSB: Analytical thinking
5) The accounting firm of Smith & Jones LLC has a staff of 32 staff accountants and auditors and administrative staff. Budgeted total costs of the firm total $4,800,000 of which $2,700,000 is direct-labor costs. Assuming that the remaining costs are indirect and direct-labor cost is the allocation base, calculate the budgeted indirect cost rate. (Round the final answer to the nearest whole percent.) A) 44% of direct-labor cost B) 78% of direct-labor cost C) 56% of direct-labor cost D) 178% of direct-labor cost Answer: B Explanation: B) 2,100,000 / 2,700,000 Diff: 2 Objective: 8 AACSB: Application of knowledge
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6) A local accounting firm employs 27 full-time professionals. The budgeted annual compensation per employee is $40,000. The average chargeable time is 400 hours per client annually. All professional labor costs are included in a single direct-cost category and are allocated to jobs on a per-hour basis. Other costs are included in a single indirect-cost pool, allocated according to professional labor-hours. Budgeted indirect costs for the year are $782,000, and the firm expects to have 75 clients during the coming year. What is the budgeted direct labor cost rate per hour? (Round the final answer to the nearest cent.) A) $36.00 per hour B) $26.07 per hour C) $3.70 per hour D) $100.00 per hour Answer: A Explanation: A) Total direct labor cost = $40,000 × 27 = $1,080,000 Total hours = 400 × 75 = 30,000 hours Direct labor cost rate per hour = $1,080,000 / 30,000 = $36.00 per hour Diff: 2 Objective: 8 AACSB: Application of knowledge
7) A local accounting firm employs 24 full-time professionals. The budgeted annual compensation per employee is $49,500. The average chargeable time is 400 hours per client annually. All professional labor costs are included in a single direct-cost category and are allocated to jobs on a per-hour basis. Other costs are included in a single indirect-cost pool, allocated according to professional labor-hours. Budgeted indirect costs for the year are $780,000, and the firm expects to have 90 clients during the coming year. What is the budgeted indirect-cost rate per hour? (Do not round intermediary calculations and round the final calculation to the nearest cent.) A) $6.57 per hour B) $81.25 per hour C) $33.00 per hour D) $21.67 per hour Answer: D Explanation: D) Indirect-cost rate per hour = [($780,000 / 400) / 90] = $21.67 per hour Diff: 2 Objective: 8 AACSB: Application of knowledge
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8) A local accounting firm employs 25 full-time professionals. The budgeted annual compensation per employee is $44,000. The average chargeable time is 410 hours per client annually. All professional labor costs are included in a single direct-cost category and are allocated to jobs on a per-hour basis. Other costs are included in a single indirect-cost pool, allocated according to professional labor-hours. Budgeted indirect costs for the year are $781,000, and the firm expects to have 100 clients during the coming year. If ten clients are lost and the workforce stays at 25 employees, then the direct labor cost rate per hour: (Do not round intermediary calculations and round the final calculation to the nearest cent.) A) $26.83 per hour B) $19.05 per hour C) $29.81 per hour D) $17.32 per hour Answer: C Explanation: C) Total direct cost = $44,000 × 25 = $1,100,000 Total hours = 410 × 90 = 36,900 hours Direct cost rate per hour = $1,100,000 / 36,900 = $29.81 per hour The direct labor cost rate per hour increased from $26.83 per hour to $29.81 per hour Diff: 2 Objective: 8 AACSB: Application of knowledge
9) James Ford an architect charges $150 per hour for his time spent drawing blueprints for clients. His budgeted annual cost to run his office is $25,200 a year (rent and utilities) and he allocates these indirect costs based on direct labor hours. Ford predicts that he will work about 1,400 billable hours per year for his clients. Recently, Ford completed a set of blueprints for a garage for one of his clients and involving 28 hours of work, how much indirect costs should ford allocate to the garage blueprints job when considering how much to charge his client and cover his costs? A) $560 B) $448 C) $504 D) $644 Answer: C Explanation: C) $25,200/1,400 = $18 per dlh × 28 hours = $504 Diff: 1 Objective: 8 AACSB: Analytical thinking
10) In an accounting firm that conducts audits, how would the costs of secretarial support, office staff, rent, and depreciation be classified if the audit of a particular client is the cost object? A) Not allocated to any of the audits because there is no reasonable allocation base. B) Indirect costs because they do not support the performance of audits. C) Indirect costs because these costs cannot easily be traced to jobs. D) Direct costs because they can be accurately calculated. Answer: C Diff: 1 Objective: 8 AACSB: Analytical thinking
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11) In some variations of normal costing, organizations use budgeted rates to assign direct costs as well as indirect costs to jobs. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
12) In some service organizations, a variation of normal costing is used to provide timely information during the progression of the year, using budgeted direct labor costs and allocated budgeted overhead. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
13) An accounting firm completes an audit for a local union and has the following cost information for the year. Indirect labor $60,000 Office lease $22,000 Depreciation on office equipment $8,000 Marketing expense $20,000 Utilities $15,000 The firm's direct labor costs are budgeted at $500,000 for the year and overhead is allocated based on direct labor costs. The firm used 1 partner and 2 audit associates on the audit. Partners are paid $150 per hour while audit associates earn $50 per hour. The partner spent 6 hours on the engagement while the audit associates spent a total of 40 hours. Required: What is the cost of the audit? Answer: ($150 × 6) + (40 × $50) + ($2,900 × ($125,000/$500,000) = $3,625 Diff: 2 Objective: 8 AACSB: Analytical thinking
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14) A local engineering firm is bidding on a design project for a new client. The total budgeted direct-labor costs for the firm are $400,000. The total budgeted indirect costs are $600,000. It is estimated that there are 8,000 billable hours in total. Required: a. What is the budgeted direct-labor cost rate? b. What is the budgeted indirect-cost rate assuming direct-labor cost is the allocation base? c. What should be the engineering firm bid on the project if the direct labor hours are estimated at Answer: a. $400,000/8,000 = $50/hour b. $600,000/$400,000 = 150% of direct labor cost c. (300 × 50) + (15,000 × 1.5) = $37,500 Diff: 3 Objective: 8 AACSB: Analytical thinking
15) A local CPA employs ten full-time professionals. The budgeted compensation per employee is $50,000. The maximum billable hours for each client are 400. Clients always receive their full amount of time. All professional labor costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. Any other costs are included in a single indirect-cost pool, allocated according to professional labor-hours. Budgeted indirect costs for the year are $200,000 and the firm had 20 clients. Required: a. What is the direct-labor-cost rate per hour? b. What is the indirect-cost rate per hour? Answer: a. Total direct cost = $50,000 × 10 = $500,000 Total hours = 400 × 20 = 8,000 Direct-cost rate per unit = $500,000/8,000 = $62.50 per hour b.
Indirect-cost rate per unit = $200,000/8,000 = $25.00 per hour
Diff: 2 Objective: 8 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 5 Activity-Based Costing and Activity-Based Management Objective 5.1 1) Which of the following statements is true of a peanut-butter costing system? A) A peanut-butter costing system typically has more-homogeneous indirect cost pools. B) A peanut-butter costing system broadly averages or spreads the cost of resources uniformly to cost objects. C) A peanut-butter costing system assumes that all costs are variable. D) In a peanut-butter costing system, costs of activities are used to assign costs to other cost objects such as products or services based on the activities the products or services consume. Answer: B
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Diff: 2 Objective: 1 AACSB: Analytical thinking
2) Overcosting a particular product may result in: A) pricing the product too high B) pricing the product too low C) operating efficiencies D) understating total product costs Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
3) For a company with diverse products, undercosting overhead of a product will lead to product-cross -subsidization which means that: A) direct labor costs of the product are misallocated B) direct material costs of the product are misallocated C) indirect costs of another product are misallocated D) direct costs of another product are misallocated Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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4) Aqua Company produces two products–Alpha and Beta. Alpha has a high market share and is produced in bulk. Production of Beta is based on customer orders and is custom designed. Also, 55% of Beta's cost is shared between design and setup costs, while Alpha's major portions of costs are direct costs. Alpha is using a single cost pool to allocate indirect costs. Which of the following statements is true of Aqua? A) Aqua will over cost Beta's direct costs as it is using a single cost pool to allocate indirect costs. B) Aqua will under cost Alpha's indirect costs because alpha has high direct costs. C) Aqua will over cost Alpha's indirect costs as it is using a single cost pool to allocate indirect costs. D) Aqua will over cost Beta's indirect costs because beta has high indirect costs. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
5) Product-cost cross-subsidization means that: A) when one product is overcosted, it results in more than one other product being overcosted B) when a company under costs more than one of its products, it will over cost more than one of its other products C) when a company under costs one of its products, it will over cost at least one of its other products D) when one product is overcosted it results in all other products being overcosted Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Which of the following has accelerated need for refined cost systems? A) global monopolies B) rising prices C) intense competition D) a shift toward increased direct costs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Uniformly assigning the costs of resources to cost objects when those resources are actually used in a nonuniform way is called activity based costing. Answer: FALSE Explanation: Peanut butter costing occurs when costs are assigned uniformly amount multiple products using average costs that do not take into account the nonuniform way the resources are consumed to produce the different products. Diff: 1 Objective: 1 AACSB: Analytical thinking
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8) Product-cost cross-subsidization is very common when costs are uniformly spread across various products. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
9) Companies that over cost products risk becoming less effective on pricing and losing market share when competition utilizes more accurate cost systems. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
10) If companies increase market share in a given product line because their reported costs are less than their actual costs, they will become more profitable in the long run. Answer: FALSE Explanation: The actual costs will increase because of the additional sales and the other product lines (which are subsidizing the undercosting of the growing product line) will suffer. The net result will be the company having a lower operating income than it could have had. Diff: 2 Objective: 1 AACSB: Analytical thinking
11) As product diversity and indirect costs increase, it is usually best to switch away from a broad averaging system to an activity-based cost system. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
12) The risk of peanut-butter costing rises when broad averages are used across multiple products without managers considering the true amounts of resources consumed in the making of each product. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
13) The risk of product-cost cross-subsidization is high when managers of a company with a multi-product offering, carefully study and accurately estimate the amount of resources each product consumes. Answer: FALSE Explanation: Product-cost cross-subsidization is very common when a cost is uniformly spread–meaning it is broadly averaged–across multiple products without managers recognizing the amount of resources each product consumes. Diff: 2 Objective: 1 AACSB: Analytical thinking
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14) Explain how a top-selling product may actually result in losses for the company. Answer: If indirect costs are not properly allocated to the products, a product may appear to cost less than it actually does cost to produce. If the selling price is based on these lower costs, the selling price may actually be lower than the costs needed to produce the product resulting in losses for the company. This would make undercosted products appear more profitable and therefore making marketing efforts to promote the undercosted product counterproductive. Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 5.2 1) Refining a cost system involves which of the following? A) classifying as many costs as indirect costs as is feasible B) creating as many cost pools as possible to capture all costs C) identifying the activities involved in a process and understanding how those activities consume resources D) seeking an easier and more cost effective way to calculate average costs Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
2) Which of the following is true of refinement of a costing system? A) While refining a costing system, companies should identify as many indirect costs as is economically feasible. B) A homogeneous cost pool will use multiple cost drivers to allocate costs. C) It reduces the use of broad averages for assigning the cost of resources to cost objects. D) It is likely to yield the most decision-making benefits when direct costs are a high percentage of total costs. Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Which of the following is a reason that has accelerated the demand for refinements to the costing system? A) The declining demand for customized products has led managers to decrease the variety of products and services their companies offer. B) The use of product and process technology has led to an increase in indirect costs and a decrease in direct costs. C) The increased of automated processes has led to the increase in direct manufacturing cost leading to a decrease in break-even point. D) The increasing competition in product markets has led to an increase in contribution margin resulting in a decrease of break-even point. Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
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4) Demand for refinements to the costing system has accelerated due to: A) increase in direct costs B) decrease in product diversity C) decrease in indirect costs D) competition in product markets Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
5) Which of the following is NOT a reason for an increased need to refine cost accounting systems? A) Increased product diversity in many firms. B) Broad use of advanced or complex technology, including hardware, software, and robotics to aid the execution of processes. C) Fierce competition from companies located all over the globe. D) Increase cost of gathering and validating data. Answer: D Diff: 1 Objective: 2 AACSB: Application of knowledge
6) Johnson Superior Products Inc. produces hospital equipment and the setup requirements vary from product to product. Johnson produces its products based on customer orders and uses ABC costing. In one of its indirect cost pools, setup costs and distribution costs are pooled together. Costs in this pool are allocated using number of customer orders for the easiness of costing operations. Based on the information provided, which of the following arguments is valid? A) Johnson has clearly failed to identify as many direct costs as is economically feasible. B) All costs in a homogeneous cost pool have the same or a similar cause-and-effect relationship with the single cost driver that is used as the cost-allocation base for Johnson. C) Johnson has unnecessarily wasted resources by classifying setup and distribution costs as they could have been considered as direct costs. D) Johnson has failed to use the correct cost driver as the cost-allocation base for setup costs. Answer: D Diff: 1 Objective: 2 AACSB: Application of knowledge
7) Increased used of automation, computer integrated manufacturing, and utilization of robots have led to an increase in indirect costs relative to direct costs. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
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8) Modern manufacturing practices have helped reduce overhead costs relative to direct costs as the reliance on support resources such as scheduling, design, and engineering has diminished. Answer: FALSE Explanation: Managing complex technology and producing diverse products require additional support functions such as production scheduling, product and process design, and engineering. Diff: 1 Objective: 2 AACSB: Analytical thinking
9) Indirect labor and distribution costs would most likely be in the same activity-cost pool. Answer: FALSE Explanation: Indirect labor and distribution costs would NOT be in the same activity-cost pool because their cost drivers are very dissimilar. A cost driver of indirect labor would include direct labor hours, while a cost driver of distribution costs would include, for example, cubic feet of cargo moved. Diff: 2 Objective: 2 AACSB: Analytical thinking
10) Managers should look for evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
11) Identification of a cost-allocation base is not a critical element when using a strategy that will refine a costing system. Answer: FALSE Explanation: Managers refine their cost systems by looking for effective cost=allocation basis (cost driver) and seek evidence of cause-and-effect when choosing a cost driver with the driver being the cause and the effect being the cost incurred. Diff: 1 Objective: 2 AACSB: Analytical thinking
12) What are the factors that are causing many companies to refine their costing systems to obtain more accurate measures of the costs of their products? Answer: The first cause is increasing product diversity. Companies are producing many more products than they used to, placing strains on more simple, older cost systems. A second cause is the overall increased in indirect costs and the relative decline of direct costs. The indirect nature of these costs requires allocation, and any inaccuracies in allocation of these costs become magnified as these indirect costs increase. A third cause would be advances in information technology that makes complex allocation of indirect costs less burdensome. Finally, increased competition from both national and international competitors has resulted in more pressure to reduce costs, as well as increasing the need for and value of information to support responses to these new threats. Diff: 2 Objective: 2 AACSB: Analytical thinking
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13) What are the implications of refining a company's cost system as a means to accomplish the goal of maximizing customer profitability? Answer: Better costing methods gives companies the ability to more accurately segment their customers according to how profitable each customer is and to better see if one customer is more valuable than another. Better estimating of resource consumption such as the costs of customer service, marketing and distribution, and returns of custom orders, can reveal slimmer margins than what a uniform allocation of costs might show. Better cost systems allow companies to make better strategic decisions. Diff: 2 Objective: 2 AACSB: Analytical thinking
Objective 5.3 1) ABC systems create: A) one large cost pool B) homogeneous activity-related cost pools C) activity-cost pools with a broad focus D) activity-cost pools containing many direct costs Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
2) Activity based costing system differs from traditional costing systems in the treatment of: A) direct labor costs B) direct material costs C) prime costs D) indirect costs Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
3) The fundamental cost objects of ABC are: A) activities B) cost drivers C) products D) services Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
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4) Which of the following statements is true of activity-based costing? A) In activity-based costing, direct labor-hours is always the best allocation base to allocate all non-manufacturing indirect costs. B) Activity based costing is more suited to companies with high product diversity than companies with single product line. C) Activity based costing broadly averages or spreads the cost of resources uniformly to cost objects such as products or services. D) The main advantage of activity-based costing over peanut-butter costing is the accurate distribution of all direct costs to the products. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
5) A single indirect-cost rate distorts product costs because: A) there is an assumption that all support activities affect all products in a uniform way B) it recognizes specific activities that are required to produce a product C) competitive pricing is ignored D) it assumes all costs are product costs Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
6) Extracts from cost information of Hebar Corp.: Simple L3 Pack Setup cost allocated using direct labor-hours $19,700 Setup cost allocated using setup-hours $13,700
Total Complex L7 Pack $7,300 $27,000 $13,300 $27,000
Assuming that setup-hours is considered a more effective cost drive for allocating setup costs than direct labor-hours. Which of the following statements is true of Hebar's setup costs under traditional costing? A) L3 pack is undercosted by $6,000 B) L7 pack is undercosted by $5,900 C) L3 pack is overcosted by $6,000 D) L7 pack is overcosted by $6,000 Answer: C Explanation: C) Setup cost allocated using direct labor-hours - Setup cost allocated using setup-hours = $19,700 − $13,700 = $6,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
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7) Which of the following is true with activity based cost accounting? A) Activity-based costing ignores the allocation of marketing and distribution costs. B) Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures only one product rather than multiple products. C) The focus is on activities that account for a sizable fraction of indirect costs . D) Chances of product-cost cross-subsidization are higher in activity-based costing compared to traditional costing systems. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
8) Activity-based costing (ABC) can eliminate cost distortions because ABC systems: A) establish a cause-and-effect relationship with the activities performed B) use single cost pool for all overhead costs, thereby enabling simplicity C) use a broad average to allocate all overhead costs D) never consider interactions between different departments in assigning support costs Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
9) When "available time" (i.e., setup-hours) is used to calculate a cost of a resource and to allocate costs to cost objects , the system is called: A) job costing B) process costing C) hybrid costing D) time-driven activity based costing Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
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10) Extreme Manufacturing Company provides the following ABC costing information: Activities Account inquiry Account billing Account verification accounts Correspondence letters Total costs
Total Costs $390,000 $210,000 $75,000 $36,000 $711,000
Activity-cost drivers 13,000 hours 6,000,000 lines 40,000 accounts 6,000 letters
The above activities are used by Departments A and B as follows:
Account inquiry hours Account billing lines Account verification accounts Correspondence letters
Department A 2,800 hours 900,000 lines 12,000 accounts 1,000 letters
Department B 4,300 hours 750,000 lines 10,000 accounts 1,400 letters
How much of the account inquiry cost will be assigned to Department A? A) $84,000 B) $390,000 C) $195,000 D) $129,000 Answer: A Explanation: A) Account inquiry costs - Department A = ($390,000 ÷ 13,000) × 2,800 = $84,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
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11) Extreme Manufacturing Company provides the following ABC costing information: Activities Account inquiry Account billing Account verification accounts Correspondence letters Total costs
Total Costs $130,000 $300,000 $99,000 $23,000 $552,000
Activity-cost drivers 13,000 hours 6,000,000 lines 40,000 accounts 4,000 letters
The above activities are used by Departments A and B as follows:
Account inquiry hours Account billing lines Account verification accounts Correspondence letters
Department A 2,000 hours 900,000 lines 13,000 accounts 1,100 letters
Department B 3,500 hours 750,000 lines 11,000 accounts 1,500 letters
How much of the account billing cost will be assigned to Department B? A) $300,000 B) $150,000 C) $37,500 D) $45,000 Answer: C Explanation: C) Billing costs - Department B = ($300,000 ÷ 6,000,000) × 750,000 = $37,500 Diff: 2 Objective: 3 AACSB: Application of knowledge
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12) Extreme Manufacturing Company provides the following ABC costing information: Activities Account inquiry Account billing Account verification accounts Correspondence letters Total costs
Total Costs $140,000 $120,000 $198,000 $33,000 $491,000
Activity-cost drivers 14,000 hours 6,000,000 lines 80,000 accounts 6,000 letters
The above activities are used by Departments A and B as follows:
Account inquiry hours Account billing lines Account verification accounts Correspondence letters
Department A 2,700 hours 800,000 lines 8,000 accounts 1,200 letters
Department B 4,200 hours 650,000 lines 6,000 accounts 1,600 letters
How much of account verification costs will be assigned to Department A? A) $14,850 B) $19,800 C) $198,000 D) $99,000 Answer: B Explanation: B) Account verification costs - Department A = ($198,000/ 80,000) × 8,000 = $19,800 Diff: 2 Objective: 3 AACSB: Analytical thinking
289 richard@qwconsultancy.com
13) Extreme Manufacturing Company provides the following ABC costing information: Activities Account inquiry Account billing Account verification accounts Correspondence letters Total costs
Total Costs $440,000 $220,000 $198,000 $56,250 $914,250
Activity-cost drivers 11,000 hours 4,000,000 lines 80,000 accounts 9,000 letters
The above activities are used by Departments A and B as follows:
Account inquiry hours Account billing lines Account verification accounts Correspondence letters
Department A 2,600 hours 600,000 lines 14,000 accounts 1,700 letters
Department B 4,100 hours 450,000 lines 12,000 accounts 2,100 letters
How much of correspondence costs will be assigned to Department A? A) $56,250 B) $87,500 C) $10,625 D) $10,900 Answer: C Explanation: C) Correspondence costs - Department A = ($56,250 ÷ 9,000) × 1,700 = $10,625 Diff: 2 Objective: 3 AACSB: Application of knowledge
290 richard@qwconsultancy.com
14) Extreme Manufacturing Company provides the following ABC costing information: Activities Account inquiry Account billing Account verification accounts Correspondence letters Total costs
Total Costs $260,000 $200,000 $142,500 $56,250 $658,750
Activity-cost drivers 13,000 hours 4,000,000 lines 60,000 accounts 9,000 letters
The above activities are used by Departments A and B as follows:
Account inquiry hours Account billing lines Account verification accounts Correspondence letters
Department A 2,400 hours 800,000 lines 12,000 accounts 1,600 letters
Department B 3,900 hours 650,000 lines 10,000 accounts 2,000 letters
How much of the total costs will be assigned to Department A? (Do not round intermediary calculations and round final calculations to the nearest whole dollar.) A) $126,500 B) $156,500 C) $166,800 D) $121,750 Answer: A Explanation: A) Account inquiry costs = ($260,000 ÷ 13,000) × 2,400 = $48,000 Billing costs = ($200,000 ÷ 4,000,000) × 800,000 = $40,000 Account verification costs= ($142,500 ÷ 60,000) × 12,000 = $28,500 Correspondence costs = ($56,250 ÷ 9,000) × 1,600 = $10,000 $126,500 Diff: 3 Objective: 3 AACSB: Application of knowledge
291 richard@qwconsultancy.com
15) Extreme Manufacturing Company provides the following ABC costing information: Activities Account inquiry Account billing Account verification accounts Correspondence letters Total costs
Total Costs $550,000 $125,000 $103,750 $32,500 $811,250
Activity-cost drivers 11,000 hours 5,000,000 lines 50,000 accounts 5,000 letters
The above activities are used by Departments A and B as follows:
Account inquiry hours Account billing lines Account verification accounts Correspondence letters
Department A 2,800 hours 800,000 lines 10,000 accounts 1,700 letters
Department B 4,300 hours 650,000 lines 8,000 accounts 2,100 letters
How much of the total costs will be assigned to Department B? (Do not round intermediary calculations and round final calculations to the nearest whole dollar.) A) $313,607.5 B) $267,200 C) $261,500 D) $273,550 Answer: C Explanation: C) Account inquiry costs = ($550,000 ÷ 11,000) × 4,300 = $215,000 Billing costs = ($125,000 ÷ 5,000,000) × 650,000 = $16,250 Account verification costs = ($103,750 ÷ 50,000) × 8,000 = $16,600 Correspondence costs = ($32,500 ÷ 5,000) × 2,100 = $13,650 $261,500 Diff: 3 Objective: 3 AACSB: Application of knowledge
16) Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is 40,000. What is the budgeted indirect cost allocation rate for this activity? A) $0.50 B) $1.00 C) $1.50 D) $2.00 Answer: D Explanation: D) $80,000 / 40,000 = $2.00 Diff: 2 Objective: 3 AACSB: Application of knowledge
292 richard@qwconsultancy.com
17) Activity-based costing is most likely to yield benefits for companies: A) with complex product design processes that vary significantly from product to product B) with operations that remain fairly consistent across product lines C) in a monopolistic market D) having nominal percentage of indirect costs Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
18) Which of the following statements is true of ABC systems? A) ABC systems are time-driven cost systems. B) ABC systems classify some direct costs as indirect costs and some indirect costs as direct costs. C) ABC systems provide valuable information to managers beyond accurate product costs. D) ABC systems assume all costs are variable costs. Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
19) Columbus Company provides the following ABC costing information: Activities Labor Gas Invoices Total costs
Total Costs $410,000 $6,000 $40,000 $456,000
Activity-cost drivers 10,000 hours 3,000 gallons 2,500 invoices
The above activities used by their three departments are:
Labor Gas Invoices
Lawn Department 3,200 hours 1,700 gallons 1,100 invoices
Bush Department 1,400 hours 900 gallons 400 invoices
How much of the labor cost will be assigned to the Bush Department? A) $131,200 B) $57,400 C) $221,400 D) $63,840 Answer: B Explanation: B) Labor cost assigned = ($410,000 ÷ 10,000) × 1,400 = $57,400 Diff: 2 Objective: 3 AACSB: Analytical thinking
293 richard@qwconsultancy.com
Plowing Department 5,400 hours 400 gallons 1,000 invoices
20) Columbus Company provides the following ABC costing information: Activities Labor Gas Invoices Total costs
Total Costs $368,000 $72,000 $130,000 $570,000
Activity-cost drivers 8,000 hours 6,000 gallons 6,500 invoices
The above activities used by their three departments are:
Labor Gas Invoices
Lawn Department 2,600 hours 1,700 gallons 1,100 invoices
Bush Department 1,300 hours 800 gallons 300 invoices
Plowing Department 4,100 hours 3,500 gallons 5,100 invoices
If labor hours are used to allocate the non-labor, overhead costs, what is the overhead allocation rate? (Round the final calculation to the nearest cent.) A) $71.25 per hour B) $27.80 per hour C) $46.00 per hour D) $25.25 per hour Answer: D Explanation: D) Overhead allocation rate = ($72,000 + $130,000) ÷ 8,000 = $25.25 Diff: 2 Objective: 3 AACSB: Application of knowledge
294 richard@qwconsultancy.com
21) Columbus Company provides the following ABC costing information: Activities Labor Gas Invoices Total costs
Total Costs $410,000 $40,000 $56,000 $506,000
Activity-cost drivers 10,000 hours 4,000 gallons 3,500 invoices
The above activities used by their three departments are:
Labor Gas Invoices
Lawn Department 2,600 hours 1,900 gallons 1,100 invoices
Bush Department 1,500 hours 1,000 gallons 100 invoices
How much of invoice cost will be assigned to the Bush Department? A) $1,600 B) $36,800 C) $17,600 D) $56,000 Answer: A Explanation: A) ($56,000 / 3,500 invoices) × 100 invoices = $1,600 Diff: 2 Objective: 3 AACSB: Application of knowledge
295 richard@qwconsultancy.com
Plowing Department 5,900 hours 1,100 gallons 2,300 invoices
22) Columbus Company provides the following ABC costing information: Activities Labor Gas Invoices Total costs
Total Costs $440,000 $72,000 $110,000 $622,000
Activity-cost drivers 10,000 hours 6,000 gallons 5,500 invoices
The above activities used by their three departments are:
Labor Gas Invoices
Lawn Department 2,600 hours 1,800 gallons 1,600 invoices
Bush Department 1,400 hours 900 gallons 200 invoices
How much of the gas cost will be assigned to the Lawn Department? A) $10,800 B) $21,600 C) $39,600 D) $72,000 Answer: B Explanation: B) Gas cost = ($72,000 ÷ 6,000 gallons) × 1,800 gallons = $21,600 Diff: 2 Objective: 3 AACSB: Application of knowledge
296 richard@qwconsultancy.com
Plowing Department 6,000 hours 3,300 gallons 3,700 invoices
23) Columbus Company provides the following ABC costing information: Activities Labor Gas Invoices Total costs
Total Costs $450,000 $30,000 $130,000 $610,000
Activity-cost drivers 10,000 hours 5,000 gallons 6,500 invoices
The above activities used by their three departments are:
Labor Gas Invoices
Lawn Department 2,800 hours 1,900 gallons 1,300 invoices
Bush Department 1,400 hours 900 gallons 200 invoices
How much of the total cost will be assigned to the Plowing Department? A) $610,000 B) $374,200 C) $203,333 D) $163,400 Answer: B Explanation: B) ($450,000 / 10,000) × 5,800 = $261,000 ($30,000 / 5,000) × 2,200 = $13,200 ($130,000 / 6,500) × 5,000 = $100,000 $374,200 Diff: 3 Objective: 3 AACSB: Application of knowledge
297 richard@qwconsultancy.com
Plowing Department 5,800 hours 2,200 gallons 5,000 invoices
24) Columbus Company provides the following ABC costing information: Activities Labor Gas Invoices Total costs
Total Costs $450,000 $24,000 $180,000 $654,000
Activity-cost drivers 10,000 hours 3,000 gallons 7,500 invoices
The above activities used by their three departments are:
Labor Gas Invoices
Lawn Department 3,000 hours 1,800 gallons 1,300 invoices
Bush Department 1,200 hours 900 gallons 200 invoices
How much of the total costs will be assigned to the Lawn Department? A) $194,605 B) $654,000 C) $180,600 D) $218,000 Answer: C Explanation: C) Labor costs = ($450,000 ÷ 10,000) × 3,000 = $135,000 Gas costs = ($24,000 ÷ 3,000) × 1,800 = $14,400 Invoice costs = ($180,000 ÷ 7,500) × 1,300 = $31,200 $180,600 Diff: 3 Objective: 3 AACSB: Application of knowledge
298 richard@qwconsultancy.com
Plowing Department 5,800 hours 300 gallons 6,000 invoices
25) Milan Manufacturing Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Supervision of direct labor Machine maintenance Facility rent Total overhead costs
Overhead Costs $794,000 $140,000 $216,000 $1,150,000
Cost driver Direct labor-hours Machine-hours Square feet of area
Activity level 920,000 1,040,000 130,000
The accounting records show the Mossman Job consumed the following resources: Cost driver Direct labor-hours Machine-hours Square feet of area
Actual level 230 1,547 50
If direct labor-hours are considered the only overhead cost driver, what is the single cost driver rate for Milan? A) $0.80 per direct labor-hour B) $0.86 per direct labor-hour C) $1.25 per direct labor-hour D) $1.16 per direct labor-hour Answer: C Explanation: C) Cost driver rate = $1,150,000 ÷ 920,000 = 1.25 per dlh Diff: 2 Objective: 3 AACSB: Application of knowledge
299 richard@qwconsultancy.com
26) Milan Company has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Supervision of direct labor Machine maintenance Facility rent Total overhead costs
Overhead Costs $597,000 $100,000 $213,000 $910,000
Cost driver Direct labor-hours Machine-hours Square feet of area
Activity level 910,000 840,000 140,000
The accounting records show the Mossman Job consumed the following resources: Cost driver Direct labor-hours Machine-hours Square feet of area
Actual level 270 1,681.68 50
Under activity-based costing, what is the amount of machine maintenance costs allocated to the Mossman Job? (Do not round any intermediary calculations.) A) $1,821.82 B) $200.20 C) $1,681.68 D) $210.45 Answer: B Explanation: B) Machine maintenance costs = 1,681.68 mh × ($100,000 ÷ 840,000) = $200.20 Diff: 2 Objective: 3 AACSB: Application of knowledge
300 richard@qwconsultancy.com
27) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $1,920,000 for an annual production capacity of 16 million pages. For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $160,000 Setups 1,660,000 Inspections 100,000 Total manufacturing overhead costs $1,920,000
Activity level 500 design changes 6,000 setups 8,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 70,000 15 20 25
Hospital Systems 86,000 0 10 33
What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 16 million pages of production capacity? A) $0.01 per page B) $0.12 per page C) $0.11 per page D) $0.10 per page Answer: B Explanation: B) $0.12 per page = ($1,920,000 / 16,000,000 pages) Diff: 2 Objective: 3 AACSB: Application of knowledge
301 richard@qwconsultancy.com
28) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $1,680,000 for an annual production capacity of 12 million pages. For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $120,000 Setups 1,490,000 Inspections 70,000 Total manufacturing overhead costs $1,680,000
Activity level 500 design changes 5,000 setups 9,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 90,000 15 18 27
Hospital Systems 106,000 0 8 35
Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Money Managers during 2020? A) $14,840 B) $11,700 C) $12,600 D) $9,174 Answer: C Explanation: C) $12,600 = [90,000 pages × ($1,680,000 / 12,000,000)] Diff: 2 Objective: 3 AACSB: Application of knowledge
302 richard@qwconsultancy.com
29) Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $930,000 for an annual production capacity of 10 million pages. For 2020, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $160,000 Setups 602,000 Inspections 168,000 Total manufacturing overhead costs $930,000
Activity level 500 design changes 3,000 setups 14,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 50,000 14 20 26
Hospital Systems 66,000 6 10 64
If manufacturing overhead costs are considered one large cost pool and are assigned based on 10 million pages of production capacity, what is the cost driver rate? (Round the final answer to three decimal places.) A) $0.082 per page B) $0.033 per page C) $0.060 per page D) $0.093 per page Answer: D Explanation: D) Cost driver rate = ($930,000 ÷ 10 million pages) = $0.093 per page Diff: 2 Objective: 3 AACSB: Application of knowledge
303 richard@qwconsultancy.com
30) Xylon Corp. has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $910,000 for an annual production capacity of 10 million pages. For 2020, Xylon decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $170,000 Setups 590,000 Inspections 150,000 Total manufacturing overhead costs $910,000
Activity level 200 design changes 6,000 setups 15,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 70,000 13 16 27
Hospital Systems 86,000 5 6 65
Under ABC costing, what is the inspection cost allocated to Hospital Systems? A) $650 B) $150 C) $270 D) $1,573 Answer: A Explanation: A) Inspection cost = ($150,000 ÷ 15,000 inspections) × 65 = $650 Diff: 2 Objective: 3 AACSB: Application of knowledge
31) Only indirect costs are included in the cost pools of ABC. Answer: FALSE Explanation: Both direct and indirect costs are included in the cost pools associated with activities. Diff: 2 Objective: 3 AACSB: Analytical thinking
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32) When allocating the total indirect cost pool to cost pools such as setup costs including depreciation and maintenance costs of setup equipment, wages of setup employees, and allocation of supervisors is called a second-stage allocation. Answer: FALSE Explanation: What is described is a first-stage allocation. Diff: 1 Objective: 3 AACSB: Analytical thinking
33) In activity based costing systems, limiting cost-allocation bases to only units of output strengthens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool. Answer: FALSE Explanation: Limiting cost-allocation bases to only units of output weakens the cause-and-effect relationship between the cost-allocation base and the costs in a cost pool. Diff: 2 Objective: 3 AACSB: Analytical thinking
34) Activity-based costing attempts to identify the most relevant cause-and-effect relationship for each activity pool without restricting the cost driver to only units of output or variables related to units of output. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
35) ABC systems identify activities only in the product function of the value chain as that is where product costs incur. Answer: FALSE Explanation: ABC systems identify activities in all functions of the value chain, calculate costs of individual activities, and assign costs to cost objects such as products and services on the basis of the mix of activities needed to produce each product or service. Diff: 2 Objective: 3 AACSB: Analytical thinking
305 richard@qwconsultancy.com
36) Explain how activity-based costing systems can provide more accurate product costs than traditional cost systems. Answer: A key reason for assigning indirect costs using an ABC system rather than a traditional system is that ABC cost systems reflect differences required by different processes. Activity-based costing systems provide better product costs when they identify and cost more indirect cost differences among products. Activity-based costing seeks to distinguish batch-level, product-sustaining, and facility-sustaining costs especially when they are not proportionate to one another. Unit-level drivers in traditional cost systems distort product costs because, effectively, these systems assume that all indirect activities affect all products. Thus, these systems assign each unit of product an average cost that fails to recognize the specific activities that are required to produce that product. Activity-based costing differs from traditional costing systems in that products are not cross-subsidized by support costs being shared by everyone. Activity-based costing is more likely to result in major differences from traditional costing systems if the firm manufactures multiple products rather than only one product. Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 5.4 1) ________ is an example of an output unit-level cost in the cost hierarchy. A) Factory rent expense B) Building security costs C) Top management compensation costs D) Machine depreciation Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
2) For a company which produce its products in batches, the CEO's salary is a(n) ________ cost. A) batch-level B) output unit-level C) facility-sustaining D) product-sustaining Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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3) Top management compensation cost is an example of ________ in the cost hierarchy. A) unit-level costs B) batch-level costs C) product-sustaining costs D) facility-sustaining costs Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
4) ________ costs support the organization as a whole. A) Unit-level B) Batch-level C) Product-sustaining D) Facility-sustaining Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
5) It is usually difficult to find good cost driver (cause-and-effect relationship) between ________ and a cost allocation base. A) unit-level costs B) batch-level costs C) product-sustaining costs D) facility-sustaining costs Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
6) Facility-sustaining costs are the costs of activities: A) undertaken to support individual products or services regardless of the number of units or batches in which the units are produced B) related to a group of units of a product or services, rather than each individual unit of product or service C) that managers cannot trace to individual products or services but that support the organization as a whole D) performed on each individual unit of a product or service such as the cost of energy, machine depreciation, and repair Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
307 richard@qwconsultancy.com
7) ________ are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the units are produced. A) Unit-level costs B) Batch-level costs C) Product-sustaining costs D) Facility-sustaining costs Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking
8) Advanced Technology Products produces 10 different fasteners. Each time a type of fastener is produced, the equipment must be stopped and items such as filters and drill bits must be changed, oil must be added to the equipment and some parts need lubrication. This work must be done before the products can be produced; the costs related to this activity would be part of which cost pool? A) output-level costs B) batch-level costs C) product-sustaining costs D) service-sustaining costs Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
9) With traditional costing systems, products manufactured in small batches and in small annual volumes may be ________ because batch-related and product-sustaining costs are assigned using unit-related drivers. A) overcosted B) fairly costed C) undercosted D) ignored Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
10) Which of the following is the most important reason to classify costs into a four-level hierarchy? A) The company produces one product but the process is very complex. B) The company has four departments and the overhead of each department is allocated using a different cost driver. C) The company has several cost pools and each relates to a different cost allocation base. D) The company's manufacturing process is very labor intensive. Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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11) Which of the following ordering of the levels best depicts the cost hierarchy within an ABC system? A) batch-level, output unit-level, product-sustaining level, and facility-sustaining level B) batch-level, output unit-level, facility-sustaining levels, product-sustaining levels C) output unit-level, batch-level, product-sustaining level, and facility-sustaining level D) facility-sustaining level, output unit-level, batch-level, product-sustaining level Answer: C Diff: 2 Objective: 4 AACSB: Application of knowledge
12) Service-sustaining costs are the costs of activities that managers cannot trace to individual services but that support the organization as a whole. Answer: FALSE Explanation: Service-sustaining costs are the costs of activities undertaken to support individual services regardless of the number of units or batches in which the units are produced. they are similar to the product-sustaining costs in a manufacturing setting. Diff: 2 Objective: 4 AACSB: Analytical thinking
13) Quality-inspection costs is an example of batch-level costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
14) An effective activity-based cost system always ignores facility-sustaining cost drivers. Answer: FALSE Explanation: An effective activity-based cost system usually uses facility-sustaining cost drivers along with other cost drivers. Facility-sustaining cost drivers are ignored only when it is difficult to find a good cause-and-effect relationship between these costs and the cost-allocation base. Diff: 2 Objective: 4 AACSB: Analytical thinking
15) Over time, the cost of design activities depend largely on the time designers spend on designing and modifying the product not on the number of products made or the number of batches produced. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
16) A common cost hierarchy in an ABC system is the four-level structure including: output unit—level costs, batch-level costs, product-sustaining costs, and facility-sustaining costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
309 richard@qwconsultancy.com
17) Is it advisable to ignore facility-sustaining cost drivers during product costing? Answer: Facility-sustaining cost drivers are ignored only when it is difficult to find a good cause-and-effect relationship between these costs and the cost-allocation base. So, some companies deduct facility-sustaining costs as a separate lump-sum amount from operating income rather than allocate them to products. Managers who follow this approach need to keep in mind that when making decisions based on costs (such as pricing), some lump-sum costs have not been allocated. They must set prices that are much greater than the allocated costs to recover some of the unallocated facility-sustaining costs. Allocating all costs to products or services ensures that managers have taken into account all costs when making decisions based on costs. Diff: 2 Objective: 4 AACSB: Analytical thinking
18) What are the four parts of the cost hierarchy? Briefly explain each part, and contrast this cost hierarchy to the fixed-variable dichotomy? Answer: The four parts of the cost hierarchy are output unit-level costs, batch-level costs, product (or service) sustaining costs, and facility sustaining costs. Output unit-level costs are costs of activities performed on each individual unit of a product or service. Batch-level costs are the costs of activities related to a group of units of products or services rather than to each individual unit of product or service. Product (or service) sustaining costs are the costs of activities undertaken to support individual products or services regardless of the number of units or batches in which the products are produced. Facility-sustaining costs are the costs of activities that cannot be traced to individual products or services but support the organization as a whole. When compared to the fixed-variable dichotomy, which considers only units of output as a cost driver, the four part cost hierarchy provides opportunity to model many different cost drivers. For example, batch-level costs and product (or service) sustaining costs are driven by the number of batches of a product and the number of different products. Neither of these class of cost drivers are able to be considered in a simple fixed-variable dichotomy. Diff: 2 Objective: 4 AACSB: Analytical thinking
310 richard@qwconsultancy.com
Objective 5.5 1) Put the following ABC implementation steps in order: A Compute the allocation rates. B Compute the total cost of the products. C Identify the products that are the cost objects. D Select the cost allocation bases. A) DACB B) DBCA C) BADC D) CDAB Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
2) ________ is considered while choosing a cost allocation base for activity costs in ABC costing. A) Marketing strategy and material price level B) Availability of reliable data and measures C) Product price level D) Market share of a product Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
3) Which of the following cost and cost allocation base have a strong cause and effect relationship? A) administration costs and cubic feet B) setup costs and square feet C) quality control costs and the number of inspections D) machine maintenance and setup hours Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
4) Management accountants use the cost hierarchy to first calculate the: A) labor costs of each product and then they compute material costs B) overhead costs of each product and then they compute prime costs C) factory costs of each product and then they compute labor costs D) total costs of each product and then they compute per-unit costs Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
311 richard@qwconsultancy.com
5) For a business that offers customers a store where product can be purchased and picked up or a delivery service that can ship the product directly to the customer, which of the following would most likely be the best cost allocation base for distribution costs? A) number of customer service phone calls and emails per period B) number of pounds of product shipped or delivered C) electricity costs for the period D) number of products sold Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
6) For a manufacturing firm that produces multiple families of products requiring various combinations of different types of parts, what would be the best allocation base for human resource administration costs? A) direct labor hours B) electricity costs C) number of parts purchased D) machine hours Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
7) Assuming a successful implementation of an ABC system, all of the following would be true EXCEPT: A) Use of a cost hierarchy should result in a fairly accurate estimate of the variable costs consumed by a product and ignore the irrelevant fixed costs. B) Use of a cost hierarchy should result in a fairly accurate estimate of the cost ALL resources consumed by a product. C) The system will identify both variable and fixed resources necessary to product a unit. D) The system will accumulate total costs related to a product and then derive a per unit cost. Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
312 richard@qwconsultancy.com
8) Comfort Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 12 26
Number of Components 10 16
$49,400
$101,400
Number of Direct Labor Hours 265 210
Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.) A) $75,400 B) $66,669 C) $84,131 D) $56,571 Answer: C Explanation: C) Total amount of overhead costs = [($49,400 + $101,400) ÷ (265 + 210)] × 265 = $84,131 Diff: 2 Objective: 5 AACSB: Application of knowledge
9) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 12 29
Number of Components 7 14
$73,800
$77,700
Number of Direct Labor Hours 295 210
Assume a traditional costing system applies the overhead costs based on direct labor hours. What is the total amount of overhead costs assigned to the deluxe model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.) A) $32,311 B) $63,000 C) $30,689 D) $75,750 Answer: B Explanation: B) The total amount of overhead costs = [($73,800 + $77,700) ÷ (295 + 210)] × 210 = $63,000 Diff: 3 Objective: 5 AACSB: Application of knowledge
313 richard@qwconsultancy.com
10) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 19 31
Number of Components 9 18
$50,000
$102,600
Number of Direct Labor Hours 250 210
Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model? A) $76,300 B) $81,200 C) $53,200 D) $99,400 Answer: C Explanation: C) Setups: $50,000 ÷ (19 + 31) = $1,000 Components: $102,600 ÷ (9 + 18) = $3,800 Total amount of overhead costs = ($1,000 × 19) + ($3,800 × 9) = $53,200 Diff: 3 Objective: 5 AACSB: Application of knowledge
11) Dartmouth Corporation manufactures two models of office chairs, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 16 30
Number of Components 8 17
$87,400
$100,000
Number of Direct Labor Hours 255 225
Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the deluxe model? A) $93,700 B) $125,000 C) $98,400 D) $89,000 Answer: B Explanation: B) Setups: $87,400 ÷ (16 + 30) = $1,900 Components: $100,000 ÷ (8 + 17) = $4,000 Total amount of overhead costs = ($1,900 × 30) + ($4,000 × 17) = $125,000 Diff: 3 Objective: 5 AACSB: Application of knowledge
314 richard@qwconsultancy.com
12) Dartmouth Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 19 25
Number of Components 6 20
$14,080
$26,000
Number of Direct Labor Hours 800 480
Assume a traditional costing system applies the $40,080 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.) A) $15,030 B) $25,050 C) $22,773 D) $17,307 Answer: B Explanation: B) [$40,080 / (800 + 480)] × 800 = $25,050 Diff: 2 Objective: 5 AACSB: Application of knowledge
13) North Street Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 20 33
Number of Components 9 13
$21,200
$21,340
Number of Direct Labor Hours 750 420
Assume a traditional costing system applies the $42,540 of overhead costs based on direct labor hours. What is the total amount of overhead cost assigned to the deluxe model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.) A) $15,271 B) $27,269 C) $26,487 D) $16,053 Answer: A Explanation: A) [$42,540 / (750 + 420)] × 420 = $15,271 Diff: 2 Objective: 5 AACSB: Application of knowledge
315 richard@qwconsultancy.com
14) North Street Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 14 33
Number of Components 10 13
$18,800
$20,930
Number of Direct Labor Hours 710 440
Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the standard model? (Do not round interim calculations. Round the final answer to the nearest whole dollar.) A) $19,865 B) $14,700 C) $16,740 D) $25,030 Answer: B Explanation: B) Setups: 18,800 ÷ (14 + 33) = $400 Components: $20,930 ÷ (10 + 13) = $910 Total amount of overhead cost = ($400 × 14) + ($910 × 10) = $14,700 Diff: 3 Objective: 5 AACSB: Application of knowledge
316 richard@qwconsultancy.com
15) North Street Corporation manufactures two models of motorized go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 15 32
Number of Components 9 14
$17,390
$21,620
Number of Direct Labor Hours 780 490
Number of setups and number of components are identified as activity-cost drivers for overhead. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the deluxe model? A) $25,000 B) $19,505 C) $18,710 D) $20,300 Answer: A Explanation: A) Setups: 17,390 ÷ (15 + 32) = $370 Components: $21,620 ÷ (9 + 14) = $940 Total amount of overhead cost = ($370 × 32) + ($940 × 14) = $25,000 Diff: 3 Objective: 5 AACSB: Application of knowledge
317 richard@qwconsultancy.com
16) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:
Production and sales volume Selling price Direct material Direct labor Manufacturing overhead Gross profit Selling and administrative Operating profit
T-SHIRTS 56,000 units $20.00 $1.90 $4.60 $6.00 $ 7.50 $4.40 $3.10
SWEATSHIRTS 22,500 units $29.00 $ 5.00 $ 7.20 $ 3.00 $13.80 $ 7.00 $ 6.80
Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information: Activity Supervision Inspection
Activity cost $98,280 $148,750
Activity-cost driver Direct labor hours (DLH) Inspections
Activities Demanded T-SHIRTS SWEATSHIRTS 0.75 DLH/unit 1.60 DLH/unit 42,000 DLHs 36,000 DLHs 70,000 inspections 17,500 inspections Under the revised ABC system, the activity-cost driver rate for the supervision activity is: A) $1.70 B) $2.73 C) $2.34 D) $1.26 Answer: D Explanation: D) $98,280 / (42,000 dlh + 36,000 dlh) = $1.26 per dlh Diff: 2 Objective: 5 AACSB: Application of knowledge
318 richard@qwconsultancy.com
17) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:
Production and sales volume Selling price Direct material Direct labor Manufacturing overhead Gross profit Selling and administrative Operating profit
T-SHIRTS 64,000 units $18.00 $2.00 $5.00 $3.50 $ 7.50 $4.00 $3.50
SWEATSHIRTS 37,500 units $29.00 $ 5.00 $ 7.20 $ 3.00 $13.80 $ 7.00 $ 6.80
Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information: Activity Supervision Inspection
Activity cost $130,200 $141,600
Activity-cost driver Direct labor hours (DLH) Inspections
Activities Demanded T-SHIRTS SWEATSHIRTS 0.75 DLH/unit 1.20 DLH/unit 48,000 DLHs 45,000 DLHs 70,000 inspections 18,500 inspections Under the revised ABC system, supervision costs allocated to Sweatshirts will be: (Do not round interim calculations. Round the final answer to the nearest whole dollar.) A) $63,000 B) $141,600 C) $130,200 D) None of these answers are correct. Answer: A Explanation: A) $130,200 / (48,000 dlh + 45,000 dlh) = $1.40 per dlh × 45,000 dlh = $63,000 Diff: 2 Objective: 5 AACSB: Application of knowledge
319 richard@qwconsultancy.com
18) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:
Production and sales volume Selling price Direct material Direct labor Manufacturing overhead Gross profit Selling and administrative Operating profit
T-SHIRTS 216,000 units $17.00 $2.20 $4.50 $2.80 $ 7.50 $4.00 $3.50
SWEATSHIRTS 30,000 units $29.00 $ 5.00 $ 7.20 $ 3.00 $13.80 $ 7.00 $ 6.80
Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information: Activity Supervision Inspection
Activity cost $109,890 $136,800
Activity-cost driver Direct labor hours (DLH) Inspections
Activities Demanded T-SHIRTS SWEATSHIRTS 0.25 DLH/unit 1.50 DLH/unit 54,000 DLHs 45,000 DLHs 60,000 inspections 16,000 inspections Under the revised ABC system, total overhead costs allocated to Sweatshirts will be: A) $49,950 B) $78,750 C) $246,690 D) None of these answers are correct. Answer: B Explanation: B) $136,800 / (60,000 inspections + 16,000 inspections) = $1.80 per inspection × 16,000 = $28,800 plus $109,890 / (54,000 dlh + 45,000 dlh) = $1.11 per dlh × 45,000 dlh = $49,950; $28,800 + $49,950 = $78,750 Diff: 3 Objective: 5 AACSB: Application of knowledge
320 richard@qwconsultancy.com
19) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:
Production and sales volume Selling price Direct material Direct labor Manufacturing overhead Gross profit Selling and administrative Operating profit
T-SHIRTS 72,000 units $16.00 $2.50 $4.80 $1.20 $ 7.50 $3.90 $3.60
SWEATSHIRTS 30,000 units $29.00 $ 5.00 $ 7.20 $ 3.00 $13.80 $ 7.00 $ 6.80
Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information: Activity Supervision Inspection
Activity cost $144,840 $104,250
Activity-cost driver Direct labor hours (DLH) Inspections
Activities Demanded T-SHIRTS SWEATSHIRTS 0.75 DLH/unit 1.60 DLH/unit 54,000 DLHs 48,000 DLHs 50,000 inspections 19,500 inspections Under the revised ABC system, overhead costs per unit for the Sweatshirts will be: (Do not round interim calculations. Round the final answer to the nearest cent) A) $1.35 per unit B) $1.50 per unit C) $3.25 per unit D) $2.03 per unit Answer: C Explanation: C) $104,250 / (50,000 inspections + 19,500 inspections) = $1.50 per inspection × 19,500 = $29,250 plus $144,840 / (54,000 dlh + 48,000 dlh) = $1.42 per dlh × 48,000 dlh = $68,160 $29,250 + $68,160 = $97,410 $97,410 / 30,000 sweatshirts = $3.25 Diff: 3 Objective: 5 AACSB: Application of knowledge
321 richard@qwconsultancy.com
20) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:
Production and sales volume Selling price Direct material Direct labor Manufacturing overhead Gross profit Selling and administrative Operating profit
T-SHIRTS 204,000 units $20.00 $2.00 $4.50 $6.00 $ 7.50 $4.50 $3.00
SWEATSHIRTS 24,375 units $29.00 $ 5.00 $ 7.20 $ 3.00 $13.80 $ 7.00 $ 6.80
Tiger Pride's managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information: Activity Supervision Inspection
Activity cost $112,500 $124,200
Activity-cost driver Direct labor hours (DLH) Inspections
Activities Demanded T-SHIRTS SWEATSHIRTS 0.25 DLH/unit 1.60 DLH/unit 51,000 DLHs 39,000 DLHs 50,000 inspections 19,000 inspections Using an ABC system, next year's estimates show manufacturing overhead costs will total $220,300 for 50,000 T-shirts. If all other T-shirt costs and sales prices remain the same, the profitability that can be expected is: (Round the final answer to the nearest whole cent.) A) $9.00 per t-shirt B) $4.41 per t-shirt C) $4.59 per t-shirt D) ($0.22) per t-shirt Answer: C Explanation: C) [50,000 ($20.00 - $2.00 - $4.50 - $4.50)] - $220,300 = $229,700 / 50,000 = $4.59 Diff: 3 Objective: 5 AACSB: Application of knowledge
322 richard@qwconsultancy.com
21) Canton Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period: Cost Pool Materials handling Machine maintenance Setups Inspections Total support costs
Overhead Costs $50,000 $380,000 $257,040 $134,820 $821,860
Activity-cost driver 90,000 orders 20,000 maintenance hours 45,900 setups 21,400 inspections
Production Estimates Production units: Regular = 8,000,000 units Jumbo = 16,000,000 units Machine-hours = 600,000 mh Labor-hours = 1,200,000 dlh Expected direct costs amounts to $966,000 for the period. Support cost requirements of both products are substantially different from one another. Canton uses an ABC costing system. The setups activity-cost driver rate is: A) $6.30 per setup B) $5.60 per setup C) $4.64 per setup D) $19.00 per setup Answer: B Explanation: B) Setups activity-cost driver rate = $257,040 ÷ 45,900 setups = $5.60 per setup Diff: 2 Objective: 5 AACSB: Application of knowledge
323 richard@qwconsultancy.com
22) Canton Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period: Cost Pool Materials handling Machine maintenance Setups Inspections Total support costs
Overhead Costs $43,000 $330,000 $238,500 $133,590 $745,090
Activity-cost driver 96,000 orders 15,000 maintenance hours 45,000 setups 21,900 inspections
Production Estimates Production units: Regular = 10,000,000 units Jumbo = 20,000,000 units Machine-hours = 400,000 mh Labor-hours = 800,000 dlh Expected direct costs amounts to $985,000 for the period. Support cost requirements of both products are substantially different from one another. Zitriks uses an ABC costing system. Which of the following is true of Canton's overhead costing? A) Multiple cost pools are appropriate for Canton's because of high direct costs. B) Single cost pool is appropriate for Canton's because of high direct costs. C) Multiple cost pools are appropriate for Canton's because of diverse support costs. D) Single cost pool is appropriate for Canton's because of diverse support costs. Answer: C Diff: 2 Objective: 5 AACSB: Application of knowledge
324 richard@qwconsultancy.com
23) Canton's Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period: Cost Pool Materials handling Machine maintenance Setups Inspections Total support costs
Overhead Costs $42,000 $350,000 $241,680 $133,920 $767,600
Activity-cost driver 98,000 orders 20,000 maintenance hours 45,600 setups 21,600 inspections
Production Estimates Production units: Regular = 12,000,000 units Jumbo = 24,000,000 units Machine-hours = 200,000 mh Labor-hours = 400,000 dlh Expected direct costs amounts to $947,000 for the period. Support cost requirements of both products are substantially different from one another. Canton's uses an ABC costing system. The inspections activity-cost driver rate is: A) $0.43 B) $5.70 C) $6.20 D) $11.63 Answer: C Explanation: C) Inspections activity-cost driver rate = $133,920 ÷ 21,600 inspections = $6.20 per inspection Diff: 2 Objective: 5 AACSB: Application of knowledge
325 richard@qwconsultancy.com
24) Canton's Corp. manufactures two sizes of ceramic paperweights, regular and jumbo. The following information applies to their expectations for the planning period: Cost Pool Materials handling Machine maintenance Setups Inspections Total support costs
Overhead Costs $44,000 $400,000 $241,150 $133,920 $819,070
Activity-cost driver 90,000 orders 15,000 maintenance hours 45,500 setups 21,600 inspections
Production Estimates Production units: Regular = 8,000,000 units Jumbo = 16,000,000 units Machine-hours = 200,000 mh Labor-hours = 400,000 dlh Expected direct costs amounts to $9,880,000 for the period. Support cost requirements of both products are substantially different from one another. Canton uses an ABC costing system. Which of the following statements is true of implementing an ABC system? A) Managers should never compromise on the cause-and-effect relationship of cost drivers and costs. B) The three guidelines for refining costing systems should be ignored while implementing an ABC costing system. C) The heterogeneous cost pools give managers greater confidence in the activity and product cost numbers from the ABC system. D) Identifying the cost-allocation bases defines the number of activity pools into which costs must be grouped in an ABC system. Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
326 richard@qwconsultancy.com
25) Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: Activities Material handling Assembly Inspection
Cost driver Number of parts Labor hours Time at inspection station
Allocation Rate $6 per part $10 per hour $20 per minute
The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $240 per labor hour. Nichols' management is considering to implement ABC system because: A) ABC system can be implemented cheaply B) ABC system provides more accurate direct cost figures C) ABC system is a highly refined costing system D) ABC system requires minimal expertise to operate Answer: C Diff: 2 Objective: 5 AACSB: Application of knowledge
26) Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: Activities Material handling Assembly Inspection
Cost driver Number of parts Labor hours Time at inspection station
Allocation Rate $7 per part $20 per hour $10 per minute
The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $40 per labor hour. What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 10 remote controls are produced? The batch requires 100 parts, 4 direct manufacturing labor hours, and 1 minutes of inspection time. A) $4.00 per remote control B) $79.00 per remote control C) $37.00 per remote control D) $790.00 per remote control Answer: B Explanation: B) ($7 × 100) + ($20 × 4) + ($10 × 1) = $790 per batch / 10 units per batch = $79.00 per unit Diff: 2 Objective: 5 AACSB: Application of knowledge
327 richard@qwconsultancy.com
27) Nichols Inc. manufactures remote controls. Currently the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager is considering switching-over to ABC costing system and has asked the accounting department to identify the primary production activities and their cost drivers which are as follows: Activities Material handling Assembly Inspection
Cost driver Number of parts Labor hours Time at inspection station
Allocation Rate $7 per part $20 per hour $10 per minute
The current traditional cost method allocates overhead based on direct manufacturing labor hours using a rate of $600 per labor hour. What are the indirect manufacturing costs per remote control assuming an activity-based-costing method is used and a batch of 100 remote controls are produced? The batch requires 470 parts, 9 direct manufacturing labor hours, and 18 minutes of inspection time. A) $6.00 per remote control B) $36.50 per remote control C) $37.00 per remote control D) $3,650.00 per remote control Answer: B Explanation: B) Cost per batch = ($7 × 470) + ($20 × 9) + ($10 × 18) = $3,650.00 per batch Cost per remote control = $3,650.00 per batch ÷ 100 units per batch = $36.50 per unit Diff: 3 Objective: 5 AACSB: Application of knowledge
328 richard@qwconsultancy.com
28) Nile Corp. has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Supervision of direct labor $312,000 Machine maintenance $135,800 Facility rent $200,000 Total overhead costs $647,800
Cost driver Activity level Direct labor-hours 780,000 Machine-hours 970,000 Square feet of area 125,000
The accounting records show the Mossman Job consumed the following resources: Cost driver Direct labor-hours Machine-hours Square feet of area
Actual level 210 1,900 50
If Nile Corp. uses the three activity cost pools to allocate overhead costs, what are the activity-cost driver rates for supervision of direct labor, machine maintenance, and facility rent, respectively? A) $0.40 per dlh; $0.14 per mh; $1.50 per sq ft B) $2.50 per dlh; $7.14 per mh; $0.63 per sq ft C) $0.40 per dlh; $0.14 per mh; $1.60 per sq ft D) $0.30 per dlh; $0.14 per mh; $1.68 per sq ft Answer: C Explanation: C) Supervision cost driver rate = 312,000 ÷ 780,000 dlh = $0.40 per dlh Machine maintenance cost driver rate = $135,800 ÷ 970,000 mh = $0.14 per mh Facility rent cost driver rate = $200,000 ÷ 125,000 sq ft = $1.60 per sq ft Diff: 3 Objective: 5 AACSB: Application of knowledge
329 richard@qwconsultancy.com
29) Nile Corp. has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Supervision of direct labor $240,000 Machine maintenance $165,600 Facility rent $195,500 Total overhead costs $601,100
Cost driver Activity level Direct labor-hours 800,000 Machine-hours 920,000 Square feet of area 115,000
The accounting records show the Mossman Job consumed the following resources: Cost driver Direct labor-hours Machine-hours Square feet of area
Actual level 210 1,900 90
Using the three cost pools to allocate overhead costs, what is the total amount of overhead costs to be allocated to the Mossman Job? A) $549.00 B) $558.00 C) $11,308.50 D) $544.20 Answer: B Explanation: B) Supervision cost driver rate = 240,000 ÷ 800,000 dlh = $0.30 per dlh Machine maintenance cost driver rate = $165,600 ÷ 920,000 mh = $0.18 per mh Facility rent cost driver rate = $195,500 ÷ 115,000 sq ft = $1.70 per sq ft Total amount of overhead costs to be allocated to the Mossman Job = (210 × $0.30 per dlh) + (1,900 × $0.18 per mh) + (90 × $1.70 per sq ft) = $558.00 Diff: 3 Objective: 5 AACSB: Application of knowledge
330 richard@qwconsultancy.com
30) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $1,900,000 for an annual production capacity of 19 million pages. For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $190,000 Setups 1,640,000 Inspections 70,000 Total manufacturing overhead costs $1,900,000
Activity level 300 design changes 4,000 setups 11,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 100,000 15 17 28
Hospital Systems 116,000 0 7 36
Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, setups, and inspections cost pools? A) $633.33 per change, $410.00 per setup, $6.36 per inspection B) $633.33 per change, $17.50 per setup, $149.09 per inspection C) $47.50 per change, $6.36 per setup, $410.00 per inspection D) $17.27 per change, $410.00 per setup, $233.333,333 per inspection Answer: A Explanation: A) Design changes: $633.33 per change = ($190,000 / 300 design changes) Setups: $410.00 per setup = ($1,640,000 / 4,000 setups) Inspections: $6.36 per inspection = ($70,000 / 11,000 inspections) Diff: 3 Objective: 5 AACSB: Application of knowledge
331 richard@qwconsultancy.com
31) Velshi Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $750,000 for an annual production capacity of 15 million pages. For 2020 Velshi Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $150,000 Setups 550,000 Inspections 50,000 Total manufacturing overhead costs $750,000
Activity level 100 design changes 2,000 setups 12,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 70,000 13 21 30
Hospital Systems 86,000 0 11 38
Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Money Managers during 2020? (Do not round interim calculations. Round the final answer to the nearest cent.) A) $9,312.50 B) $3,062.50 C) $25,400.00 D) $21,400.00 Answer: C Explanation: C) $25,400.00 = (13 × $1,500.00 per change = $19,500.00) + (21 × $275.00 per setup = $5,775.00 + (30 × $4.17 per inspection = $125.00) Diff: 3 Objective: 5 AACSB: Application of knowledge
332 richard@qwconsultancy.com
32) Answer the following questions using the information below: Eagle Eye Company produces two types of lenses–L7 and L9.
Total direct costs Total indirect costs Total costs assigned to L7 Total costs assigned to L9
Single Indirect-Cost Pool System $73,000 $36,000 $61,000 (b)
ABC System $59,000 (a) $50,500 $54,500
What is the total indirect costs (a) under ABC system? A) $48,000 B) $50,000 C) $54,500 D) $37,000 Answer: B Explanation: B) Total costs = $73,000 + $36,000 = $109,000 Total indirect costs under ABC system = $109,000 − $59,000 = $50,000 Diff: 2 Objective: 5 AACSB: Application of knowledge
33) Answer the following questions using the information below: Eagle Eye Company produces two types of lenses–L7 and L9.
Total direct costs Total indirect costs Total costs assigned to L7 Total costs assigned to L9
Single Indirect-Cost Pool System $79,000 $33,500 $65,000 (b)
ABC System $59,000 (a) $52,500 $46,500
What is the total costs assigned to L9 (b) under single indirect-cost pool system? A) $47,500 B) $53,500 C) $46,500 D) $54,000 Answer: A Explanation: A) A) The total costs assigned to L9 (b) under single indirect-cost pool system = $112,500 − $65,000 = $47,500 Diff: 2 Objective: 5 AACSB: Application of knowledge
333 richard@qwconsultancy.com
34) If the separate activities of design, process design, and prototyping are combined into one activity called "design" in an ABC system, management is forming one homogeneous cost pool. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
35) Distribution can be a cost-driver for a manufacturing company under ABC system. Answer: FALSE Explanation: Distribution is an activity cost rather than a cost driver. Diff: 1 Objective: 5 AACSB: Analytical thinking
36) ABC systems attempt to trace more costs as indirect costs. Answer: FALSE Explanation: ABC systems attempt to trace more costs as direct costs. Diff: 1 Objective: 5 AACSB: Analytical thinking
37) The cost data produced by an ABC system for either a service or a product are only derived from indirect costs. Answer: FALSE Explanation: The final step in an ABC system is to add all direct and indirect costs assigned to the cost object by the ABC system. Diff: 2 Objective: 5 AACSB: Analytical thinking
38) Implementing activity-based costing system involves use of different cost rates for different activities to compute indirect costs of a product. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
39) Managers consider the accuracy gained by converting from a traditional cost accounting system to the cost of implementation and measurement required by ABC. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
334 richard@qwconsultancy.com
40) For each of the following activities identify an appropriate activity-cost driver. a. machine maintenance b. machine setup c. quality control d. material ordering e. production scheduling f. warehouse expense g. engineering design Answer: Any one of the listed cost drivers is correct. Activity A. Machine Maintenance
# of machines
B. Machine Setup # of setups
C. Quality Control # of inspections
D. Material Ordering
# of orders
E. Production Scheduling F. Warehousing
# of runs
G. Engineering Design
# of engineers # of designs
# of bins, aisles
Machine hours
Actual times for various maintenances of various machines Setup hours Actual times for various setups for various machines Inspection hours Actual times for various inspections for various controls Ordering hours Actual times for various orders for various materials Scheduling hours Actual times for various runs for various schedules Picking hours Actual times for various parts for various warehousing activities Engineering hours Actual times for various engineering designs
Diff: 3 Objective: 5 AACSB: Analytical thinking
335 richard@qwconsultancy.com
Objective 5.6 1) Gregory Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Supervision of direct labor $320,000 Machine maintenance $120,000 Facility rent $200,000 Total overhead costs $640,000
Cost driver Activity level Direct labor-hours 800,000 Machine-hours 960,000 Square feet of area 100,000
The accounting records show the Mossman Job consumed the following resources: Cost driver Direct labor-hours Machine-hours Square feet of area
Actual level 200 1,600 50
Which method of allocation probably best estimates actual overhead costs used? Why? A) Single direct labor-hours cost driver because it is best to allocate total costs uniformly to individual jobs. B) Single direct labor-hours cost driver because it is easiest to analyze and interpret. C) Three activity-cost drivers because they best reflect the relative consumption of resources. D) Three activity-cost drivers because product costs can be significantly cross-subsidized. Answer: C Diff: 2 Objective: 6 AACSB: Application of knowledge
2) It only makes sense to implement an ABC system when: A) a single product is produced in bulk B) its benefits exceed its implementation costs C) it traces more costs as direct costs D) production process is labor-intensive Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
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3) Which of the following is a sign that an ABC system may be useful for an organization? A) Significant amounts of indirect costs are allocated using multiple cost pools. B) Products make similar demands on resources because of similarities in volume, process steps, batch size, or complexity. C) Many indirect costs are described as batch-level costs, product-sustaining costs, or facility-sustaining costs. D) Operations staff disagrees with accountants about the costs of manufacturing and marketing products and services. Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
4) Which of the following statements is true of ABC systems? A) ABC systems provide less insight than traditional systems into the management of the indirect costs. B) ABC systems are used by managers for strategic decisions rather than for inventory valuation in merchandising companies. C) Service companies find great value from ABC because a vast majority of their cost structure is composed of direct costs. D) ABC systems is valuable for pricing decisions but not for understanding, managing, and reducing costs in government institutions. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
5) Which of the following statements about ABC is NOT true? A) A byproduct of ABC implementation can improve the efficiency of operations. B) ABC should be implemented solely by the accountants as they are the guardians of the accounting information system. C) ABC may empower employees to also implement cost saving projects. D) Although implementation of ABC can be a refinement of a cost system, it has its limitations. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
6) Which of the following statements is true of ABC systems? A) ABC system will always result in higher product costs. B) ABC system employs multiple activity-cost drivers. C) ABC system is least suited for service companies. D) ABC system is simpler compared to traditional systems. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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7) Recognizing ABC information is NOT always perfect because: A) it mostly uses far too many indirect cost pools than what is actually required B) it balances the need for better information against the costs of creating a complex system C) it lacks the simplicity that traditional systems used to have to allocate overhead costs D) it never measures how the resources of an organization are used Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
8) Which of the following is a sign that an ABC system will provide benefits? A) There are relatively few indirect cost pools associated with the product and the indirect costs are a small percentage of total product cost. B) All the products produced are similar and sell in equal proportions (sales mix). C) Operations staff has no substantial disagreements with the reported costs of manufacturing and marketing products and services. D) All or most indirect costs are treated as output-unit level costs. Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
Answer the following questions using the information below: Cannady produces six products. Under their traditional cost system using one cost driver, SR6 costs $168.00 per unit. An analysis of the activities and their costs revealed that three cost drivers would be used under the new ABC system. The new cost of SR6 was determined to be $178.00 per unit. 9) The total amount of indirect costs assigned to product SR6 using the traditional method is ________ the total amount assigned using ABC. A) more than B) less than C) equal to D) more accurate than Answer: B Diff: 1 Objective: 6 AACSB: Application of knowledge
10) Given this change in the cost: A) SR6 will now command a higher sales price B) SR6 has benefited from the new system C) SR6 is definitely more accurately costed D) the costing results for SR6 under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system Answer: D Diff: 2 Objective: 6 AACSB: Application of knowledge
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Answer the following questions using the information below: Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards. Under their traditional cost system using one cost driver (direct manufacturing labor hours), the cost of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set. 11) The reduction in cost per unit of wooden chess pieces under ABC system is due to difference in allocation of: A) labor costs B) prime costs C) indirect costs D) material costs Answer: C Diff: 2 Objective: 6 AACSB: Application of knowledge
12) Given this change in the cost structure: A) the costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system B) chess pieces have benefited from the new system C) chess pieces are definitely more accurately costed D) chess will now have a lower sales price Answer: A Diff: 2 Objective: 6 AACSB: Application of knowledge
13) The goal of a properly constructed ABC system is to: A) have the most accurate cost system B) identify more indirect costs C) develop the best cost system that meets the cost/benefit test D) have separate allocation rates for each department Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
14) As ABC systems get very detailed and more cost pools are created, more allocations are necessary to calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of different activity cost pools. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
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15) ABC system are likely to provide the most benefits to a company with significant amounts of indirect costs that are allocated using just one or two costs pools and products that make diverse demands on resources. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
16) For an ABC system to be useful, it must allocated costs from all "links "of the value chain. Answer: FALSE Explanation: Global surveys show that ABC implementation varies among companies but that its framework and concepts help managers improve costing systems . Some companies choose very comprehensive and detailed implementation of ABC while other companies may focus the system on certain divisions and while advances in information technology and the accompany decline in the cost of cost measurement continues, more detailed and refined systems will pass the cost/benefit test. Diff: 2 Objective: 6 AACSB: Analytical thinking
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17) Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Setups 3 7
Number of Components 30 50
$40,000
$120,000
Number of Direct Labor Hours 650 150
Assume a traditional costing system applies the $160,000 of overhead costs based on direct labor hours. a. What is the total amount of overhead costs assigned to the standard model? b. What is the total amount of overhead costs assigned to the deluxe model? Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead. c. What is the total amount of overhead costs assigned to the standard model? d. What is the total amount of overhead costs assigned to the deluxe model? e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why? Answer: a. [$160,000 / (650 + 150)] × 650 = $130,000 b.
[$160,000 / (650 + 150)] × 150 = $30,000
c.
Setups: $40,000 / (3 + 7) = $4,000 Components: $120,000 / (30 + 50) = $1,500 ($4,000 × 3) + ($1,500 × 30) = $57,000
d. ($4,000 × 7) + ($1,500 × 50) = $103,000 e. Because the products do not all require the same proportionate shares of the overhead resources of setup hours and components, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated. Diff: 3 Objective: 6 AACSB: Application of knowledge
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18) Luzent Company produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 2020, Luzent compiled the following data for the two products:
Sales units
Deluxe 50,000
Standard 400,000
Sales price per unit Prime costs per unit Direct materials cost per unit Direct labor costs per unit Manufacturing support costs per unit
$650.00 $180.00 $95.00 $75.00 $ 80.00
$475.00 $130.00 $75.00 $55.00 $120.00
Last year, Luzent Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2020: Activity Setups Machine-related Packing
Cost Driver Cost of setups $ 500,000 of machine hours $44,000,000 of shipments $ 5,000,000
Total 500 600,000 250,000
Deluxe 400 300,000 50,000
Standard 100 300,000 200,000
Required: a. Using the current system,what is the estimated 1. total cost of manufacturing one unit for each type of door? 2. profit per unit for each type of door? b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is a likely explanation for this? c. "ABC systems may result in misallocation of indirect costs." Do you agree? Give reasons for your answer. d. What considerations need to be examined when determining a sales mix strategy? e. While implementing an ABC system for the first time, achieving a significant change overnight is difficult and this may de motivate employees. How can managers overcome this problem?
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Answer: a. Currently estimated deluxe-entry door total cost per unit is $260 = $180 + $80. Currently estimated standard-entry door total cost per unit is $250 = $130 + $120. Currently estimated deluxe-entry door profit per unit is $390 = $650 − $260. Currently estimated standard-entry door profit per unit is $225 = $475 − $250. b. Support manufacturing costs are currently allocated based on direct labor dollars. Because the deluxe doors are manufactured using the new robotics system, it appears that less direct labor is needed to manufacture each unit in the deluxe product line. c. When ABC systems get very detailed and more cost pools are created, more allocations are necessary to calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of different activity cost pools. For example, supervisors are more prone to incorrectly identify the time they spend on different activities if they have to allocate their time over five activities rather than only two activities. Occasionally, managers are also forced to use allocation bases for which data are readily available rather than allocation bases they would have liked to use. When incorrect cost-allocation bases are used, activity-cost information can be misleading. For example, if the cost per load moved decreases, a company may conclude that it has become more efficient in its materials-handling operations. In fact, the lower cost per load may have resulted solely from moving many lighter loads over shorter distances. d. First, the sales-mix strategy ought to consider the current and future market demands for the two types of entry doors. Other considerations include the capacity-related constraints of the robotics system, other equipment, and the facilities. The fact that customers may be willing to pay more for the deluxe doors should be considered when evaluating the profitability of each product line. Costs do not drive a sales-mix strategy. e. In many situations, achieving a significant change overnight is difficult. However, showing how ABC information has helped improve a process and save costs, even if only in small ways, motivates the team to stay on course and build momentum. The credibility gained from small victories leads to additional and bigger improvements involving larger numbers of people and different parts of the organization. Eventually ABC becomes rooted in the culture of the organization. Sharing short-term successes also helps motivate employees to be innovative. Diff: 3 Objective: 6 AACSB: Application of knowledge
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19) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1,000-unit batches of brass, chrome, and white faucets, respectively. The following additional data apply:
Projected sales in units PER UNIT data: Selling price Direct materials Direct labor Overhead cost based on direct labor hours (traditional system) Hours per 1000-unit batch: Direct labor hours Machine hours Setup hours Inspection hours
BRASS 30,000
CHROME 50,000
WHITE 40,000
$40
$20
$30
$8 $15
$4 $3
$8 $9
$12
$3
$9
40 25 1.0 30
10 25 0.5 20
30 10 1.0 20
Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labor hours Machine hours Setups Inspections
Overhead costs
$465,500 $405,000 $870,500
Activity levels 2,900 hours 2,400 hours 95 setup hours 2,700 inspection hours
Required: a. Using the traditional system, determine the operating profit per unit for the brass style of faucet. b.
Determine the activity-cost-driver rate for setup costs and inspection costs.
c.
Using the ABC system, for the brass style of faucet: 1. compute the estimated overhead costs per unit. 2. compute the estimated operating profit per unit.
d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
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Answer: a. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 - ($8 + 15 + 12). b. The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95, and for inspection costs is $150 per inspection hour = $405,000/2,700. c.
ABC system: Overhead costs per unit for Brass faucets are $9.40 per unit. 30,000 units in projected sales / 1000 units per batch = 30 batches; 30 batches × 1 setup hour per batch = 30 setup hours; 30 batches × 30 inspection hours per batch = 900 inspection hours. 30 setup hours × $4,900 = $147,000/30,000 units = $4.90/unit 900 inspection hours × $150 = $135,000/30,000 units = $4.50/unit Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit. Operating profit per unit for Brass faucets is $7.60 = $40 - ($8 + 15 + 9.40).
d. Traditional system: Operating profit per unit for Brass faucets is $5.00. ABC system: Operating profit per unit for Brass faucets is $7.60. Because the products do not all require the same proportionate shares of the support resources of setup hours and inspection hours, the ABC system provides different results than the traditional system, which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated. Diff: 3 Objective: 6 AACSB: Application of knowledge
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20) Brilliant Accents Company manufactures and sells three styles of kitchen faucets: Brass, Chrome, and White. Production takes 25, 25, and 10 machine hours to manufacture 1000-unit batches of brass, chrome and white faucets, respectively. The following additional data apply:
Projected sales in units PER UNIT data: Selling price Direct materials Direct labor Overhead cost based on direct labor hours (traditional system) Hours per 1000-unit batch: Direct labor hours Machine hours Setup hours Inspection hours
BRASS 30,000
CHROME 50,000
WHITE 40,000
$40
$20
$30
$8 $15
$4 $3
$8 $9
$12
$3
$9
40 25 1.0 30
10 25 0.5 20
30 10 1.0 20
Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labor hours Machine hours Setups Inspections
Overhead costs
$465,500 $405,000 $870,500
Activity levels 2,900 hours 2,400 hours 95 setup hours 2,700 inspection hours
Required: a. Using the traditional system, determine the operating profit per unit for each style of faucet. b.
Determine the activity-cost-driver rate for setup costs and inspection costs.
c.
Using the ABC system, for each style of faucet 1. compute the estimated overhead costs per unit. 2. compute the estimated operating profit per unit.
d. Explain the differences between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
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Answer: a. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 - ($8 + $15 + $12) Operating profit per unit for Chrome faucets is $10 = $20 - ($4 + $3 + $3) Operating profit per unit for White faucets is $4 = $30 - ($8 + $9 + $9) b. The activity-cost-driver rate for setup costs is $4,900 per setup hour = $465,500/95, and for inspection costs is $150 per inspection hour = $405,000/2,700. c.
ABC system: Overhead costs per unit for Brass faucets are $9.40 per unit. 30,000 units in projected sales / 1,000 units per batch = 30 batches; 30 batches × 1 setup hour per batch = 30 setup hours; 30 batches × 30 inspection hours per batch = 900 inspection hours 30 setup hours × $4,900 = $147,000/30,000 units = $4.90/unit 900 inspection hours × $150 = $135,000/30,000 units = $4.50/unit Overhead costs for Brass faucets ($4.90 + $4.50) = $9.40 per unit Operating profit per unit for Brass faucets is $7.60 = $40 - ($8 + $15 + $9.40). Overhead costs per unit for Chrome faucets are $5.45 per unit. 50,000 units in projected sales / 1,000 units per batch = 50 batches; 50 batches × .5 setup hour per batch = 25 setup hours; 50 batches × 20 inspection hours per batch = 1,000 inspection hours 25 setup hours × $4,900 = $122,500/50,000 units = $2.45/unit 1,000 inspection hours × $150 = $150,000/50,000 units = $3.00/unit Overhead costs for Chrome faucets ($2.45 + $3.00) = $5.45 per unit Operating profit per unit for Chrome faucets is $7.55 = $20 - ($4 + $3 + $5.45). Overhead costs per unit for White faucets are $7.90 per unit. 40,000 units in projected sales/ 1,000 units per batch = 40 batches; 40 batches × 1 setup hour per batch = 40 setup hours; 40 batches × 20 inspection hours per batch = 800 inspection hours 40 setup hours × $4,900 = $196,000/40,000 units = $4.90/unit 800 inspection hours × $150 = $120,000/40,000 units = $3.00/unit Overhead costs for white faucets ($4.90 + $3.00) = $7.90 per unit. Operating profit per unit for White faucets is $5.10 = $30 - ($8 + $9 + $7.90).
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d. Traditional system: Operating profit per unit for Brass faucets is $5 = $40 - ($8 + $15 + $12). Operating profit per unit for Chrome faucets is $10 = $20 - ($4 + $3 + $3). Operating profit per unit for White faucets is $4 = $30 - ($8 + $9 + $9). ABC system: Operating profit per unit for Brass faucets is $7.60 = $40 - ($8 + $15 + $9.40). Operating profit per unit for Chrome faucets is $7.55 = $20 - ($4 + $3 + $5.45). Operating profit per unit for White faucets is $5.10 = $30 - ($8 + $9 + $7.90). Because the products do not all require the same proportionate shares of the overhead resources of setup hours and inspection hours, the ABC system provides different results than the traditional system, which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the profitability from each faucet style provided that the activity measures are fairly estimated. Diff: 3 Objective: 6 AACSB: Application of knowledge
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21) Aunt Ethel's Fancy Cookie Company manufactures and sells three flavors of cookies: Macaroon, Sugar, and Buttercream. The batch size for the cookies is limited to 1,000 cookies based on the size of the ovens and cookie molds owned by the company. Based on budgetary projections, the information listed below is available: Macaroon 500,000
Sugar 800,000
PER UNIT data: Selling price
$0.80
$0.75
$0.60
Direct materials Direct labor
$0.20 $0.04
$0.15 $0.02
$0.14 $0.02
2 1 0.5
1 1 0.5
1 1 0.5
Projected sales in units
Hours per 1000-unit batch: Direct labor hours Oven hours Packaging hours
Buttercream 600,000
Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labor Oven Packaging
Overhead costs $210,000 $150,000 $360,000
Activity levels 2,400 hours 1,900 oven hours 950 packaging hours
Required: a. Determine the activity-cost-driver rate for packaging costs. b.
Using the ABC system, for the sugar cookie: 1. compute the estimated overhead costs per thousand cookies. 2. compute the estimated operating profit per thousand cookies.
c. Using a traditional system (with direct labor hours as the overhead allocation base), for the sugar cookie:. 1. compute the estimated overhead costs per thousand cookies. 2. compute the estimated operating profit per thousand cookies. d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
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Answer: a. activity-cost-driver rate = packaging overhead / packaging hours = $150,000 / 950 hours = $157.89 per packaging hour b. 1. To compute the estimated overhead costs for a batch of sugar cookies (using the ABC system), first calculate the activity-cost-driver rate for the oven activity. activity-cost-driver rate = oven overhead / oven hours = $210,000 / 1,900 hours = $110.53 per oven hour Then calculate the overhead for a 1,000 cookie batch by multiplying the number of activity hours per batch by the appropriate activity-cost-driver rate for each of the relevant overhead activities and sum to get the total overhead for the batch. (1 × $110.53) + (.5 × $157.89) = $189.48 2. To compute the estimated operating profit for a batch of sugar cookies (using the ABC system), subtract the costs from the revenues: Revenue Direct Material Direct Labor Overhead
= 1,000 × $0.75 = 1,000 × $.015 = 1,000 × $.02
Operating Profit
= $ 750.00 = ($150.00) = ($ 20.00) = ($189.48) = $ 390.52
c. 1. To compute the estimated overhead costs for a batch of sugar cookies (using the traditional system), first calculate the overhead rate per direct labor hour. Overhead per direct labor hour
= Total Overhead / Total Direct Labor Hours = $ 360,000 / 2,400 hours = $ 150.00 per direct labor hour
Since it takes 1 direct labor hour per 1,000 sugar cookies, the overhead is $150.00 2. To compute the estimated operating profit for a batch of sugar cookies (using the traditional system), subtract the costs from the revenues: Revenue Direct Material Direct Labor Overhead Operating Profit
= 1,000 × $0.75 = 1,000 × $.015 = 1,000 × $.02
= $ 750.00 = ($150.00) = ($ 20.00) = ($150.00) = $ 430.00
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d. Traditional system: Operating profit per batch of sugar cookies is $430.00. ABC system: Operating profit per batch of sugar cookies is $390.52. Because the products do not all require the same proportionate shares of the direct labor resources, the allocation of the total overhead on that basis is not as accurate as using the ABC system. The ABC system allocates the overhead based on activity levels for the specific categories as well as activity usage by the product lines. Diff: 3 Objective: 6 AACSB: Application of knowledge
22) What types of characteristics would indicate the implementation of an ABC system may provide benefits in excess of costs and what is the major cost of adopting such a system? Answer: If a company has any of the following characteristics, the benefits of an ABC system adoption may not outweigh the cost of the detailed and many measurements necessary in an ABC system (usually with the aid of technology: software, hardware), and people) • There are relatively few indirect cost pools associated with the product and the indirect costs are a small percentage of total product cost • All the products produced are similar and sell in equal proportions (sales mix) • Operations staff has no substantial disagreements with the reported costs of manufacturing and the marketing and delivery of products and services Diff: 3 Objective: 6 AACSB: Application of knowledge
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Objective 5.7 1) Excellent Printers has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages. For 2020 Excellent Printers has decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $ 120,000 Setups 640,000 Inspections 80,000 Total manufacturing overhead costs $840,000
Activity level 300 design changes 5,000 setups 8,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 60,000 10 20 30
Hospital Systems 76,000 0 10 38
When costs are assigned using the single cost driver, number of pages printed, then: A) Excellent Printers will want to retain this highly profitable customer B) Money Managers will likely seek to do business with competitors C) Money Managers is unfairly over billed for its use of printing resources D) Money Managers is grossly under billed for the job, while other jobs will be unfairly over billed Answer: D Diff: 2 Objective: 7 AACSB: Application of knowledge
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2) Excellent Printing has contracts to complete weekly supplements required by forty-six customers. For the year 2020, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages. For 2020, Excellent Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost pool Manufacturing overhead costs Design changes $ 120,000 Setups 640,000 Inspections 80,000 Total manufacturing overhead costs $840,000
Activity level 200 design changes 4,000 setups 16,000 inspections
During 2020, two customers, Money Managers and Hospital Systems, are expected to use the following printing services: Activity Pages Design changes Setups Inspections
Money Managers 60,000 10 20 30
Hospital Systems 76,000 2 10 38
When costs are assigned using the single cost driver, number of pages printed, then Hospital Systems: A) is fairly billed because resources are allocated uniformly to all jobs B) is grossly under billed for the job, while other jobs will be unfairly over billed C) will likely seek to do business with competitors D) will contribute too little to profits, and Wallace Printing will not want to accept additional work from the company Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
3) Using Activity Based Management principles when evaluating how a customer might react to the reengineering of a product, resulting in dropping some features while allowing for a cut in the selling price, would be which kind of management decision? A) pricing decision B) design decision C) product-mix decision D) research and development decision Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
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4) Which of the following statements is true of costing systems? A) Single-indirect cost pool systems always result in overcosting of products. B) Single-indirect cost pool systems classify some direct costs as indirect costs. C) ABC systems always result in overcosting of products. D) ABC systems classify some indirect costs as direct costs helping to improve processes Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
5) Lavender Company is a logistics company and has recently implemented ABC system. Using activity-based information, it decides to reduce the bulkiness of the packages delivered, thereby reducing costs. This suggests that ABC system helps managers in ________ decisions. A) pricing B) product-mix C) process-improvement D) product-design Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
6) ABC and traditional systems are quite similar in: A) the treatment of direct costs B) the allocation of overheads C) evaluating performance D) the identification of cost pools Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
7) It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process so that: A) total costs reflect market price B) value-added costs can be eliminated C) there is high likelihood of cross-subsidizing of product costs D) product-pricing errors are minimal Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
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8) A well-designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis: A) can be used to eliminate nonvalue-added activities B) is easy to analyze and interpret C) takes the choices and judgment challenges away from the managers D) emphasizes how managers can achieve higher sales Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
9) One reason for assigning selling and distribution costs to products for analytical purposes is: A) to justify a varied product-mix B) that these costs should be included in the cost of goods sold in the income statement C) to ensure that all costs are considered D) that all direct costs must be assigned Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
10) ABC systems help managers to: A) value ending inventory more accurately B) identify new designs to reduce costs C) evaluate direct material costs more efficiently D) improve the inventory turnaround time Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
11) ABC reveals opportunities to reduce costs on nonvalue added activities. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
12) Activity-based management refers to the use of information derived from ABC analysis to analyze and improve operations. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
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13) Managers implementing ABC systems for the first time always start by analyzing budgeted costs to identify activity-cost pools. Answer: FALSE Explanation: Most managers implementing ABC systems for the first time start by analyzing actual costs to identify activity-cost pools. Diff: 2 Objective: 7 AACSB: Analytical thinking
14) ABC costing systems cannot be used in marketing decisions. Answer: FALSE Explanation: Management can identify which products are more profitable using ABC systems and market those products. Diff: 2 Objective: 7 AACSB: Analytical thinking
15) AMB principles can be applied to process improvement, pricing and product mix decisions. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 6 Master Budget and Responsibility Accounting Objective 6.1 1) Which of the following is true of a budget? A) Budgets are used to express only the operational plans and not the strategic plans of a company. B) Budgets do not account for nonfinancial aspects of the upcoming period. C) Budgets are most useful when they are planned independent of the company's strategic plans. D) Budgets help managers to revise their plans and strategies. Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Which of the following is a financial budget? A) pro forma balance sheet B) cash receivables budget C) production budget D) cost of goods sold budget Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Budgets encompass managements goals and: A) are a strategic long range plan
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B) are both a short range and long range profit plan C) includes only financial aspects of an operation as those are the only items that can be quantified in a profit plan D) express management's operating and financial plan for a specified period - usually a fiscal year Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
4) Which of the following is true of master budgets? A) They include only financial aspects of a plan and exclude nonfinancial aspects. B) Includes both financial and nonfinancial information. C) They aid in quantifying the expectations of all stakeholders. D) They must be administered rigidly after they are committed to. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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5) Operating decisions primarily deal with: A) the best use of scarce resources B) how to obtain funds to acquire resources C) acquiring equipment and buildings D) satisfying stockholders Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Financing decisions primarily deal with: A) the use of scarce resources B) how to obtain funds to acquire resources C) acquiring equipment and buildings D) preparing financial statements for stockholders Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
7) A master budget: A) is the initial plan of what the company intends to accomplish in the period and evolves from both the operating and financing decisions B) is only prepared for manufacturers as they are the only type of company with material purchases and work-in-process accounts C) improves companies' market capitalization and evolves from both the investing and financing decisions D) is another name given to the financial budget Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Which of the following is NOT true of a properly executed budgetary cycle? A) deviations from plan are only investigated at the conclusion of the fiscal year as actual data can be finally compiled B) past performance and market feedback are considered in setting budget amounts C) specific financial and nonfinancial expectations are set D) during the fiscal year, managers investigate deviations from plans Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
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9) Which of the following statements is true of budgets? A) Master budgets express management's operating and financial plans. B) Financial budgets are prepared before the master budget is prepared. C) Operating budgets are prepared independently of the master budget. D) The budgeted balance sheet is the first budget prepared as management is very much concerned with projected financial position Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
10) The preparation of all the budgets in the master budget forces managers to think about their business operations and to formulate plans, while: A) detecting inaccurate historical records to avoid errors in budgets B) setting expectations against which actual results can be compared C) completing the budgeting tasks with minimal cross functional feedback D) ignoring financial risks and opportunities Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
11) ________ matches a company's capabilities with opportunities to accomplish its objectives. A) Budgeting B) Strategy C) Policy D) Planning Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
12) A budget is the quantitative expression of a proposed plan of action by management for a specified period. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
13) A budget generally includes only the financial aspects of management's plan. Answer: FALSE Explanation: The budget includes financial and nonfinancial aspects of the plan including such nonfinancial aspects as units that need to be ordered, manpower requirements, quantities of materials that need to be ordered and used, hours worked etc. Diff: 1 Objective: 1 AACSB: Analytical thinking
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14) The benefit of engaging lower level management in the budget preparation process is that it helps to streamline the budget process. Answer: FALSE Explanation: Involvement of lower level management is actually more time consuming however, there are many benefits of bottom-up/participative budgeting and those benefits outweigh the additional cost of engaging more people in the process. Diff: 1 Objective: 1 AACSB: Analytical thinking
15) A master budget includes a set of pro-forma financial statements. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
16) Budgeting includes only the financial aspects of the plan and NOT any nonfinancial aspects such as the number of physical units manufactured or the hours that the direct laborers are expected to work. Answer: FALSE Explanation: Budgeting includes both financial and nonfinancial aspects of the plan. Diff: 2 Objective: 1 AACSB: Analytical thinking
17) Operating plans are generally expressed through long-run budgets. Answer: FALSE Explanation: Operating plans are generally expressed through short-run budgets. Strategic plans are expressed through long-run budgets. Diff: 1 Objective: 1 AACSB: Analytical thinking
18) A budget is a communication aid, informing staff of expectations and providing information that is essential to coordinating what needs to be done to implement the proposed plan. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
19) Budgets are sometimes called targets or commitments by some companies and as such are "set in stone" to provide effective benchmarks for management. Answer: FALSE Explanation: Budgets are guides for companies to follow but should not be "set in stone". That type of rigidity does not allow for the operational flexibility need to adjust for new information or opportunities that may arise during the budget period. Diff: 2 Objective: 1 AACSB: Analytical thinking
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20) Financing decisions deal with how to best use the limited resources of an organization. Answer: FALSE Explanation: Financing decisions deal with how to obtain funds to acquire resources needed for the organization. Diff: 2 Objective: 1 AACSB: Analytical thinking
21) A budgeting process can facilitate learning in that feedback from budgets can lead to changes in plans and strategies. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
22) Budgeted financial statements are called pro forma statements. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
23) Describe the benefits of preparing an operating budget to an organization. Answer: A well-prepared operating budget should serve as a guide for a company to follow during the budgeted period. It is not "set in stone." If new information or opportunities arise, the budget should be adjusted. A well-prepared operating budget assists management with the allocation of scarce resources. It can help management see trouble spots in advance, and then management can decide where to allocate its limited resources. A well-prepared operating budget fosters communication and coordination among various segments of the company. The process of preparing a budget requires managers from different functional areas to work together and communicate performance levels they both want and can attain. A well-prepared operating budget can become the performance standard against which firms can compare the actual results. Diff: 2 Objective: 1 AACSB: Analytical thinking
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24) Bob and Dale have just purchased a small honey manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company's main problem was an improper budgeting function. The company made a good product and market potential was great. Required: Describe the usual budgeting cycle that well-managed companies adopt? Answer: The usual budgeting cycle that well-managed companies adopt consists of the following three steps: 1. Before the start of the period, managers and management accountants work together to develop plans for the company as a whole and the performance of its subunits, taking into account the company's past performance, market feedback, and anticipated future changes. 2. At the beginning of the period, managers are provided with a framework that outlines specific financial or nonfinancial expectations against which actual results will be compared. 3. During the course of the year, management accountants and managers investigate any deviations from plans and take corrective action, if necessary. Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 6.2 1) Which of the following is true of budgets when they are administered thoughtfully? A) They eliminate subjectivity in performance evaluation. B) They can eliminate the uncertainty faced by a company. C) They promote coordination within the subunits of a company. D) They are an adequate substitute for the planning and coordination functions of management. Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Which of the following statements can be considered to be an advantage of a bottom-up budget? A) Prevents slack being built into budgets. B) Increases the rigidity and rigor of the process. C) It is the less expensive of all methods of producing and monitoring a budget. D) Lower-level managers participation brings more specialized knowledge regarding day-to-day operations. Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
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3) Which of the following is a limitation of using past performance as a basis for judging actual results? A) It does not account for productivity increases over the periods. B) It increases the incentive for managers to introduce budgetary slack. C) It assumes inefficiencies of previous periods without considering possible efficiencies of the budget period. D) It increases the tendency of senior managers exaggerating changes in future conditions as opposed to changes in current conditions. Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
4) The practice of developing reasonably challenging budgets tends to help: A) discourage out-of-the-box and creative thinking as there is very little room for error B) set unrealistic expectations and are perceived as overly ambitious and unachievable C) increase anxiety without motivation not meeting them is viewed as a failure D) motivate improved performance as employees work more intensely to avoid failure Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
5) A limitation of using past performance as a basis for judging actual results is that: A) future conditions can be different from past conditions B) any undervaluation of profits in the past period is likely to continue C) any subsequent change in accounting treatment will distort performance evaluation D) they tend to distort results when current and past conditions are similar Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Which of the following reason(s) should managers consider as to the rigidity of budget administration? A) Unanticipated events may require managers to deviate for from the budget. B) Management typically spends significant resources on the budgets and therefore flexibility should be minimal. C) Successful plans and targets are set after much debate and feedback. D) Both B and C. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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7) Which of the following is a reason why top managers want lower-level managers to participate in the budgeting process? A) To benefit from their experience with the day-to-day aspects of running the business. B) To reduce the time and cost expended in the budgeting process. C) To ensure that they do not introduce any budgetary slack. D) To ensure that the budgets are administered rigidly given the changing market conditions. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
8) The major objectives of a budgeting process should include all of the following EXCEPT: A) providing coordination among the subunits B) providing communication among the subunits C) providing unyielding commitment to targets as a means to achieve a target profit D) providing a framework for judging performance and facilitating learning Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
9) Which of the following is referred to as the bottom-up aspect of the budgeting process? A) lower-level managers setting their individual targets that aggregate to be the company-wide target B) senior managers consulting middle- and lower-level managers to investigate any deviations from the budget C) lower-level managers implementing the budgets with senior managers monitoring progress and investigating deviations D) lower-level managers providing inputs to the budgeting process based on their specialized knowledge and familiarity of the operation Answer: D Diff: 3 Objective: 2 AACSB: Analytical thinking
10) Participation of employees in the budgeting process helps: A) create greater commitment towards the budget B) create demanding but achievable budget C) decrease deviations from the budget D) secure communication of sensitive information Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
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11) Managers who feel that top management does not believe in the budget are most likely to: A) pick up the slack and participate in the budgeting process B) to face little interference in the day-to-day aspects of running the business C) be less engaged participants in the budgeting process and less committed to achieving budgeted targets D) convert the budget to a shorter more reasonable time period that will help with real time reporting Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
12) One of the benefits of a well implemented and executed budget is communication. Which of the following best describes communication within the budgetary cycle? A) meshing and balancing of all aspects of production or service B) making each manager aware of the plan and allowing each manager to understand the importance of the plan C) allocation of scarce resources across all functional areas of the company D) the calculation of deviations from plan Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
13) Budgets should: A) not be so rigid that if conditions change, adjustments in spending can be made B) be administered rigidly C) only be developed for short periods of time such as quarters D) include only variable costs Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
14) The Master budget is sometimes called the: A) profit plan B) pro forma financials C) strategic plan D) corporate objectives and commitments Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
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15) After a budget is agreed upon and finalized by the management team, the amounts should NOT be changed for any reason. Answer: FALSE Explanation: Budgets should not be administered rigidly, but rather should be adjusted for changing conditions. Diff: 2 Objective: 2 AACSB: Analytical thinking
16) Even in the face of changing conditions, attaining the original budget is critical and is the only true measure of success. Answer: FALSE Explanation: Changing conditions usually call for a change in plans. Attaining the budget should not be an end in itself and is not the final determinant of success. Diff: 2 Objective: 2 AACSB: Analytical thinking
17) Research shows that the performance of employees falls when they are asked to adhere to challenging budgets. Answer: FALSE Explanation: Research shows just the opposite. The performance of employees improves when they receive a challenging budget. Most employees are motivated to work more intensely to avoid failure than to achieve success (loss-averse). Diff: 2 Objective: 2 AACSB: Analytical thinking
18) Creating a little anxiety among managers and staff with challenging budgets helps employee work harder to achieve goals. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
19) Bottom-up budgets entrusts senior managers to prepare budgets and lower-level managers to execute them. Answer: FALSE Explanation: Bottom-up budgets encourage lower-level managers to participate in the budgeting process and hence it is not limited to senior managers alone. Diff: 2 Objective: 2 AACSB: Analytical thinking
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20) It is best to compare this year's performance with last year's actual performance rather than this year's budget. Answer: FALSE Explanation: It is best to compare this year's performance with this year's budget because inefficiencies and different conditions may be reflected in last year's actual performance amounts. Diff: 2 Objective: 2 AACSB: Analytical thinking
21) When administered wisely, budgets promote communication and coordination among the various subunits of the organization. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
22) Managers take into account the company's past performance, market feedback, and anticipated future events to prepare the budget. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
23) Capacity problems can be discovered by working through the budgeting process before those problems occur. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
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Objective 6.3 1) Which of the following is the most frequently used budget periods used in business? A) a basic budget period of 1 year often subdivided into semi-annual periods B) a basic budget period of 2 years often subdivided into quarters and semi-annual periods C) a basic budget period of 2 years subdivided into monthly periods D) a basic budget period of 1 year often subdivided into quarters and months Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
2) Which of the following is a component of operating budgets? A) production budget B) budgeted statement of cash flows C) capital expenditures budget D) budgeted balance sheet Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
3) The operating budget process generally concludes with the preparation of the: A) production budget B) cash flow statement C) balance sheet D) budgeted income statement Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
4) Which of the following best describes a rolling budget? A) It is a budget that continually outlines the amount required to roll over debt in a future period. B) It is created continually by adding a month, quarter, or year to the period just ended. C) It is a budget that outlines budgeted expenses while utilizing a moving average. D) It is a budget that is submitted to a bank at the beginning of every month as per a loan covenant. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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5) The ________ is a component of financial budgets. A) cost of goods sold budget B) budgeted income statement C) direct materials budget D) budgeted statement of cash flows Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
6) ________ include a budgeted statement of cash flows and a budgeted balance sheet. A) Revenue budgets B) Financial budgets C) Operating budgets D) Production budgets Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
7) The order to follow when preparing the operating budget is: A) revenues budget, production budget, direct manufacturing labor costs budget , and cost of goods sold B) revenues costs of goods sold budget, production budget, and cash budget C) revenues budget, manufacturing overhead costs budget, and production budget D) cash expenditures budget, revenues budget, and production budget Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
8) In which order are the following developed? First to last: A = Production budget B = Direct materials costs budget C = Budgeted income statement D = Revenues budget A) ABDC B) DABC C) DCAB D) CABD Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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9) The budgeting process is most strongly influenced by: A) the capital budget B) the budgeted statement of cash flows C) the sales forecast D) the production budget Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
10) ________ is the usual starting point for budgeting. A) The revenues budget B) The estimated net income C) The production budget D) The cash budget Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
11) The sales forecast should be primarily based on: A) statistical analysis B) input from sales managers and sales representatives C) production capacity D) input from the board of directors Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
12) Costs such as supervision, plant and equipment (production) depreciation, maintenance, supplies, and power are included in the: A) capital expenditures budget B) distribution costs budget C) revenues budget D) manufacturing overhead budget Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
13) In general, which of the following budgets is prepared first? A) sales budget B) production budget C) direct labor budget D) overhead budget Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
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14) The revenues budget reveals: A) expected cash flows for each product B) actual unit sales from last year multiplied by the budget period's expected selling prices for each product C) the expected level of unit sales multiplied by expected unit selling prices for company products D) the variance of sales from actual for each product Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
15) The number of units in the sales budget and the production budget may differ because of a change in: A) ending finished goods inventory levels B) total overhead charges for the year C) beginning direct material inventory levels D) sales returns and allowances Answer: A Diff: 3 Objective: 3 AACSB: Analytical thinking
16) Which of the following is the basic formula of the direct materials usage budget? A) Ending inventory of direct materials + direct materials purchased and used during the period = direct materials to be used this period B) Beginning inventory of direct materials + direct materials purchased and used during the period = direct materials to be used this period C) units used in production + target ending inventory - beginning inventory = purchases to be made for the budget period D) units used in production + target beginning inventory - ending inventory = purchases to be made for the budget period Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
17) Budgeted production equals: A) beginning finished goods inventory + budgeted unit sales - targeted ending finished goods inventory B) targeted ending finished goods inventory + beginning finished goods inventory - budgeted unit sales C) budgeted unit sales + targeted ending finished goods inventory - beginning finished goods inventory D) budgeted unit sales + targeted ending finished goods inventory + beginning finished goods inventory Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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18) Best Products, an Atlanta based company, is in the midst of its budgeting process. It has already prepared its direct materials usage budget and is now in the process of preparing its direct material purchase budget. In addition to the details gathered to prepare the direct materials usage budget, Best also must know: A) the target direct materials ending inventory B) the ratio of direct materials to cost of goods sold C) the beginning direct materials inventory level D) the quantity of direct materials to be purchased Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
19) To prepare the direct materials labor costs budget, which of the following budget must be prepared first? A) direct material purchase budget B) production budget C) direct material usage budget D) budgeted manufacturing overhead Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
20) Which of the following is most likely to be a cost driver for the variable portion of marketing costs? A) percentage of markup on cost B) number of units produced C) increase in revenues attributable to such marketing D) number of units sold Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
21) Which of the following is required to arrive at the budgeted units to be produced in a year? A) estimated direct materials inventory required at the end of the year B) estimated finished goods inventory required at the end of the year C) amount of direct materials to be used during the year D) amount of manufacturing overhead to be incurred Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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22) Which of the following best describes a bill of materials? A) It is a document that is prepared by a vendor to invoice a manufacturer for a purchase of materials. B) It is a document that is used to order materials. C) It is a document that requests materials be removed from the warehouse and put into production. D) It is a document that identifies how each product is manufactured, specifying materials and components and the quantities of materials in each finished good. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
23) Which of the following information is required by a company's manager while preparing a manufacturing overhead costs budget? A) estimated incentives to be paid to marketing personnel B) estimated expense for office supplies C) estimated expense for maintenance of factory building D) rent expense for lease of office building Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
24) In which order are the following developed for a manufacturer? First to last: A = Budgeted Balance Sheet B = Budgeted Income Statement C = Budgeted Cost of Goods Sold D = Budgeted Statement of Cash Flows A) ABDC B) DABC C) CABD D) DCAB Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
25) Mary's Baskets Company expects to manufacture and sell 24,000 baskets in 2020 for $5 each. There are 2,000 baskets in beginning finished goods inventory with target ending inventory of 2,000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 2020 budgeted income statement? A) $130,000 B) $120,000 C) $110,000 D) $70,000 Answer: B Explanation: B) Sales revenue = 24,000 baskets × $5 = $120,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
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26) Orange Corporation has budgeted sales of 17,000 units, targeted ending finished goods inventory of 6,000 units, and beginning finished goods inventory of 3,000 units. How many units should be produced next year? A) 26,000 units B) 23,000 units C) 20,000 units D) 17,000 units Answer: C Explanation: C) Number of units to be produced next year = 17,000 units (estimated sales) + 6,000 units (budgeted ending inventory) - 3,000 units (opening inventory) = 20,000 units. Diff: 2 Objective: 3 AACSB: Application of knowledge
27) For next year, Roberts, Inc., has budgeted sales of 19,000 units, targeted ending finished goods inventory of 1,750 units, and beginning finished goods inventory of 1,250 units. All other inventories are zero. How many units should be produced next year? A) 18,500 units B) 19,000 units C) 19,500 units D) 22,000 units Answer: C Explanation: C) Units to be produced next year = 19,000 units (estimated sales) + 1,750 units (budgeted ending inventory) – 1,250 units (opening inventory) = 19,500 units Diff: 2 Objective: 3 AACSB: Application of knowledge
28) Antique Brass Company has budgeted sales volume of 120,000 units and budgeted production of 113,000 units, while 21,000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory? A) 21,000 units B) 28,000 units C) 7,000 units D) 14,000 units Answer: D Explanation: D) 113,000 units (Budgeted production) + 21,000 units (Beginning finished goods inventory) - 120,000 units (Budgeted sales) = 14,000 units (Budgeted ending finished goods inventory) Diff: 2 Objective: 3 AACSB: Application of knowledge
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29) First Class, Inc., expects to sell 30,000 pool cues for $14 each. Direct materials costs are $4, direct manufacturing labor is $5, and manufacturing overhead is $0.89 per pool cue. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 28,000 units 0 units 1,600 units
Ending inventory 28,000 units 0 units 2,700 units
On the 2020 budgeted income statement, what amount will be reported for sales? A) $435,400 B) $420,000 C) $392,000 D) $407,400 Answer: B Explanation: B) 30,000 units sold × $14 per pool cue = $420,000 Diff: 2 Objective: 3 AACSB: Analytical thinking
30) First Class, Inc., expects to sell 21,000 pool cues for $14 each. Direct materials costs are $4, direct manufacturing labor is $4, and manufacturing overhead is $0.83 per pool cue. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 24,000 units 0 units 1,700 units
Ending inventory 24,000 units 0 units 3,100 units
How many pool cues need to be produced in 2020? A) 24,100 cues B) 22,700 cues C) 22,400 cues D) 19,600 cues Answer: C Explanation: C) 21,000 units (Budgeted sales) + 3,100 (Budgeted ending inventory) - 1,700 (Beginning inventory) = 22,400 cues Diff: 2 Objective: 3 AACSB: Application of knowledge
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31) First Class, Inc., expects to sell 25,000 pool cues for $12 each. Direct materials costs are $4, direct manufacturing labor is $6, and manufacturing overhead is $0.88 per pool cue. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 29,000 units 0 units 1,700 units
Ending inventory 29,000 units 0 units 3,300 units
On the 2020 budgeted income statement, what amount will be reported for cost of goods sold? A) $289,408 B) $272,000 C) $254,592 D) $307,904 Answer: B Explanation: B) The cost per unit is $10.88 ($4 + $6 + $0.88). Therefore, the total cost of goods sold is $272,000 ($10.88 × 25,000). Diff: 3 Objective: 3 AACSB: Application of knowledge
32) First Class, Inc., expects to sell 27,000 pool cues for $13 each. Direct materials costs are $3, direct manufacturing labor is $6, and manufacturing overhead is $0.87 per pool cue. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 29,000 units 0 units 1,900 units
Ending inventory 29,000 units 0 units 2,500 units
What are the 2020 budgeted costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively? A) $87,000; $174,000; $25,230 B) $86,700; $173,400; $25,143 C) $82,800; $165,600; $24,012 D) $81,000; $162,000; $23,490 Answer: C Explanation: C) Direct materials = 27,600 × $3 = $82,800; Direct manufacturing labor = 27,600 × $6 = $165,600; Manufacturing overhead = 27,600 × $0.87 = $24,012 Diff: 3 Objective: 3 AACSB: Application of knowledge
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33) Bradford, Inc., expects to sell 10,000 ceramic vases for $20 each. Direct materials costs are $3, direct manufacturing labor is $11, and manufacturing overhead is $4 per vase. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 4,000 units 0 units 200 units
Ending inventory 4,000 units 0 units 700 units
On the 2020 budgeted income statement, what amount will be reported for sales? A) $210,000 B) $190,000 C) $280,000 D) $200,000 Answer: D Explanation: D) Total sales = 10,000 units × $20 = $200,000. Diff: 3 Objective: 3 AACSB: Application of knowledge
34) Bradford, Inc., expects to sell 15,000 ceramic vases for $20 each. Direct materials costs are $4, direct manufacturing labor is $11, and manufacturing overhead is $4 per vase. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 6,000 units 0 units 300 units
Ending inventory 6,000 units 0 units 500 units
How many ceramic vases should be produced in 2020? A) 14,800 vases B) 15,200 vases C) 21,000 vases D) 15,000 vases Answer: B Explanation: B) Number of vases to be produced = 15,000 units (Estimated sales) + 500 units (Budgeted ending inventory) – 300 units (Opening inventory) = 15,200 units. Diff: 3 Objective: 3 AACSB: Application of knowledge
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35) Bradford, Inc., expects to sell 12,000 ceramic vases for $20 each. Direct materials costs are $3, direct manufacturing labor is $12, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 2,000 units 0 units 100 units
Ending inventory 2,000 units 0 units 700 units
On the 2020 budgeted income statement, what amount will be reported for cost of goods sold? A) $252,000 B) $226,800 C) $216,000 D) $205,200 Answer: C Explanation: C) Cost of goods sold is $216,000 [12,000 × ($3 + $12 + $3)]. Diff: 3 Objective: 3 AACSB: Application of knowledge
36) Bradford, Inc., expects to sell 16,000 ceramic vases for $21 each. Direct materials costs are $2, direct manufacturing labor is $11, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2020:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 4,000 units 0 units 200 units
Ending inventory 4,000 units 0 units 700 units
What are the 2020 budgeted production costs for direct materials, direct manufacturing labor, and manufacturing overhead, respectively? A) $33,000; $181,500; $49,500 B) $32,000; $176,000; $48,000 C) $8,000; $44,000; $12,000 D) $8,000; $0; $14,100 Answer: A Explanation: A) Budgeted cost for direct materials = $33,000 [16,500 units × $2]. Budgeted cost for direct manufacturing labor = $181,500 [16,500 units × $11]. Budgeted manufacturing overhead = $49,500 [16,500 × $3]. Diff: 3 Objective: 3 AACSB: Application of knowledge
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37) The following information pertains to the January operating budget for Murphy Corporation, a retailer: Budgeted sales are $206,000 for January Collections of sales are 50% in the month of sale and 50% the next month Cost of goods sold averages 61% of sales Merchandise purchases total $160,000 in January Marketing costs are $3,600 each month Distribution costs are $6,000 each month Administrative costs are $10,000 each month For January, budgeted gross margin is: A) $103,000 B) $125,660 C) $80,340 D) $46,000 Answer: C Explanation: C) $206,000 - (0.61 × $206,000) = $80,340 Diff: 3 Objective: 3 AACSB: Application of knowledge
38) The following information pertains to the January operating budget for Murphy Corporation, a retailer: Budgeted sales are $203,000 for January Collections of sales are 50% in the month of sale and 50% the next month Cost of goods sold averages 66% of sales Merchandise purchases total $152,000 in January Marketing costs are $3,200 each month Distribution costs are $5,000 each month Administrative costs are $10,200 each month For January, the amount budgeted for the nonmanufacturing costs budget is: A) $87,420 B) $10,200 C) $170,400 D) $18,400 Answer: D Explanation: D) $3,200 + $5,000 + $10,200 = $18,400 Diff: 2 Objective: 3 AACSB: Application of knowledge
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39) Tiger Pride produces two product lines: T-shirts and Sweatshirts. Product profitability is analyzed as follows:
Production and sales volume Selling price Direct material Direct labor Manufacturing overhead Gross profit Selling and administrative Operating profit
T-SHIRTS 64,000 units $16.00 $2.00 $ 4.50 $ 2.00 $7.50 $ 4.00 $3.50
SWEATSHIRTS 29,000 units $29.00 $ 5.00 $8.20 $ 3.00 $12.80 $ 7.00 $5.80
What is the projected decline in operating income if the direct materials costs of T-Shirts increase to $3.50 per unit and direct labor costs of Sweatshirts increase to $14.00 per unit? A) $264,200 B) $96,000 C) $168,200 D) $630,000 Answer: A Explanation: A) (64,000 × $1.50) + (29,000 × $5.80) = $264,200 Diff: 1 Objective: 3 AACSB: Application of knowledge
380 richard@qwconsultancy.com
40) Nantucket Industries manufactures and sells two models of watches, Prime and Luxuria. It expects to sell 4,000 units of Prime and 1,700 units of Luxuria in 2020.The following estimates are given for 2020:
Selling price Direct materials Direct labor Manufacturing overhead
Prime $200 40 60 50
Luxuria $500 50 190 120
Nantucket had an inventory of 220 units of Prime and 115 units of Luxuria at the end of 2019. It has decided that as a measure to counter stock outages it will maintain ending inventory of 390 units of Prime and 220 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $10. There were 140 units of Crimpson in stock at the end of 2019.The management does not want to have any stock of Crimpson at the end of 2020. How many units of Prime watches must be produced in 2020? A) 4,390 units B) 4,170 units C) 4,000 units D) 3,780 units Answer: B Explanation: B) Number of units of Prime to be produced = [4,000 units (Estimated sales) + 390 units (Budgeted ending inventory) - 220 units (Opening inventory)] = 4,170 units. Diff: 3 Objective: 3 AACSB: Application of knowledge
381 richard@qwconsultancy.com
41) Nantucket Industries manufactures and sells two models of watches, Prime and Luxuria. It expects to sell 3,500 units of Prime and 1,300 units of Luxuria in 2020.The following estimates are given for 2020:
Selling price Direct materials Direct labor Manufacturing overhead
Prime $200 30 50 60
Luxuria $500 70 190 130
Nantucket had an inventory of 200 units of Prime and 105 units of Luxuria at the end of 2019. It has decided that as a measure to counter stock outages it will maintain ending inventory of 390 units of Prime and 250 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $14. There were 140 units of Crimpson in stock at the end of 2019.The management does not want to have any stock of Crimpson at the end of 2020. What is the amount budgeted for purchase of Crimpson in 2020? A) $51,660 B) $18,270 C) $20,230 D) $18,200 Answer: B Explanation: B) Budgeted amount for purchase of Crimpson = [$14 × (1,445 units (Luxuria units produced) – 140 units (Units in hand)] = $18,270; Number of units of Luxuria to be produced = [1,300 units (Estimated sales) + 250 units (Budgeted ending inventory) – 105 units (Opening inventory)] = 1,445 units. Diff: 3 Objective: 3 AACSB: Application of knowledge
382 richard@qwconsultancy.com
42) Nantucket Industries manufactures and sells two models of watches, Prime and Luxuria. It expects to sell 3,000 units of Prime and 1,400 units of Luxuria in 2020.The following estimates are given for 2020:
Selling price Direct materials Direct labor Manufacturing overhead
Prime $200 20 60 60
Luxuria $500 100 190 140
Nantucket had an inventory of 230 units of Prime and 85 units of Luxuria at the end of 2019. It has decided that as a measure to counter stock outages it will maintain ending inventory of 380 units of Prime and 240 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $12. There were 130 units of Crimpson in stock at the end of 2019. The management does not want to have any stock of Crimpson at the end of 2020. What is the total budgeted cost of goods sold for Nantucket Industries in 2020? A) $1,482,000 B) $1,022,000 C) $1,038,800 D) $1,254,000 Answer: B Explanation: B) Budgeted cost of goods sold for Prime = [3,000 units (Estimated sales) × $140 (Cost per unit)] = $420,000. Budgeted cost of goods sold for Luxuria = [1,400 units (Estimated sales) × $430 (Cost per unit)] = $602,000. Total cost of goods sold = $420,000 + $602,000 =$1,022,000. Diff: 3 Objective: 3 AACSB: Application of knowledge
383 richard@qwconsultancy.com
43) Nantucket Industries manufactures and sells two models of watches, Prime and Luxuria. It expects to sell 3,700 units of Prime and 1,400 units of Luxuria in 2020.The following estimates are given for 2020:
Selling price Direct materials Direct labor Manufacturing overhead
Prime $200 30 90 60
Luxuria $500 90 200 150
Nantucket had an inventory of 220 units of Prime and 75 units of Luxuria at the end of 2019. It has decided that as a measure to counter stock outages it will maintain ending inventory of 400 units of Prime and 250 units of Luxuria. Each Luxuria watch requires one unit of Crimpson and has to be imported at a cost of $13. There were 140 units of Crimpson in stock at the end of 2019. The management does not want to have any stock of Crimpson at the end of 2020. What is the total budgeted cost of goods manufactured in 2020? A) $1,282,000 B) $1,172,600 C) $1,391,400 D) $1,392,600 Answer: C Explanation: C) Budgeted cost of goods manufactured for Prime = [3,880 units (Estimated units to be manufactured) × $180 (Cost per unit)] = $698,400. Budgeted cost of goods manufactured for Luxuria = [1,575 units (Estimated units to be manufactured) × $440 (Cost per unit)] = $693,000. Total cost of goods sold = $698,400 + $693,000 = $1,391,400 Diff: 3 Objective: 3 AACSB: Application of knowledge
384 richard@qwconsultancy.com
44) Furniture, Inc., estimates the following number of mattress sales for the first four months of 2020: Month January February March April
Sales 31,000 34,800 31,600 37,200
Finished goods inventory at the end of December is 6,800 units. Target ending finished goods inventory is 20% of the next month's sales. How many mattresses need to be produced in January 2020? A) 30,400 mattresses B) 31,160 mattresses C) 44,000 mattresses D) 44,760 mattresses Answer: B Explanation: B) Number of mattresses to be produced in January = [31,000 units (Estimated sales) + 6,960 units (Budgeted ending inventory for January × 20%) – 6,800 units (Beginning inventory)] = 31,160 mattresses. Diff: 2 Objective: 3 AACSB: Application of knowledge
385 richard@qwconsultancy.com
45) Furniture, Inc., estimates the following number of mattress sales for the first four months of 2020: Month January February March April
Sales 26,000 35,800 29,600 44,200
Finished goods inventory at the end of December is 7,100 units. Target ending finished goods inventory is 10% of the next month's sales. How many mattresses should be produced in the first quarter of 2020? A) 93,140 mattresses B) 88,720 mattresses C) 66,240 mattresses D) 57,660 mattresses Answer: B Explanation: B) January February March Total (For the quarter) Estimated sales 26,000 35,800 29,600 91,400 Less: Opening inventory 7,100 3,580 2,960 7,100 18,900 32,220 26,640 84,300 Add: Closing inventory 3,580 2,960 4,420 4,420 (20% of next month's sales) Budgeted production 22,480 35,180 31,060 88,720 Diff: 3 Objective: 3 AACSB: Application of knowledge
386 richard@qwconsultancy.com
46) Wallace Company provides the following data for next year: Month January February March April
Budgeted Sales $127,000 117,000 139,000 148,000
The gross profit rate is 25% of sales. Inventory at the end of December is $28,600 and target ending inventory levels are 10% of next month's sales, stated at cost. What is the amount of purchases budgeted for January? A) $86,475 B) $75,425 C) $95,250 D) $104,025 Answer: B Explanation: B) Budgeted purchases for January = $75,425 ($95,250* − $28,600 + $8,775**) *$127,000 × (100% − 25%) = $95,250 **$117,000 × (100% − 25%) × 10% = $8,775 Diff: 3 Objective: 3 AACSB: Application of knowledge
47) Wallace Company provides the following data for next year: Month January February March April
Budgeted Sales $129,000 112,000 134,000 147,000
The gross profit rate is 25% of sales. Inventory at the end of December is $23,600 and target ending inventory levels are 10% of next month's sales, stated at cost. What is the amount of purchases budgeted for February? A) $30,150 B) $84,000 C) $85,650 D) $106,800 Answer: C Explanation: C) Budgeted purchases for February = $85,650 ($84,000* −$8,400 + $10,050**) *$112,000 × (100% − 25%) = $84,000 **$134,000 × (100% − 25%) × 10% = $10,050 Diff: 3 Objective: 3 AACSB: Application of knowledge
387 richard@qwconsultancy.com
48) Three Bears Manufacturing produces an auto-quartz watch movement called OM362. Three Bears expects to sell 10,000 units of OM362 and to have an ending finished inventory of 3,000 units. Currently, it has a beginning finished inventory of 1,200 units. Each unit of OM362 requires two labor operations, one labor hour(s) of assembling and three labor hour(s) of polishing. The direct labor rate for assembling is $11 per assembling hour and the direct labor rate for polishing is $15.50 per polishing hour. The expected number of hours of direct labor for OM362 is: A) 8,200 hours of assembling; 24,600 hours of polishing B) 11,800 hours of assembling; 35,400 hours of polishing C) 24,600 hours of assembling; 8,200 hours of polishing D) 35,400 hours of assembling; 11,800 hours of polishing Answer: B Explanation: B) 10,000 + 3,000 - 1,200 = 11,800 (11,800 × 1) = 11,800 hours of assembling; (11,800 × 3) = 35,400 hours of polishing Diff: 3 Objective: 3 AACSB: Application of knowledge
49) Three Bears Manufacturing produces an auto-quartz watch movement called OM362. Three Bears expects to sell 10,000 units of OM362 and to have an ending finished inventory of 7,000 units. Currently, it has a beginning finished inventory of 1,200 units. Each unit of OM362 requires two labor operations, one labor hour(s) of assembling and one labor hour(s) of polishing. The direct labor rate for assembling is $13 per assembling hour and the direct labor rate for polishing is $16.50 per polishing hour. The expected cost of direct labor for OM362 is: A) $295,000 B) $330,400 C) $466,100 D) $501,500 Answer: C Explanation: C) Expected cost of direct labor for OM362 = 15,800 units (Estimated units to be manufactured) × [($13 × 1 (assembling) + ($16.50 × 1) (polishing)] = $466,100. Diff: 2 Objective: 3 AACSB: Application of knowledge
388 richard@qwconsultancy.com
50) J & S Manufacturing expects to produce and sell 14,000 units of Big, its only product, for $20 each. Direct material cost is $7 per unit, direct labor cost is $10 per unit, and variable manufacturing overhead is $10 per unit. Fixed manufacturing overhead is $28,000 in total. Variable selling and administrative expenses are $3 per unit, and fixed selling and administrative costs are $3,000 in total. According to generally accepted accounting principles, inventoriable cost per unit of Big would be: A) $17.00 per unit B) $20.00 per unit C) $29.00 per unit D) $27.00 per unit Answer: C Explanation: C) The inventoriable cost as per GAAP is $29.00 ($7 + $10 + $10 + ($28,000 / 14,000 units)). As per GAAP, variable and fixed selling and administrative overhead costs are not inventoriable. Diff: 2 Objective: 3 AACSB: Application of knowledge
51) JJ Esscence Inc. always has a 12-month budget in place. This is called a: A) rolling budget B) zero based budget C) activity based budget D) kaizen budget Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
52) JJ Essence Inc.'s management prepares a type of budget that causes them to continuously think dynamically about the forthcoming 12 months, regardless of the time of year or the quarter at hand. This is called a: A) rolling budget B) kaizen budget C) activity based budget D) zero based budget Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
53) The use of activity-based budgeting is growing because of: A) the increased use of activity-based costing B) the increased use of kaizen costing C) increases in work-in-process inventory D) increases in direct materials inventory Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
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54) Activity-based budgeting would separately estimate: A) the cost of overhead for a department B) a plant-wide cost-driver rate C) the cost of a setup activity D) All of these answers are correct. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
55) Activity-based-costing analysis makes no distinction between: A) direct-materials inventory and work-in-process inventory B) short-run variable costs and short-run fixed costs C) parts of the supply chain D) components of the value chain Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
56) Activity-based budgeting makes it easier to: A) determine a rolling budget B) prepare pro forma financial statements C) determine how to reduce costs D) execute a financial budget Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
57) Which of the following statements is true about activity-based budgeting? A) activity-based budgeting estimates total costs more accurately than cost-based budgeting B) activity-based budgeting provides more detailed information than cost-based budgeting C) activity-based budgeting is cheaper than cost-based budgeting D) activity-based budgeting is simpler to implement than cost-based budgeting Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
58) Activity-based budgeting: A) uses one cost driver such as direct labor-hours B) uses only output-based cost drivers such as units sold C) focuses on activities necessary to produce and sell products and services D) classifies costs by functional area within the value chain Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
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59) Which one of the following budgets would be prepared using activity based budgeting techniques? A) direct materials purchase budget B) revenues budget C) manufacturing overhead cost budget D) production budget Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
60) A rolling budget is the same as a continuous budget. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
61) Cost of goods sold budget is calculated as follows: beginning finished-goods inventory +cost of goods manufactured - ending finished-goods inventory Answer: TRUE Explanation: C Diff: 2 Objective: 3 AACSB: Analytical thinking
62) Preparation of the budgeted balance sheet is the final step in preparing the operating budget. Answer: FALSE Explanation: Preparation of the budgeted income statement is the final step in preparing the operating budget. Diff: 1 Objective: 3 AACSB: Analytical thinking
63) A company usually prepares a budget for nonmanufacturing costs after preparing all operating budgets. Answer: FALSE Explanation: A company usually prepares a budget for nonmanufacturing costs along with operating budgets. Diff: 2 Objective: 3 AACSB: Analytical thinking
64) The cost of goods sold budget is calculated by deducting beginning finished-goods from cost of goods available for sale. Answer: FALSE Explanation: The cost of goods sold budget is calculated by deducting ending finished-goods from cost of goods available for sale. Diff: 2 Objective: 3 AACSB: Analytical thinking
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65) Data from the revenues budget is utilized in the production budget. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
66) Cost-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services. Answer: FALSE Explanation: Activity-based budgeting is a budgeting method that focuses on the budgeted cost of the activities necessary to produce and sell products and services. Diff: 2 Objective: 3 AACSB: Analytical thinking
67) The production cost budget identifies how each product is manufactured and specifies all the materials, the quantity of materials in each finished product, and the work centers where the operations will be performed. Answer: FALSE Explanation: The bill of materials identifies how each product is manufactured, specifying all materials, the sequence in which the materials are used, the quantity of materials in each finished unit, and the work centers where the operations are performed. Diff: 2 Objective: 3 AACSB: Analytical thinking
68) The manufacturing labor budget depends on wage rates, production methods, and hiring plans. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
69) The revenues budget is prepared after all other operating budgets are prepared as it is at that point that the amount of projected expenses are known and so a target revenue can be calculated to cover those expenses and provide a target profit. Answer: FALSE Explanation: The revenues budget is generally the starting point for preparing operating budgets and is generally the first operating budget to be prepared. Diff: 3 Objective: 3 AACSB: Analytical thinking
70) Activity-based budgeting, with its focus on cost drivers and the cost of activities, provides better decision-making information than budgeting based solely on output-based cost drivers (units produced, units sold, or revenues). Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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71) Activity-based costing analysis takes a long-run perspective and treats all activity costs as variable costs. Answer: TRUE Diff: 3 Objective: 3 AACSB: Analytical thinking
72) As budgeting is not a cross-functional activity, it tends to be accurate and reliable with regard to forecasts. Answer: FALSE Explanation: Budgeting is a cross-functional activity involving inputs from different business functions of the value chain. Diff: 1 Objective: 3 AACSB: Analytical thinking
73) Activity-based budgeting would permit the use of multiple drivers and multiple cost pools in the budgeting process. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
74) Listed below are elements of the master budget. Determine whether each budget is an operating budget or a financial budget. Place an O for operating budget or F for a financial budget. 1. Capital expenditures budget 2. Cost of goods sold budget 3. Revenues budget 4. Budgeted statement of cash flows 5. Distribution costs budget 6. Marketing costs budget 7. Cash budget 8. Direct materials cost budget 9. Budgeted balance sheet 10. Budgeted income statement Answer: 1. F 6. O 2. O 7. F 3. O 8. O 4. F 9. F 5. O 10. O Diff: 3 Objective: 3 AACSB: Analytical thinking
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75) Prescher Company sells three products with the following seasonal sales pattern:
Quarter 1 2 3 4
A 40% 30% 20% 10%
Products B 30% 20% 20% 30%
C 10% 30% 50% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per unit to be as follows: Product A B C
Units 50,000 125,000 62,500
Selling Price $ 16 40 24
Required: Prepare a sales budget, in units and dollars, by quarters for the company for the coming year. Answer: First Second Third Fourth Quarter Quarter Quarter Quarter Total Product A Sales (in units) × Price per unit Sales (in dollars)
20,000 $16 $320,000
15,000 $16 $240,000
10,000 $16 $160,000
5,000 $16 $80,000
50,000 $16 $800,000
Product B Sales (in units) × Price per unit Sales (in dollars)
37,500 $40 $1,500,000
25,000 $40 $1,000,000
25,000 $40 $1,000,000
37,500 $40 $1,500,000
125,000 $40 $5,000,000
Product C Sales (in units) × Price per unit Sales (in dollars)
6,250 $24 $150,000
18,750 $24 $450,000
31,250 $24 $750,000
6,250 $24 $150,000
62,500 $24 $1,500,000
$1,970,000
$1,690,000
$1,910,000
$1,730,000
$7,300,000
Total sales
Diff: 2 Objective: 3 AACSB: Application of knowledge
394 richard@qwconsultancy.com
76) Lubriderm Corporation has the following budgeted unit sales for the next six-month period: Month June July August September October November
Unit Sales 90,000 120,000 210,000 150,000 180,000 120,000
There were 30,000 units of finished goods in inventory at the beginning of June. Plans are to have an inventory of finished products that equal 20% of the unit sales for the next month. Five pounds of materials are required for each unit produced. Each pound of material costs $8. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on June 1 was 15,000 pounds. Required: a. Prepare production budgets in units for July, August, and September. b. Prepare a purchases budget in pounds for July, August, and September, and give total purchases in both pounds and dollars for each month.
395 richard@qwconsultancy.com
Answer: a. Budgeted sales Add: Required ending inventory
July 120,000 42,000
August 210,000 30,000
September 150,000 36,000
Total inventory requirements Less: Beginning inventory
162,000 24,000
240,000 42,000
186,000 30,000
Budgeted production
138,000
198,000
156,000
Production in units
July 138,000
August 198,000
September 156,000
297,000
234,000
**252,000
690,000
990,000
780,000
987,000 ****207,000 Less: Beginning inventory in lbs.
1,224,000
1,032,000
297,000
234,000
b.
Targeted ending inventory in lbs.* Production needs in lbs.*** Total requirements in lbs.
*
Purchases needed in lbs. Cost ($8 per lb.)
780,000 × $8
927,000 × $8
798,000 × $8
Total material purchases
$6,240,000
$7,416,000
$6,384,000
0.3 times next month's needs
**
(180,000 + 24,000 - 36,000) times 5 lbs. × 0.3 *** 5 lbs. times units to be produced, across row **** (690,000 × .3) = 207,000 lbs., etc. row across Diff: 3 Objective: 3 AACSB: Application of knowledge
396 richard@qwconsultancy.com
77) Perry Company has provided the following information: Month March April May June July
Budgeted Sales $200,000 212,000 204,000 218,000 210,000
In addition, the gross profit rate is 40% and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for April through June. Answer: April May June Desired ending inventory $36,720 $39,240 $37,800 Add: Cost of goods sold 127,200 122,400 130,800 Total needed 163,920 161,640 168,600 Less: Opening inventory 38,160 36,720 39,240 Total purchases budget $125,760 $124,920 $129,360 Explanation: Desired ending inventory is for example for April: $204,000 × .60 × .30=$36,720. Cost of goods sold is for example for April: $212,000 × .60 = $127,200 Opening inventory for example for April: $212,000 × .60 × .30 = $38,160 Diff: 2 Objective: 3 AACSB: Application of knowledge
397 richard@qwconsultancy.com
Total $113,760 380,400 494,160 114,120 $380,040
78) Favata Company has the following information: Month June July August September October
Budgeted Sales $60,000 51,000 40,000 70,000 72,000
In addition, the cost of goods sold rate is 70% and the desired inventory level is 30% of next month's cost of sales. Required: Prepare a purchases budget for July through September. Answer: July Aug Sept Desired ending inventory $ 8,400 $14,700 $15,120 Plus: COGS 35,700 28,000 49,000 Total needed 44,100 42,700 64,120 Less beginning inventory 10,710 8,400 14,700 Total purchases $33,390 $34,300 $49,420
Total $15,120 112,700 127,820 10,710 $117,110
Diff: 2 Objective: 3 AACSB: Application of knowledge
398 richard@qwconsultancy.com
79) Picture Pretty manufactures picture frames. Sales for August are expected to be 10,000 units of various sizes. Historically, the average frame requires four feet of framing, one square foot of glass, and two square feet of backing. Beginning inventory includes 1,500 feet of framing, 500 square feet of glass, and 500 square feet of backing. Current prices are $0.90 per foot of framing, $8.00 per square foot of glass, and $4 per square foot of backing. Ending inventory of materials should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during August. b. Determine the total costs of direct materials for August purchases. Answer: a. Framing Glass Backing Desired ending inventory* 2,250 750 750 Production needs (10,000 units)** 40,000 10,000 20,000
b.
Total needs Less: Beginning inventory
42,250 1,500
10,750 500
20,750 500
Purchases planned
40,750
10,250
20,250
Cost of direct materials: Framing (40,750 × $0.90) Glass (10,250 × $8.00) Backing (20,250 × $4) Total
*
**
$36,675.00 82,000.00 81,000.00 $199,675.00
1,500 × 1.5 = 2,250 framing 500 × 1.5 = 750 glass 500 × 1.5 = 750 backing 10,000 × 4 feet of framing = 40,000 feet of framing 10,000 × 1 square foot of glass = 10,000 square feet of glass 10,000 × 2 square feet of backing = 20,000 square feet of backing
Diff: 2 Objective: 3 AACSB: Application of knowledge
399 richard@qwconsultancy.com
80) Christy Enterprises reports the year-end information from 2020 as follows: Sales (100,000 units) Cost of goods sold Gross profit Operating expenses (includes $20,000 of Depreciation) Net income
$500,000 300,000 200,000 120,000 $ 80,000
Christy is developing the 2020 budget. In 2020 the company would like to increase selling prices by 10%, and as a result expects a decrease in sales volume of 5%. Cost of goods sold as a percentage of sales is expected to increase to 62%. Other than depreciation, all operating costs are variable. Required: Prepare a budgeted income statement for 2020. Answer: Christy Enterprises Budgeted Income Statement For the Year 2020 Sales (95,000 × $5.50) Cost of goods sold (2020 sales × 62%) Gross profit Less: Operating expenses [($1.00 × 95,000] + $20,000) Net income
$522,500 323,950 198,550 115,000 $ 83,550
Diff: 2 Objective: 3 AACSB: Application of knowledge
81) Describe operating and financial budgets and give at least two examples of each discussed in the textbook. Answer: Operating budgets specify the expected outcomes of any selling, manufacturing, purchasing, labor management, R&D, marketing, distribution, customer service, and administrative activities during the planning period. Operations personnel use these plans to guide and coordinate activities during the planning period. Examples of operating budgets include the revenues budget, production budget, direct materials costs budget, direct manufacturing labor costs budget, manufacturing overhead budget, and budgets for R&D, marketing, distribution, customer service, and administrative activities. Financial budgets are used to evaluate the financial consequences of a proposed decision. Examples of financial budgets include the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted statement of cash flows. Diff: 2 Objective: 3 AACSB: Analytical thinking
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82) Discuss the importance of the sales forecast and items that influence its accuracy. Answer: All other budgets are based on information from the sales forecast. The sales forecast is a challenge to predict because its accuracy depends on the ability to forecast the state of the general economy, changes in the industry, actions of the competition, and developments in technology. Each of these items affects individual products or product lines and are quantified and aggregated to obtain the sales forecast. Diff: 2 Objective: 3 AACSB: Analytical thinking
83) Rolling budgets help management to: A) better review the most recent calendar year B) deal with a long-term view such as 5-year planning frame C) think dynamically about the forthcoming 12 months D) rigidly administer the budget Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 6.4 1) Financial planning models: A) are primarily used to evaluate the differences between actual and planned volume B) are not part of sensitivity analysis C) are mathematical representations of the relationships among factors such as operating and financing activities that affect the budget D) allow for analysis of changes in predicted data but not the other underlying assumptions of the budget Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
2) Financial planning software packages assist management with: A) assigning responsibility to various levels of management B) identifying the target customer C) sensitivity analysis in their planning and budgeting activities D) achieving greater commitment from lower management Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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3) ERP systems store vast quantities of information about the materials, machines and equipment, labor, power, maintenance, and setups needed to manufacture different products. This helps simplify the budgeting process as ERP systems: A) can quickly calculate the manufacturing and nonmanufacturing costs based on a given sales quantity B) automatically identify and record changes in processes involved in producing products C) identify which underlying assumptions are likely to change D) always use a rolling budget ensuring that a budget is always available for a specified future period Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
4) When performing a sensitivity analysis, if the selling price per unit is increased, then the: A) per unit fixed administrative costs will increase B) per unit direct materials purchase price will increase C) total volume of sales will increase D) total costs for sales commissions and other nonmanufacturing variable costs will increase Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
5) Sensitivity analysis helps managers evaluate risks: A) by showing the effects of changes to the original data or an underlying assumption B) by identifying inconsistencies in underlying assumptions and actual conditions C) by removing the effects of foreign currency exposure and other uncontrollable factors D) by identifying gaps in the production process using information on setups needed to manufacture products Answer: A Diff: 3 Objective: 4 AACSB: Analytical thinking
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6) Advanced Enterprises reports year-end information from 2019 as follows: Sales (161,250 units) Cost of goods sold Gross margin Operating expenses Operating income
$964,000 (645,000) 319,000 (267,000) $52,000
Advanced is developing the 2020 budget. In 2020 the company would like to increase selling prices by 13.5%, and as a result expects a decrease in sales volume of 9%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. The budgeted sales for 2020 is: A) $1,094,140 B) $964,000 C) $995,667 D) $877,240 Answer: C Explanation: C) Budgeted sales = $964,000 × 1.135 × 0.91 = $995,667 Diff: 3 Objective: 4 AACSB: Application of knowledge
7) Advanced Enterprises reports year-end information from 2019 as follows: Sales (160,250 units) Cost of goods sold Gross margin Operating expenses Operating income
$969,000 (641,000) 328,000 (268,000) $60,000
Advanced is developing the 2020 budget. In 2020 the company would like to increase selling prices by 13.5%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. What is budgeted cost of goods sold for 2020? A) $727,535 B) $576,900 C) $705,100 D) $641,000 Answer: B Explanation: B) Cost of goods sold in 2019 per unit: $641,000/160,250 units = $4 per unit Number of units sold in 2020 = 160,250 × 0.9 = 144,225 units × $4 per unit = $576,900. Diff: 3 Objective: 4 AACSB: Application of knowledge
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8) Advanced Enterprises reports year-end information from 2019 as follows: Sales (161,250 units) Cost of goods sold Gross margin Operating expenses Operating income
$967,000 (645,000) 322,000 (264,000) $58,000
Advanced is developing the 2020 budget. In 2020 the company would like to increase selling prices by 12.5%, and as a result expects a decrease in sales volume of 9%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. Should Advanced increase the selling price in 2020? A) Yes, because operating income increases for 2020. B) Yes, because sales revenue increases for 2020. C) No, because sales volume decreases for 2020. D) No, because gross margin decreases for 2020. Answer: A Explanation: A) Yes, because it would result in an increase in operating income compared to 2019. The 2020 operating income would be: $989,966 -$586,950 (COGS)-$264,000 (operating expenses, which are fixed) = $139,016 compared to $58,000 in 2019. Diff: 3 Objective: 4 AACSB: Application of knowledge
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9) Violet Sales Corp, reports the year-end information from 2020 as follows: Sales (35,375 units) Cost of goods sold Gross margin Operating expenses Operating income
$283,000 (111,000) $172,000 (160,000) $12,000
Violet is developing the 2020 budget. In 2020 the company would like to increase selling prices by 4.5%, and as a result expects a decrease in sales volume of 13%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. What is budgeted sales for 2020? (Round interim calculations to the nearest cent and the final answer to the nearest dollar.) A) $295,735 B) $257,289 C) $334,181 D) $283,001 Answer: B Explanation: B) Budgeted sales in 2020: Selling prices in 2019 were $8 per unit ($283,000/35,375 units); increase selling price by 4.5% in 2020 means new selling price per unit in 2020 is $8.36 per unit; 2020 sales volume will be 35,375 units × 0.87 = 30,776.25 units times $8.36 per unit = $257,289 Diff: 3 Objective: 4 AACSB: Application of knowledge
405 richard@qwconsultancy.com
10) Violet Sales Corp, reports the year-end information from 2020 as follows: Sales (35,000 units) Cost of goods sold Gross margin Operating expenses Operating income
$280,000 (105,000) $175,000 (155,000) $20,000
Violet is developing the 2020 budget. In 2020 the company would like to increase selling prices by 5.5%, and as a result expects a decrease in sales volume of 15%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. What is budgeted cost of goods sold for 2020? A) $89,250 B) $110,775 C) $15,750 D) $251,090 Answer: A Explanation: A) Budgeted cost of goods sold = $105,000 × 0.85 = $89,250 Diff: 3 Objective: 4 AACSB: Application of knowledge
11) Violet Sales Corp, reports the year-end information from 2019 as follows: Sales (35,500 units) Cost of goods sold Gross margin Operating expenses Operating income
$284,000 106,000 178,000 151,000 $27,000
Violet is developing the 2020 budget. In 2020 the company would like to increase selling prices by 5.5%, and as a result expects a decrease in sales volume of 15%. All other operating expenses are expected to remain constant. Assume that cost of goods sold is a variable cost and that operating expenses are a fixed cost. Should Violet increase the selling price in 2020? A) Yes, because sales revenue increases for 2020. B) Yes, because gross margin increases for 2020. C) No, because sales volume decreases for 2020. D) No, because operating income decreases for 2020. Answer: D Explanation: D) $254,677.00 – $90,100.00 = $164,577.00 (Gross margin); $164,577.00 – $151,000 = $13,577.00 (Operating income). No, because there would be a decrease in operating income compared to 2020. Diff: 3 Objective: 4 AACSB: Application of knowledge
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12) Computer-based systems, like ERP, help managers budget for all manufacturing costs but lack the ability to help managers budget for non-manufacturing costs. Answer: FALSE Explanation: Computer-based systems, like ERP, not only help managers budget for manufacturing costs but also for non-manufacturing costs. Diff: 2 Objective: 4 AACSB: Analytical thinking
13) Rolling budgets are constantly updated to reflect the latest cost and revenue information. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
14) Most computer-based financial planning models have difficulty incorporating sensitivity (what-if) analysis. Answer: FALSE Explanation: Computer-based financial planning models easily assist management with sensitivity (what-if) analysis. Diff: 2 Objective: 4 AACSB: Analytical thinking
15) Sensitivity analysis is a useful tool that helps managers evaluate risks. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
16) Computer-based systems, such as ERP systems, cannot perform calculations for financial planning models. Answer: FALSE Explanation: Managers can use computer-based systems, such as enterprise resource planning (ERP) systems, to perform calculations for financial planning models. Diff: 2 Objective: 4 AACSB: Analytical thinking
17) To determine the predicted results, such as the change in budgeted operating income if there was a decrease in the selling price of a product by 5% and an increase in material costs of 3%. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
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18) Sensitivity analysis is more likely to be used for sales forecasts and their impact on the operating budget rather than for fixed overhead costs and its impact on the marketing budget. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
19) Explain what is meant by sensitivity analysis in budgeting, and discuss how managers might use sensitivity analysis in practice. Answer: Sensitivity analysis is a "what-if" technique that examines how results will change if the original predicted data are not achieved or if an underlying assumption changes. Managers often use financial planning models, which are mathematical representations of relationships among the factors that influence the master budget. It is possible, using these models, to examine the financial impact of one or more parameters that influence a master budget, for example selling price and material cost. Management could consider three levels of each of these two parameters, resulting in nine scenarios of different selling prices and material costs. The financial model could then present a master budget based on each of these changes, and demonstrate the financial impact on the original data given changes in selling prices and/or material costs. Management could use these predictions to make contingency plans, change their strategies, or simply update the budgets as environmental conditions change. Diff: 2 Objective: 4 AACSB: Analytical thinking
20) Explain how if you were building a financial planning model in MS Excel how the sales forecast would impact the purchases budget, marketing budget, and the cash budget and why Excel would be perfect for sensitivity analysis. Answer: Financial planning models are mathematical representations of the relationships among -operating activities, financing activities, and other factors that affect the master budget. The sales forecast is the basis for the sales budget and the sales budget has an impact on many of the budgets in the master budget. For example, a predicted increase in sales will impact the purchases budget which in turn impacts cash outflows (cash budget) as payments to suppliers (accounts payables) are planned. The cash budget must also account for predictions of collections which is also a function of sales and sales goals are also influenced by planned expenditures in the marketing budget. While preparing the budget in MS Excel. The ability to link cells and use formulas and functions allows you to create a dynamic model that makes sensitivity analysis possible — you can play "what-if" techniques to examine how a change in the sales forecast will impact all budgets in the master budget. Diff: 2 Objective: 4 AACSB: Analytical thinking
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Objective 6.5 1) Which of the following is true of responsibility accounting? A) It is a system that measures the plans, budgets, actions, and actual results of a responsibility center. B) It is an arrangement of lines of responsibility and authority within a responsibility center. C) It explicitly incorporates continuous improvement and changes due to learning curve. D) It examines how a result will change if the original plan is not achieved. Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
2) Which of the following departments is most likely to be a cost center? A) sales department of a company selling industrial tools B) call center of a company that serves customers and cross-sells other products C) maintenance department of a luxury resort D) research department of a company providing consultancy services Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
3) Which of the following departments is most likely to be a profit center? A) the accounting department of a company that also assists in budgeting process B) the research and development department of a company C) the sales department of a company whose objective is to maximize the revenues D) the consulting department of a law firm Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
4) A quality control manager of a golf ball maker is most likely to be responsible for a(n): A) revenue center B) investment center C) cost center D) profit center Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
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5) The district director of 5 mortgage origination offices staffed by bank associates who could call potential customers in an attempt to gain home mortgage and home equity loan business is most likely responsible for a(n): A) revenue center B) investment center C) cost center D) profit center Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
6) A regional manager of a restaurant chain in charge of finding additional locations for expansion is most likely responsible for a(n): A) revenue center B) investment center C) cost center D) profit center Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
7) Annette has been recently promoted to head of her department. She is responsible for activities that influence revenues and is responsible for controlling the expenses of her department. She is held responsible for maximizing the profits of the department and to ensure that the earnings are ploughed back into the business. Annette is most likely to head a (n): A) revenue center B) investment center C) cost center D) profit center Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
8) A manager of a revenue center is responsible: A) for only the profits of his center B) for investments, revenues, and costs C) for only the sales and fees generated by his center D) for the revenues, costs, and profits of his center Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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9) A controllable cost is any cost that can be ________ by a responsibility center manager for a period of time. A) controlled B) influenced C) segregated D) excluded Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
10) Which of the following statements is true about responsibility accounting statements? A) Responsibility accounting excludes controllable costs. B) Responsibility accounting segregates fixed costs and variable costs. C) Responsibility accounting excludes fixed costs and variable costs. D) Responsibility accounting segregates uncontrollable costs from controllable costs. Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
11) Which of the following is the fundamental purpose of responsibility accounting? A) to penalize managers for inefficiency B) to gather information that will enable future improvement C) to create an efficient and centralized organization D) to evaluate the performance of managers Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
12) A company using responsibility accounting system decides to exclude all uncontrollable costs from a manager's performance report. Jenson is the machine supervisor. Which of the following costs will impact Jenson's performance report? A) rent and taxes paid on by the company B) cost of materials used in manufacture C) direct labor cost D) cost of power consumed by the plant Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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13) Responsibility accounting: A) emphasizes controllability B) focuses on who should be asked about the information C) attempts to assign blame for problems to a specific manager D) attempts to create a decentralized organization Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
14) A primary consideration in assigning a cost to a responsibility center is: A) whether the cost is fixed or variable B) whether the cost is direct or indirect C) who can best control the change in that cost D) where in the organizational structure the cost was incurred Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
15) The major objectives of a master budget is to: A) define responsibility centers, provide a basis for performance evaluation, and promote communication and coordination among organization units. B) define responsibility centers and place blame for budget variances. C) encourage managers to devise operating plans, provide a basis for performance evaluation, and promote communication and coordination among organization units. D) encourage managers to devise operating plans, place of blame for missed budget targets, and increase the odds of goal congruence between superiors and subordinates. Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
16) A responsibility center is a part, segment, or subunit of an organization, whose manager is accountable for a specified set of activities that impact revenues, costs, or profits and in the case of an investment center, profits. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
17) Decentralized operations organized by brand or product line might result in some inefficiencies as support functions may be duplicated. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
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18) In a revenue center, a manager is responsible for investments, revenues, and costs. Answer: FALSE Explanation: In a revenue center, a manager is responsible for only revenues. Diff: 1 Objective: 5 AACSB: Analytical thinking
19) A packaging department is most likely a profit center. Answer: FALSE Explanation: A packaging department is most likely a cost center. Diff: 2 Objective: 5 AACSB: Analytical thinking
20) Variances between actual and budgeted amounts inform management about performance relative to the budget. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
21) Variances that are calculated frequently and in a timely manner can provide early warnings to management so corrective action can be taken. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
22) A responsibility center is a part, segment, or subunit of an organization whose manager is accountable for a specified set of activities. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
23) Management will most likely behave the same way if a department is structured as a cost center or if the same department is structured as a profit center. Answer: FALSE Explanation: Management will most likely behave differently if a department is structured as a cost center than if the same department is structured as a profit center due to the incentives to control costs as well as revenues in a profit center. Diff: 2 Objective: 5 AACSB: Analytical thinking
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24) Responsibility accounting focuses on control, NOT on information and knowledge. Answer: FALSE Explanation: Responsibility accounting focuses on information and knowledge, not on control. Diff: 2 Objective: 5 AACSB: Analytical thinking
25) The sales department in any organization is usually a profit center. Answer: FALSE Explanation: The sales department is a revenue center because the sales manager is responsible primarily for revenues, and the department's budget is primarily based on revenues. Diff: 2 Objective: 5 AACSB: Analytical thinking
26) Distinguish between controllable and uncontrollable aspects of revenue and costs. Can a manager totally control all revenue and costs? Why or why not? Answer: Although no revenue or cost can be totally controlled, a cost or revenue is a controllable item when a manager has significant influence over the amount of a cost or revenue. It is uncontrollable if this is not the case. A manager's ability to influence costs and revenues depends on two factors: (1) the manager's level of authority, and (2) the time period involved. Costs and revenue contracts, the economic costs of disposing of fixed assets, and the economy are three conditions that are likely to affect the period of time during which an item is not controllable. Diff: 2 Objective: 5 AACSB: Analytical thinking
Objective 6.6 1) The Japanese use the term kaizen when referring to: A) scarce resources B) pro forma financial statements C) continuous improvement D) the sales forecast Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
2) Kaizen refers to incorporating cost reductions: A) in each successive budgeting period B) in each successive sales forecast C) in all customer service centers D) in all areas of the organization Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
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3) Tom Magic Company manufactures various kinds of toys for different age groups. The company's flagship product is Rx. The company currently requires 8.50 labor hours to manufacture per unit of Rx. The company believes that because of numerous small improvements in the process, it will require 0.10 labor-hours less and hence will only 8.40 labor-hours in the next quarter. It will require 8.35 and 8.25 labor-hours in third and fourth quarter. The company has adopted: A) activity based budgeting B) kaizen budgeting C) zero-based budgeting D) cost-based budgeting Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
4) Kaizen budgeting involves: A) large cost reductions B) management directed improvements C) continual small cost reductions D) continual small revenue increases Answer: C Diff: 3 Objective: 6 AACSB: Analytical thinking
5) Kaizen budgeting is driven by: A) management B) employees C) stockholders D) creditors Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
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6) Sherry and John Enterprises are using the kaizen approach to budgeting for 2020. The budgeted income statement for January 2020 is as follows: Sales (168,000 units) Cost of goods sold Gross margin Operating expenses (includes $50,000 of fixed costs) Operating income
$1,090,000 (610,000) $480,000 (390,000) $90,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month. What is budgeted cost of goods sold for March 2020? A) $597,861 B) $616,100 C) $610,000 D) $603,900 Answer: A Explanation: A) Cost of goods sold in February is $603,900 ($610,000 × 0.99) and March = $597,861 ($603,900 × 0.99). Diff: 3 Objective: 6 AACSB: Application of knowledge
7) Sherry and John Enterprises are using the kaizen approach to budgeting for 2020. The budgeted income statement for January 2020 is as follows: Sales (168,000 units) Cost of goods sold Gross margin Operating expenses (includes $53,000 of fixed costs) Operating income
$1,050,000 (690,000) $360,000 (320,000) $40,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 3% per month. What is budgeted gross margin for March 2020? A) $338,724 B) $349,200 C) $381,924 D) $400,779 Answer: D Explanation: D) Sales = $1,050,000. The cost of goods sold for the month of March = $649,221 ($690,000 × 0.97 × 0.97). Therefore, the budgeted gross margin for March is $400,779. Diff: 3 Objective: 6 AACSB: Application of knowledge
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8) Sherry and John Enterprises are using the kaizen approach to budgeting for 2020. The budgeted income statement for January 2020 is as follows: Sales (168,000 units) Cost of goods sold Gross margin Operating expenses (includes $50,000 of fixed costs) Operating income
$1,020,000 (630,000) $390,000 (360,000) $30,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 2% per month. What is the budgeted operating income for March 2020? A) $92,600 B) $353,800 C) $67,224 D) $617,400 Answer: C Explanation: C) Sales = $1,020,000. The cost of goods sold = $605,052 ($630,000 × 0.98 × 0.98). Budgeted gross margin for March = $414,948. Budgeted operating expenses = $347,724 (($310,000 × 0.98 × 0.98) + $50,000). Budgeted operating income = $67,224. Diff: 2 Objective: 6 AACSB: Application of knowledge
9) To reduce budgetary slack management may: A) incorporate stretch or challenge targets B) use external benchmark performance measures C) award bonuses for achieving budgeted amounts D) reduce projected cost targets by 10% across all areas Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
10) Which of the following would NOT be an effective budgeting practice? A) Allowing managers to build "hedges" into their budgets to guard against adverse circumstances. B) Prepare budgets for uses that are mostly planning related and to a lesser extent, performance evaluation related. C) Use a rolling budget. D) Where ever possible, take into consideration external benchmarks. Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
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11) A stretch budget is a budget that: A) crosses more than one responsibility center B) represents a challenging, but achievable level of performance C) is impossible to implement in a cost center D) is designed to include the effects of exchange rate fluctuations Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
12) Rolling budgets help in reducing budgetary slack. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
13) Budgetary slack is the practice of underestimating costs so as to project an optimistic future outlook. Answer: FALSE Explanation: Budgetary slack is the practice of underestimating budgeted revenues or overestimating budgeted costs to make budgeted targets easier to achieve. Diff: 1 Objective: 6 AACSB: Analytical thinking
14) Companies implementing kaizen budgeting believe that employees who actually do the job have the best knowledge of how the job can be done better. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
15) The Japanese use kaizen to mean financing alternatives. Answer: FALSE Explanation: The Japanese use kaizen to mean CONTINUOUS IMPROVEMENT. Diff: 1 Objective: 6 AACSB: Analytical thinking
16) Kaizen budgeting does NOT make sense for cost centers. Answer: FALSE Explanation: Kaizen budgeting can be used in any type of responsibility center. Diff: 2 Objective: 6 AACSB: Analytical thinking
17) Kaizen budgeting encourages dramatic improvements and substantial reduction in costs. Answer: FALSE Explanation: Kaizen budgeting encourages small incremental changes rather than major improvements. Diff: 1 Objective: 6 AACSB: Analytical thinking
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18) Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period to allow for the effects of normal inflation. Answer: FALSE Explanation: Kaizen budgeting allows for budgeting of small incremental decreases in costs each budgeting period. Diff: 2 Objective: 6 AACSB: Analytical thinking
19) Budgeting is a mechanical tool because the budgeting techniques are free of emotions. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
20) Budgetary slack results because management sets challenging but achievable levels of expected performance. Answer: FALSE Explanation: Budgetary slack provides management with a hedge against unexpected adverse circumstances. Diff: 2 Objective: 6 AACSB: Analytical thinking
21) Most ethical issues related to budgetary decisions are clear cut because at no point should pressure for performance influence budgetary decisions. Answer: FALSE Explanation: Some ethical issues are subtle and not clear-cut. Diff: 2 Objective: 6 AACSB: Ethical understanding and reasoning
22) Kaizen budgeting can be applied to activities such as setups with the goal of reducing setup time and setup costs. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
23) Kaizen budgeting techniques, with suggestions put forth by management, are utilized in companies to generate "quantum improvement leaps." Answer: FALSE Explanation: Kaizen techniques are most often implemented because of staff (not management) suggestions and result in incremental, not quantum, improvements. Diff: 2 Objective: 6 AACSB: Analytical thinking
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24) When the operating budget is used as a control device, managers are less likely to be motivated to budget higher sales than actually anticipated. Answer: TRUE Diff: 3 Objective: 6 AACSB: Analytical thinking
25) Budgeting based on cost for specific activities is a key building block of the master budget for companies that use the Kaizen approach. Answer: FALSE Explanation: Kaizen budgeting for specific activities is a key building block of the master budget for companies that use the Kaizen approach. Diff: 3 Objective: 6 AACSB: Analytical thinking
26) Administration of budgets is free of emotions as budgets are mechanical tools. Answer: FALSE Explanation: Administration of budgeting requires education, persuasion, and intelligent interpretation. Diff: 2 Objective: 6 AACSB: Analytical thinking
27) Omitting basic maintenance expenditures out of a budget could be considered unethical if the risks of a breakdown and loss are substantial. Answer: TRUE Diff: 2 Objective: 6 AACSB: Ethical understanding and reasoning
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28) Alcott Company is developing its budgets for 2020 and, for the first time, will use the kaizen approach. The initial 2020 income statement, based on static data from 2019, is as follows: Sales (140,000 units) Cost of goods sold
$420,000 (280,000)
Gross margin Operating expenses (includes $28,000 of depreciation)
140,000 (112,000)
Net income
$28,000
Selling prices for 2020 are expected to increase by 8%, and sales volume in units will decrease by 10%. The cost of goods sold as estimated by the kaizen approach will decline by 10% per unit. Other than depreciation, all other operating costs are expected to decline by 5%. Required: Prepare a kaizen-based budgeted income statement for 2020. Answer: Sales (126,000 × $3.24) COGS (126,000 × $1.80)
$408,240 (226,800)
Gross margin Operating expenses ($28,000 + $79,800)
181,440 107,800
Net income
$ 73,640
Diff: 2 Objective: 6 AACSB: Application of knowledge
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29) Steve Corporation is using the kaizen approach to budgeting for 2020. The budgeted income statement for January 2020 is as follows: Sales (240,000 units) Cost of goods sold
$360,000 (240,000)
Gross margin Operating expenses (includes $32,000 of fixed costs)
120,000 (96,000)
Net income
$ 24,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month. Required: Prepare a kaizen-based budgeted income statement for March of 2020. Answer: Sales $360,000 Less: Cost of goods sold ($240,000 × 0.99 × 0.99) 235,224 Gross margin Operating expenses [($64,000 × 0.99 × 0.99) + $32,000]
124,776 94,726
Net income
$ 30,050
Diff: 2 Objective: 6 AACSB: Analytical thinking
30) Describe the concept of kaizen budgeting. Answer: Kaizen budgeting explicitly incorporates continuous improvement in cost reduction anticipated during the budget period. Much of the cost reduction arises from many small improvements rather than large one time improvements. Most of the improvements come from employee suggestions. Companies that employ kaizen budgeting create a culture where employee suggestions are valued, recognized, and rewarded. Diff: 2 Objective: 6 AACSB: Analytical thinking
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31) Describe some of the drawbacks, including unethical behaviors, of using the operating budget as a control device. Answer: When the operating budget is used as a control device it can lead to behavior that is actually detrimental to the organization. The major problem with the budget performance report is not the report itself, but rather the way it is used. In general, managers are rewarded for favorable variances, and disciplined for unfavorable variances. This encourages managers to set lax standards for both sales and costs so favorable variances result. It can also lead to "budget games." Sometimes the "pressures" or stresses of trying to achieve budgeted objectives can lead to unethical behaviors that make managers look better on performance evaluations and obtain bonuses. Unethical actions such as biasing information during participative budgeting activities or otherwise carrying out activities to "game" the realization of budgets including questionable earnings management practices and improper arrangements with customers and suppliers. Another drawback is that once the budget is established, if there is any variance between budget and actual, it is assumed to be because of actual. However, as we know, the budget will never be totally accurate due to the uncertainties of predicting the future. If used properly, however, the operating budget can be a tremendous benefit to any company. Diff: 2 Objective: 6 AACSB: Analytical thinking
32) What is budgetary slack? What are the pros and cons of building slack into the budget from the point of view of (a) an employee and (b) a senior manager? Answer: Budgetary slack occurs when subordinates (a) ask for excess resources above and beyond what they need to accomplish budget objectives and (b) distort information by claiming they are not as efficient or effective at what they do, thus lowering management's performance expectations of them. Employee's point of view: There are two benefits from this point of view. First, the subordinate may be able to obtain excess resources to achieve desired goals. This may take a lot of pressure off the subordinate and reduce job anxiety. Second, the subordinate may be able to convince senior management to lower their work expectations of him or her. This may also lead to lower pressure on the subordinate to perform. Both of these types of slack building are designed to reduce job stress for the subordinate. However, if incentives are graduated in such a way that achieving higher and higher goals provides the subordinate with more and more compensation in the form of bonuses, then the subordinate may lose income by selecting lower goals. Senior management's point of view: When subordinates build in slack, they are either using unnecessary resources to achieve a goal that they should have been able to achieve with fewer resources, or they are understating their performance capabilities. Thus, the organization is either not running as efficiently as it can, or is losing potential productivity from employees who are not working as hard as they can. In some cases, senior management may believe that subordinates build in slack to relieve job pressure. If burnout of employees has been happening in the organization, then perhaps senior management may be more forgiving and view some slack building as necessary to keep their employees from quitting. Diff: 2 Objective: 6 AACSB: Analytical thinking
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33) How is budgeting for a multinational corporation different than budgeting for a corporation that is strictly domestic? Answer: Budgeting for a multinational corporation is made far more complex than budgeting for a domestic corporation because the multinational corporation often has subunits operating in many different countries, resulting in less familiar business environments and many different currencies. Multinational corporations need to understand many different business environments with significant political, legal, and economic environments. Multinational companies earn their revenues and incur their expenses in many different currencies, and must report their results a single currency. Additionally, management accountants in different countries need to budget for foreign exchange rates and anticipate changes that might take place during the year in the face of constantly fluctuating exchange rates. Diff: 2 Objective: 6 AACSB: Analytical thinking
Objective 6.7 1) Which of the following is a reason why budgets in multinational companies are not used to evaluate the firm's performance relative to its budgets? A) Evaluations based on budgets can be meaningless due to factors such as exchange rate risk and other volatility. B) Evaluations based on budgets are not possible because of cultural differences in the budgeting approach. C) Evaluations based on relative regional performance are considered more meaningful as compared to evaluations against budgets. D) Evaluations based on budgets are harder when managers use sophisticated techniques to minimize foreign currency exposure. Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
2) Which of the following statements is true in the case of budgeting for multinational companies? A) While budgeting for multinational companies, managers consider difference in tax statutes as an uncontrollable factor. B) While budgeting for multinational companies, managers do not account for foreign exchange fluctuations as the operating profits are reported in different currencies. C) While budgeting for multinational companies, managers must be aware that budgets will not be used for evaluating performance. D) While budgeting for multinational companies, managers are not concerned about the domestic factors of the different countries in which they operate. Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
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3) If an international business unit will experience considerable business and exchange rate risk, which of the following is a reasonable conclusion? A) Because of the risk of global operations, multinational companies find budgeting to difficult to execute and therefore the costs often outweigh the benefits. B) When conditions are shifting and volatile, budgeting is not useful for planning. C) Risky situations may make budgeting difficult for evaluating performance but managers can use budgets to help them adapt their plans. D) Budgets may need to be abandoned because senior managers can only evaluate performance. Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
4) Some companies are budgeting annual carbon emissions of their operations after considering an annual global emissions budget, a share for individual sectors of the economy, and what a reasonable annual allocation would be for the company. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
5) The possibility of exchange rate fluctuations does NOT influence the budgeting procedures in a multinational corporation. Answer: FALSE Explanation: The possibility of exchange rate fluctuations influences the budgeting procedures in a multinational corporation. Diff: 2 Objective: 7 AACSB: Analytical thinking
6) In a multinational company, budgeting is primarily done to evaluate the firm's performance relative to its budgets. Answer: FALSE Explanation: In case of a multinational company, budgeting is not done so much to evaluate the firm's performance relative to its budgets as it is to help managers adapt their plans and coordinate the actions a company needs to take. Diff: 2 Objective: 7 AACSB: Analytical thinking
7) When conditions are volatile and rapidly shifting, senior managers may have to evaluate performance more subjectively rather than base evaluation on variances. Answer: FALSE Explanation: In case of a multinational company, budgeting is not done so much to evaluate the firm's performance relative to its budgets as it is to help managers adapt their plans and coordinate the actions a company needs to take. Diff: 2 Objective: 7 AACSB: Analytical thinking
425 richard@qwconsultancy.com
Objective 6.A 1) The ________ is required to prepare the cash budget of an organization. A) statement of shareholders' equity B) budgeted balance sheet C) capital expenditures budget D) budgeted statement of cash flow Answer: C Diff: 2 Objective: A AACSB: Analytical thinking
2) In the cash budget, the total cash available for needs is calculated using which of the following formulas? A) ending cash + receipts B) beginning cash + receipts C) beginning cash + receipts - disbursements D) beginning cash + projected depreciation expense Answer: B Diff: 2 Objective: A AACSB: Analytical thinking
3) In the cash budget, the cash excess (surplus) or deficiency (deficit) is calculated using which of the following formulas? A) beginning cash + receipts - disbursements B) beginning cash + receipts - disbursements - minimum cash balance + loan proceeds C) beginning cash + receipts - disbursements - minimum cash balance D) total cash needed - cash disbursements Answer: C Diff: 2 Objective: A AACSB: Analytical thinking
4) The cash budget is a schedule of expected cash receipts and disbursements that: A) requires an aging of accounts receivable and accounts payable B) is a self-liquidating cycle C) is prepared immediately after the sales forecast D) predicts the effect on the cash position at given levels of operations Answer: D Diff: 1 Objective: A AACSB: Analytical thinking
426 richard@qwconsultancy.com
5) The following information pertains to Monroe Company: Month January February March
Sales $61,000 $80,000 $106,000
Purchases $35,000 $43,000 $66,000
∙
Cash is collected from customers in the following manner: Month of sale 35% Month following the sale 65% ∙ 50% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. ∙ Labor costs are 20% of sales. Other operating costs are $30,000 per month (including $10,000 of depreciation). Both of these are paid in the month incurred. ∙ The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000. How much cash will be collected from customers in March? A) $96,900 B) $89,100 C) $106,000 D) $117,100 Answer: B Explanation: B) ($80,000 × 65%) + ($106,000 × 35%) = $89,100 Diff: 2 Objective: A AACSB: Analytical thinking
427 richard@qwconsultancy.com
6) The following information pertains to Monroe Company: Month January February March
Sales $62,000 $88,000 $102,000
Purchases $36,000 $40,000 $60,000
∙ Cash is collected from customers in the following manner: Month of sale 35% Month following the sale 65% ∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. ∙ Labor costs are 30% of sales. Other operating costs are $40,000 per month (including $8,000 of depreciation). Both of these are paid in the month incurred. ∙ The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000. How much cash will be paid to suppliers in March? A) $48,000 B) $60,000 C) $96,000 D) $100,000 Answer: A Explanation: A) ($40,000 × 60%) + ($60,000 × 40%) = $48,000 Diff: 2 Objective: A AACSB: Analytical thinking
428 richard@qwconsultancy.com
7) The following information pertains to Monroe Company: Month January February March
Sales $62,000 $85,000 $101,000
Purchases $38,000 $48,000 $63,000
∙ Cash is collected from customers in the following manner: Month of sale 30% Month following the sale 70% ∙ 45% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. ∙ Labor costs are 25% of sales. Other operating costs are $38,000 per month (including $9,000 of depreciation). Both of these are paid in the month incurred. ∙ The cash balance on March 1 is $8,000. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000. How much cash will be disbursed in total in March? A) $54,250 B) $63,250 C) $109,000 D) $118,000 Answer: C Explanation: C) ($48,000 × 55%) + ($63,000 × 45%) + ($101,000 × 25%) + ($38,000 - $9,000) = $109,000 Diff: 2 Objective: A AACSB: Analytical thinking
429 richard@qwconsultancy.com
8) The following information pertains to Monroe Company: Month January February March
Sales $65,000 $81,000 $104,000
Purchases $35,000 $45,000 $59,000
∙ Cash is collected from customers in the following manner: Month of sale 40% Month following the sale 60% ∙ 45% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. ∙ Labor costs are 30% of sales. Other operating costs are $30,000 per month (including $8,000 of depreciation). Both of these are paid in the month incurred. ∙ The cash balance on March 1 is $19,300. A minimum cash balance of $6,000 is required at the end of the month. Money can be borrowed in multiples of $1,000. What is the ending cash balance for March? A) $19,300 B) $10,100 C) $5,000 D) $6,000 Answer: D Explanation: D) $19,300 + $90,200 - $104,500 + $1,000 = $6,000 Diff: 2 Objective: A AACSB: Analytical thinking
430 richard@qwconsultancy.com
9) Freemore Company has the following sales budget for the last six months of 2020: July August September
$201,000 163,000 203,000
October November December
$188,000 200,000 181,000
Sales are immediately due, however the cash collection of sales, historically, has been as follows: 55% of sales collected in the month of sale, 35% of sales collected in the month following the sale, 7% of sales collected in the second month following the sale, and 3% of sales are uncollectible. Cash collections for September are: A) $123,060 B) $168,700 C) $182,770 D) $194,180 Answer: C Explanation: C) September sales ($203,000 × 0.55) + August sales ($163,000 × 0.35) + July sales ($201,000 × 0.07) = $182,770 Diff: 2 Objective: A AACSB: Application of knowledge
10) Freemore Company has the following sales budget for the last six months of 2020: July August September
$209,000 165,000 203,000
October November December
$186,000 206,000 190,000
Sales are immediately due, however the cash collection of sales, historically, has been as follows: 65% of sales collected in the month of sale, 25% of sales collected in the month following the sale, 8% of sales collected in the second month following the sale, and 2% of sales are uncollectible. What is the ending balance of accounts receivable for the end of September, assuming uncollectible balances are written off at the end of the second month following the sale? A) $201,950 B) $101,630 C) $91,355 D) $87,550 Answer: D Explanation: D) September ($203,000 × 0.35) + August ($165,000 × 0.1) =$87,550 Diff: 2 Objective: A AACSB: Application of knowledge
431 richard@qwconsultancy.com
11) Freemore Company has the following sales budget for the last six months of 2020: July August September
$203,000 170,000 200,000
October November December
$185,000 200,000 185,000
Sales are immediately due, however the cash collection of sales, historically, has been as follows: 60% of sales collected in the month of sale, 30% of sales collected in the month following the sale, 9% of sales collected in the second month following the sale, and 1% of sales are uncollectible. Cash collections for October are: A) $111,000 B) $186,300 C) $201,500 D) $183,150 Answer: B Explanation: B) October sales ($185,000 × 0.6) + September sales ($200,000 × 0.3) + August sales ($170,000 × 0.09) = $186,300 Diff: 2 Objective: A AACSB: Application of knowledge
12) Estate Corp., has the following information: Month January February March April May
Budgeted Purchases $27,200 29,800 29,100 30,080 27,580
Purchases are paid for in the following manner: 10% of the purchase amount in the month of purchase 50% of the purchase amount in the month after purchase 40% of the purchase amount in the second month after purchase What is the expected balance in Accounts Payable as of March 31? A) $38,110 B) $14,550 C) $2,980 D) $26,190 Answer: A Explanation: A) March ($29,100 × 0.9) + February ($29,800 × 0.4) = $38,110 Diff: 2 Objective: A AACSB: Application of knowledge
432 richard@qwconsultancy.com
13) Estate Corp., has the following information: Month January February March April May
Budgeted Purchases $27,600 29,600 28,900 29,780 27,480
Purchases are paid for in the following manner: 10% of the purchase amount in the month of purchase 50% of the purchase amount in the month after purchase 40% of the purchase amount in the second month after purchase What is the expected balance in Accounts Payable as of April 30? A) $37,850 B) $38,362 C) $28,900 D) $17,868 Answer: B Explanation: B) April ($29,780 × 0.9) + March ($28,900 × 0.4) = $38,362 Diff: 2 Objective: A AACSB: Application of knowledge
14) Estate Corp., has the following information: Month January February March April May
Budgeted Purchases $27,000 29,400 29,400 29,880 27,480
Purchases are paid for in the following manner: 5% of the purchase amount in the month of purchase 40% of the purchase amount in the month after purchase 55% of the purchase amount in the second month after purchase What is the expected Accounts Payable balance as of May 31? A) $38,058 B) $37,866 C) $42,540 D) $1,494 Answer: C Explanation: C) May ($27,480 × 0.95) + April ($29,880 × 0.55) = $42,540 Diff: 2 Objective: A AACSB: Application of knowledge
433 richard@qwconsultancy.com
15) The following information pertains to the January operating budget for Casey Corporation. ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙
Budgeted sales for January $210,000 and February $110,000. Collections for sales are 40% in the month of sale and 60% the next month. Gross margin is 25% of sales. Administrative costs are $13,000 each month. Beginning accounts receivable is $30,000. Beginning inventory is $20,000. Beginning accounts payable is $75,000. (All from inventory purchases.) Purchases are paid in full the following month. Desired ending inventory is 20% of next month's cost of goods sold (COGS).
For January, budgeted cash collections are: A) $210,000 B) $114,000 C) $84,000 D) $30,000 Answer: B Explanation: B) Budgeted cash collections = $30,000 + ($210,000 × 40%) = $114,000 Diff: 3 Objective: A AACSB: Application of knowledge
16) The following information pertains to the January operating budget for Casey Corporation. ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙
Budgeted sales for January $207,000 and February $100,000. Collections for sales are 60% in the month of sale and 40% the next month. Gross margin is 35% of sales. Administrative costs are $10,000 each month. Beginning accounts receivable is $29,000. Beginning inventory is $16,000. Beginning accounts payable is $67,000. (All from inventory purchases.) Purchases are paid in full the following month. Desired ending inventory is 30% of next month's cost of goods sold (COGS).
At the end of January, budgeted accounts receivable from January sales is: A) $40,000 B) $82,800 C) $124,200 D) $155,200 Answer: B Explanation: B) Budgeted accounts receivable at the end of January = $207,000 × 40% = $82,800. The factor of 40% is found by subtracting the collections on sales of 60% from 100%: 100% - 60% - 40% of projected January sales not collected in January. Diff: 2 Objective: A AACSB: Application of knowledge
434 richard@qwconsultancy.com
17) The following information pertains to the January operating budget for Casey Corporation. ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙
Budgeted sales for January $202,000 and February $101,000. Collections for sales are 60% in the month of sale and 40% the next month. Gross margin is 30% of sales. Administrative costs are $15,000 each month. Beginning accounts receivable is $29,000. Beginning inventory is $17,000. Beginning accounts payable is $65,000. (All from inventory purchases.) Purchases are paid in full the following month. Desired ending inventory is 25% of next month's cost of goods sold (COGS).
For January, budgeted cost of goods sold is: A) $202,000 B) $141,400 C) $124,400 D) $106,960 Answer: B Explanation: B) Budgeted cost of goods sold = $202,000 × 70% = $141,400. The factor of 70% is found by subtracting 30% gross margin from 100 (100% - 30% = 70%). Diff: 3 Objective: A AACSB: Application of knowledge
18) The following information pertains to the January operating budget for Casey Corporation. ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙
Budgeted sales for January $207,000 and February $100,000. Collections for sales are 40% in the month of sale and 60% the next month. Gross margin is 30% of sales. Administrative costs are $16,000 each month. Beginning accounts receivable is $25,000. Beginning inventory is $19,000. Beginning accounts payable is $68,000. (All from inventory purchases.) Purchases are paid in full the following month. Desired ending inventory is 25% of next month's cost of goods sold (COGS).
For January, budgeted net income is: A) $62,100 B) $46,100 C) $66,800 D) $108,200 Answer: B Explanation: B) Budgeted net income for January = $207,000 – $144,900 – $16,000 = $46,100 Diff: 3 Objective: A AACSB: Application of knowledge
435 richard@qwconsultancy.com
19) The following information pertains to the January operating budget for Casey Corporation. ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙
Budgeted sales for January $201,000 and February $105,000. Collections for sales are 40% in the month of sale and 60% the next month. Gross margin is 30% of sales. Administrative costs are $11,000 each month. Beginning accounts receivable is $26,000. Beginning inventory is $17,000. Beginning accounts payable is $75,000. (All from inventory purchases.) Purchases are paid in full the following month. Desired ending inventory is 25% of next month's cost of goods sold (COGS).
For January, budgeted cash payments for purchases are: A) $105,000 B) $73,500 C) $75,000 D) $49,300 Answer: C Explanation: C) Accounts payable, $75,000 as stated Diff: 2 Objective: A AACSB: Application of knowledge
20) The following information pertains to the January operating budget for Casey Corporation. ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙
Budgeted sales for January $210,000 and February $103,000. Collections for sales are 60% in the month of sale and 40% the next month. Gross margin is 25% of sales. Administrative costs are $17,000 each month. Beginning accounts receivable is $30,000. Beginning inventory is $15,000. Beginning accounts payable is $71,000. (All from inventory purchases.) Purchases are paid in full the following month. Desired ending inventory is 25% of next month's cost of goods sold (COGS).
At the end of January, budgeted ending inventory is: A) $6,438 B) $19,313 C) $25,750 D) $34,313 Answer: B Explanation: B) Budgeted ending inventory at the end of January = $103,000 × 75% × 25% = $19,313 Diff: 3 Objective: A AACSB: Application of knowledge
436 richard@qwconsultancy.com
21) The cash budget is a schedule of expected cash receipts, disbursements, and financing. Answer: TRUE Diff: 1 Objective: A AACSB: Analytical thinking
22) A key type of sensitivity analysis for managers is to play "what-if" with the cash budget so as to anticipate outcomes and take steps to minimize the effects of shortfalls in cash balances. Answer: TRUE Diff: 1 Objective: A AACSB: Analytical thinking
23) The financial budget includes the purchases budget, capital expenditures budget, the budgeted balance sheet, and the budgeted statement of cash flows. Answer: FALSE Explanation: The financial budget is the other part of the master budget, and includes the capital expenditures budget, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows. Diff: 1 Objective: A AACSB: Analytical thinking
437 richard@qwconsultancy.com
24) Russell Company has the following projected account balances for June 30, 2020: Accounts payable Accounts receivable Depreciation, factory Inventories (5/31 & 6/30) Direct materials used Office salaries Insurance, factory Plant wages Bonds payable
$80,000 200,000 48,000 360,000 400,000 160,000 8,000 280,000 320,000
Sales $1,600,000 Capital stock 800,000 Retained earnings ? Cash 112,000 Equipment, net 480,000 Buildings, net 800,000 Utilities, factory 32,000 Selling expenses 120,000 Maintenance, factory 56,000
Required: a. Prepare a budgeted income statement for June 2020 b. Prepare a budgeted balance sheet as of June 30, 2020.
438 richard@qwconsultancy.com
Answer: a.
Russell Company Budgeted Income Statement For the Month of June 2020
Sales Cost of goods sold: Materials used Wages Depreciation Insurance Maintenance Utilities Gross profit Operating expenses: Selling expenses Office salaries Net income b.
Assets: Cash Accounts receivable Inventories Equipment, net Buildings, net Total
$1,600,000 $400,000 280,000 48,000 8,000 56,000 32,000
$120,000 160,000
824,000 776,000
280,000 $496,000
Russell Company Budgeted Balance Sheet June 30, 2020
$ 112,000 200,000 360,000 480,000 800,000 $1,952,000
Liabilities and Owners' Equity: Accounts payable $ 80,000 Bonds payable 320,000 Capital stock 800,000 Retained earnings* 752,000 Total
$1,952,000
*$1,952,000 - ($80,000 + $320,000 + $800,000) = $752,000 Diff: 2 Objective: A AACSB: Application of knowledge
439 richard@qwconsultancy.com
25) Duffy Corporation has prepared the following sales budget: Month May June July August September
Cash Sales $16,000 20,000 18,000 24,000 22,000
Credit Sales $68,000 80,000 74,000 92,000 76,000
Collections are 40% in the month of sale, 45% in the month following the sale, and 10% two months following the sale. The remaining 5% is expected to be uncollectible. Required: Prepare a schedule of cash collections for July through September. Answer: July August September Cash sales $18,000 $24,000 $22,000
Total $64,000
Collections of credit sales from: Current month 29,600 Previous month 36,000 Two months ago 6,800 Total collections $90,400
96,800 110,700 22,200 $293,700
36,800 33,300 8,000 $102,100
30,400 41,400 7,400 $101,200
Diff: 2 Objective: A AACSB: Application of knowledge
440 richard@qwconsultancy.com
26) The following information pertains to Amigo Corporation: Month July August September October November December
Sales $30,000 34,000 38,000 42,000 48,000 60,000
Purchases $10,000 12,000 14,000 16,000 18,000 20,000
∙
Cash is collected from customers in the following manner: Month of sale (2% cash discount) 30% Month following sale 50% Two months following sale 15% Amount uncollectible 5% ∙ 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. Required: a. Prepare a summary of cash collections for the 4th quarter. b. Prepare a summary of cash disbursements for the 4th quarter. Answer: a. Cash collections Oct $36,448 + Nov $40,812 + Dec $47,940 = $125,200
August September October November December
b.
October $ 5,100 19,000 12,348
November
-------$36,448
--------$40,812
5,700 21,000 14,112
December
6,300 24,000 17,640 -------$47,940
Cash disbursements Oct $14,800 + Nov $16,800 + Dec $18,800 = $50,400
September October November December
October 8,400 6,400
-------$14,800
November 9,600 7,200 --------$16,800
December
10,800 8,000 -------$18,800
Diff: 2 Objective: A AACSB: Application of knowledge
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 7 Flexible Budgets, Direct-Cost Variances, and Management Control 441 richard@qwconsultancy.com
Objective 7.1 1) A master budget is: A) a budget which starts from a zero base B) based on the level of expected output at the start of the budget period C) developed at the end of a period D) a type of flexible budget once actual results are known Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Management by exception is a practice whereby managers focus more closely on: A) variances in the larger departments B) areas not operating as anticipated and less closely on areas that are operating as anticipated C) activity-based budgeting D) unfavorable variances Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) A variance is: A) the difference between actual fixed cost per unit and standard variable cost per unit B) the standard units of inputs for one output C) the difference between an actual result and a budgeted performance D) the difference between actual variable cost per unit and standard fixed cost per unit Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
4) An unfavorable variance indicates that: A) the actual costs are less than the budgeted costs B) the actual revenues exceed the budgeted revenues C) the actual units sold are less than the budgeted units D) the budgeted contribution margin is less than the actual amount Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
442 richard@qwconsultancy.com
5) A favorable variance indicates that: A) budgeted costs are less than actual costs B) actual revenues exceed budgeted revenues C) actual operating income is less than the budgeted amount D) budgeted contribution margin is more than the actual amount Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Lincoln Corporation used the following data to evaluate their current operating system. The company sells items for $19 each and used a budgeted selling price of $19 per unit.
Units sold Variable costs Fixed costs
Actual 48,000 units $167,000 $41,000
Budgeted 39,000 units $152,000 $50,000
What is the static-budget variance of revenues? A) $171,000 favorable B) $171,000 unfavorable C) $6,000 favorable D) $9,000 unfavorable Answer: A Explanation: A) Static-budget variance of revenues = (48,000 units × $19) - (39,000 units × $19) = $171,000 F Diff: 2 Objective: 1 AACSB: Application of knowledge
7) Lincoln Corporation used the following data to evaluate their current operating system. The company sells items for $18 each and used a budgeted selling price of $18 per unit.
Units sold Variable costs Fixed costs
Actual 45,000 units $161,000 $44,000
Budgeted 31,000 units $150,000 $50,000
What is the static-budget variance of variable costs? A) $6,000 favorable B) $11,000 unfavorable C) $14,000 favorable D) $5,000 unfavorable Answer: B Explanation: B) Static-budget variance of variable costs = $161,000 − $150,000 = $11,000 U Diff: 2 Objective: 1 AACSB: Application of knowledge
443 richard@qwconsultancy.com
8) Lincoln Corporation used the following data to evaluate their current operating system. The company sells items for $18 each and used a budgeted selling price of $18 per unit.
Units sold Variable costs Fixed costs
Actual 43,000 units $166,000 $41,000
Budgeted 33,000 units $150,000 $58,000
What is the static-budget variance of operating income? A) $164,000 favorable B) $164,000 unfavorable C) $181,000 favorable D) $181,000 unfavorable Answer: C Explanation: C) Actual Static Static-budget Results Budget Variance Units sold 43,000 33,000 Revenues Variable costs Contribution margin Fixed costs Operating income
$774,000 166,000 $608,000 41,000 $567,000
$594,000 150,000 $444,000 58,000 $386,000
$180,000 F 16,000 U 164,000 F $17,000 F $181,000 F
Diff: 3 Objective: 1 AACSB: Application of knowledge
9) Schooner Corporation used the following data to evaluate its current operating system. The company sells items for $23 each and used a budgeted selling price of $23 per unit.
Units sold Variable costs Fixed costs
Actual 171,000 units $1,081,000 $800,000
Budgeted 187,000 units $1,285,000 $774,000
What is the static-budget variance of revenues? A) $368,000 favorable B) $368,000 unfavorable C) $16,000 favorable D) $16,000 unfavorable Answer: B Explanation: B) Static-budget variance of revenues = (171,000 units × $23) − (187,000 units × $23) = $368,000 U Diff: 2 Objective: 1 AACSB: Application of knowledge
444 richard@qwconsultancy.com
10) Schooner Corporation used the following data to evaluate its current operating system. The company sells items for $25 each and used a budgeted selling price of $25 per unit.
Units sold Variable costs Fixed costs
Actual 173,000 units $1,081,000 $806,000
Budgeted 181,000 units $1,285,000 $770,000
What is the static-budget variance of variable costs? A) $36,000 favorable B) $36,000 unfavorable C) $204,000 favorable D) $204,000 unfavorable Answer: C Explanation: C) Static-budget variance of variable costs = $1,081,000 − $1,285,000 = $204,000 F Diff: 2 Objective: 1 AACSB: Application of knowledge
11) Schooner Corporation used the following data to evaluate its current operating system. The company sells items for $24 each and used a budgeted selling price of $24 per unit.
Units sold Variable costs Fixed costs
Actual 177,000 units $1,090,000 $804,000
Budgeted 184,000 units $1,290,000 $780,000
What is the static-budget variance of operating income? A) $8,000 favorable B) $176,000 unfavorable C) $32,000 favorable D) $7,000 unfavorable Answer: A Explanation: A) Actual Static Static-budget Results Budget Variance Units sold 177,000 184,000 Revenues $4,248,000 Variable costs 1,090,000 Contribution margin $3,158,000 Fixed costs 804,000 Operating income $2,354,000
$4,416,000 1,290,000 $3,126,000 780,000 $2,346,000
$168,000 200,000 32,000 24,000 $8,000
Diff: 3 Objective: 1 AACSB: Application of knowledge
445 richard@qwconsultancy.com
U F F U F
12) Daniels Corporation used the following data to evaluate their current operating system. The company sells items for $19 each and had used a budgeted selling price of $20 per unit.
Units sold Variable costs Fixed costs
Actual 280,000 units $980,000 $58,000
Budgeted 279,000 units $881,000 $45,000
What is the static-budget variance of revenues? A) $299,000 favorable B) $260,000 favorable C) $260,000 unfavorable D) $299,000 unfavorable Answer: C Explanation: C) Static-budget variance of revenues = (280,000 units × $19) − (279,000 units × $20) = $260,000 U Diff: 2 Objective: 1 AACSB: Application of knowledge
13) Daniels Corporation used the following data to evaluate their current operating system. The company sells items for $19 each and had used a budgeted selling price of $20 per unit.
Units sold Variable costs Fixed costs
Actual 280,000 units $990,000 $60,000
Budgeted 270,000 units $887,000 $47,000
What is the static-budget variance of variable costs? A) $116,000 favorable B) $116,000 unfavorable C) $103,000 favorable D) $103,000 unfavorable Answer: D Explanation: D) Static-budget variance of variable costs = $990,000 − $887,000 = $103,000 U Diff: 2 Objective: 1 AACSB: Application of knowledge
446 richard@qwconsultancy.com
14) Daniels Corporation used the following data to evaluate their current operating system. The company sells items for $18 each and had used a budgeted selling price of $19 per unit.
Units sold Variable costs Fixed costs
Actual 280,000 units $960,000 $60,000
Budgeted 278,000 units $886,000 $51,000
What is the static-budget variance of operating income? A) $325,000 favorable B) $325,000 unfavorable C) $316,000 favorable D) $316,000 unfavorable Answer: B Explanation: B) Actual Static Static-budget Results Budget Variance Units sold 280,000 278,000 Revenues $5,040,000 Variable costs 960,000 Contribution margin $4,080,000 Fixed costs 60,000 Operating income $4,020,000
$5,282,000 886,000 $4,396,000 51,000 $4,345,000
$242,000 74,000 316,000 9,000 $325,000
U U U U U
Diff: 3 Objective: 1 AACSB: Application of knowledge
15) Johnson Company had planned for operating income of $10 million in the master budget with a contribution margin of $3 million, but actually achieved operating income of only $7 million and a contribution margin of $2.5 million. A) The static-budget variance for operating income is $3 million favorable. B) The static-budget variance for operating income is $3 million unfavorable. C) The flexible-budget variance for operating income is $3 million favorable. D) The flexible-budget variance for operating income is $3 million unfavorable. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
16) A disadvantage of a static budget is: A) It is very difficult to develop. B) It is based on only one level of activity. C) It can only be utilized at the end of the period. D) The variances of a static budget are difficult to calculate. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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17) A master budget is called a static budget because it is developed around a single planned output level. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
18) The static budget is based on the actual level of output achieved by the end of the budget period. Answer: FALSE Explanation: The static budget is based on the level of output planned at the start of the budget period. The master budget is called a static budget because the budget for the period is developed around a single (static) planned output level. Diff: 1 Objective: 1 AACSB: Analytical thinking
19) For revenue items, a favorable variance means that actual revenues are less than expected. Answer: FALSE Explanation: Favorable means the revenues were more than expected (budgeted revenues) Diff: 2 Objective: 1 AACSB: Application of knowledge
20) A variance is the difference between the actual cost for the current and expected (or budgeted) performance. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
21) A favorable expense variance results when actual costs exceed budgeted costs. Answer: FALSE Explanation: A favorable variance results when actual costs are less than budgeted costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
22) Management by exception is the practice of concentrating on areas not operating as anticipated (such as a cost overrun) and placing less attention on areas operating as anticipated. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
23) A favorable variance indicates that budgeted costs are less than actual costs. Answer: FALSE Explanation: A favorable variance indicates that budgeted costs are greater than actual costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
24) A favorable variance should be ignored by management.
448 richard@qwconsultancy.com
Answer: FALSE Explanation: Favorable variance investigation may lead to improved production methods, other discoveries for future opportunities, or not be good news at all and adversely affect other variances. Diff: 1 Objective: 1 AACSB: Analytical thinking
25) Variances are used for evaluating performance and for motivating managers. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
26) Static-budget variance for operating income is calculated by taking a difference between static-budget operating income and actual operating income. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
27) Explain the difference between a static budget and a flexible budget. Explain what is meant by a static budget variance and a flexible budget variance. Answer: A static budget is one based on the level of output planned at the start of the budget period. A flexible budget calculates budgeted revenue and budgeted costs based on the actual output in the budget period. The only difference between the static budget and the flexible budget is that the static budget is prepared for the planned output, whereas the flexible budget is prepared based on the actual output. A static budget variance is the difference between the actual results and the corresponding budgeted amounts in the static budget. A flexible-budget variance is the difference between an actual result and the corresponding flexible-budget amount based on the actual output in the budget period. Diff: 2 Objective: 1 AACSB: Analytical thinking
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Objective 7.2 1) The flexible budget contains: A) budgeted amounts for actual output B) static budget amounts for planned output C) actual costs for actual output D) actual costs for planned output Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
2) Which of the following items will be same for a flexible budget and a master budget? A) total variable cost B) total expected fixed costs C) total contribution margin D) total expected revenues Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
3) A flexible budget: A) is another name for management by exception B) is developed at the end of the period C) is based on the budgeted level of output D) provides favorable operating results Answer: B Diff: 1 Objective: 2 AACSB: Analytical thinking
4) The difference between the actual amounts and the flexible budget amounts for the actual output is the: A) flexible budget variance B) sales-volume variance C) static budget variance D) standard cost variance Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
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5) A company budgets 11,000 units of sales based on a projected selling price of $14. The actual units sold were 18,000 at a price of $9. What is the flexible budget for sales? A) $252,000 B) $162,000 C) $154,000 D) $99,000 Answer: A Explanation: A) 18,000 × $14 = $252,000 Diff: 2 Objective: 2 AACSB: Analytical thinking
6) An unfavorable flexible-budget variance for variable costs may be the result of: A) using more input quantities than were budgeted B) paying lower prices for inputs than were budgeted C) selling output at a higher selling price than budgeted D) selling less quantity compared to the budgeted Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
7) In a flexible budget: A) variable costs are calculated proportionately for the budgeted level of sales B) fixed costs are calculated proportionately for the actual level of sales C) fixed costs are kept at the same level of static budget D) variable costs are kept at the same level of static budget Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
8) Which of the following information is needed to prepare a flexible budget? A) actual units sold B) actual variable cost C) actual selling price per unit D) actual fixed cost Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
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9) Which of the following is true of flexible budget? A) It calculates total variable cost by multiplying actual units by budgeted variable cost per unit. B) It calculates total fixed cost by multiplying actual units by budgeted fixed cost per unit. C) It calculates revenues by multiplying budgeted units by actual selling price per unit. D) It calculates contribution margin by multiplying budgeted units by actual contribution margin per unit. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
10) A flexible-budget variance is $600 favorable for unit-related costs. This indicates that costs were: A) $600 more than the master budget B) $600 less than for the planned level of activity C) $600 more than standard for the achieved level of activity D) $600 less than standard for the achieved level of activity Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
11) Goddard Inc. planned to use $153 of material per unit but actually used $140 of material per unit, and planned to make 1,100 units but actually made 940 units. The flexible-budget amount for materials is: A) $168,300 B) $143,820 C) $154,000 D) $131,600 Answer: B Explanation: B) 940 units × $153 = $143,820 Diff: 2 Objective: 2 AACSB: Application of knowledge
12) Goddard Inc. planned to use $156 of material per unit but actually used $141 of material per unit, and planned to make 1,150 units but actually made 920 units. The flexible-budget variance for materials is: A) $13,800 favorable B) $13,800 unfavorable C) $17,250 unfavorable D) $17,250 favorable Answer: A Explanation: A) ($141 − $156) × 920 = $13,800 F Diff: 2 Objective: 2 AACSB: Application of knowledge
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13) Goddard Inc. planned to use $155 of material per unit but actually used $147 of material per unit, and planned to make 1,110 units but actually made 1,000 units. The sales-volume variance for materials is: A) $8,000 favorable B) $16,170 unfavorable C) $17,050 favorable D) $8,000 unfavorable Answer: C Explanation: C) (1,000 − 1,110) × $155 = $17,050 F Diff: 2 Objective: 2 AACSB: Application of knowledge
14) Harland Corporation currently produces cardboard boxes in an automated process. Expected production per month is 20,000 units, direct material costs are $2.50 per unit, and manufacturing overhead costs are $15,000 per month. Manufacturing overhead is all fixed costs. What are the flexible budgets for 14,000 and 20,000 units, respectively? A) $14,000; $65,000 B) $14,000; $30,000 C) $50,000; $65,000 D) $50,000; $30,000 Answer: C Explanation: C) 14,000 units 20,000 units Materials ($2.50) $35,000 $50,000 Machinery 15,000 15,000 Flexible Budgets $50,000 $$65,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
15) Alberts Incorporated planned to use materials of $11 per unit but actually used materials of $15 per unit and planned to make 1,560 units but actually made 1,730 units. The flexible-budget amount for materials is: A) $17,160 B) $23,400 C) $19,030 D) $25,950 Answer: C Explanation: C) 1,730 units × $11 = $19,030 Diff: 2 Objective: 2 AACSB: Application of knowledge
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16) Alberts Incorporated planned to use materials of $11 per unit but actually used materials of $13 per unit and planned to make 1,590 units but actually made 1,780 units. The flexible-budget variance for materials is: A) $3,180 favorable B) $3,560 unfavorable C) $3,180 unfavorable D) $3,560 favorable Answer: B Explanation: B) ($13 − $11) × 1,780 = $3,560 U Diff: 2 Objective: 2 AACSB: Application of knowledge
17) Alberts Incorporated planned to use materials of $9 per unit but actually used materials of $14 per unit and planned to make 1,640 units but actually made 1,770 units. The sales-volume variance for materials is: A) $1,170 favorable B) $1,820 unfavorable C) $1,170 unfavorable D) $1,820 favorable Answer: C Explanation: C) (1,770 − 1,640) × $9 = $1,170 U Diff: 2 Objective: 2 AACSB: Application of knowledge
18) Better Products Inc. planned to use $43 of material per unit but actually used $32 of material per unit and planned to make 1,510 units but actually made 1,340 units. The flexible-budget amount for materials is: A) $57,620 B) $64,930 C) $48,320 D) $42,880 Answer: A Explanation: A) 1,340 units × $43 = $57,620 Diff: 2 Objective: 2 AACSB: Application of knowledge
454 richard@qwconsultancy.com
19) Better Products Inc. planned to use $36 of material per unit but actually used $34 of material per unit and planned to make 1,520 units but actually made 1,310 units. The flexible-budget variance for materials is: A) $3,040 favorable B) $3,040 unfavorable C) $2,620 unfavorable D) $2,620 favorable Answer: D Explanation: D) ($34 − $36) × 1,310 = $2,620 F Diff: 2 Objective: 2 AACSB: Application of knowledge
20) Better Products Inc. planned to use $40 of material per unit but actually used $30 of material per unit and planned to make 1,560 units but actually made 1,310 units. The sales-volume variance for materials is: A) $10,000 favorable B) $10,000 unfavorable C) $7,500 unfavorable D) $7,500 favorable Answer: A Explanation: A) (1,310 − 1,560) × $40 = $10,000 F Diff: 2 Objective: 2 AACSB: Application of knowledge
21) Zebra Corporation currently produces baseball caps in an automated process. Expected production per month is 17,000 units, direct material costs are $7.50 per unit, and manufacturing overhead costs are $60,000 per month. Manufacturing overhead is entirely fixed costs. What is the flexible budget for 11,000 and 17,000 units, respectively? A) $60,000; $187,500 B) $60,000; $105,000 C) $142,500; $187,500 D) $142,500; $105,000 Answer: C Explanation: C) 11,000 units 17,000 units Materials ($7.50) $82,500 $127,500 Machinery 60,000 60,000 Flexible Budget $142,500 $187,500 Diff: 2 Objective: 2 AACSB: Application of knowledge
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22) The actual information pertains to the month of June. As a part of the budgeting process, Great Cabinets Company developed the following static budget for June. Great Cabinets is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 18,000
Static Budget 23,000
Sales revenues Variable costs Contribution margin Fixed costs Operating profit
$900,000 360,000 540,000 275,300 $264,700
$ $ ________ $ $ ________ $
$1,150,000 463,910 686,090 269,500 $416,590
The flexible budget will report ________ for variable costs. (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.) A) $592,774 B) $460,000 C) $363,060 D) $463,910 Answer: C Explanation: C) 18,000 units × $463,910 / 23,000 = $363,060 Diff: 2 Objective: 2 AACSB: Application of knowledge
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23) The actual information pertains to the month of June. As a part of the budgeting process, Great Cabinets Company developed the following static budget for June. Great Cabinets is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 20,000
Static Budget 22,000
Sales revenues Variable costs Contribution margin Fixed costs Operating profit
$1,000,000 480,000 520,000 276,200 $243,800
$ $ _______ $ $ _______ $
$1,100,000 530,200 569,800 270,600 $299,200
The flexible budget will report ________ for the fixed costs. A) $303,820 B) $270,600 C) $530,200 D) $246,000 Answer: B Explanation: B) $270,600, given in the static budget Diff: 2 Objective: 2 AACSB: Analytical thinking
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24) The actual information pertains to the month of June. As a part of the budgeting process, Great Cabinets Company developed the following static budget for June. Great Cabinets is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 17,000
Static Budget 21,000
Sales revenues Variable costs Contribution margin Fixed costs Operating profit
$935,000 391,000 544,000 275,800 $268,200
$ $ ________ $ $ ________ $
$1,155,000 480,270 674,730 268,600 $406,130
The flexible-budget variance for variable costs is: (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.) A) $2,210 unfavorable B) $202,275 unfavorable C) $89,270 favorable D) $137,930 favorable Answer: A Explanation: A) $391,000 − (17,000 × $480,270 / 21,000) = $2,210 U Diff: 2 Objective: 2 AACSB: Application of knowledge
25) A flexible budget allows management to compare actual results with budgeted results for the actual activity level. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
26) The only difference between the static budget and flexible budget is that the static budget is prepared using actual prices charged and costs per units incurred. Answer: FALSE Explanation: The only difference between the two budgets is output. The static budget is prepared based on planned output while the flexible budget is prepared based on actual output. Diff: 2 Objective: 2 AACSB: Analytical thinking
27) A flexible-budget variance can be subdivided into the static-budget variance and the sales-volume variance. Answer: FALSE Explanation: A static-budget variance can be subdivided into the flexible-budget variance and the sales-volume variance. Diff: 2 Objective: 2 AACSB: Analytical thinking
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28) Expected performance is also called budgeted performance. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
29) Studies show that variance analysis is no longer a popular tool of corporate managers as they have adopted various other forms of performance evaluation. Answer: FALSE Explanation: Variance analysis is still a very popular tool utilized by organizations of all sizes. Diff: 2 Objective: 2 AACSB: Analytical thinking
30) When preparing a flexible budget, fixed costs must be adjusted to reflect actual costs at actual output. Answer: FALSE Explanation: Fixed costs are the same whether you are preparing a static budget or a flexible budget. Diff: 2 Objective: 2 AACSB: Analytical thinking
31) An unfavorable variance is conclusive evidence of poor performance. Answer: FALSE Explanation: An unfavorable variance suggests further investigation, not conclusive evidence of poor performance. Diff: 1 Objective: 2 AACSB: Analytical thinking
32) When actual revenues exceed budgeted revenues, a favorable variance arises. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
33) A favorable flexible-budget variance for variable costs may be the result of using more input quantities than were budgeted. Answer: FALSE Explanation: An unfavorable flexible-budget variance for variable costs may be the result of using more input quantities than were budgeted. Diff: 1 Objective: 2 AACSB: Analytical thinking
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34) The president of the company, Peter Francis, has come to you for help. Use the following data to prepare a flexible budget for possible sales/production levels of 10,000, 15,000, and 20,000 units. Show the contribution margin at each activity level. Sales price Variable costs: Manufacturing Administrative Selling Fixed costs: Manufacturing Administrative Answer:
$30 per unit $10 per unit $ 3 per unit $ 1 per unit $70,000 $30,000 Flexible Budget for Various Levels of Sales/Production Activity
Units
10,000
15,000
20,000
Sales
$300,000
$450,000
$600,000
Variable costs: Manufacturing Administrative Selling
100,000 30,000 10,000
150,000 33,000 11,000
200,000 36,000 12,000
Total variable costs
140,000
194,000
248,000
Contribution margin
160,000
256,000
352,000
Fixed costs: Manufacturing Administrative
70,000 30,000
70,000 30,000
70,000 30,000
$ 60,000
$ 156,000
$ 252,000
Operating income/(loss) Diff: 3 Objective: 2 AACSB: Application of knowledge
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35) Nicholas Company manufacturers TVs. Some of the company's data was misplaced. Use the following information to replace the lost data:
Analysis Units Sold Revenues Variable Costs Fixed Costs Operating Income
Actual Flexible Flexible Results Variances Budget 112,500 112,500 $42,080 $1,000 F (A) (C) $200 U $15,860 $8,280 $860 F $9,140 $17,740 (D) $16,080
SalesVolume Variances $1,400 U $2,340 F (E)
Static Budget 103,125 (B) $18,200 $9,140 $15,140
Required: a. What are the respective flexible-budget revenues (A)? b. What are the static-budget revenues (B)? c. What are the actual variable costs (C)? d. What is the total flexible-budget variance (D)? e. What is the total sales-volume variance (E)? f. What is the total static-budget variance? Answer: a. $42,080 - $1,000 = $41,080 b.
$41,080 + $1,400 = $42,480
c.
$15,860 + $200 = $16,060
d. $17,740 - $16,080 = $1,660 favorable e.
$16,080 - $15,140 = $940 favorable
f.
$17,740 - $15,140 = $2,600 favorable
Diff: 3 Objective: 2 AACSB: Application of knowledge
36) List the steps involved in developing the flexible budget. Answer: Identify the actual output quantity. Calculate flexible-budget revenues (budgeted selling price × actual quantity). Calculate flexible-budget costs (budgeted per-unit variable cost × actual quantity plus fixed costs). Diff: 2 Objective: 2 AACSB: Application of knowledge
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Objective 7.3 1) The actual information pertains to the month of June. As part of the budgeting process, Colonial Fencing Company developed the following static budget for September. Colonial is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 19,000
Static Budget 20,500
Sales revenues Variable costs
$510,000 256,000
$ $ ________
$615,000 300,000
Contribution margin
$254,000
$
315,000
Fixed costs Operating profit
235,000 $19,000
$ ________ $
228,000 $87,000
The flexible budget for sales revenues will be? (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.) A) $615,000 B) $510,000 C) $635,500 D) $570,000 Answer: D Explanation: A) Actual volume of 19,000 × ($615,000/20,500) = $570,000 Diff: 3 Objective: 3 AACSB: Application of knowledge
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2) The actual information pertains to the third quarter. As part of the budgeting process, the Duck Decoy Department of Paralith Incorporated had developed the following static budget for the third quarter. Duck Decoy is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 15,000
Static Budget 11,000
Sales revenues Variable costs
$245,000 139,000
$ $ ________
$235,000 184,000
Contribution margin
106,000
$
51,000
Fixed costs Operating profit
42,000 $64,000
$ ________ $
31,000 $20,000
The flexible budget will report ________ for variable costs. (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.) A) $101,970 B) $250,950 C) $45,000 D) $184,000 Answer: B Explanation: B) 15,000 units × $184,000 / 11,000 = $250,909 Diff: 2 Objective: 3 AACSB: Application of knowledge
463 richard@qwconsultancy.com
3) The actual information pertains to the third quarter. As part of the budgeting process, the Duck Decoy Department of Paralith Incorporated had developed the following static budget for the third quarter. Duck Decoy is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 15,000
Static Budget 13,000
Sales revenues Variable costs
$236,000 166,000
$ $ ________
$234,000 182,000
Contribution margin
70,000
$
52,000
Fixed costs Operating profit
41,000 $29,000
$ ________ $
31,000 $21,000
The flexible budget will report ________ for the fixed costs. A) $73,923 B) $31,000 Favorable C) $31,000 D) $10,000 Unfavorable Answer: C Explanation: C) $31,000, given in the static budget Diff: 2 Objective: 3 AACSB: Application of knowledge
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4) The actual information pertains to the third quarter. As part of the budgeting process, the Duck Decoy Department of Paralith Incorporated had developed the following static budget for the third quarter. Duck Decoy is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 16,000
Static Budget 12,000
Sales revenues Variable costs
$241,000 148,000
$ $ ________
$233,000 183,000
Contribution margin
93,000
$
50,000
Fixed costs Operating profit
36,000 $57,000
$ ________ $
33,000 $17,000
The flexible-budget variance for variable costs is: (Round any intermediate calculations to the nearest cent, and round your final answer to the nearest dollar.) A) $35,000 favorable B) $37,000 unfavorable C) $35,000 unfavorable D) $96,000 favorable Answer: D Explanation: D) [(16,000 × $183,000 / 12,000)] − $148,000 = $96,000 F Diff: 2 Objective: 3 AACSB: Application of knowledge
5) The sales-volume variance is sometimes due to: A) the difference between selling price and budgeted selling price B) quality problems leading to customer dissatisfaction C) unexpected increase in manufacturing labor time D) unexpected increase in the use of quantities of inputs of raw material Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
6) An unfavorable sales-volume variance could result from: A) an inappropriate assignment of labor or machines to specific jobs B) competitors taking market share C) an inefficiency of a purchasing manager in bargaining with suppliers D) a decrease in actual selling price compared to anticipated selling price Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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7) If a sales-volume variance was caused by poor-quality products, then the ________ would be in the best position to explain the variance. A) production manager B) sales supervisor C) financial supervisor D) logistic manager Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
8) The actual information pertains to the third quarter. As part of the budgeting process, the controller for Foley Manufacturing had developed the following static budget for the third quarter. The company is in the process of preparing the flexible budget and understanding the results. Flexible Budget
Sales volume (in units)
Actual Results 11,000
Static Budget 10,000
Sales revenues Variable costs
$238,000 150,000
$ $ ________
$230,000 180,000
Contribution margin Fixed costs Operating profit
88,000 36,000 $ 52,000
$
50,000
$ ________ $
35,000 $ 15,000
The primary reason for high actual operating profits was: A) the variable-cost variance B) increased fixed costs C) flexible budget variance for revenues D) lower sales volume than planned Answer: A Explanation: A) Actual variable costs per unit were significantly less than the static budget. Actual sales revenues were only slightly greater than the static budget, and actual fixed costs were only slightly greater than the static budget. Diff: 3 Objective: 3 AACSB: Application of knowledge
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9) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:
Units sold Revenues Variable costs Fixed costs Operating income
Actual Flexible Budget Results Variances 490,000 $187,250 $5,000 F
Flexible Sales-Volume Budget Variances 490,000 (A) $6,260 U
Static Budget 448,350 (B)
(C) $36,670
$890 U $3,740 F
$71,260 $40,410
$10,800 F 0
$82,060 $40,410
$78,430
(D)
$70,580
(E)
$66,040
What amounts are reported for revenues in the flexible-budget (A) and the static-budget (B), respectively? A) $192,250; $175,990 B) $182,250; $188,510 C) $187,250; $185,990 D) $180,990; $188,510 Answer: B Explanation: B) $187,250 − $5,000 = $182,250; $182,250 + $6,260 = $188,510 Diff: 2 Objective: 3 AACSB: Application of knowledge
10) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:
Units sold Revenues Variable costs Fixed costs Operating income
Actual Flexible Budget Results Variances 490,000 $187,950 $4,900 F
Flexible Sales-Volume Budget Variances 490,000 (A) $6,260 U
Static Budget 448,350 (B)
(C) $36,670
$850 U $3,700 F
$72,070 $40,370
$10,400 F 0
$82,470 $40,370
$78,360
(D)
$70,610
(E)
$66,470
What are the actual variable costs (C)? A) $71,220 B) $72,920 C) $72,070 D) $82,470 Answer: B Explanation: B) $72,070 + $850 = $72,920 Diff: 2 Objective: 3 AACSB: Application of knowledge
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11) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:
Units sold Revenues Variable costs Fixed costs Operating income
Actual Flexible Budget Results Variances 490,000 $186,850 $5,000 F
Flexible Sales-Volume Budget Variances 490,000 (A) $6,460 U
Static Budget 448,450 (B)
(C) $36,710
$870 U $3,780 F
$70,870 $40,490
$10,300 F 0
$81,170 $40,490
$78,400
(D)
$70,490
(E)
$66,650
What is the total flexible-budget variance (D)? A) $11,750 favorable B) $0 C) $3,840 favorable D) $7,910 favorable Answer: D Explanation: D) $78,400 − $70,490 = $7,910 Diff: 2 Objective: 3 AACSB: Application of knowledge
12) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:
Units sold Revenues Variable costs Fixed costs Operating income
Actual Flexible Budget Results Variances 490,000 $186,550 $4,400 F
Flexible Sales-Volume Budget Variances 490,000 (A) $6,460 U
Static Budget 447,950 (B)
(C) $36,510
$860 U $3,750 F
$70,970 $40,260
$10,700 F 0
$81,670 $40,260
$78,210
(D)
$70,920
(E)
$66,680
What is the total sales-volume variance (E)? A) $11,530 unfavorable B) $7,290 unfavorable C) $4,240 favorable D) $11,530 favorable Answer: C Explanation: C) $70,920 − $66,680 = $4,240 Diff: 2 Objective: 3 AACSB: Application of knowledge
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13) Classic Products Company manufactures colonial style desks. Some of the company's data was misplaced. Use the following information to replace the lost data:
Units sold Revenues Variable costs Fixed costs Operating income
Actual Flexible Budget Results Variances 500,000 $185,050 $4,400 F
Flexible Sales-Volume Budget Variances 500,000 (A) $6,460 U
Static Budget 458,850 (B)
(C) $36,770
$800 U $3,750 F
$68,740 $40,520
$10,900 F 0
$79,640 $40,520
$78,740
(D)
$71,390
(E)
$66,950
What is the total static-budget variance? A) $11,790 favorable B) $7,350 favorable C) $4,440 unfavorable D) $4,440 favorable Answer: A Explanation: A) $78,740 − $66,950 = $11,790 Diff: 2 Objective: 3 AACSB: Application of knowledge
14) Which of the following variances will always be favorable when actual sales exceed budgeted sales? A) variable cost B) fixed cost C) sales volume D) operating profit Answer: C Diff: 2 Objective: 3 AACSB: Application of knowledge
15) A flexible-budget variance pertaining to revenues is often called a sales-volume variance. Answer: FALSE Explanation: A flexible-budget variance for revenues is called the selling-price variance because it arises solely from the difference between the actual selling price and the budgeted selling price. Diff: 2 Objective: 3 AACSB: Analytical thinking
16) A difference between the static-budget and the flexible-budget amounts is called the sales-volume variance. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
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17) The flexible-budget variance for revenues arises from the difference between the actual selling price and the budgeted selling price and the difference between budgeted sales volume (units) and actual sales volume (units). Answer: FALSE Explanation: The flexible-budget variance for revenues is called the selling-price variance as it arises only from the difference between the actual selling price and the budgeted selling price. Diff: 2 Objective: 3 AACSB: Analytical thinking
18) Bennett Street Table Company manufactures tables for schools. The 2020 operating budget is based on sales of 45,000 units at $55 per table. Operating income is anticipated to be $240,000. Budgeted variable costs are $35 per unit, while fixed costs total $660,000. Actual income for 2020 was a surprising $569,000 on actual sales of 46,000 units at $60 each. Actual variable costs were $34 per unit and fixed costs totaled $627,000.
Required: Prepare a variance analysis report with both flexible-budget and sales-volume variances. Answer: Bennett Street Table Company Variance Analysis Flexible Actual Results Variances 46,000 $2,760,000 $230,000 F
Units sold Sales Variable costs 1,564,000 Contributio n margin $1,196,000 Fixed costs 627,000 Operating income $569,000
Flexible Budget 46,000 $2,530,000
Volume Variances $55,000 F
Sales-Static 44,000 $2,475,000
46,000 F
1,610,000
35,000 U
1,540,000
$276,000 F 33,000 F
$920,000 660,000
$20,000 F 0
$900,000 660,000
$309,000 F
$260,000
$20,000 F
$240,000
Total flexible-budget variance = $217,000 favorable. Total sales-volume variance = $40,000 favorable. Diff: 3 Objective: 3 AACSB: Application of knowledge
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Objective 7.4 1) The flexible-budget variance for direct cost inputs can be further subdivided into a: A) static-budget variance and a sales-volume variance B) sales-volume variance and an efficiency variance C) price variance and an efficiency variance D) static-budget variance and a price variance Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking
2) An efficiency variance reflects the difference between: A) actual input quantities used last period and current period B) an actual input quantity and a budgeted input quantity C) an actual input quantity used in a company and its main competitors D) a standard input quantity in a company and its main competitors Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
3) Which of the following is the correct formula for the materials price variance? A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Budgeted price of input C) (Actual price of input - Budgeted price of input) × Actual quantity of input D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual price of input Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
4) Which of the following is a disadvantage of using the standards developed by a firm itself to develop a budget? A) A firm's inefficiencies will be part of the data. B) They are not based on realized benchmarks and can be unrealistic. C) The expected future changes are not included in the standards. D) The flexible-budget amounts are difficult to determine. Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
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5) J.C Coats Inc. carefully develops standards for its coat making operation. Its specifications call for 2 square yards of wool per coat. The budgeted price of wool is $44 per square yard. The actual price for the wool was $36 and the usage was only 1.70 yards of wool per coat. What would be the standard cost per output for the wool? A) $61.20 per coat B) $72.00 per coat C) $88.00 per coat D) $74.80 per coat Answer: C Explanation: C) $44 × 2 = $88.00 Diff: 1 Objective: 4 AACSB: Analytical thinking
6) Standard cost per output unit for each variable direct cost input is calculated by multiplying: A) standard input allowed for one output unit by standard price per input unit B) standard input allowed for one output unit by actual price per input unit C) actual input allowed for one output unit by standard price per input unit D) actual input allowed for one output unit by actual price per input unit Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
7) Standard material cost per kg of raw material is $6.50. Standard material allowed per unit is 5 Kg. Actual material used per unit is 6.00 Kg. Actual cost per kg is $6.00. What is the standard cost per output unit? A) $30.00 B) $36.00 C) $32.50 D) $39.00 Answer: C Explanation: C) Standard cost per output unit = Standard material cost per kg × standard material allowed per unit = $6.50 × 5 kg = $32.50 Diff: 2 Objective: 4 AACSB: Application of knowledge
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8) Standard labor rate is $7.50 per hour. Standard labor allowed per unit is 0.7 hours. Actual cost per labor hour is $7.00 and actual labor hour per unit is 1 hours. What is the standard labor cost per output unit? A) $4.90 B) $5.25 C) $7.50 D) $7.00 Answer: B Explanation: B) Standard cost per output unit = Standard labor allowed per unit × Standard labor rate = $7.50 × 0.7 hours = $5.25 per unit Diff: 2 Objective: 4 AACSB: Application of knowledge
9) A standard price is the minimum price a company will have to pay for a unit of input. Answer: FALSE Explanation: A standard price is a carefully determined price a company expects to pay for a unit of input. Diff: 2 Objective: 4 AACSB: Analytical thinking
10) To prepare budgets based on actual data from past periods is preferred since past inefficiencies are EXCLUDED. Answer: FALSE Explanation: A deficiency of using budgeted input quantity information based on actual quantity data from past periods is that past inefficiencies are included. Diff: 2 Objective: 4 AACSB: Analytical thinking
11) A firm's inefficiencies, such as the wastage of direct materials, are incorporated in past data. Hence the data represents the ideal performance of a firm. Answer: FALSE Explanation: A firm's inefficiencies, such as the wastage of direct materials, are incorporated in past data. Hence the data does not represent the ideal performance of a firm. Diff: 2 Objective: 4 AACSB: Analytical thinking
12) A standard is attainable through efficient operations but allows for normal disruptions such as machine breakdowns and defective production. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
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13) One advantage of using standard times to develop a budget is they are simple to compile, are based solely on the past actual history, and do not require expected future changes to be taken into account. Answer: FALSE Explanation: An advantage of using standard times is they aim to take into account changes expected to occur in the budget period. Diff: 1 Objective: 4 AACSB: Analytical thinking
14) The textbook discusses three levels of variances, Level 0, Level 1, Level 2, and Level 3. Briefly explain the meaning of each of those levels and provide an example of a variance at each of those levels. Answer: A Level 0 variance is simply the difference between actual operating income and planned operating income in the static budget. A Level 1 variance would be any of the differences between the static budget and the actual results that make up operating income. Examples of such differences could include the following items: Units sold Revenues Material costs Direct manufacturing labor Variable manufacturing overhead Contribution margin Fixed costs
(Static budget - actual) (Static budget - actual) (Static budget - actual) (Static budget - actual) (Static budget - actual) (Static budget - actual) (Static budget - actual)
A Level 2 variance subdivides the level 0 variance (which is the total of the Level 1 variances) into a sales volume variance and a flexible-budget variance. The sales volume variance is the difference between the flexible budget amount and the corresponding static budget amount. The flexible budget variance is an actual result and the corresponding flexible budget amount based on the actual output level in the budget period. Specific examples of Level 2 variances could include any of the items shown in the list of Level 1 variances. A Level 3 variance would include price variances that reflect the difference between the actual input price and a budgeted input price, such as the direct material price variance, the direct labor rate variance, and the variable overhead rate variance. Level 3 variances would also include efficiency variances that reflect the difference between an actual input quantity and a budgeted input quantity. Examples would include material quantity variances, labor efficiency variances, and variable overhead efficiency variances. Diff: 3 Objective: 4 AACSB: Analytical thinking
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15) Explain how the flexible-budget variance for direct materials is subdivided to provide further insight to management. Answer: The flexible-budget variance for direct materials needs to be subdivided into two more-detailed variances: the materials price variance and the materials efficiency variance. A price variance reflects the difference between an actual input price and a budgeted input price while an efficiency variance reflects the difference between an actual input quantity and a budgeted input quantity. Diff: 2 Objective: 4 AACSB: Analytical thinking
Objective 7.5 1) Which of the following can be a reason for a favorable price variance for direct materials? A) a decrease in the price of materials due to an oversupply of materials B) an unexpected increase in the price of materials C) less amount of material used during production than planned for actual output D) workers taking less time to produce the products than was expected Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
2) A favorable efficiency variance for direct manufacturing labor indicates that: A) a lower wage rate than planned was paid for direct labor B) a higher wage rate than planned was paid for direct labor C) less direct manufacturing labor-hours were used during production than planned for actual output D) more direct manufacturing labor-hours were used during production than planned for actual output Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
3) Which of the following is the correct formula for the materials price variance? A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Budgeted price of input C) (Actual price of input - Budgeted price of input) × Actual quantity of input D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual price of input Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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4) A favorable efficiency variance for direct labor might indicate that: A) lower-quality materials were purchased B) work is scheduled efficiently C) there is an unexpected increase in direct labor rates D) management hired underskilled workers Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
5) A favorable price variance for direct manufacturing labor might indicate that: A) employees were paid more than planned B) unexpected increase in direct labor rates C) underskilled employees are being hired D) congestion due to scheduling problems Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
6) An unfavorable efficiency variance for direct manufacturing labor might indicate that: A) there is unexpected increase in direct labor rates B) work is scheduled inefficiently C) lower-quality materials were purchased D) more higher-skilled workers were scheduled than planned Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
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7) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.
Direct materials Direct labor
Budgeted quantity 0.10 pounds 0.20 hours
Budgeted price $80 per pound $25 per hour
During June, Heavy Products produced and sold 19,000 containers using 2500 pounds of direct materials at an average cost per pound of $82 and 1900 direct manufacturing labor-hours at an average wage of $26.00 per hour. June's direct material flexible-budget variance is: A) $38,000 unfavorable B) $5000 favorable C) $53,000 unfavorable D) $1900 favorable Answer: C Explanation: C) Flexible-budget variance = (2500 × $82) − (19,000 × 0.10 × $80) = $53,000 U Diff: 2 Objective: 5 AACSB: Application of knowledge
8) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.
Direct materials Direct labor
Budgeted quantity 0.10 pounds 0.15 hours
Budgeted price $80 per pound $20 per hour
During June, Heavy Products produced and sold 18,000 containers using 2200 pounds of direct materials at an average cost per pound of $83 and 1800 direct manufacturing labor-hours at an average wage of $21.56 per hour. The direct material price variance during June is: A) $6600 unfavorable B) $38,600 favorable C) $38,600 unfavorable D) $2808 favorable Answer: A Explanation: A) Direct material price variance = 2200 × ($83 − $80) = $6600 U Diff: 2 Objective: 5 AACSB: Application of knowledge
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9) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.
Direct materials Direct labor
Budgeted quantity 0.90 pounds 0.10 hours
Budgeted price $60 per pound $30 per hour
During June, Heavy Products produced and sold 19,000 containers using 1,200 pounds of direct materials at an average cost per pound of $63 and 17,100 direct manufacturing labor-hours at an average wage of $31.25 per hour. The direct manufacturing labor price variance during June is: A) $21,375 unfavorable B) $21,375 favorable C) $3600 unfavorable D) $950,400 unfavorable Answer: A Explanation: A) Direct manufacturing labor price variance = 17,100 dlh × ($30 − $31.25) = $21,375 U Diff: 2 Objective: 5 AACSB: Application of knowledge
10) Heavy Products, Inc. (HPI) developed standard costs for direct material and direct labor. In 2020, HPI estimated the following standard costs for one of their major products, the 10-gallon plastic container.
Direct materials Direct labor
Budgeted quantity 0.80 pounds 0.15 hours
Budgeted price $50 per pound $25 per hour
During June, Heavy Products produced and sold 20,000 containers using 1000 pounds of direct materials at an average cost per pound of $52 and 3000 direct manufacturing labor-hours at an average wage of $50.75 per hour. The direct manufacturing labor efficiency variance during June is: A) $22,838 unfavorable B) $77,250 favorable C) $515,000 unfavorable D) $0 Answer: D Explanation: D) Direct manufacturing labor efficiency variance = [3000 dlh − (20,000 × 0.15)] × $25 = $0 Diff: 2 Objective: 5 AACSB: Application of knowledge
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11) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.
Direct materials Direct labor
Budgeted quantity 0.30 pounds 0.60 hours
Budgeted price $50 per pound $12 per hour
During July, GII produced and sold 4,000 containers using 1,350 pounds of direct materials at an average cost per pound of $48 and 2,450 direct manufacturing labor hours at an average wage of $12.25 per hour. July's direct material flexible-budget variance is: A) $4,800 unfavorable B) $7,500 favorable C) $9,900 unfavorable D) $0 Answer: A Explanation: A) Direct material flexible-budget variance = (1,350 × $48) − (4,000 × 0.30 × $50) = $4,800 U Diff: 2 Objective: 5 AACSB: Application of knowledge
12) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.
Direct materials Direct labor
Budgeted quantity 0.40 pounds 0.80 hours
Budgeted price $20 per pound $15 per hour
During July, GII produced and sold 4,000 containers using 1,700 pounds of direct materials at an average cost per pound of $15 and 3,225 direct manufacturing labor hours at an average wage of $15.25 per hour. The direct material price variance during July is: A) $20,000 unfavorable B) $8,500 favorable C) $8,500 unfavorable D) $2,000 unfavorable Answer: B Explanation: B) Direct material price variance = 1,700 × ($20 − $15) = $8,500 F Diff: 2 Objective: 5 AACSB: Application of knowledge
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13) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.
Direct materials Direct labor
Budgeted quantity 0.20 pounds 0.10 hours
Budgeted price $40 per pound $18 per hour
During July, GII produced and sold 4,000 containers using 1,000 pounds of direct materials at an average cost per pound of $37 and 475 direct manufacturing labor hours at an average wage of $18.75 per hour. The direct material efficiency variance during July is: A) $5,000 unfavorable B) $7,400 favorable C) $8,000 unfavorable D) $5,000 favorable Answer: C Explanation: C) Direct material efficiency variance = $40 × [1,000 − (4,000 × 0.20)] = $8,000 U Diff: 2 Objective: 5 AACSB: Application of knowledge
14) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.
Direct materials Direct labor
Budgeted quantity 0.60 pounds 0.30 hours
Budgeted price $20 per pound $14 per hour
During July, GII produced and sold 4,000 containers using 2,700 pounds of direct materials at an average cost per pound of $19 and 1,290 direct manufacturing labor hours at an average wage of $14.30 per hour. The direct manufacturing labor flexible-budget variance during July is: A) $1,260.00 unfavorable B) $900.00 favorable C) $1,647.00 unfavorable D) $3,300.00 favorable Answer: C Explanation: C) Direct manufacturing labor flexible-budget variance = (1,290 × $14.30) − (4,000 × 0.30 × $14) = $1,647.00 U Diff: 2 Objective: 5 AACSB: Application of knowledge
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15) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.
Direct materials Direct labor
Budgeted quantity 0.20 pounds 0.60 hours
Budgeted price $20 per pound $18 per hour
During July, GII produced and sold 3000 containers using 700 pounds of direct materials at an average cost per pound of $16 and 1825 direct manufacturing labor hours at an average wage of $18.30 per hour. The direct manufacturing labor price variance during July is: A) $450.00 unfavorable B) $547.50 unfavorable C) $540.00 favorable D) $800.00 unfavorable Answer: B Explanation: B) Direct manufacturing labor price variance = 1825 dlh × ($18.30 − $18) = $547.50 U Diff: 2 Objective: 5 AACSB: Application of knowledge
16) Genent Industries, Inc. (GII), developed standard costs for direct material and direct labor. In 2020, GII estimated the following standard costs for one of their major products, the 30-gallon heavy-duty plastic container.
Direct materials Direct labor
Budgeted quantity 0.30 pounds 0.50 hours
Budgeted price $50 per pound $18 per hour
During July, GII produced and sold 4000 containers using 1400 pounds of direct materials at an average cost per pound of $45 and 2090 direct manufacturing labor hours at an average wage of $18.75 per hour. The direct manufacturing labor efficiency variance during July is: A) $1620.00 unfavorable B) $1567.50 favorable C) $3187.50 favorable D) $1687.50 unfavorable Answer: A Explanation: A) Direct manufacturing labor efficiency variance = [2090 dlh − (4000 × 0.50)] × $18 = $1620.00 U Diff: 2 Objective: 5 AACSB: Application of knowledge
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17) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.
Direct materials Direct labor
Budgeted quantity 1 pounds 0.50 hours
Budgeted price $5.40 per pound $13.00 per hour
During September, MCP produced and sold 1,000 units using 1,300 pounds of direct materials at an average cost per pound of $5.00 and 480 direct labor hours at an average wage of $13.15 per hour. September's direct material flexible-budget variance is: A) $400 unfavorable B) $120 favorable C) $1,100 unfavorable D) $520 favorable Answer: C Explanation: C) Direct material flexible-budget variance = (1,300 × $5.00) − (1,000 × 1 × $5.40) = $1,100 U Diff: 2 Objective: 5 AACSB: Application of knowledge
18) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.
Direct materials Direct labor
Budgeted quantity 1 pounds 0.20 hours
Budgeted price $8.60 per pound $13.00 per hour
During September, MCP produced and sold 1,000 units using 1,400 pounds of direct materials at an average cost per pound of $8.00 and 160 direct labor hours at an average wage of $13.50 per hour. The direct material price variance during September is: A) $840 favorable B) $840 unfavorable C) $2,600 unfavorable D) $2,600 favorable Answer: A Explanation: A) Direct material price variance = 1,400 × ($8.00 − $8.60) = $840 F Diff: 2 Objective: 5 AACSB: Application of knowledge
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19) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.
Direct materials Direct labor
Budgeted quantity 2 pounds 0.40 hours
Budgeted price $2.30 per pound $15.00 per hour
During September, MCP produced and sold 1,000 units using 2,200 pounds of direct materials at an average cost per pound of $2.00 and 360 direct labor hours at an average wage of $15.15 per hour. The direct material efficiency variance during September is: A) $660 favorable B) $660 unfavorable C) $460 favorable D) $460 unfavorable Answer: D Explanation: D) Direct material efficiency variance = $2.30 × [2,200 − (1,000 × 2)] = $460 U Diff: 2 Objective: 5 AACSB: Application of knowledge
20) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.
Direct materials Direct labor
Budgeted quantity 7 pounds 0.50 hours
Budgeted price $7.30 per pound $10.00 per hour
During September, MCP produced and sold 2,000 units using 14,400 pounds of direct materials at an average cost per pound of $7.00 and 950 direct labor hours at an average wage of $10.40 per hour. The direct labor flexible-budget variance during September is: A) $120.00 favorable B) $120.00 unfavorable C) $520.00 favorable D) $520.00 unfavorable Answer: A Explanation: A) Direct labor flexible-budget variance = (950 × $10.40) − (2,000 × 0.50 × $10.00) = $120.00 F Diff: 2 Objective: 5 AACSB: Application of knowledge
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21) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.
Direct materials Direct labor
Budgeted quantity 6 pounds 0.50 hours
Budgeted price $4.25 per pound $15.00 per hour
During September, MCP produced and sold 2,000 units using 12,400 pounds of direct materials at an average cost per pound of $4.00 and 950 direct labor hours at an average wage of $15.15 per hour. The direct labor price variance during September is: A) $750.00 unfavorable B) $150.00 favorable C) $142.50 unfavorable D) $142.50 favorable Answer: C Explanation: C) Direct labor price variance = 950 dlh × ($15.15 − $15.00) = $142.50 U Diff: 2 Objective: 5 AACSB: Application of knowledge
22) Mid City Products Inc. (MCP), developed standard costs for direct material and direct labor. In 2020, MCP estimated the following standard costs for one of their most popular products.
Direct materials Direct labor
Budgeted quantity 4 pounds 0.60 hours
Budgeted price $7.25 per pound $17.00 per hour
During September, MCP produced and sold 2,000 units using 8,200 pounds of direct materials at an average cost per pound of $7.00 and 1,160 direct labor hours at an average wage of $17.50 per hour. The direct labor efficiency variance during September is: A) $680 favorable B) $700 unfavorable C) $600 favorable D) $100 unfavorable Answer: A Explanation: A) Direct labor efficiency variance = [1,160 dlh − (2,000 × 0.60)] × $17.00 = $680 F Diff: 2 Objective: 5 AACSB: Application of knowledge
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Answer the following questions using the information below: These questions refer to flexible-budget variance formulas with the following descriptions for the variables: A = Actual; B = Budgeted; P = Price; Q = Quantity. 23) Which variance is calculated using the formula (AQ - BQ) BP? A) efficiency variance B) price variance C) total flexible-budget variance D) spending variance Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
24) Which variance is calculated by using the formula: (AP - BP) AQ? A) efficiency variance B) price variance C) total flexible-budget variance D) material spending variance Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
25) The flexible-budget variance for materials is $2,000 (U). The sales-volume variance is $18,000 (U). The price variance for material is $38,000 (F). The efficiency variance for direct manufacturing labor is $12,000 (F). Calculate the efficiency variance for materials. A) $40,000 favorable B) $18,000 unfavorable C) $6,000 favorable D) $40,000 unfavorable Answer: D Explanation: D) $2,000(U) = $38,000(F) + Efficiency variance Efficiency variance = $2,000 + $38,000 = $40,000 (U) Diff: 3 Objective: 5 AACSB: Application of knowledge
26) Which of the following is the correct formula for the materials price variance? A) (Actual price of input - Budgeted price of input) × Budgeted quantity of input B) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Budgeted price of input C) (Actual price of input - Budgeted price of input) × Actual quantity of input D) (Actual quantity of input used - Budgeted quantity of input allowed for actual output) × Actual price of input Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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27) A company purchases $650,000 of materials on credit. The standard cost for the materials is $675,000. Which of the following would be the correct journal entries to record the purchase under a standard costing system? A) Direct Materials Control $675,000 Direct Materials Price Variance $25,000 Accounts Payable Control $650,000 B) WIP Control $675,000 Direct Materials Price Variance $25,000 Accounts Payable Control $650,000 C) Accounts Payable Control $650,000 Direct Materials Price Variance $25,000 Direct Materials Control $675,000 D) Accounts Payable Control $650,000 Direct Materials Price Variance $25,000 WIP Control $675,000 Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
28) These questions refer to flexible-budget variance formulas with the following descriptions for the variables: A = Actual; B = Budgeted; P = Price; Q = Quantity. The best label for the formula [(AP)(AQ) (BP)(BQ)] is the: A) efficiency variance. B) price variance C) total flexible-budget variance D) spending variance Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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29) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance. Flexible Budget Material A $44,000 Material B 66,000 Direct manufacturing labor 80,000
Variances Price Efficiency $1,000F $3,400U 200U 1,800F 600U 2,300F
The most likely explanation of the above variances for Material A is that: A) a lower price than expected was paid for Material A B) higher-quality raw materials were used than were planned C) the company used a higher-priced supplier D) Material A used during September was $2,000 less than expected Answer: A Diff: 3 Objective: 5 AACSB: Application of knowledge
30) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance. Flexible Budget Material A $45,000 Material B 61,000 Direct manufacturing labor 83,000
Variances Price Efficiency $1,100F $3,200U 800U 2,000F 600U 2,500F
The actual amount spent for Material B was: A) $58,200 B) $59,800 C) $61,000 D) $62,200 Answer: B Explanation: B) $61,000 + $800 U - $2,000 F = $59,800 Diff: 2 Objective: 5 AACSB: Application of knowledge
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31) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance. Flexible Budget Material A $48,000 Material B 69,000 Direct manufacturing labor 88,000
Variances Price Efficiency $1,900F $3,400U 800U 1,600F 900U 2,200F
The actual amount spent for direct manufacturing labor was: A) $88,000 B) $91,100 C) $89,300 D) $86,700 Answer: D Explanation: D) $88,000 + $900 U - $2,200 F = $86,700 Diff: 2 Objective: 5 AACSB: Application of knowledge
32) Handley Manufacturing Company has prepared the following flexible budget for August and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance. Flexible Budget Material A $40,000 Material B 68,000 Direct manufacturing labor 85,000
Variances Price Efficiency $1,600F $3,200U 500U 1,900F 200U 2,700F
The most likely explanation of the above direct manufacturing labor variances is that: A) the average wage rate paid to employees was less than expected B) employees did not work as efficiently as expected to accomplish the job C) the company may have assigned more experienced employees this month than originally planned D) management may have a problem with budget slack and might be using lax standards for both labor-wage rates and expected efficiency Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
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33) Madden's Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.
Material A Material B Material C
Flexible Budget $27,000 32,000 46,000
Variances Price Efficiency $2,000U $1,200F 400F 700U 1,800U 2,300F
The actual amount spent for Material A was: A) $30,200 B) $26,200 C) $27,800 D) $23,800 Answer: C Explanation: C) Actual amount spent for Material A = $27,000 + $2,000 U − $1,200 F = $27,800 Diff: 2 Objective: 5 AACSB: Application of knowledge
34) Madden's Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.
Material A Material B Material C
Flexible Budget $26,000 39,000 46,000
Variances Price Efficiency $1,200U $1,600F 400F 800U 1,400U 2,400F
The actual amount spent for Material B was: A) $38,600 B) $37,800 C) $40,200 D) $39,400 Answer: D Explanation: D) Actual amount spent for Material B = $39,000 − $400 F + $800 U = $39,400 Diff: 2 Objective: 5 AACSB: Application of knowledge
489 richard@qwconsultancy.com
35) Madden's Camera Shop has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favorable variance and U denotes an unfavorable variance.
Material A Material B Material C
Flexible Budget $29,000 37,000 44,000
Variances Price Efficiency $1,200U $1,900F 800F 700U 1,500U 2,500F
The explanation that lower-quality materials were purchased is most likely for: A) Material A B) Material B C) Material C D) both Material A and C Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
36) The flexible-budget variance is the total of price variance and efficiency variance. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
37) The price variance is the difference between the actual price and the budgeted price of the input, multiplied by the actual quantity of input. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
38) For any actual level of output, the efficiency variance is the difference between actual quantity of input used and the budgeted quantity of input allowed to produce actual output, multiplied by the budgeted price. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
39) From the perspective of control, the direct materials price variance should be isolated at the time of sales. Answer: FALSE Explanation: From the perspective of control, the direct materials price variance should be isolated at the time of purchase of materials. Diff: 2 Objective: 5 AACSB: Analytical thinking
490 richard@qwconsultancy.com
40) When referring to direct labor, the price variance is often called the rate variance. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
41) With a direct materials price variance of $40,000 F and direct materials efficiency, direct manufacturing labor price, and direct labor efficiency variances of $60,000 U, 20,000 U, and 15,000 U, the write-off to cost of goods sold if these are deemed immaterial would be a debit of $55,000. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
42) Nancy's Draperies manufactures curtains. A certain window curtain requires the following: Direct materials standard Direct manufacturing labor standard
10 square yards at $5 per yard 5 hours at $10
During the second quarter, the company made 1,500 curtains and used 14,000 square yards of fabric costing $72,000. Direct labor totaled 7,600 hours for $83,600. Required: a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labor price and efficiency variances for the quarter. Answer: a. Direct materials variances:
b.
Actual unit cost
= $72,000/14,000 square yards = $5.14 per square yard
Price variance
= 14,000 × ($5.00 - $5.14) = $1,960 unfavorable
Efficiency variance
= $5.00 × [14,000 - (1,500 × 10)] = $5,000 favorable
Direct manufacturing labor variances: Actual labor rate
= $83,600/7,600 = $11.00 per hour
Price variance
= 7,600 × ($11.00 - $10.00) = $7,600 unfavorable
Efficiency variance
= $10.00 × (7,600 - 7,500) = $1,000 unfavorable
Diff: 3 Objective: 5 AACSB: Application of knowledge
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43) Fine Lumber Inc. mills and finishes furniture kits. A certain kit requires the following: Direct materials standard Direct manufacturing labor standard
2 square yards at $13.50 per yard 1.5 hours at $20.00 per hour
During the third quarter, the company made 1,500 kits and used 3,150 square yards of wood costing $42,600. Direct labor totaled 2,100 hours for $46,150. Required: a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labor price and efficiency variances for the quarter. Answer: a. Direct materials variances:
b.
Actual unit cost
= $42,600/3,150 square yards = $13.33 per square yard
Price variance
= 3,150 × ($13.50 - $13.33) = $535.50 favorable
Efficiency variance
= $13.50 × [3,150 - (1,500 × 2)] = $2,025 unfavorable
Direct manufacturing labor variances: Actual labor rate
= $46,150/2,100 = $21.98 per hour
Price variance
= 2,100 × ($21.98 - $20.00) = $4,150 unfavorable
Efficiency variance
= $20.00 × (2,100 - (1,500 × 1.5) = $3,000 favorable
Diff: 3 Objective: 5 AACSB: Application of knowledge
492 richard@qwconsultancy.com
44) The following data for the Prender Company pertain to the production of 800 urns during August. Direct Materials (all materials purchased were used): Standard cost: $4.80 per pound of urn. Total actual cost: $4,480. Standard cost allowed for units produced was $4,800. Materials efficiency variance was $96 unfavorable. Direct Manufacturing Labor: Standard cost is 2 urns per hour at $19.20 per hour. Actual cost per hour was $19.60. Labor efficiency variance was $288 favorable. Required: a. What is standard direct material amount per urn? b. What is the direct material price variance? c. What is the total actual cost of direct manufacturing labor? d. What is the labor price variance for direct manufacturing labor? Answer: a. Standard cost per urn = $4,800 / 800 = $6.00 per urn Standard number of pounds per urn
= $6.00 / $4.80 = 1.25 pound per urn
b.
Materials price variance
= Total variance - efficiency variance = ($4,480 − $4,800) − $96 unfavorable = $416 favorable
c.
Total standard labor cost of actual hours
= ((800/2) × $19.2) − $288 favorable = $7,392 = $7,392/19.2 = 385 hours = 385 × $19.60 = $7,546
Actual hours Total actual costs d. Labor price variance
= $7,546 − $7,392 = $154 unfavorable
Diff: 3 Objective: 5 AACSB: Application of knowledge
493 richard@qwconsultancy.com
45) The following data for the Green Garden Supplies Company pertains to the production of 2,000 garden spades during March. The spade consists of a wooden handle and a metal forged tool that comes in contact with the ground. Direct Materials (all materials purchased were used): Standard cost: $1.00 per handle and $3.00 per metal tool. Total actual cost: $9,000. Materials flexible-budget efficiency variance was $500 unfavorable. Direct Manufacturing Labor: Standard cost is 5 garden spades per hour at $20.00 per hour. Actual cost per hour was $21.00. Labor efficiency variance was $500 favorable. Required: a. What is the standard direct material amount per garden spade? b. What is the standard cost allowed for all units produced? c. What is the total direct materials flexible-budget variance? d. What is the direct material flexible-budget price variance? e. What is the total actual cost of direct manufacturing labor? f. What is the labor price variance for direct manufacturing labor? Answer: a. Standard cost per garden spade = $1.00 (handle) + $3.00 (tool) = $4.00 per garden spade b.
Standard cost allowed for all units
= 2,000 × $4.00 = $8,000 per garden spade
c.
Total materials variance = $1,000 unfavorable
= $8,000 − $9,000 = $1,000 unfavorable
d. Materials price variance
= Total variance - efficiency variance = ($9,000 − $8,000) − $500 unfavorable = $500 unfavorable
e.
= ((2,000/5) × $20) − $500 favorable = $7,500 = $7,500/20 = 375 hours = 375 × $21 = $7,875
Total standard labor cost of actual hours Actual hours Total actual costs
f.
Labor price variance
= $7,500 − $7,875 = $375 unfavorable
Diff: 3 Objective: 5 AACSB: Application of knowledge
494 richard@qwconsultancy.com
46) The following data for the telephone company pertain to the production of 450 rolls of telephone wire during June. Selected items are omitted because the costing records were lost in a windstorm. Direct Materials (All materials purchased were used.) Standard cost per roll: a pounds at $4.00 per pound. Total actual cost: b pounds costing $9,600. Standard cost allowed for units produced was $9,000. Materials price variance: c . Materials efficiency variance was $80 unfavorable. Direct Manufacturing Labor Standard cost is 3 hours per roll at $8.00 per hour. Actual cost per hour was $8.25. Total actual cost: d . Labor price variance: e . Labor efficiency variance was $400 unfavorable. Required: Compute the missing elements in the report represented by the lettered items. Answer: a. Standard cost per roll = $9,000/450 = $20.00 Standard number of pounds per roll
= $20/$4 = 5 pounds per roll
b.
Actual pounds
= ($9,000 + $80)/$4
c.
Materials price variance
= $9,600 - ($9,000 + $80) = $520 unfavorable
= 2,270 pounds
d. Total standard labor cost of actual hours = (450 × 3 × $8) + $400 = $11,200 Actual hours = $11,200/$8 = 1,400
e.
Total actual cost
= 1,400 × $8.25
= $11,550
Labor price variance
= $11,550 - $11,200 = $350 unfavorable
Diff: 3 Objective: 5 AACSB: Application of knowledge
495 richard@qwconsultancy.com
47) Littrell Company produces chairs and has determined the following direct cost categories and budgeted amounts:
Category Direct Materials Direct Labor Direct Marketing
Standard Inputs for 1 output 1.00 0.30 0.50
Standard Cost per input $7.50 9.00 3.00
Actual performance for the company is shown below: Actual output: (in units) Direct Materials: Materials costs Input purchased and used Actual price per input Direct Manufacturing Labor: Labor costs Labor-hours of input Actual price per hour Direct Marketing Labor: Labor costs Labor-hours of input Actual price per hour
4,000 $30,225 3,900 $7.75 $11,470 1,240 $9.25 $5,880 2,100 $2.80
Required: a. What is the combined total of the flexible-budget variances? b. What is the price variance of the direct materials? c. What is the price variance of the direct manufacturing labor and the direct marketing labor, respectively? d. What is the efficiency variance for direct materials? e. What are the efficiency variances for direct manufacturing labor and direct marketing labor, respectively?
496 richard@qwconsultancy.com
Answer: a. Actual Results Direct materials $30,225 Direct manufacturing labor 11,470 Direct marketing labor 5,880 $47,575
Flexible Budget $30,000 10,800 6,000 $46,800
Variances $225 U 670 U 120 F $775 U
b.
($7.75 - $7.50) × (3,900) = $975 unfavorable
c.
Manufacturing Labor ($9.25 - $9.00) × 1,240 = $310 unfavorable Marketing Labor ($2.80 - $3.00) × 2,100 = $420 favorable
d. [3,900 - (4,000 units × 1.00)] × $7.50 = $750 favorable e.
Manufacturing Labor = [1,240 hours - (4,000 × 0.30 hours)] × $9.00 = $360 unfavorable Marketing Labor = [2,100 hours - (4,000 × 0.50 hours)] × $3.00 = $300.00 unfavorable
Diff: 3 Objective: 5 AACSB: Application of knowledge
48) Give at least three good reasons why a favorable price variance for direct materials might be reported. Answer: Any three of the following: a. The purchasing manager skillfully negotiated a better purchase price. b. The purchasing manager changed to a lower-priced supplier. c. The purchasing manager purchased in larger quantities resulting in quantity discounts. d. The purchasing manager changed to lower-quality materials. e. An unexpected industry oversupply resulted in decreased prices for materials. f. Budgeted purchase prices were not carefully set. Diff: 3 Objective: 5 AACSB: Application of knowledge
49) Give at least three good reasons why an unfavorable efficiency variance for direct manufacturing labor might be reported. Answer: Any three of the following: a. More lower-skilled workers were scheduled than planned. b. Work was inefficiently scheduled. c. Machines were not properly maintained. d. Budgeted time standards were too tight. Diff: 3 Objective: 5 AACSB: Application of knowledge
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50) A company uses a standard costing system and with its journal entries isolates any direct materials price variance at the time the materials are purchased and isolates any direct materials efficiency variance at the time the direct materials are used by increasing the Work-in-Process Control account. For a particular production run, the company purchases $650,000 of direct materials on credit while the standard cost of that purchase is $700,000. Because of some improvements in the manufacturing process, the flexible budgeted amount for materials requisitioned for the production run was only $680,000. Required: Record the journal entry and the requisition of the materials onto the production floor, assuming standard costing is used. Answer: Direct Materials Control 700,000 Direct Materials Price Variance 50,000 Accounts Payable Control 650,000 Work-in-Process Control Direct Materials Efficiency Variance Direct Materials Control
680,000 20,000 700,000
Diff: 3 Objective: 5 AACSB: Application of knowledge
Objective 7.6 1) A purchasing manager's performance is best evaluated using information such as: A) usage efficiency and direct materials price variance B) direct materials flexible-budget variance C) direct manufacturing labor flexible-budget variance D) price and terms bargaining effectiveness, achievement of quality goals, and direct materials price variance Answer: D Diff: 3 Objective: 6 AACSB: Analytical thinking
2) Which of the following could be a reason for a favorable material price variance? A) the purchasing manager bargaining effectively with suppliers B) the purchasing manager giving orders for small quantity to reduce storage cost C) the purchasing manager accepting a bid from the highest-priced supplier to ensure the quality of material D) the personnel manager hiring under skilled workers Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
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3) Efficiency is: A) the degree to which a predetermined objective or target is met B) the difference between an actual input quantity and a budgeted input quantity C) the continuous process of comparing a firm's performance levels against the best levels of performance in competing companies D) the relative amount of inputs used to achieve a given output level Answer: D Diff: 1 Objective: 6 AACSB: Analytical thinking
4) Which of the following is true of variance? A) Managers should interpret a favorable variance as "good news". B) Managers should not simply interpret a favorable variance as good but should understand why the variance occurred. C) A small variance or zero variance definitively reveals efficient performance. D) Managers' performance must be evaluated solely on single variance. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
5) The degree to which a predetermined objective or target is met is known as: A) efficiency B) variance C) effectiveness D) marking Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
6) If management experiences an unfavorable direct materials efficiency variance, which of the following would NOT be the possible corrective action? A) improve the design of the product B) provide additional training for the direct laborers C) purchase higher quality materials D) negotiate lower prices for material acquisition Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
499 richard@qwconsultancy.com
7) Which of the following statements is true about analyzing a single variance? A) It should be overemphasized to take proper decision. B) It should be evaluated in isolation from other variances. C) It can lead to different other variances. D) It should be used for quality evaluation. Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
8) Variance analysis should be used: A) to understand why variances arise and to improve future performance B) as the sole source of information for performance evaluation C) to punish employees that do not meet standards D) to set the standards which are very easy to achieve to encourage employees to focus on meeting standards Answer: A Diff: 3 Objective: 6 AACSB: Analytical thinking
9) Cost variances should be investigated: A) when they are considered within the "in-control" range as determined by management B) when the variance is more than a certain percentage of budgeted costs, as determined by management C) even though the cost of investigation exceeds the benefit as determined by management D) when the variance is less than a certain percentage of budgeted costs, as determined by management Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
10) The emphasis on variance analysis and its use in performance evaluation must be such that: A) managers focus on setting easy to attain targets B) larger unfavorable variances should result in negative consequences for personnel held accountable C) management should set targets that challenge but are reasonably achievable and require creativity and resourcefulness by personnel held accountable D) management should stretch resources to meet goals even if continuous improvement and quality suffers Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
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11) Nonfinancial performance measures: A) are usually used in combination with financial measures for control purposes B) are rarely used to evaluate overall efficiency C) allow managers to make informed tradeoffs D) are often the sole basis of a manager's performance evaluations Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
12) Which of the following is an example of nonfinancial performance measure? A) percentage of products started and completed without requiring any rework B) direct manufacturing labor efficiency variance C) direct materials price variance D) quantity discounts obtained on order of large quantity Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
13) A company has a policy "investigate all variances exceeding $3,000 or 15% of the budgeted cost, whichever is lower." There is a variance of $2,000 in repair and maintenance costs of $12,000. What does the company do in the given situation? A) It should be ignored as it is less than $3,000. B) It deserves more attention as it is more than 15% of total repair cost. C) It should be considered an in-control occurrence. D) It should be investigated as all variances are equally important. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
14) The term for understanding why actual performance deviates from planned performance is: A) variance calculation B) organizational learning C) favorable variance D) continuous improvement Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
501 richard@qwconsultancy.com
15) Effectiveness is: A) the relative amount of inputs used to achieve a given output level B) the continuous process of comparing a firm's performance levels against the best levels of performance in competing companies C) the degree to which a predetermined objective or target is met D) is a practice whereby managers focus more closely on areas that are not operating as expected and less closely on areas that are Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
16) Which of the following is NOT a good criteria, rule or reason as to why variances should be investigated? A) Variances should be investigated when they are considered material. B) Generally, materiality is based on an objective criterion such as a set percentage of deviation from the budgeted amount. C) In some instances, subjective judgment may replace an objective rule of thumb. D) It is equally important to investigate favorable variances as well as unfavorable. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
17) A favorable variance can be automatically interpreted as "good news." Answer: FALSE Explanation: A favorable variance may not be good news at all because it adversely affects other variances that increase total costs. Diff: 1 Objective: 6 AACSB: Analytical thinking
18) Continuous improvement through the use of standard costs is the process of repeatedly identifying the causes of variances, taking corrective actions, and evaluating results. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
19) If variance analysis is used for performance evaluation, managers are encouraged to meet targets using creativity and resourcefulness. Answer: FALSE Explanation: The most common outcome when variance analysis is used for performance evaluation is that managers seek targets that are easily attainable and avoid targets that require creativity and resourcefulness. Diff: 2 Objective: 6 AACSB: Analytical thinking
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20) When using variance analysis for performance evaluation, managers often focus on effectiveness and efficiency as two of the common attributes used in comparing expected results with actual results. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
21) For critical items such as product defects, a small variance may prompt investigation. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
22) A variance within an acceptable range is considered to be an "in-control occurrence" and calls for no investigation or action by managers. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
23) In variance analysis, if any single performance measure is underemphasized, managers will tend to make decisions that will cause the particular performance measure to look good. Answer: TRUE Explanation: In variance analysis, if any single performance measure is overemphasized, managers will tend to make decisions that will cause the particular performance measure to look good. Diff: 2 Objective: 6 AACSB: Analytical thinking
24) Efficiency is the relative amount of inputs used to achieve a given output level. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
25) Efficiency is the degree to which a predetermined objective or target is met. Answer: FALSE Explanation: Effectiveness is the degree to which a predetermined objective or target is met. Diff: 2 Objective: 6 AACSB: Analytical thinking
26) Managerial performance evaluation occurs on two dimensions–effectiveness and economies of scale. Answer: FALSE Explanation: Managerial performance evaluation occurs on two dimensions–effectiveness and efficiency. Diff: 2 Objective: 6 AACSB: Analytical thinking
503 richard@qwconsultancy.com
27) A percentage of products started and completed without requiring any rework is an example of nonfinancial performance measure. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
28) It is best to rely totally on financial performance measures rather than using a combination of financial and nonfinancial performance measures. Answer: FALSE Explanation: It is best to rely on a combination of financial and nonfinancial performance measures. Diff: 2 Objective: 6 AACSB: Analytical thinking
29) The goal of variance analysis is for managers to understand why variances arise, to learn, and to improve future performance. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
30) Possible operational causes of an unfavorable direct materials efficiency variance include poor design of products or processes. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
31) Effectiveness is the degree to which a predetermined objective or target is met. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
32) With disregard to all other factors, the use of high-quality raw materials is likely to result in a favorable efficiency variance and an unfavorable price variance. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
33) Direct material price variance is likely to be unfavorable if the purchasing manager switched to a lower-price supplier. Answer: FALSE Explanation: Direct material price variance is likely to be favorable if the purchasing manager switched to a lower-price supplier. Diff: 2 Objective: 5 AACSB: Analytical thinking
504 richard@qwconsultancy.com
34) With disregard to other factors, direct manufacturing labor efficiency variance is likely to be unfavorable if under skilled workers are put on a job. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
35) Coffey Company maintains a very large direct materials inventory because of critical demands placed upon it for rush orders from large hospitals. Item A contains hard-to-get material Y. Currently, the standard cost of material Y is $4.25 per gram. During February, 22,000 grams were purchased for $4.40 per gram, while only 20,000 grams were used in production. There was no beginning inventory of material Y. Required: a. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the materials purchasing manager. b. Determine the direct materials price variance, assuming that all materials costs are the responsibility of the production manager. c. Discuss the issues involved in determining the price variance at the point of purchase versus the point of consumption. Answer: a. Material price variance = 22,000 × ($4.40 - $4.25) = $3,300 unfavorable b.
Material price variance = 20,000 × ($4.40 - $4.25) = $3,000 unfavorable
c. Measuring the price variance at the time of materials purchased is desirable in situations where the amount of materials purchased varies substantially from the amount used during the period. Failure to measure the price variance based on materials purchased could result in a substantial delay in determining that a price change occurred. Also, if the purchasing manager is to be held accountable for his/her purchasing activities, it is appropriate to have the materials price variances computed at the time of purchase so the manager can include the variances on his/her monthly report. This encourages the purchasing manager to be more responsible for the activities under his/her control. It provides a closer relationship between responsibility and authority and becomes a relevant performance measure. Diff: 2 Objective: 6 AACSB: Application of knowledge
505 richard@qwconsultancy.com
36) During February the Lungren Manufacturing Company's costing system reported several variances that the production manager was surprised to see. Most of the company's monthly variances are under $125, even though they may be either favorable or unfavorable. The following information is for the manufacture of garden gates, its only product: 1. 2. 3. 4.
Direct materials price variance, $800 unfavorable. Direct materials efficiency variance, $1,800 favorable. Direct manufacturing labor price variance, $4,000 favorable. Direct manufacturing labor efficiency variance, $600 unfavorable.
Required: a. Provide the manager with some ideas as to what may have caused the price variances. b. What may have caused the efficiency variances? Answer: a. Direct materials' unfavorable price variance may have been caused by: (1) paying a higher price than the standard for the period, (2) changing to a new vendor, or (3) buying higher-quality materials. Direct manufacturing labor's favorable price variance may have been caused by: (1) changing the work force by hiring lower-paid employees, (2) changing the mix of skilled and unskilled workers, or (3) not giving pay raises as high as anticipated when the standards were set for the year. b. Direct materials' favorable efficiency variance may have been caused by: (1) employees/machinery working more efficiency and having less scrap and waste materials, (2) buying better-quality materials, or (3) changing the production process. Direct manufacturing labor's unfavorable efficiency variance may have been caused by: (1) poor working conditions, (2) changes in the production process (learning something new initially takes longer), (3) different types of direct materials to work with, or (4) poor attitudes on behalf of the workers. Diff: 3 Objective: 6 AACSB: Analytical thinking
506 richard@qwconsultancy.com
37) Mayberry Company had the following journal entries recorded for the end of June. Unfortunately, the company's only accountant quit on July 10 and the president is at a loss as to the company's performance for the month of June. Materials Control Direct Materials Price Variance Accounts Payable Control
300,000
Work-in-Process Control Direct Materials Efficiency Variance Materials Control
120,000 8,000
10,000 290,000
128,000
Work-in-Process Control 850,000 Direct Manufacturing Labor Price Variance 15,000 Direct Manufacturing Labor Efficiency Variance Wages Payable Control
18,000 847,000
Required: a. What kind of performance did the company have for June? Explain each variance. b. Why is Direct Materials given in two entries? Answer: a. The first entry is for materials purchases. The credit entry indicates a favorable variance. This could be an indicator that the purchasing agent did a good job or he/she bought inferior goods. Production was not as lucky in June. The debit entry for materials efficiency indicates that more materials were used than should have been under the operating plans for the month. For labor, the price was unfavorable, while the efficiency was favorable. This could have been caused by using higher-priced workers who were, in fact, better workers. Of course, there are many other possible causes. b. recording variances for direct materials is completed with two separate entries since the price variance is isolated at the point of purchase, while the efficiency variance is isolated at the point of use. Diff: 3 Objective: 6 AACSB: Analytical thinking
507 richard@qwconsultancy.com
38) Waddell Productions makes separate journal entries for all cost accounting-related activities. It uses a standard cost system for all manufacturing items. For the month of June, the following activities have taken place: Direct Manufacturing Materials Purchased Direct Manufacturing Materials Used Direct Materials Price Variance (at time of purchase) Direct Materials Efficiency Variance Direct Manufacturing Labor Price Variance Direct Manufacturing Labor Efficiency Variance Direct Manufacturing Labor Payable
$300,000 250,000 10,000 unfavorable 15,000 favorable 6,000 favorable 4,000 favorable 170,000
Required: Record the necessary journal entries to close the accounts for the month. Answer: Materials Control 300,000 Direct Manufacturing Materials Price Variance 10,000 Accounts Payable Control 310,000 Work-in-Process Control Direct Materials Efficiency Variance Materials Control
265,000 15,000 250,000
Work-in-Process Control 180,000 Direct Manufacturing Labor Price Variance Direct Manufacturing Labor Efficiency Variance Wages Payable Control
6,000 4,000 170,000
Diff: 3 Objective: 6 AACSB: Application of knowledge
39) Describe the purpose of variance analysis. Answer: Variance analysis should help the company learn about what happened and how to perform better and should not be a tool in playing the "blame game." Diff: 2 Objective: 6 AACSB: Analytical thinking
508 richard@qwconsultancy.com
Objective 7.7 1) The process by which a company's products or services are measured relative to the best possible levels of performance in competing companies is known as: A) efficiency B) benchmarking C) a standard costing system D) variance analysis Answer: B Diff: 1 Objective: 7 AACSB: Analytical thinking
2) Benchmarking is a process: A) in which overhead costs are absorbed into units of output, or 'jobs' B) in which a firm's performance levels are compared against the best levels of performance in competing companies or in companies having similar processes C) which is based on calculating the breakeven point and analyzing the consequences of changes in various factors calculating the breakeven point D) in which the underlying processes of an organization is optimized using a systematic approach to achieve more efficient goals Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
3) Which of the following statements is true of benchmarking? A) It is a systematic approach of optimizing business processes. B) It fails to help to improve organizational performance as benchmarking data does not provide insight into why costs or revenues differ across companies. C) It is difficult to ensure that the benchmark numbers are comparable due to the existence of differences across companies. D) It considers four major business aspects such as financial, customer, internal business processes, and learning and growth. Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
4) When benchmarking, management accountants are most valuable when they: A) present differences in the benchmarking data to management B) highlight differences in the benchmarking data to management C) provide insight into why costs or revenues differ across companies D) provide complex mathematical analysis Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
509 richard@qwconsultancy.com
5) Benchmarking is the continuous process of measuring products, services, and activities against the best possible levels of performance, either inside or outside the organization. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
6) Coast to Coast Bus Lines acquired the following data about the operating cost of three of its top competitors. Operating cost per seat per mile Competitor A $.11 Competitor B $.15 Competitor C $.16 Management decides to use the average operating cost per seat per mile as a mark. Coast to Coast per seat is 12.5 cents per mile. A) It is equal to the mark. B) It compares favorably. C) It compares unfavorably. D) It compares favorably to the best performing competitor. Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
7) It is difficult for firms to find appropriate benchmarks because differences can exist across companies in their strategies, inventory costing methods, depreciation methods, and so on. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
8) When benchmarking it is best when management accountants simply analyze the costs and allow management to provide the insight as to why the revenues and costs differ between companies. Answer: FALSE Explanation: When benchmarking, management accountants are more valuable when they analyze the costs and also provide management with insight as to why the revenues and costs differ between companies. Diff: 1 Objective: 7 AACSB: Analytical thinking
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9) Benchmarking compares a firm's current performance against its best levels of performance to measure how well the company and managers are doing within the context of its corporate history. Answer: FALSE Explanation: Benchmarking compares a firm's performance against the best levels of performance in competing companies or companies with similar processes to measure how well a company and its managers are doing. Diff: 2 Objective: 7 AACSB: Analytical thinking
10) What is benchmarking, and how is it useful to a company? Answer: Benchmarking is the continuous process of comparing the levels of performance in producing products and services and executing activities against the best levels of performance in competing companies or in companies having similar processes. Companies can examine aspects of their own operations in comparison to similar operations and see if they are operating at a disadvantage. Benchmarking might provide targets and opportunities to cut costs, and might even show where they have a competitive advantage over similar companies. Diff: 2 Objective: 7 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 8 Flexible Budgets, Overhead Cost Variances, and Management Control Objective 8.1 1) Compared to variable overhead costs planning, fixed overhead cost planning has an additional strategic issue beyond undertaking only essential activities and efficient operations. That additional requirement is best described as: A) focusing on the highest possible quality B) increasing the linearity between total costs and volume of production C) choosing the appropriate level of capacity that will benefit the company in the long-run D) identifying essential value-adding activities Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
2) Effective planning of variable overhead costs means that managers must: A) increase the expenditures in the variable overhead budgets B) focus on activities that add value for the customer and eliminate nonvalue-added activities C) increase the linearity between total costs and volume of production D) identify the product advertising requirements and factor those into the variable overhead budget Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Which of the following is a true statement of energy costs? A) Energy costs are not controllable.
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B) Strategies to reduce energy costs will not impact variable cost budgets. C) Energy costs are a fixed cost of doing business for a manufacturer. D) Energy costs are a growing component of variable overhead costs. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
4) Fixed overhead costs include: A) the cost of sales commissions B) leasing of machinery used in a factory C) energy costs D) indirect materials Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
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5) Effective planning of fixed overhead costs includes: A) planning day-to-day operational decisions B) eliminating value-added costs C) determining which products are to be produced D) choosing the appropriate level of investment in productive assets Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Effective planning of variable overhead costs includes: A) choosing the appropriate level of investment B) eliminating value-added costs C) redesigning products or processes to use fewer resources D) reorganizing management structure Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Most of the decisions determining the level of fixed overhead costs to be incurred will be made: A) by the end of a budget period B) by the middle of a budget period C) on a day-to-day ongoing basis D) at the start of a budget period Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
8) The major challenge when planning fixed overhead is: A) calculating total costs B) calculating the cost-allocation rate C) choosing the appropriate level of capacity D) choosing the appropriate planning period Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
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9) With regards to variable overhead costs, which of the following is true? A) At the start of the budget period most decisions regarding variable costs will have been made. B) Day to day decisions will have little impact of the per unit variable cost of a manufactured product. C) When managers are concerned about improving quality, little focus is placed on variable costs and more focus is on fixed costs during an operating cycle. D) Day-to-day operating decisions made by management affect the level of variable costs incurred in the period. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
10) An effective plan for variable overhead costs will eliminate activities that do not add value. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
11) At the start of the budget period, management will have made most decisions regarding the level of fixed overhead costs to be incurred. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
12) The planning of fixed overhead costs differs from the planning of variable overhead costs in terms of timing. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
13) The costs related to buildings (such as rent and insurance), equipment (such as lease payments or straight-line depreciation), and salaried labor in a factory are all examples of cost items that would be part of the fixed overhead budget. Answer: TRUE Explanation: The costs mentioned are all fixed overhead costs. Diff: 1 Objective: 1 AACSB: Analytical thinking
14) In planning variable overhead costs, managers must focus attention on activities that create a superior product or service and eliminate activities that do not add value. Answer: TRUE Explanation: The costs mentioned are all fixed overhead costs. Diff: 1 Objective: 1 AACSB: Analytical thinking
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Objective 8.2 1) Which of the following mathematical expression is used to calculate budgeted variable overhead cost rate per output unit? A) Budgeted output allowed per input unit × Budgeted variable overhead cost rate per input unit B) Budgeted input allowed per output unit ÷ Budgeted variable overhead cost rate per input unit C) Budgeted output allowed per input unit ÷ Budgeted variable overhead cost rate per input unit D) Budgeted input allowed per output unit × Budgeted variable overhead cost rate per input unit Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
2) While calculating the costs of products and services, a standard costing system: A) allocates overhead costs on the basis of the actual overhead-cost rates B) uses standard costs to determine the cost of products C) does not keep track of overhead cost D) traces direct costs to output by multiplying the standard prices or rates by the actual quantities Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Which of the following best defines standard costing? A) It is the same as actual costing but done in real time. B) It is a system that traces direct cost to output by multiplying actual process or rates by actual quantities of inputs + allocates overhead by on the basis of actual quantities of the allocation base used. C) It is a system that traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities of inputs allowed for the actual output produced. D) It is a system that allocates overhead costs on the basis of standard overhead cost rates times the actual quantities of the allocation based used. Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
4) Which of the following is the mathematical expression for the budgeted fixed overhead cost per unit of cost allocation base? A) Budgeted fixed overhead cost per unit of cost allocation base = Actual total costs in fixed overhead cost pool ÷ Budgeted total quantity of cost allocation base B) Budgeted fixed overhead cost per unit of cost allocation base = Budgeted total costs in fixed overhead cost pool ÷ Budgeted total quantity of cost allocation base C) Budgeted fixed overhead cost per unit of cost allocation base = Actual total costs in fixed overhead cost pool ÷ Actual total quantity of cost allocation base D) Budgeted fixed overhead cost per unit of cost allocation base = Budgeted total costs in fixed overhead cost pool ÷ Actual total quantity of cost allocation base Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
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5) In flexible budgets the costs that are not "flexed" because they remain the same within a relevant range of activity (such as sales or output) are called: A) total overhead costs B) total budgeted costs C) fixed costs D) variable costs Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
6) Really Great Corporation manufactures industrial-sized landscaping trailers and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information pertains to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 40,000 units
40,000 units 10,000 hours $310,000
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
36,500 units 14,600 hours $350,400
What is the budgeted variable overhead cost rate per output unit? A) $9.60 B) $12.40 C) $7.75 D) $31.00 Answer: C Explanation: A) C) Machine hour per unit = 10,000 ÷ 40,000 = 0.25 Budgeted cost per machine hour = $310,000 ÷ 10,000 = $31.00 Budgeted cost per unit = $31.00 × 0.25 = $7.75 Diff: 2 Objective: 2 AACSB: Application of knowledge
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7) Home Plate Corporation manufactures baseball uniforms and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information pertains to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 7,000 units
7,000 units 19,000 hours $119,000
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
6,000 units 18,000 hours $108,000
What is the budgeted variable overhead cost rate per output unit? A) $6.26 B) $6.00 C) $17.00 D) $18.00 Answer: C Explanation: C) $119,000/7,000 = $17.00 Diff: 2 Objective: 2 AACSB: Application of knowledge
8) Healthy Earth Products Inc. produces fertilizer and distributes the product by using company trucks. The controller of the company uses budgeted fleet hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units Budgeted fleet hours Budgeted pounds of fertilizer Budgeted variable manufacturing overhead costs for 800 loads
800 truckloads 520 hours 28,000,000 pounds $93,600.00
Actual output units produced and delivered Actual fleet hours Actual pounds of fertilizer produced and delivered Actual variable manufacturing overhead costs
760 truckloads 460 hours 29,400,000 pounds $91,200.00
What is the budgeted variable overhead cost rate per output unit? A) $114.00 B) $117.00 C) $123.16 D) $120.00 Answer: B Explanation: B) Budgeted fleet hours per unit = 520 ÷ 800= 0.65 Budgeted cost per fleet hour = $93,600.00 ÷ 520 = $180 Budgeted cost per unit = $180 × 0.65 = $117.00 Diff: 2 Objective: 2 AACSB: Application of knowledge
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9) Standard costing is a costing system that allocates overhead costs on the basis of the standard overhead-cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
10) Fixed costs automatically increase or decrease with the level of activity within a relevant range of activity. Answer: FALSE Explanation: Fixed costs do not automatically increase or decrease with the level of activity within the relevant range. Diff: 1 Objective: 2 AACSB: Analytical thinking
11) Standard costing is a cost system that allocates overhead costs on the basis of overhead cost rates based on actual overhead costs times the standard quantities of the allocation bases allowed for the actual outputs produced. Answer: FALSE Explanation: Standard costing is a costing system that traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities of inputs allowed for actual outputs produced. Diff: 2 Objective: 2 AACSB: Analytical thinking
12) Computing standard costs at the start of the budget period results in a complex record keeping system. Answer: FALSE Explanation: Computing standard costs at the start of the budget period simplifies record keeping because no records are needed of the actual overhead costs or of the actual quantities of the cost-allocation bases used. Diff: 2 Objective: 2 AACSB: Analytical thinking
13) A standard costing system allocates overhead costs on the basis of the standard overhead cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
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14) Ideal rate is synonymous with standard rate. Answer: FALSE Explanation: Budgeted rate is synonymous with standard rate as an ideal rate is attainable only if all circumstances result in the best possible outcome whereas a standard should be reasonable attainable and becomes the rate used in the budget (budgeted rate). Diff: 2 Objective: 2 AACSB: Analytical thinking
15) List the four steps to develop budgeted variable overhead cost-allocation. Answer: Step 1: Choose the period to be used for the budget. Step 2: Select the cost-allocation bases to use in allocating the variable overhead costs to the output produced. Step 3: Identify the variable overhead costs associated with each cost-allocation base. Step 4: Compute the rate per unit of each cost-allocation base used to allocate the variable overhead costs to the output produced. Diff: 2 Objective: 2 AACSB: Analytical thinking
16) What is a standard costing system? Answer: Standard costing is a costing system that (1) traces direct costs to output produced by multiplying the standard prices or rates by the standard quantities of inputs allowed for actual outputs produced and (2) allocates overhead costs on the basis of the standard overhead-cost rates times the standard quantities of the allocation bases allowed for the actual outputs produced. Diff: 2 Objective: 2 AACSB: Analytical thinking
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Objective 8.3 1) The variable overhead spending variance measures the difference between ________, multiplied by the actual quantity of variable overhead cost-allocation base used. A) the actual variable overhead cost per unit and the budgeted variable overhead cost per unit B) the standard variable overhead cost rate and the budgeted variable overhead cost rate C) the actual variable overhead cost per unit and the budgeted fixed overhead cost per unit D) the actual quantity per unit and the budgeted quantity per unit Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
2) A $5,000 unfavorable flexible-budget variance indicates that: A) the flexible-budget amount exceeded actual variable manufacturing overhead by $5,000 B) the actual variable manufacturing overhead exceeded the flexible-budget amount by $5,000 C) the flexible-budget amount exceeded standard variable manufacturing overhead by $5,000 D) the standard variable manufacturing overhead exceeded the flexible-budget amount by $5,000 Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
3) Majestic Corporation manufactures wheelbarrows and uses budgeted machine hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 28,475 units
28,475 units 17,085 hours $358,785
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
32,475 units 15,000 hours $384,060
What is the flexible-budget amount for variable manufacturing overhead? A) $358,785 B) $409,185 C) $384,060 D) $336,755 Answer: B Explanation: B) Budgeted machine hours per unit = 17,085 ÷ 28,475 = 0.6 Budgeted machine hours allowed for 32,475 units = 32,475 × 0.6 = 19,485 Budgeted variable overhead rate per machine hour = $358,785 ÷ 17,085 = $21.00 Flexible-budget amount = 19,485 × $21.00 = $409,185 Diff: 2 Objective: 3 AACSB: Application of knowledge
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4) Majestic Corporation manufactures wheelbarrows and uses budgeted machine hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 43,500 units
43,500 units 17,400 hours $382,800
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
45,500 units 14,500 hours $435,709
What is the flexible-budget variance for variable manufacturing overhead? A) $35,309 unfavorable B) $52,909 unfavorable C) $35,309 favorable D) $52,909 favorable Answer: A Explanation: A) Budgeted machine hours per unit = 17,400 ÷ 43,500 = 0.4 Budgeted machine hours allowed for 45,500 units = 45,500 × 0.4 = 18,200 Budgeted variable overhead rate per machine hour = $382,800 ÷ 17,400 = $22.00 Flexible-budget amount = 18,200 × $22.00 = $400,400 Flexible-budget variance = $435,709 − $400,400 = $35,309 unfavorable Diff: 3 Objective: 3 AACSB: Application of knowledge
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5) Majestic Corporation manufactures wheelbarrows and uses budgeted machine hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 43,500 units
43,500 units 17,400 hours $382,800
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
47,500 units 15,100 hours $387,518
What is the amount of the budgeted variable manufacturing overhead cost per unit? (Do not round any intermediary calculations. Round your final answer to the nearest cent.) A) $8.91 B) $8.06 C) $8.80 D) $8.16 Answer: C Explanation: C) Budgeted machine hours per unit = 17,400 ÷ 43,500 = 0.4 Budgeted variable overhead rate per machine hour = $382,800 ÷ 17,400 = $22.00 Budgeted variable manufacturing overhead cost per unit = 0.4 × $22.00 = $8.80 Diff: 3 Objective: 3 AACSB: Application of knowledge
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6) Lancelot Corporation manufactures tennis gear and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 8,000 units
8,000 units 24,000 hours $288,000
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
8,500 units 23,750 hours $250,000
What is the flexible-budget amount for variable manufacturing overhead? A) $250,000 B) $306,000 C) $288,000 D) $235,294 Answer: B Explanation: B) Budgeted machine hours per unit = 24,000 ÷ 8,000 = 3 Budgeted machine hours allowed for 8,500 units = 8,500 × 3 = 25,500 Budgeted variable overhead rate per machine hour = $288,000 ÷ 24,000 = $12.00 Flexible-budget amount = 25,500 × $12.00 = $306,000 Diff: 3 Objective: 3 AACSB: Application of knowledge
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7) Lancelot Corporation manufactures tennis gear and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 3,000 units
3,000 units 15,000 hours $180,000
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
3,350 units 14,700 hours $250,000
What is the flexible-budget variance for variable manufacturing overhead? A) $49,000 unfavorable B) $49,000 favorable C) $70,000 unfavorable D) $70,000 favorable Answer: A Explanation: A) Budgeted machine hours per unit = 15,000 ÷ 3,000 = 5 Budgeted machine hours allowed for 3,350 units = 3,350 × 5 = 16,750 Budgeted variable overhead rate per machine hour = $180,000 ÷ 15,000 = $12.00 Flexible-budget amount = 16,750 × $12.00 = $201,000 Flexible-budget variance = $250,000 − $201,000 = $49,000 U Diff: 3 Objective: 3 AACSB: Application of knowledge
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8) Lancelot Corporation manufactures tennis gear and uses budgeted machine-hours to allocate variable manufacturing overhead. The following information relates to the company's manufacturing overhead data: Budgeted output units Budgeted machine-hours Budgeted variable manufacturing overhead costs for 9,500 units
9,500 units 28,500 hours $68,400
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
9,800 units 28,100 hours $250,000
What is the amount of the budgeted variable manufacturing overhead cost per unit? A) $2.40 per unit B) $6.98 per unit C) $7.20 per unit D) $25.51 per unit Answer: C Explanation: C) Budgeted machine hours per unit = 28,500 ÷ 9,500 = 3 Budgeted variable overhead rate per machine hour = $68,400 ÷ 28,500 = $2.40 Budgeted variable manufacturing overhead cost per unit = 3 × $2.40 = $7.20 Diff: 3 Objective: 3 AACSB: Application of knowledge
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9) J&J Materials and Construction Corporation produces mulch and distributes the product by using dump trucks. The company uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company's manufacturing overhead data: Budgeted output units Budgeted fleet hours Budgeted variable manufacturing overhead costs for 690 loads
690 truckloads 621 hours $94,392
Actual output units produced and delivered Actual fleet hours Actual variable manufacturing overhead costs
630 truckloads 546 hours $89,592
What is the flexible-budget amount for variable manufacturing overhead? (Round intermediary calculations two decimal places and your final answer to the nearest whole dollar.) A) $81,801 B) $94,392 C) $86,184 D) $89,592 Answer: C Explanation: C) Budgeted fleet hours per unit = 621 ÷ 690 = 0.9 Budgeted fleet hours allowed for 630 truckloads = 630 × 0.9 = 567 Budgeted variable overhead rate per machine hour = $94,392 ÷ 621 = $152.00 Flexible-budget amount = 567 × $152.00 = $86,184 Diff: 2 Objective: 3 AACSB: Application of knowledge
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10) J&J Materials and Construction Corporation produces fertilizer and distributes the product by using dump trucks. The company uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company's manufacturing overhead data: Budgeted output units Budgeted fleet hours Budgeted variable manufacturing overhead costs for 680 loads
680 truckloads 476 hours $72,590.00
Actual output units produced and delivered Actual fleet hours Actual variable manufacturing overhead costs
615 truckloads 376 hours $67,790.00
What is the flexible-budget variance for variable manufacturing overhead? A) $4,800 favorable B) $4,800 unfavorable C) $2,139 favorable D) $2,139 unfavorable Answer: D Explanation: D) Budgeted fleet hours per unit = 476 ÷ 680 = 0.7 Budgeted fleet hours allowed for 615 truckloads = 615 × 0.7 = 430.5 Budgeted variable overhead rate per machine hour = $72,590.00 ÷ 476 = $152.50 Flexible-budget amount = 430.5 × $152.50 = $65,651.3 Flexible-budget variance = $67,790.00 − $65,651.3 = $2,139 U Diff: 3 Objective: 3 AACSB: Application of knowledge
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11) J&J Materials and Construction Corporation produces mulch and distributes the product by using dump trucks. The company uses budgeted fleet hours to allocate variable manufacturing overhead. The following information pertains to the company's manufacturing overhead data: Budgeted output units Budgeted fleet hours Budgeted variable manufacturing overhead costs for 710 loads
710 truckloads 568 hours $87,756.00
Actual output units produced and delivered Actual fleet hours Actual variable manufacturing overhead costs
635 truckloads 468 hours $82,896.00
What is the budgeted variable manufacturing overhead cost per unit? A) $154.50 per unit B) $177.13 per unit C) $130.54 per unit D) $123.60 per unit Answer: D Explanation: D) Budgeted fleet hours per unit = 568 ÷ 710 = 0.8 Budgeted variable overhead rate per machine hour = $87,756.00 ÷ 568 = $154.50 Budgeted variable manufacturing overhead cost per unit = 0.8 × $154.50 = $123.60 Diff: 3 Objective: 3 AACSB: Application of knowledge
12) The variable overhead flexible-budget variance can be further explained by calculating the: A) price variance and the efficiency variance B) static-budget variance and sales-volume variance C) spending variance and the efficiency variance D) sales-volume variance and the spending variance Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
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13) Teddy Company uses a standard cost system. In May, $234,000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $240,000. Which of the following variable manufacturing overhead entries would have been recorded for May? A) Accounts Payable Control and other accounts 240,000 Work-in-Process Control 240,000 B) Work-in-Process Control 240,000 Variable Manufacturing Overhead Allocated 240,000 C) Work-in-Process Control 234,000 Accounts Payable Control and other accounts 234,000 D) Accounts Payable Control and other accounts 234,000 Variable Manufacturing Overhead Control 234,000 Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
14) A company is using a standard cost system and receives its electricity bill. Electricity is considered a variable cost of operations for this company. The bill is for $15,000 and will be paid next month. Which of the following entries would be the correct recording of the electricity bill? A) Work-in-Process Control $15,000 Variable Overhead Allocated $15,000 B) Variable Overhead Control $15,000 Accounts payable $15,000 C) Work-in-Process Control $15,000 Accounts Payable $15,000 D) Variable Overhead Control $15,000 Variable Overhead Allocated $15,000 Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
15) When machine-hours are used as an overhead cost-allocation base, the most likely cause of a favorable variable overhead spending variance is: A) excessive machine breakdowns B) the production scheduler efficiently scheduled jobs C) a decline in the cost of energy D) strengthened demand for the product Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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16) The variable overhead efficiency variance measures the difference between the ________, multiplied by the budgeted variable overhead cost per unit of the cost-allocation base. A) budgeted quantity of the cost-allocation base used and the budgeted quantity of the cost-allocation base that should have been used to produce the actual output B) actual quantity of the cost-allocation base used and the budgeted quantity of the cost-allocation base that should have been used to produce the actual output C) actual cost incurred and the budgeted quantity of the cost-allocation base that should have been used to produce the actual output D) budgeted cost and the actual cost used to produce the actual output Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
17) When variable overhead efficiency variance is favorable, it can be safely assumed that the: A) actual rate per unit of the cost-allocation base is higher than the budgeted rate B) actual quantity of the cost-allocation base used is higher than the budgeted quantity C) actual rate per unit of the cost-allocation base is lower than the budgeted rate D) actual quantity of the cost-allocation base used is lower than the budgeted quantity Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
18) Lazy Guy Corporation manufactured 4,000 chairs during June. The following variable overhead data relates to June: Budgeted variable overhead cost per unit Actual variable manufacturing overhead cost Flexible-budget amount for variable manufacturing overhead Variable manufacturing overhead efficiency variance
$10.00 $49,000 $46,800 $720 unfavorable
What is the variable overhead flexible-budget variance? A) $2,200 favorable B) $1,480 favorable C) $2,200 unfavorable D) $1,480 unfavorable Answer: C Explanation: C) Variable overhead flexible-budget variance = $49,000 − $46,800 = $2,200 (U) Diff: 2 Objective: 3 AACSB: Application of knowledge
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19) Lazy Guy Corporation manufactured 6,000 chairs during June. The following variable overhead data relates to June: Budgeted variable overhead cost per unit Actual variable manufacturing overhead cost Flexible-budget amount for variable manufacturing overhead Variable manufacturing overhead efficiency variance
$10.00 $52,800 $46,900 $790 unfavorable
What is the variable overhead spending variance? A) $5,110 favorable B) $5,900 favorable C) $5,900 unfavorable D) $5,110 unfavorable Answer: D Explanation: D) Variable overhead flexible-budget variance = $52,800 - $46,900 = $5,900 (U) Variable overhead spending variance = $5,900 (U) − $790 (U) = $5,110 (U) Diff: 3 Objective: 3 AACSB: Application of knowledge
20) Outdoor Gear Corporation manufactured 2000 coolers during October. The following variable overhead data relates to October: Variable overhead spending variance Variable overhead efficiency variance Budgeted machine hours allowed for actual output Actual cost per machine hour Budgeted cost per machine hour
$1232 Unfavorable $260 Unfavorable 606 machine hours $28 $26
Calculate the actual machine hours used by Stark during October. A) 616 hours B) 606 hours C) 596 hours D) 615 hours Answer: A Explanation: A) (Actual machine hours − 606 budgeted machine hours) × $26 = $260 Actual machine hours = 10 hours + 606 hours = 616 hours Diff: 2 Objective: 3 AACSB: Application of knowledge
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21) Outdoor Gear Corporation manufactured 1,000 coolers during October. The following variable overhead data relates to October: Variable overhead spending variance Variable overhead efficiency variance Budgeted machine hours allowed for actual output Actual cost per machine hour Budgeted cost per machine hour
$1,300 Unfavorable $182 Unfavorable 608 machine hours $28 $26
Calculate the variable overhead flexible-budget variance. A) $1,118 unfavorable B) $1,118 favorable C) $1,482 unfavorable D) $1,482 favorable Answer: C Explanation: C) Variable overhead flexible-budget variance = $1,300 (U) + $182 (U) = $1,482 (U) Diff: 3 Objective: 3 AACSB: Application of knowledge
22) Zitrik Corporation manufactured 90,000 buckets during February. The variable overhead cost-allocation base is $5.10 per machine-hour. The following variable overhead data pertain to February:
Production Machine-hours Variable overhead cost per machine-hour
Actual 90,000 units 9,800 hours $5.25
Budgeted 90,000 units 9,000 hours $5.10
What is the actual variable overhead cost? A) $472,500 B) $459,000 C) $51,450 D) $49,980 Answer: C Explanation: C) Actual variable overhead cost = 9,800 mh × $5.25 = $51,450 Diff: 2 Objective: 3 AACSB: Application of knowledge
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23) Zitrik Corporation manufactured 90,000 buckets during February. The variable overhead cost-allocation base is $5.00 per machine-hour. The following variable overhead data pertain to February:
Production Machine-hours Variable overhead cost per machine-hour
Actual 90,000 units 10,800 hours $5.05
Budgeted 90,000 units 10,000 hours $5.00
What is the flexible-budget amount? A) $54,000 B) $50,000 C) $50,500 D) $54,540 Answer: B Explanation: B) Flexible-budget amount = 10,000 mh × $5.00 = $50,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
24) Zitrik Corporation manufactured 110,000 buckets during February. The variable overhead cost-allocation base is $5.45 per machine-hour. The following variable overhead data pertain to February:
Production Machine-hours Variable overhead cost per machine-hour
Actual 110,000 units 10,500 hours $5.55
Budgeted 110,000 units 10,000 hours $5.45
What is the variable overhead spending variance? A) $1,050 favorable B) $1,000 unfavorable C) $1,050 unfavorable D) $1,000 favorable Answer: C Explanation: C) Variable overhead spending variance = ($5.55 − $5.45) × 10,500 mh = $1,050 unfavorable Diff: 3 Objective: 3 AACSB: Application of knowledge
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25) Zitrik Corporation manufactured 130,000 buckets during February. The variable overhead cost-allocation base is $5.30 per machine-hour. The following variable overhead data pertain to February:
Production Machine-hours Variable overhead cost per machine-hour
Actual 130,000 units 9,500 hours $5.35
Budgeted 130,000 units 9,000 hours $5.30
What is the variable overhead efficiency variance? A) $2,650 unfavorable B) $2,675 favorable C) $2,650 favorable D) $2,675 unfavorable. Answer: A Explanation: A) Variable overhead efficiency variance = [9,500 − 9,000] × $5.30 = $2,650 unfavorable Diff: 3 Objective: 3 AACSB: Application of knowledge
26) Cold Products Corporation manufactured 34,000 ice chests during September. The variable overhead cost-allocation base is $14.50 per machine-hour. The following variable overhead data pertain to September:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 34,000 units 15,200 hours $14.00
Budgeted 30,000 units 10,800 hours $14.50
What is the actual variable overhead cost? A) $156,600 B) $177,480 C) $212,800 D) $220,400 Answer: C Explanation: C) 15,200 mh × $14.00 = $212,800 Diff: 2 Objective: 3 AACSB: Application of knowledge
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27) Cold Products Corporation manufactured 27,000 ice chests during September. The variable overhead cost-allocation base is $15.00 per machine-hour. The following variable overhead data pertain to September:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 27,000 units 21,600 hours $14.75
Budgeted 20,000 units 6,000 hours $15.00
What is the flexible-budget amount? A) $90,000 B) $121,500 C) $318,600 D) $324,000 Answer: B Explanation: B) 27,000 × (6,000/20,000) × $15.00 = $121,500 Diff: 2 Objective: 3 AACSB: Application of knowledge
28) Cold Products Corporation manufactured 32,000 ice chests during September. The variable overhead cost-allocation base is $13.45 per machine-hour. The following variable overhead data pertain to September:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 32,000 units 15,200 hours $13.25
Budgeted 26,000 units 10,800 hours $13.45
What is the variable overhead spending variance? A) $3,040 favorable B) $25,658 unfavorable C) $22,618 unfavorable D) $59,180 unfavorable Answer: A Explanation: A) ($13.25 - $13.45) × 15,200 mh = $3,040 favorable Diff: 3 Objective: 3 AACSB: Application of knowledge
535 richard@qwconsultancy.com
29) Cold Products Corporation manufactured 27,000 ice chests during September. The variable overhead cost-allocation base is $11.75 per machine-hour. The following variable overhead data pertain to September:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 27,000 units 13,500 hours $11.25
Budgeted 26,000 units 7,800 hours $11.75
What is the variable overhead efficiency variance? A) $6,750 favorable B) $63,450 unfavorable C) $56,700 unfavorable D) $66,975 unfavorable Answer: B Explanation: B) [13,500 - (27,000 × 7,800/26,000) mh] × $11.75 = $63,450 unfavorable Diff: 3 Objective: 3 AACSB: Application of knowledge
30) Russo Corporation manufactured 17,000 air conditioners during November. The overhead cost-allocation base is $34.75 per machine-hour. The following variable overhead data pertain to November:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 17,000 units 12,925 hours $34.00
Budgeted 20,000 units 14,000 hours $34.75
What is the actual variable overhead cost? A) $439,450 B) $476,000 C) $449,144 D) $486,500 Answer: A Explanation: A) 12,925 mh × $34.00 = $439,450 Diff: 2 Objective: 3 AACSB: Analytical thinking
536 richard@qwconsultancy.com
31) Russo Corporation manufactured 15,000 air conditioners during November. The overhead cost-allocation base is $33.25 per machine-hour. The following variable overhead data pertain to November:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 15,000 units 13,275 hours $33.00
Budgeted 18,000 units 14,400 hours $33.25
What is the flexible-budget amount? A) $441,394 B) $399,000 C) $396,000 D) $475,200 Answer: B Explanation: B) 15,000 × (14,400 / 18,000) × 33.25 = 399,000 Diff: 2 Objective: 3 AACSB: Analytical thinking
32) Russo Corporation manufactured 21,000 air conditioners during November. The overhead cost-allocation base is $34.25 per machine-hour. The following variable overhead data pertain to November:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 21,000 units 13,300 hours $34.00
Budgeted 24,000 units 14,400 hours $34.25
What is the variable overhead spending variance? A) $3,600.00 unfavorable B) $3,325.00 unfavorable C) $3,600.00 favorable D) $3,325.00 favorable Answer: D Explanation: D) ($34.00- $34.25) × 13,300 mh = $3,325.00 favorable Diff: 3 Objective: 3 AACSB: Analytical thinking
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33) Russo Corporation manufactured 17,000 air conditioners during November. The overhead cost-allocation rate is $35.50 per machine-hour. The following variable overhead data pertain to November:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 17,000 units 8,325 hours $35.00
Budgeted 19,000 units 9,500 hours $35.50
What is the variable overhead efficiency variance? A) $6,212.50 favorable B) $6,212.50 unfavorable C) $4,750.00 favorable D) $4,750.00 unfavorable Answer: A Explanation: A) [8,325 - (17,000 × 9,500/19,000) mh] × $35.50 = $6,212.50 favorable Diff: 3 Objective: 3 AACSB: Analytical thinking
34) Russo Corporation manufactured 21,000 air conditioners during November. The overhead cost-allocation base is $34.50 per machine-hour. The following variable overhead data pertain to November:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 21,000 units 12,700 hours $34.00
Budgeted 23,000 units 13,800 hours $34.50
What is the total variable overhead variance? A) $2,900.00 unfavorable B) $3,450.00 unfavorable C) $2,900.00 favorable D) $3,450.00 favorable Answer: C Explanation: C) Actual variable overhead - Flexible budgeted variable overhead (12,700 mh × $34.00) - [21,000 × (13,800/23,000) mh × $34.50] $431,800 - $434,700 = $2,900.00 favorable Diff: 3 Objective: 3 AACSB: Analytical thinking
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35) Vision Ware had the following data for the month of July: Actual machine hours Total variable overhead (actual) Spending Variance Standard machine hours Efficiency Variance
22,000 $242,000 $22,000 U 400 $4000 F
What was standard rate per hour? A) $11.00 B) $10.80 C) $10.00 D) $10.02 Answer: C Explanation: C) Variable overhead spending variance = Actual variable overhead cost per unit of cost-allocation base – Budgeted variable overhead cost per unit of cost-allocation base) × Actual quantity of variable overhead cost-allocation base used $242,000 / 22,000 = $11 Actual rate $22,000U = ($11 – x) × 22,000 1 = $11 – x x = $10.00 Diff: 3 Objective: 3 AACSB: Analytical thinking
36) The variable overhead efficiency variance is computed ________ and interpreted ________ the direct-cost efficiency variance. A) the same as; the same as B) the same as; differently than C) differently than; the same as D) differently than; differently than Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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37) Mendel Company makes the following journal entry: Variable Manufacturing Overhead Allocated 229,000 Variable Manufacturing Overhead Efficiency Variance 7,000 Variable Manufacturing Overhead Control Variable Manufacturing Overhead Spending Variance
179,000 57,000
Which of the following statements is true of the given journal entry? A) A variable manufacturing overhead cost of $179,000 is written-off. B) An unfavorable spending variance of $57,000 is recorded. C) A favorable efficiency variance of $7,000 is recorded. D) A favorable flexible-budget variance of $50,000 is recorded. Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge
38) The balances in the variable overhead account and the variable overhead control account are $120,000 and $125,000 respectively. The variable overhead spending variance is $6,000 and the variable overhead efficiency variance is $11,000. Which of the following entries would be required to record the variances in a standard costing system? A) Cost of Goods Sold $5,000 Variable Overhead Spending $6,000 Variable Overhead Efficiency Variance $11,000 B) Work-in-Process $5,000 Variable Overhead Spending $6,000 Variable Overhead Efficiency Variance $11,000 C) Variable Overhead Allocated $120,000 Variable Overhead Spending Variance $11,000 Variable Overhead Efficiency Variance $6,000 Variable Overhead Control $125,000 D) Variable Overhead Control $120,000 Variable Overhead Spending Variance $11,000 Variable Overhead Efficiency Variance $6,000 Variable Overhead Allocated $125,000 Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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39) Osium Company made the following journal entry: Variable Manufacturing Overhead Allocated 250,000 Variable Manufacturing Overhead Efficiency Variance 80,000 Variable Manufacturing Overhead Control Variable Manufacturing Overhead Spending Variance
300,000 30,000
Which of the following statements is true of the given journal entry? A) Osium overallocated variable manufacturing overhead. B) A $30,000 unfavorable spending variance was recorded. C) Work-in-Process is currently overstated. D) A $80,000 unfavorable efficiency variance was recorded. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
40) Which of the following is the correct mathematical expression is used to calculate variable overhead efficiency variance? A) (Actual rate − Budgeted rate) × Budgeted quantity B) (Actual quantity × Budgeted rate) - (Budgeted input quantity allowed for actual output × Budgeted rate) C) (Actual quantity ÷ Budgeted rate) − (Budgeted quantity ÷ Budgeted rate) D) (Actual quantity ÷ Budgeted rate) × Budgeted quantity allowed for actual output Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
41) Marshall Company uses a standard cost system. In March, $270,000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $310,000. Which of the following variable manufacturing overhead entries would have been recorded for March? A) Accounts Payable Control and other accounts 310,000 Work-in-Process Control 310,000 B) Variable Manufacturing Overhead Allocated 310,000 Accounts Payable and other accounts 310,000 C) Work-in-Process Control 270,000 Accounts Payable Control and other accounts 270,000 D) Variable Manufacturing Overhead Control 270,000 Accounts Payable Control and other accounts 270,000 Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
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42) All of the following are possible causes of actual machine hours exceeding budgeted machine hours EXCEPT: A) poor scheduling B) actual leasing costs for the machine were higher than expected C) machines were not maintained in good operating condition D) budgeted standards were set to tight Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
43) Which of the following journal entries is used to record actual variable overhead costs incurred? A) Accounts Payable Variable Overhead Control B) Variable Overhead Control Accounts Receivable C) Work-in-Process Control Variable Overhead Control D) Variable Overhead Control Accounts Payable and various other accounts Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
44) When variances are immaterial, which of the following statements is true of the journal entry to write-off the variable overhead variance accounts? A) Cost of Goods Sold account will always be debited. B) Unfavorable efficiency variance will be credited. C) Favorable efficiency variance will be credited. D) Cost of Goods Sold account will always be credited. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
45) The flexible budget highlights the differences between budgeted costs and budgeted quantities versus actual costs and actual quantities for the budgeted output level. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
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46) Managers can always view a favorable variable overhead spending variance as desirable. Answer: FALSE Explanation: Managers should not always view a favorable variable overhead spending variance as desirable. For example, the variable overhead spending variance would be favorable if managers purchased lower-priced, poor-quality indirect materials. These decisions, however, are likely to hurt product quality and harm the long-run prospects of the business. Diff: 2 Objective: 3 AACSB: Analytical thinking
47) The variable overhead efficiency variance is the difference between actual quantity of the cost-allocation base used and budgeted quantity of the cost-allocation base allowed for actual output, multiplied by the budgeted variable overhead cost per unit of the cost-allocation base. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
48) Tightly budgeted machine time standards can lead to unfavorable variable overhead efficiency variance. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
49) If budgeted and actual machine hours are equal, spending variance will always be nil. Answer: FALSE Explanation: Even if budgeted and actual machine hours are equal, spending variance can occur. Because even though the company used the correct number of machine-hours, the energy consumed per machine-hour could be higher than budgeted. Diff: 2 Objective: 3 AACSB: Analytical thinking
50) Unskilled work force can lead to unfavorable efficiency variance. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
51) Causes of a favorable variable overhead efficiency variance might include using lower-skilled workers than expected. Answer: FALSE Explanation: Possible causes of a favorable variable overhead efficiency variance might include using HIGHER-skilled workers that are more efficient than expected. Diff: 1 Objective: 3 AACSB: Analytical thinking
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52) If the production planners set the budgeted machine hours standards too tight, one could anticipate there would be a favorable variable overhead efficiency variance. Answer: FALSE Explanation: If the production planners set the budgeted machine hours standards too tight, one could anticipate there would be an unfavorable variable overhead efficiency variance. Diff: 1 Objective: 3 AACSB: Analytical thinking
53) If a company has only one product, then variable overhead could be thought of as being driven by units produced. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
54) Comfort Company manufactures pillows. The 2020 operating budget is based on production of 25,000 pillows with 0.75 machine-hour allowed per pillow. Budgeted variable overhead per hour was $25. Actual production for 2020 was 27,000 pillows using 19,050 machine-hours. Actual variable costs were $23 per machine-hour. Required: Calculate the variable overhead spending and efficiency variances. Answer: Budgeted variable overhead = $25 × (25,000 × 0.75) machine-hours = $468,750 Spending variance = ($25 − $23) × 19,050 = $38,100 favorable Efficiency variance = [19,050 − (27,000 × 0.75)] × $25 = $30,000 favorable Diff: 3 Objective: 3 AACSB: Application of knowledge
55) Skytalk Company manufactures weathervanes. The 2020 operating budget is based on the production of 5,300 weathervanes with 1.25 machine-hour allowed per weathervane. Variable manufacturing overhead is anticipated to be $145,750. Actual production for 2020 was 5,250 weathervanes using 6,050 machine-hours. Actual variable costs were $21.75 per machine-hour. Required: Calculate the variable overhead spending and the efficiency variances. Answer: Budgeted variable overhead per hour = $145,750 ÷ (5,300 × 1.25) machine-hours = $22 Spending variance = ($21.75 − $22) × 6,050 = $1,512.50 favorable Efficiency variance = [6,050 − (5,300 × 1.25)] × $22 = $12,650 favorable Diff: 3 Objective: 3 AACSB: Application of knowledge
544 richard@qwconsultancy.com
56) Briefly explain the meaning of the variable overhead efficiency variance and the variable overhead spending variance. Answer: The variable overhead efficiency variance is the difference between actual quantity of the cost-allocation base used and the budgeted amount of the cost allocation base that should have been used to produce the actual output, multiplied by budgeted variable overhead cost per unit of the cost-allocation base. The efficiency variance for variable overhead cost is based on the efficiency with which the cost allocation base was used to make the actual output. The variable overhead spending variance is the difference between the actual variable overhead cost per unit of the cost-allocation base and the budgeted variable overhead cost per unit of the cost-allocation base, multiplied by actual quantity of the variable overhead cost-allocation base used for actual output. The meaning of this variance hinges on an explanation of why the per unit cost of the allocation base is lower or higher than the amount budgeted. Some explanations might include different-than-budgeted prices for the individual inputs to variable overhead or perhaps more efficient usage of some of the variable overhead items. Diff: 2 Objective: 3 AACSB: Analytical thinking
57) Define variable overhead spending variance. Briefly explain why a favorable variable overhead spending variance may not always be desirable. Answer: The variable overhead spending variance is the difference between the actual variable overhead cost per unit of the cost-allocation base and the budgeted variable overhead cost per unit of the cost-allocation base, multiplied by the actual quantity of the variable overhead cost-allocation base used for the actual output. Variable overhead costs include costs of energy, machine maintenance, indirect materials, and indirect labor. If a favorable variable overhead spending variance had been obtained by the managers of the company purchasing low-priced, poor-quality indirect materials, hired less talented supervisors, or performed less machine maintenance there could be negative future consequences. The long-run prospects for the business may suffer as the company ends up putting out a lower quality product, or it may end up having very large equipment repairs as a result of cutting corners in the short term. Hence, manager should not always view a favorable variable overhead spending variance as desirable. Diff: 2 Objective: 3 AACSB: Analytical thinking
58) Can the variable overhead efficiency variance a. be COMPUTED the same way as the efficiency variance for direct-cost items? b. be INTERPRETED the same way as the efficiency variance for direct-cost items? Explain. Answer: a. Yes, the variable overhead efficiency variance can be computed the same way as the efficiency variance for direct-cost items. b. No, the interpretations are different. The variable overhead efficiency variance focuses on the quantity of allocation-base used, while the efficiency variance for direct-cost items focuses on the quantity of materials and labor-hours used. Diff: 2 Objective: 3 AACSB: Analytical thinking
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Objective 8.4 1) When machine-hours are used as an overhead cost-allocation base and annual leasing costs for equipment unexpectedly increase, the most likely result would be to report a(n): A) unfavorable variable overhead spending variance B) favorable variable overhead efficiency variance C) unfavorable fixed overhead flexible-budget variance D) favorable production-volume variance Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
2) The amount reported for fixed overhead on the static budget is also reported: A) as actual fixed costs B) as allocated fixed overhead costs C) as flexible budget costs D) as committed variable costs Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking
3) An unfavorable fixed overhead spending variance indicates that: A) there was more excess capacity than planned B) the price of fixed overhead items cost more than budgeted C) the fixed overhead cost-allocation base was not used efficiently D) the denominator level was more than planned Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
4) Which of the following is the correct mathematical expression to calculate the fixed overhead spending variance? A) Static-budget amount — Flexible-budget amount B) Actual costs incurred — Flexible-budget amount C) Static-budget amount — Fixed overhead allocated for actual output D) Flexible-budget amount — Fixed overhead allocated for actual output Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
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5) For fixed manufacturing overhead, there is no: A) spending variance B) efficiency variance C) flexible-budget variance D) production-volume variance Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
6) Advanced Manufacturing Company reported: Actual fixed overhead Fixed manufacturing overhead spending variance Fixed manufacturing production-volume variance
$430,000 $19,000 favorable $24,000 unfavorable
To isolate these variances at the end of the accounting period, John would debit Fixed Manufacturing Overhead Allocated for: A) $411,000 B) $425,000 C) $430,000 D) $435,000 Answer: B Explanation: B) $430,000 + $19,000 - $24,000 = $425,000 Diff: 2 Objective: 4 AACSB: Analytical thinking
7) Castleton Corporation manufactured 36,000 units during March. The following fixed overhead data relates to March:
Production Machine-hours Fixed overhead costs for March
Actual 36,000 units 6,960 hours $164,700
Static Budget 34,000 units 6,800 hours $156,400
What is the flexible-budget amount? A) $170,379.31 B) $156,400.00 C) $165,600.00 D) $164,700.00 Answer: B Explanation: B) $156,400, the same lump sum as the static budget Diff: 2 Objective: 4 AACSB: Application of knowledge
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8) Castleton Corporation manufactured 41,000 units during March. The following fixed overhead data relates to March:
Production Machine-hours Fixed overhead costs for March
Actual 41,000 units 6,020 hours $125,500
Static Budget 39,000 units 5,850 hours $117,000
What is the amount of fixed overhead allocated to production? A) $128,210.13 B) $117,000.00 C) $125,500.00 D) $123,000.00 Answer: D Explanation: D) Fixed overhead cost per machine hour = $117,000 ÷ 5,850 = $20 Machine hours per unit = 5,850 ÷ 39,000 = 0.15 Fixed overhead cost per unit = $20 × 0.15 = $3.00 Fixed overhead allocated = 41,000 × $3.00 = $123,000.00 Diff: 3 Objective: 4 AACSB: Application of knowledge
9) Castleton Corporation manufactured 36,500 units during March. The following fixed overhead data relates to March:
Production Machine-hours Fixed overhead costs for March
Actual 36,500 units 5,400 hours $139,510
Static Budget 35,000 units 5,250 hours $131,250
What is the fixed overhead spending variance? A) $2,635.00 unfavorable B) $8,260.00 favorable C) $8,260.00 unfavorable D) $2,635.00 favorable Answer: C Explanation: C) Fixed overhead spending variance = $139,510 actual costs − $131,250 budgeted cost = $8,260.00 unfavorable Diff: 2 Objective: 4 AACSB: Application of knowledge
548 richard@qwconsultancy.com
10) Davidson Corporation manufactured 52,400 units during September. The following fixed overhead data relates to September:
Production Machine-hours Fixed overhead costs for September
Actual 52,400 units 2485 hours $108,900
Static Budget 52,000 units 2600 hours $109,200
What is the flexible-budget amount? A) $108,900 B) $110,040 C) $109,200 D) $52,400 Answer: C Explanation: C) $109,200, the same lump sum as the static budget Diff: 2 Objective: 4 AACSB: Application of knowledge
11) Davidson Corporation manufactured 58,500 units during September. The following fixed overhead data relates to September:
Production Machine-hours Fixed overhead costs for September
Actual 58,500 units 3,320 hours $170,220
Static Budget 58,000 units 3,480 hours $170,520
What is the amount of fixed overhead allocated to production? (Round intermediary calculations two decimal places and your final answer to the nearest whole dollar.) A) $171,990 B) $170,220 C) $170,520 D) $58,500 Answer: A Explanation: A) Fixed overhead cost per machine hour = $170,520 ÷ 3,480 = $49 Machine hours per unit = 3,480 ÷ 58,000 = 0.06 Fixed overhead cost per unit = $49 × 0.06 = $2.94 Fixed overhead allocated = 58,500 × $2.94 = $171,990 Diff: 3 Objective: 4 AACSB: Application of knowledge
549 richard@qwconsultancy.com
12) Davidson Corporation manufactured 53,400 units during September. The following fixed overhead data relates to September:
Production Machine-hours Fixed overhead costs for September
Actual 53,400 units 1,960 hours $86,520
Static Budget 53,000 units 2,120 hours $86,920
What is the fixed overhead spending variance? A) $1,056 unfavorable B) $400 favorable C) $400 unfavorable D) $1,056 favorable Answer: B Explanation: B) Fixed overhead spending variance = $86,520 actual costs − $86,920 budgeted cost = $400 favorable Diff: 2 Objective: 4 AACSB: Application of knowledge
13) Hockey Accessories Corporation manufactured 22,400 duffle bags during March. The following fixed overhead data pertain to March:
Production Machine-hours Fixed overhead cost for March
Actual 22,400 units 10,450 hours $451,700
Static Budget 23,000 units 11,500 hours $460,000
What is the flexible-budget amount? A) $451,700 B) $472,321 C) $460,000 D) $448,000 Answer: C Explanation: C) $460,000, the same lump sum as the static budget Diff: 2 Objective: 4 AACSB: Application of knowledge
550 richard@qwconsultancy.com
14) Hockey Accessories Corporation manufactured 23,000 duffle bags during March. The following fixed overhead data pertain to March:
Production Machine-hours Fixed overhead cost for March
Actual 23,000 units 13,100 hours $626,100
Static Budget 23,500 units 14,100 hours $634,500
What is the amount of fixed overhead allocated to production? (Round intermediary calculations two decimal places and your final answer to the nearest whole dollar.) A) $621,000 B) $634,500 C) $639,711 D) $612,779 Answer: A Explanation: A) Fixed overhead cost per machine hour = $634,500 ÷ 14,100 = $45 Machine hours per unit = 14,100 ÷ 23,500 = 0.6 Fixed overhead cost per unit = $45 × 0.6 = $27.00 Fixed overhead allocated = 23,000 × $27.00 = $621,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
15) Hockey Accessories Corporation manufactured 21,400 duffle bags during March. The following fixed overhead data pertain to March:
Production Machine-hours Fixed overhead cost for March
Actual 21,400 units 3,400 hours $176,300
Static Budget 22,000 units 4,400 hours $184,800
What is the amount of fixed overhead spending variance? A) $8,500 unfavorable B) $3,460 favorable C) $3,460 unfavorable D) $8,500 favorable Answer: D Explanation: D) Fixed overhead spending variance = $176,300 actual costs − $184,800 budgeted cost = $8,500 favorable Diff: 3 Objective: 4 AACSB: Application of knowledge
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16) Fixed overhead costs for March for a factory were Salaries of $44,000, depreciation of $10,000, and property taxes of $4,000. Which of the following journal entries would be correct? A) Fixed Overhead Control $58,000 Accounts Payable $58,000 B) Depreciation Expense $10,000 Salaries Expense $44,000 Fixed Overhead Control $4,000 Accumulated Depreciation $10,000 Cash $44,000 Accounts Payable $4,000 C) Work-in-Process $58,000 Accounts Payable $4,000 Salaries Payable $44,000 Accumulated Depreciation $10,000 D) Fixed Overhead Control $58,000 Accounts Payable $4,000 Salaries Payable $44,000 Accumulated Depreciation $10,000 Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
17) Which of the following is the correct mathematical expression to calculate the fixed overhead production-volume variance? A) static-budget amount − flexible-budget amount B) flexible-budget amount − actual costs incurred C) actual costs incurred − fixed overhead allocated for actual output D) budgeted fixed overhead − fixed overhead allocated for actual output Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
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18) Which of the following journal entries is used to record fixed overhead costs allocated? A) Fixed Overhead Allocated Work-in-Process Control B) Work-in-Process Control Fixed Overhead Allocated C) Fixed Overhead Control Work-in-Process Control D) Fixed Overhead Allocated Fixed Overhead Control Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
19) Bismith Company reported: Actual fixed overhead Fixed manufacturing overhead spending variance Fixed manufacturing production-volume variance
$700,000 $40,000 unfavorable $30,000 unfavorable
To record the write-off of these variances at the end of the accounting period, Bismith would: A) credit Fixed Manufacturing Overhead Allocated for $700,000 B) debit Fixed Manufacturing Overhead Spending Variance for $40,000 C) credit Fixed Manufacturing Production-Volume Variance for $30,000 D) debit Fixed Manufacturing Control for $700,000 Answer: B Diff: 2 Objective: 4 AACSB: Application of knowledge
553 richard@qwconsultancy.com
20) Radon Corporation manufactured 37,500 units during March. The following fixed overhead data pertain to March:
Production Machine-hours Fixed overhead costs for March
Actual 37,500 units 10,375 hours $213,200
Static Budget 34,000 units 10,200 hours $204,000
What is the fixed overhead production-volume variance? A) $9,200.00 unfavorable B) $21,000.00 favorable C) $21,000.00 unfavorable D) $9,200.00 favorable Answer: B Explanation: B) Fixed cost per machine hour = $204,000 ÷ 10,200 = $20 Machine hours per unit = 10,200 ÷ 34,000 = 0.3 Fixed cost per unit = $20 × 0.3 = $6.00 Fixed overhead allocated = 37,500 × $6.00 = $225,000.00 Fixed overhead production-volume variance = $204,000 − $225,000.00 =$21,000.00 F Diff: 3 Objective: 4 AACSB: Analytical thinking
21) Radon Corporation manufactured 38,100 units during March. The following fixed overhead data pertain to March:
Production Machine-hours Fixed overhead costs for March
Actual 38,100 units 14,200 hours $289,100
Static Budget 35,000 units 14,000 hours $280,000
What is the fixed overhead spending variance? A) $24,800.00 favorable B) $9,100.00 favorable C) $9,100.00 unfavorable D) $24,800.00 unfavorable Answer: C Explanation: C) Fixed overhead spending variance = $289,100 − $280,000 = $9,100.00 unfavorable Diff: 3 Objective: 4 AACSB: Application of knowledge
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22) If the production planners set the budgeted machine hours standards too loose, one could anticipate there would be a favorable fixed overhead efficiency variance. Answer: FALSE Explanation: There is no efficiency variance for fixed costs because a given lump sum of fixed costs will be unaffected by how efficiently machine-hours are used to produce output in a given budget period. Diff: 2 Objective: 4 AACSB: Analytical thinking
23) If the company's fixed overhead spending variance was unfavorable it could be attributed to higher plant-leasing costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
24) Allocated fixed overhead can be expressed in terms of allocation-base units or in terms of the budgeted fixed cost per unit. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
25) Lump-sum fixed costs of acquiring capacity decrease automatically if the capacity needed turns out to be less than the capacity acquired. Answer: FALSE Explanation: Lump-sum fixed costs represent the costs of acquiring capacity. These costs do not decrease automatically if the capacity needed turns out to be less than the capacity acquired. Diff: 2 Objective: 4 AACSB: Analytical thinking
26) When forecasting fixed costs, managers should concentrate on total lump-sum costs instead of unitized fixed overhead costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
27) A favorable fixed overhead flexible-budget variance indicates that actual fixed costs exceeded the lump-sum amount budgeted. Answer: FALSE Explanation: A favorable fixed overhead flexible-budget variance indicates that actual fixed costs were LESS THAN the lump-sum amount budgeted. Diff: 2 Objective: 4 AACSB: Analytical thinking
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28) Fixed costs for the period are by definition a lump sum of costs that remain unchanged and therefore the fixed overhead spending variance is always zero. Answer: FALSE Explanation: Fixed costs for the period are by definition a lump sum of costs, but they can and do change from the amount that was originally budgeted. Diff: 2 Objective: 4 AACSB: Analytical thinking
29) An unfavorable production-volume variance indicates an overallocation of fixed overhead costs. Answer: FALSE Explanation: A favorable production-volume variance indicates an overallocation of fixed overhead costs. An unfavorable production-volume variance indicates an underallocation of fixed overhead costs. Diff: 2 Objective: 4 AACSB: Analytical thinking
30) Favorable overhead variances are always recorded with credits in a standard cost system. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
31) If fixed overhead cost variances are always written off to Cost of Goods Sold, operating income can be manipulated for either financial reporting or income tax purposes. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
32) Prorated allocation of production-volume variance results in a higher operating income for current year than if the entire favorable production-volume variance were credited to Cost of Goods Sold. Answer: FALSE Explanation: Proration of production-volume variance results in a lower operating income for current year than if the entire favorable production-volume variance were credited to Cost of Goods Sold. Diff: 2 Objective: 4 AACSB: Analytical thinking
33) Prorated allocation of production-volume variance has the effect of approximating the allocation of fixed costs based on actual costs and actual output. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
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34) Neon Company manufactured 2,500 units during April with a total overhead budget of $55,000. However, while manufacturing the 2,500 units the microcomputer that contained the month's cost information broke down. With the computer out of commission, the accountant has been unable to complete the variance analysis report. The information missing from the report is lettered in the following set of data: Variable overhead: Standard cost per unit: 1.2 labor hour at $10 per hour Actual costs: $26,250 for 2,250 hours Flexible budget: a Total flexible-budget variance: b Variable overhead spending variance: c Variable overhead efficiency variance: d Fixed overhead: Budgeted costs: e Actual costs: f Flexible-budget variance: $200 favorable Required: Compute the missing elements in the report represented by the lettered items. Answer: a. 2,500 × 1.2 × $10 = $30,000 b.
$26,250 − $30,000 = $3,750 favorable
c.
$26,250 − (2,250 × $10) = $3,750 unfavorable
d. (($2,500 × 1.2) − 2,250) × $10 = $7,500 favorable e.
$55,000 − $30,000 = $25,000
f.
$25,000 − $200 favorable = $24,800
Diff: 3 Objective: 3, 4 AACSB: Analytical thinking
557 richard@qwconsultancy.com
35) Time and Again Company makes clocks. The fixed overhead costs for 2020 total $900,000. The company uses direct labor-hours for fixed overhead allocation and anticipates 200,000 hours during the year for 330,000 units. An equal number of units are budgeted for each month. During June, 32,000 clocks were produced and $72,000 was spent on fixed overhead. Required: a. Determine the fixed overhead rate for 2020 based on units of input. b. Determine the fixed overhead static-budget variance for June. c. Determine the production-volume overhead variance for June. Answer: a. Fixed overhead rate = ($900,000 ÷ 200,000) = $4.50 per hour b.
Fixed overhead static budget variance = $72,000 − ($900,000/12) = $3,000 favorable
c.
Budgeted fixed overhead rate per output unit = $900,000/330,000 = $2.73 Production-volume overhead variance = (27,500 − 32,000) × $2.73 = $12,285 favorable
Diff: 3 Objective: 4 AACSB: Analytical thinking
36) Timely Products Company makes watches. The fixed overhead costs for 2020 total $648,000. The company uses direct labor-hours for fixed overhead allocation and anticipates 21,600 hours during the year for 540,000 units. An equal number of units are budgeted for each month. During October, 48,000 watches were produced and $52,000 was spent on fixed overhead. Required: a. Determine the fixed overhead rate for 2020 based on the units of input. b. Determine the fixed overhead static-budget variance for October. c. Determine the production-volume overhead variance for October. Answer: a. Fixed overhead rate = ($648,000 ÷ 21,600) = $30 per unit b.
Fixed overhead static budget variance = $52,000 − ($648,000 ÷ 12) = $2,000 favorable
c. Budgeted fixed overhead rate per output unit = $648,000 / 540,000 = $1.20 Production-volume overhead variance = (48,000 - (540,000 ÷ 12)) × $1.20 = $3,600 favorable Diff: 3 Objective: 4 AACSB: Analytical thinking
558 richard@qwconsultancy.com
37) A company has the following data for the month of June: Fixed overhead budget (static budget) Budgeted machine-hours Budgeted production (units) Actual output Actual fixed overhead costs
$310,000 16,000 20,000 18,000 $290,000
What was the production volume variance for June? Answer: $31,0000 unfavorable. The allocated fixed overhead was $279,000 found as follows: .8hr/unit × 16,000 units × $310,000/16,000 units = $270,000. That is based on the following formula: budgeted input quantity allowed for actual output × budgeted rate. The flexible budget amount is the same as the static budget amount which is $310,000. The variance therefore is $31,000 ($310,000 - $279,000 = $31,000) and it is unfavorable. An unfavorable production volume variances indicates that the amount of fixed manufacturing overhead costs applied (or assigned) to the manufacturer's output was less than the budgeted or planned amount of fixed manufacturing overhead costs for the same time period; it occurs when the actual output is less than planned output. Diff: 3 Objective: 4 AACSB: Analytical thinking
38) Explain why there is no efficiency variance for fixed manufacturing overhead costs. Answer: There is no efficiency variance for fixed overhead costs because a given lump sum of fixed costs will be unaffected by how efficiently machine-hours are used to produce output in a given budget period. Diff: 2 Objective: 4 AACSB: Analytical thinking
39) 'Managers should be wary of using the same unitized fixed overhead costs for planning and control purposes'. Do you agree with this argument? Give reasons for your answer. Answer: Yes. Managers should always be careful to distinguish the true behavior of fixed costs from the manner in which fixed costs are assigned to products. In particular, although fixed costs are unitized and allocated for inventory costing purposes, managers should be wary of using the same unitized fixed overhead costs for planning and control purposes. When forecasting fixed costs, managers should concentrate on total lump-sum costs instead of unitized costs. Similarly, when managers are looking to assign costs for control purposes or identify the best way to use capacity resources fixed in the short run, the use of unitized fixed costs often leads to incorrect decisions. Diff: 2 Objective: 4 AACSB: Application of knowledge
40) Explain why there is no production-volume variance for variable manufacturing overhead costs. Answer: There is no production-volume variance for variable overhead costs because the amount of variable overhead allocated is always the same as the flexible-budget amount. Diff: 2 Objective: 4 AACSB: Analytical thinking
559 richard@qwconsultancy.com
41) Abby Company has just implemented a new cost accounting system that provides two variances for fixed manufacturing overhead. While the company's managers are familiar with the concept of spending variances, they are unclear as to how to interpret the production-volume overhead variances. Currently, the company has a production capacity of 54,000 units a month, although it generally produces only 46,000 units. However, in any given month the actual production is probably something other than 46,000. Required: a. Does the production-volume overhead variance measure the difference between the 54,000 and 46,000, or the difference between the 46,000 and the actual monthly production? Explain. b. What advice can you provide the managers that will help them interpret the production-volume overhead variances? Answer: a. It is the difference between the 46,000 and the actual production level for the period. The difference between the 54,000 and the 46,000 is the unused capacity that was planned for the period. The difference between the 46,000 and the actual level was not planned. b. When actual outputs are less than the denominator level, the production-volume variance is unfavorable. This is opposite the label given other variances that have a favorable label when costs are less than the budgeted amount; therefore, caution is needed. The production-volume variance is favorable when actual production exceeds what was planned for the period. This actually provides for a cost per unit amount that was less than budgeted using the planned denominator. Diff: 2 Objective: 4 AACSB: Analytical thinking
42) Explain how fixed manufacturing overhead costs are treated under Generally Accepted Accounting Principles? Answer: Under Generally Accepted Accounting Principles (GAAP), fixed manufacturing overhead costs are allocated as an inventoriable cost to the output units produced. Every output unit manufactured will include the fixed overhead cost per unit along with other costs. That is, for purposes of allocating fixed overhead costs to products, these costs are viewed as if they had a variable-cost behavior pattern. Diff: 1 Objective: 4 AACSB: Analytical thinking
560 richard@qwconsultancy.com
43) What are the arguments for prorating a production-volume variance that has been deemed to be material among work-in-process, finished goods, cost and cost of goods sold as opposed to writing it all off to cost of goods sold? Answer: If variances are always written off to cost of goods sold, a company could set its standards to either increase (for financial reporting purposes) or decrease (for tax purposes) operating incomes. The proration method has the effect of approximating the allocation of fixed costs based on actual costs and actual output so it is not susceptible to the manipulation of operating income based on the choice of the denominator level. Diff: 2 Objective: 4 AACSB: Analytical thinking
44) Explain two concerns when interpreting the production-volume variance as a measure of the economic cost of unused capacity. Answer: The first concern would be the fact that management might have maintained some extra capacity to meet uncertain demand surges that are important to satisfy. If these surges are not occurring in a given year an unfavorable production-volume variance might occur. The second concern would be to note that this variance only focuses on fixed overhead costs, and ignores the possibility that price decreases might have been necessary to spur the extra demand to make use of any idle capacity. Diff: 2 Objective: 4 AACSB: Analytical thinking
Objective 8.5 1) Which of the following statements is true of variable overhead costs? A) Variable overhead costs always have unused capacity. B) Variable overhead costs have no production-volume variance. C) Variable overhead costs have no spending variance. D) Variable overhead costs have no efficiency variance. Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
2) Fixed overhead costs: A) never have any unused capacity B) have no spending variance C) have no efficiency variance D) have no production-volume variance Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
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3) When variable overhead spending variance is unfavorable, it can be safely assumed that: A) actual rate per unit of cost-allocation base is higher than budgeted rate B) actual quantity of cost-allocation base used is higher than budgeted quantity C) actual rate per unit of cost-allocation base is lower than budgeted rate D) actual quantity of cost-allocation base used is lower than budgeted quantity Answer: A Diff: 2 Objective: 5 AACSB: Application of knowledge
4) When fixed overhead spending variance is unfavorable, it can be safely assumed that: A) flexible budget amount is higher than actual costs incurred B) fixed overhead allocated for actual output is lower than actual costs incurred C) flexible budget amount is lower than actual costs incurred D) fixed overhead allocated for actual output is higher than actual costs incurred Answer: C Diff: 2 Objective: 5 AACSB: Application of knowledge
5) Which of the following statements is true of fixed overhead cost variances? A) The difference between actual costs and flexible budget costs will give the production volume variance. B) The difference between actual costs and static budget costs will give the production volume variance. C) The difference between flexible budget costs and allocated overhead costs will give the production volume variance. D) The difference between static budget costs and flexible budget costs will give the production volume variance. Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
562 richard@qwconsultancy.com
6) Skizone Company's 4-Variance Analysis: Spending Variance Efficiency Variance Production-Volume Variance Variable overhead $6,900 F $16,000 U No variance Fixed overhead (a) No variance $44,000 U If Skizone's combined 4-Variance Analysis shows an unfavorable spending variance of $2,900, what is the fixed overhead spending variance (a)? A) $9,800 favorable B) $4,000 unfavorable C) $9,800 unfavorable D) $4,000 favorable Answer: C Explanation: C) Fixed overhead spending variance = $2,900 U − $6,900 F = $9,800 U Diff: 2 Objective: 5 AACSB: Application of knowledge
7) Skizone Company's 4-Variance Analysis: Spending Variance Efficiency Variance Production-Volume Variance Variable overhead $6,900 F $11,000 U No variance Fixed overhead (a) No variance $45,000 U Which of the following statements is true of Skizone's overhead variances? A) Budgeted variable overhead rate is higher than actual variable overhead rate. B) Static fixed overhead amount is higher than flexible fixed overhead amount. C) Budgeted variable overhead rate is lower than actual variable overhead rate. D) Static fixed overhead amount is lower than flexible fixed overhead amount. Answer: A Diff: 3 Objective: 5 AACSB: Application of knowledge
8) Variances Variable manufacturing overhead Fixed manufacturing overhead
Spending $7,900 F $28,300 U
Efficiency $34,000 U (A)
The above table is a: A) 4-variance analysis B) 3-variance analysis C) 2-variance analysis D) 1-variance analysis Answer: A Diff: 2 Objective: 5 AACSB: Application of knowledge
563 richard@qwconsultancy.com
Volume (B) $80,000 U
9) Variances Variable manufacturing overhead Fixed manufacturing overhead
Spending $7,400 F $28,400 U
Efficiency $33,000 U (A)
Volume (B) $82,000 U
In the above table, the amounts for (A) and (B), respectively, are: A) $25,600 U; $115,000 U B) $25,600 U; Zero C) Zero; $115,000 U D) Zero; Zero Answer: D Diff: 3 Objective: 5 AACSB: Application of knowledge
10) Variances Variable manufacturing overhead Fixed manufacturing overhead
Spending $7,200 F $27,800 U
Efficiency $38,000 U (A)
Volume (B) $81,000 U
In a combined 3-variance analysis, the total spending variance would be: A) $20,600 F B) $30,800 U C) $20,600 U D) $45,200 F Answer: C Explanation: C) Spending variance = $7,200 F + $27,800 U = $20,600 U Diff: 3 Objective: 5 AACSB: Application of knowledge
11) Variances Variable manufacturing overhead Fixed manufacturing overhead
Spending $7,300 F $28,300 U
Efficiency $35,000 U (A)
Volume (B) $90,000 U
The total production-volume variance should be: A) $90,000 F B) $90,000 U C) $118,300 F D) $118,300 U Answer: B Explanation: B) Total production-volume variance = $90,000 U + 0 = $90,000 Diff: 3 Objective: 5 AACSB: Application of knowledge
564 richard@qwconsultancy.com
12) Variances Variable manufacturing overhead Fixed manufacturing overhead
Spending $7,500 F $27,500 U
Efficiency $38,000 U (A)
Volume (B) $81,000 U
The total overhead variance should be: A) $154,000 F B) $139,000 U C) $154,000 U D) $139,000 F Answer: B Explanation: B) Total overhead variance = $7,500 F + $27,500 U + $38,000 U + $81,000 U = $139,000 U Diff: 2 Objective: 5 AACSB: Application of knowledge
13) Variable overhead has no production-volume variance. Answer: TRUE Explanation: Diff: 1 Objective: 5 AACSB: Analytical thinking
14) The accounting for 3-variance analysis is simpler than the 4-variance analysis, but some information is lost because the variable and fixed overhead spending variances are combined into a single total overhead spending variance. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
15) The following overhead variances would result in a total-overhead variance of $15,000 favorable: spending variance $5,000 U, efficiency variance $20,000 F, and production-volume variance $30,000 U. Answer: FALSE Explanation: It would be $15,000 unfavorable. Diff: 1 Objective: 5 AACSB: Analytical thinking
16) At the end of the fiscal year, the fixed overhead spending variance is always prorated among work-in-process control, finished goods control, and cost of goods sold on the basis of the fixed overhead allocated to these accounts. Answer: FALSE Explanation: At the end of the fiscal year, the fixed overhead spending variance is written off to cost of goods sold if it is immaterial in amount; otherwise it is prorated among work-in-process control, finished goods control, and cost of goods sold on the basis of the fixed overhead allocated to these accounts. Diff: 1 Objective: 5 AACSB: Analytical thinking
565 richard@qwconsultancy.com
17) Wainwright has budgeted construction overhead for August of $435,000 for fixed costs. Actual costs for the month totaled for $450,000 for fixed. Allocated fixed overhead totaled $430,000. The company tracks each item in an overhead control account before allocations are made to individual jobs. The fixed overhead spending variance for August was $15,000 unfavorable for fixed. Required: a. Make journal entries for the actual costs incurred. b. Make journal entries to record the variances for August. Answer: a. Fixed Overhead Control 450,000 Accumulated Depreciation, etc. To record actual fixed construction overhead
450,000
b. Fixed Overhead Allocated Fixed Overhead Spending Variance Fixed Overhead Production-Volume Variance Fixed Overhead Control To record variances for the period
430,000 15,000
Diff: 3 Objective: 5 AACSB: Application of knowledge
566 richard@qwconsultancy.com
5,000 450,000
18) Different management levels in Bates, Inc., require varying degrees of managerial accounting information. Because of the need to comply with the managers' requests, four different variances for manufacturing overhead are computed each month. The information for the September overhead expenditures is as follows: Budgeted output units Budgeted fixed manufacturing overhead Budgeted variable manufacturing overhead Budgeted direct manufacturing labor hours Fixed manufacturing costs incurred Direct manufacturing labor hours used Variable manufacturing costs incurred Actual units manufactured
3,200 units $20,000 $5 per direct labor hour 2 hours per unit $26,000 7,200 $35,600 3,400
Required: a. Compute a 4-variance analysis for the plant controller. b. Compute a 3-variance analysis for the plant manager. c. Compute a 2-variance analysis for the corporate controller. d. Compute the flexible-budget variance for the manufacturing vice president. Answer: a. 4-variance analysis: Variable overhead spending variance = $35,600 - (7,200 × $5) = $400 favorable Variable overhead efficiency variance = $5 × (7,200 - 6,800*) = $2,000 unfavorable *3,400 units × 2 hours = 6,800 hours Fixed overhead spending variance = $26,000 - $20,000 = $6,000 unfavorable Fixed overhead production-volume variance = $20,000 - (3,400 × 2 × $3.125*) = $1,250 favorable *$20,000/(3,200 units × 2 hours) = $3.125 b.
3-variance analysis: Spending variance = $400 favorable + $6,000 unfavorable = $5,600 unfavorable Efficiency variance = $2,000 unfavorable Production-volume variance = $1,250 favorable
c.
2-variance analysis: Flexible-budget variance = $400 F + $2,000 U + $6,000 U = $7,600 unfavorable Production-volume variance = $1,250 favorable
d. 1-variance analysis: Actual
Flexible Budget
Variances
Fixed overhead
$26,000
$21,250 *
$4,750 U
Variable overhead Flexible-budget variance
35,600
34,000 **
1,600 U $6,350 U
*$3.125 × 3,400 × 2 = $21,250 **3,400 × 2 × $5 = $34,000 Diff: 3 Objective: 5 AACSB: Application of knowledge
567 richard@qwconsultancy.com
19) Explain why managers of small businesses prefer 3-variance analysis over 4-variance analysis. Answer: Managers of small businesses understand their operations better based on personal observations and nonfinancial measures. They find less value in doing the additional measurements required for 4-variance analyses. For example, to simplify their costing systems, small companies may not distinguish variable overhead incurred from fixed overhead incurred because making this distinction is often not clear-cut. Many costs such as supervision, quality control, and materials handling have both variable- and fixed-cost components that may not be easy to separate. Managers may therefore use a less detailed analysis that combines the variable overhead and fixed overhead into a single total overhead cost. Diff: 2 Objective: 5 AACSB: Analytical thinking
20) If a company expected to have 30,000 machine hours of good output but actually had 29,000 standard machine hours of good output, the products will be assigned less fixed overhead and this will cause an unfavorable production volume variance. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
21) A favorable production-volume variance arises when manufacturing capacity planned for is NOT used. Answer: FALSE Explanation: An UNFAVORABLE production-volume variance arises when manufacturing capacity planned for is not used. Diff: 1 Objective: 5 AACSB: Analytical thinking
22) An unfavorable production-volume variance always infers that management made a bad planning decision regarding the plant capacity. Answer: FALSE Explanation: An unfavorable production-volume variance does not always infer that management made a bad planning decision regarding the plant capacity. Diff: 2 Objective: 5 AACSB: Analytical thinking
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Objective 8.6 1) The fixed overhead cost variance can be further subdivided into the: A) price variance and the efficiency variance B) spending variance and flexible-budget variance C) production-volume variance and the efficiency variance D) flexible-budget variance and the production-volume variance Answer: D Diff: 1 Objective: 6 AACSB: Analytical thinking
2) The production-volume variance may also be referred to as the: A) flexible-budget variance B) denominator-level variance C) spending variance D) efficiency variance Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
3) Which of the following is a component of sales-volume variance? A) net-income volume variance B) operating-income volume variance C) taxable-income volume variance D) budgeted revenue variance Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
4) Under standard costing: A) fixed overhead costs are treated as if they are a variable cost B) fixed overhead costs are treated as if they are a fixed cost C) variable overhead costs are treated as if they are a fixed cost D) fixed overhead costs are treated as if they are a sunk cost Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
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5) An unfavorable production-volume variance: A) is not a good measure of a lost production opportunity B) indicates that the company had reduced its per unit fixed overhead cost to improve sales C) measures the amount of extra fixed costs planned for but not used D) takes into account the effect of additional revenues due to maintaining higher prices Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
6) Which of the following is NOT true of the 3 level variance analysis of operating income? A) Level 1 shows the static budget variance for operating income B) Level 2 shows the direct material price and efficiency variances C) Level 2 shows the sales-volume variance for operating income D) Level 3 shows the fixed overhead production volume variance as a component of the sales-volume variance for operating income Answer: D Diff: 1 Objective: 6 AACSB: Analytical thinking
7) The production volume variance arises only for variable overhead costs. Answer: FALSE Explanation: The production volume variance arises only for fixed overhead costs. Diff: 1 Objective: 6 AACSB: Analytical thinking
8) The production-volume variance is a component of the sales-volume variance. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
9) The level 3 components for the fixed overhead variance are the fixed overhead spending variance and the fixed overhead production volume variance. Answer: FALSE Explanation: The fixed manufacturing overhead variance has no components and is also the fixed overhead spending variance. The fixed overhead production volume variance is a component of the sales-volume variance. Diff: 2 Objective: 6 AACSB: Analytical thinking
570 richard@qwconsultancy.com
10) The operating income volume variance is measured as operating income (based on actual units sold) minus operating income per the static budget and is one of three components of the sales-volume variance. Answer: FALSE Explanation: The operating income volume variance is measured as operating income (based on actual units sold) minus operating income per the static budget and is one of two components of the sales-volume variance the other of which is the production-volume variance. Diff: 2 Objective: 6 AACSB: Analytical thinking
11) The sales-volume variance reveals the lost contribution margin from selling fewer units than planned. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
12) What are the two components of sales-volume variance? Explain why sales-volume variance could be helpful to managers. Answer: The sales-volume variance is comprised of the operating income volume variance and the production volume variance. Production volume variance is the difference between the budgeted fixed overhead and the fixed overhead allocated on the basis of actual output produced. Operating income volume variance is the difference between the static-budget operating income and the budgeted operating income for actual sales. The sales-volume variance is useful because it helps managers understand the significant changes in contribution margin, which will occur as a result of selling fewer (or more) units than called for by the budgeted level. It assumes that the fixed costs remain at the budgeted level and can be helpful to managers as they perform sensitivity analysis to see the effects of potential changes in sales volume (up or down). Based on this type of information, they could potentially make more informed decisions on pricing and other strategies. Diff: 3 Objective: 6 AACSB: Analytical thinking
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Objective 8.7 1) Fun Wheels, Inc., produces a special line of plastic toy racing cars. Fun Wheels, Inc., produces the cars in batches. To manufacture a batch of the cars, Fun Wheels, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Actual Amounts 15,700 325 3 $48 $11,310
Static-budget Amounts 11,950 265 4.25 $45 $9,010
Calculate the efficiency variance for variable overhead setup costs. (Round all intermediary calculations two decimal places and your final answer to the nearest whole number.) A) $4,810 unfavorable B) $435 unfavorable C) $4,810 favorable D) $435 favorable Answer: C Explanation: C) {[(15,700/ 325) × 3] - [(15,700 / 265) × 4.25] } × $45 = $4,810 (F) Diff: 3 Objective: 7 AACSB: Application of knowledge
572 richard@qwconsultancy.com
2) Fun Wheels, Inc., produces a special line of plastic toy racing cars. Fun Wheels, Inc., produces the cars in batches. To manufacture a batch of the cars, Fun Wheels, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Actual Amounts 14,550 320 3 $43 $10,130
Static-budget Amounts 11,550 295 4 $38 $7,830
Calculate the spending variance for variable overhead setup costs. (Round all intermediary calculations two decimal places and your final answer to the nearest whole number.) A) $2,313 unfavorable B) $2,313 favorable C) $682 unfavorable D) $682 favorable Answer: C Explanation: C) (14,550 / 320) × 3 × ($38 - $43) = $682 (U) Diff: 3 Objective: 7 AACSB: Application of knowledge
573 richard@qwconsultancy.com
3) Fun Wheels, Inc., produces a special line of plastic toy racing cars. Fun Wheels, Inc., produces the cars in batches. To manufacture a batch of the cars, Fun Wheels, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Actual Amounts 14,800 285 2 $48 $8,670
Static-budget Amounts 11,800 245 2.75 $45 $6,620
Calculate the flexible-budget variance for variable overhead setup costs. (Round all intermediary calculations two decimal places and your final answer to the nearest whole number.) A) $312 favorable B) $2,490 favorable C) $312 unfavorable D) $2,490 unfavorable Answer: B Explanation: B) Price variance: ((14,800 / 285) × 2) × (48 - 45) = 312 (U) Efficiency variance: (((14,800 / 245) × 2.75) – ((14,800 / 285) × 2)) × 45 = 2,802 (F) Flexible-budget variance: 2,802 (F) - 312 (U) = 2,490 (F) Diff: 3 Objective: 7 AACSB: Application of knowledge
574 richard@qwconsultancy.com
4) Fun Wheels, Inc., produces a special line of plastic toy racing cars. Fun Wheels, Inc., produces the cars in batches. To manufacture a batch of the cars, Fun Wheels, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Actual Amounts 14,400 295 6 $43 $16,050
Static-budget Amounts 11,300 255 6.25 $38 $13,850
Calculate the spending variance for fixed setup overhead costs. A) $15,548 unfavorable B) $2,200 unfavorable C) $3,100 unfavorable D) $2,200 favorable Answer: B Explanation: B) $16,050 - $13,850 = $2,200 (U) Diff: 3 Objective: 7 AACSB: Application of knowledge
575 richard@qwconsultancy.com
5) Fun Wheels, Inc., produces a special line of plastic toy racing cars. Fun Wheels, Inc., produces the cars in batches. To manufacture a batch of the cars, Fun Wheels, Inc., must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of car. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Actual Amounts 15,150 260 6 $43 $16,450
Static-budget Amounts 11,850 230 7 $39 $16,286
Calculate the production-volume variance for fixed overhead setup costs. (Round all intermediary calculations to two decimal places and your final answer to the nearest whole number.) A) $4,537 unfavorable B) $99 unfavorable C) $4,537 favorable D) $99 favorable Answer: C Explanation: C) Normal setup hours = (11,850 / 230) × 7 = 360.64 hours OH rate = $16,286 / 360.64 = $45.16 per setup hour [(15,150 / 230) × 7 × $45.16] - $16,286 = $4,537 favorable Diff: 3 Objective: 7 AACSB: Application of knowledge
576 richard@qwconsultancy.com
6) Bristol Fabricators, Inc., produces air purifiers in batches. To manufacture a batch of the purifiers, Bristol Fabricators, Inc, Inc., must set up the machines and assembly line tooling. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Budget Amounts 13,100 450 6 $51 $22,707
Actual Amounts 12,000 390 5 $55 $22,407
Calculate the efficiency variance for variable overhead setup costs. (Round all intermediary calculations two decimal places and your final answer to the nearest whole number.) A) $315 favorable B) $218 favorable C) $533 unfavorable D) $533 favorable Answer: A Explanation: A) {[(12,000 / 390) × 5] - [(12,000 / 450) × 6] } × $51 = $315 (F) Diff: 3 Objective: 7 AACSB: Application of knowledge
577 richard@qwconsultancy.com
7) Bristol Fabricators, Inc., produces air purifiers in batches. To manufacture a batch of the purifiers, Bristol Fabricator, Inc., must set up the machines and assembly line tooling. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Budget Amounts 14,300 450 6 $44 $24,405
Actual Amounts 13,000 410 5 $50 $24,305
Calculate the spending variance for variable overhead setup costs. (Round all intermediary calculations two decimal places and your final answer to the nearest whole number.) A) $651 unfavorable B) $651 favorable C) $951 unfavorable D) $951 favorable Answer: C Explanation: C) (13,000 / 410) × 5 × ($44 - $50) = $951 (U) Diff: 3 Objective: 7 AACSB: Application of knowledge
578 richard@qwconsultancy.com
8) Bristol Fabricators, Inc., produces air purifiers in batches. To manufacture a batch of the purifiers, Bristol Fabricators, Inc., must set up the machines and assembly line tooling. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Budget Amounts 12,100 430 8 $47 $29,040
Actual Amounts 11,000 405 7.5 $53 $28,890
Calculate the flexible-budget variance for variable overhead setup costs. (Round all intermediary calculations two decimal places and your final answer to the nearest whole number.) A) $1,178 favorable B) $1,222 favorable C) $1,222 unfavorable D) $1,178 unfavorable Answer: D Explanation: D) Price variance: ((11,000 / 405) × 7.5) × (53 - 47) = 1,222 (U) Efficiency variance: (((11,000 / 430) × 8) – ((11,000 / 405) × 7.5)) × 47 = 44 (F) Flexible-budget variance: 44 (F) - 1,222 (U) = 1,178 (U) Diff: 3 Objective: 7 AACSB: Application of knowledge
579 richard@qwconsultancy.com
9) Bristol Fabricators, Inc., produces air purifiers in batches. To manufacture a batch of the purifiers, Bristol Fabricators, Inc., must set up the machines and assembly line tooling. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Budget Amounts 16,200 460 8 $46 $33,809
Calculate the spending variance for fixed overhead setup costs. A) $100 unfavorable B) $220 unfavorable C) $100 favorable D) $220 favorable Answer: C Explanation: C) $33,809 - $33,709 = $100 (F) Diff: 3 Objective: 7 AACSB: Application of knowledge
580 richard@qwconsultancy.com
Actual Amounts 15,000 410 7 $51 $33,709
10) Bristol Fabricators, Inc., produces air purifiers in batches. To manufacture a batch of the purifiers, Bristol Fabricators, Inc., must set up the machines and assembly line tooling. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and tooling for different models of the air purifiers. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to June 2020:
Units produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup-hour Total fixed setup overhead costs
Budget Amounts 14,100 420 8 $51 $36,300
Actual Amounts 13,000 395 7 $55 $35,937
Calculate the production-volume variance for fixed overhead setup costs. (Round all intermediary calculations to two decimal places and your final answer to the nearest whole number.) A) $2,832 favorable B) $2,832 unfavorable C) $363 unfavorable D) $363 favorable Answer: B Explanation: B) Normal setup hours = (14,100 / 420) × 8 = 268.56 hours OH rate = $36,300 / 268.56 = $135.17 per setup hour [(13,000 / 420) × 8 × $135.17] - $36,300 = $2,832 unfavorable Diff: 3 Objective: 7 AACSB: Application of knowledge
11) One possible reason for unfavorable variable overhead efficiency variance for materials handling is: A) inefficient layout of product distribution channels B) loosely budgeted standard hours C) very low wait time at work centers D) very tight standards for materials-handling time Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
12) The fixed setup overhead flexible-budget variance is calculated as actual costs - flexible-budget variance. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
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13) An unfavorable price variance for materials-handling labor indicates that the actual cost per materials-handling labor-hour is less than the budgeted cost per materials-handling labor-hour. Answer: FALSE Explanation: An unfavorable price variance for materials-handling labor indicates that the actual cost per materials-handling labor-hour exceeds the budgeted cost per materials-handling labor-hour. Diff: 2 Objective: 7 AACSB: Analytical thinking
14) Possible reasons for the larger actual materials-handling labor-hours per batch include the possibility of inefficient layout of production facilities. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
582 richard@qwconsultancy.com
15) Casey Corporation produces a special line of basketball hoops. Casey Corporation produces the hoops in batches. To manufacture a batch of the basketball hoops, Casey Corporation must set up the machines and molds. Setup costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Setup Department is responsible for setting up machines and molds for different styles of basketball hoops. Setup overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of setup-hours. The following information pertains to January 2019.
Basketball hoops produced and sold Batch size (number of units per batch) Setup-hours per batch Variable overhead cost per setup hour Total fixed setup overhead costs
Static-budget Amounts 30,000 200 5 $10 $22,500
Actual Amounts 28,000 250 4 $9 $21,000
Required: a. Calculate the efficiency variance for variable overhead setup costs. b. Calculate the spending variance for variable overhead setup costs. c. Calculate the flexible-budget variance for variable overhead setup costs. d. Calculate the spending variance for fixed overhead setup costs. e. Calculate the production-volume variance for fixed overhead setup costs. Answer: a. ((28,000 / 250) × 4 × $10) - (28,000 / 200) × 5 × $10) = $2,520 (F) b.
(28,000 / 250) × 4 × ($9 - $10) = $448 (F)
c.
$2,520 (F) + $448 (F) = $2,968 (F)
d. $22,500 - $21,000 = $1,500 (F) e.
Normal setup-hours = (30,000 / 200) × 5 = 750 hours OH rate = $22,500 / 750 = $30 per setup-hour $22,500 - ((28,000 / 200) × 5 × $30) = $1,500 (U)
Diff: 3 Objective: 7 AACSB: Application of knowledge
583 richard@qwconsultancy.com
16) River Falls Company uses a flexible budget for its indirect manufacturing costs. For 2020, the company anticipated that it would produce 27,000 units with 4,800 machine-hours and 8,000 employee days. The costs and cost drivers were to be as follows:
Product handling Inspection Utilities Maintenance Supplies
Fixed $45,000 12,000 600 1,250
Variable $0.75 12.00 6.00 0.25 5.00
Cost driver per unit per 100 unit batch per 100 unit batch per machine-hour per employee day
During the year, the company processed 26,500 units, worked 8,200 employee days, and had 4,850 machine-hours. The actual costs for 2020 were:
Product handling Inspection Utilities Maintenance Supplies
Actual costs $70,000 16,000 2,000 3,000 40,000
Required: a. Prepare the static budget using the overhead items above and then compute the static-budget variances. b. Prepare the flexible budget using the overhead items above and then compute the flexible-budget variances.
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Answer:
Product handling Inspection Utilities Maintenance Supplies Total b.
Product handling Inspection Utilities Maintenance Supplies Total
River Falls Company Overhead Static Budget with Variances 2020
Actual $70,000 16,000 2,000 3,000 40,000 $131,000
Static Budget $65,250 15,240 2,220 2,450 40,000 $125,160
Variances $4,750 U 760 U 220 F 550 U 0 $5,840 U
River Falls Company Overhead Flexible Budget with Variances 2020
Actual $70,000 16,000 2,000 3,000 40,000 $131,000
Flexible Budget $64,875 15,180 2,190 2,463 41,000 $125,708
Variances $15,125 820 190 537 1,000 $5,292
Diff: 3 Objective: 7 AACSB: Application of knowledge
585 richard@qwconsultancy.com
U U F U F U
Objective 8.8 1) When distribution costs are high, managers can use standard costing to analyze variances for spending and efficiency variances. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
2) Managers can use variance analysis to make decisions about the mix of products to make. Answer: TRUE Diff: 1 Objective: 8 AACSB: Analytical thinking
3) Service-sector companies have no use of variance analysis as only few costs can be traced to their outputs in a cost effective way. Answer: FALSE Explanation: Even though service-sector companies have only few costs can be traced to their outputs in a cost effective way, service-sector companies can use variance analysis to good effect as most of their costs are fixed overhead costs. Diff: 2 Objective: 8 AACSB: Analytical thinking
4) Explain how service-sector companies can benefit from variance analysis. Answer: Service-sector companies such as airlines, hospitals, hotels, and railroads can benefit from variance analyses. The output measures these companies commonly use are passenger-miles flown, patient days provided, room-days occupied, etc. Few costs can be traced to these outputs in a cost-effective way. Most of the costs are fixed overhead costs, such as the costs of equipment, buildings, and staff. Using capacity effectively is the key to profitability, and fixed overhead variances can help managers in this task. Diff: 2 Objective: 8 AACSB: Analytical thinking
5) Explain how nonfinancial and financial measures are incorporated into the variance analysis for materials and labor. Answer: Nonfinancial measures such as variances between budgeted and actual amounts of materials used or machine hours worked must be considered in order to monitor and improve operations and are sometimes available earlier in a period than the final financial results. Both financial and nonfinancial performance measures are used to evaluate managers. Diff: 2 Objective: 8 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 9 Inventory Costing and Capacity Analysis Objective 9.1 586 richard@qwconsultancy.com
1) Which of the following costs is inventoried when using variable costing? A) rent on factory building B) electricity consumed in manufacturing process C) sales commission paid on each sale D) advertising costs incurred for the product Answer: B Diff: 1 Objective: 1 AACSB: Application of knowledge
2) Which of the following costs is inventoried when using absorption costing? A) variable selling costs B) fixed administrative costs C) variable manufacturing costs D) fixed selling costs Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Which of the following best describes how fixed cost are treated in a variable cost method? A) They are part of the product cost. B) They are excluded from inventory cost and are treated as period costs. C) They are allocated to the product cost using a denominator-level capacity choice. D) They are classified as nonmanufacturing costs. Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
4) ________ is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs. A) Variable costing B) Mixed costing C) Absorption costing D) Standard costing Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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5) Which of the following is true of absorption costing? A) It expenses marketing costs as cost of goods sold. B) It treats direct manufacturing costs as a period cost. C) It includes fixed manufacturing overhead as an inventoriable cost. D) It treats indirect manufacturing costs as a period cost. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Which of the following is true of variable costing? A) It expenses administrative costs as cost of goods sold. B) It treats direct manufacturing costs as a product cost. C) It includes fixed manufacturing overhead as an inventoriable cost. D) It is required for external reporting to shareholders. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
7) In ________, fixed manufacturing costs are included as inventoriable costs. A) variable costing B) absorption costing C) throughput costing D) activity-based costing Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
8) ________ method includes fixed manufacturing overhead costs as inventoriable costs. A) Variable costing B) Absorption costing C) Throughput costing D) Activity-based costing Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
9) Which of the following costs will be treated as period costs under absorption costing? A) raw materials used in the production B) sales commission paid on sale of product C) depreciation on factory equipment D) rent for factory building Answer: B Diff: 2 Objective: 1 AACSB: Application of knowledge
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10) Under absorption costing, fixed manufacturing costs: A) are period costs B) are inventoriable costs C) are treated as an expense D) are sunk costs Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
11) ________ is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs. A) Fixed costing B) Variable costing C) Absorption costing D) Mixed costing Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
12) Variable costing regards fixed manufacturing overhead as a(n): A) administrative cost B) inventoriable cost C) period cost D) product cost Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
13) Which of the following statements is true regarding costing systems? A) Under direct costing variable overhead costs only direct variable costs are considered inventoriable. B) Under direct costing (also called variable costing) variable nonmanufacturing costs are inventoriable. C) Both absorption costing and variable costing treat all nonmanufacturing costs as period costs. D) Some period costs are "absorbed" into a product's cost under absorption costing. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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14) AAA Manufacturing Inc, makes a product with the following costs per unit: Direct materials $130 Direct labor $70 Manufacturing overhead (variable) $40 Manufacturing overhead (fixed) $180 Marketing costs $95 What would be the inventoriable cost per unit under variable costing and what would it be under absorption costing? A) $130 for variable costing and $335 under absorption costing B) $240 for variable costing and $335 under absorption costing C) $240 for variable costing and $420 under absorption costing D) $200 for variable costing and $335 under absorption costing Answer: C Explanation: C) Variable costing: $130 + $70 + $40 = $240 Absorption costing: $130 + $70 + $40 + $180 = $420 Diff: 2 Objective: 1 AACSB: Application of knowledge
15) Time Again, LLC produces and sells a mantel clock for $140 per unit. In 2020, 40,000 clocks were produced and 37,000 were sold. Other information for the year includes: Direct materials Direct manufacturing labor Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$45 per unit $9 per unit $4.50 per unit $12.50 per part $64.50 per unit $39.00 per unit
What is the inventoriable cost per unit using variable costing? A) $71.00 B) $58.50 C) $54.00 D) $110.00 Answer: B Explanation: B) Variable costing considers all variable manufacturing costs as inventoriable costs. Therefore, in this case, direct materials, direct manufacturing labor, and variable manufacturing costs will be considered as inventoriable cost. The total inventoriable cost = ($45 + $9 + $4.50) = $58.50 Diff: 2 Objective: 1 AACSB: Application of knowledge
590 richard@qwconsultancy.com
16) Time Again LLC produces and sells a mantel clock for $190 per unit. In 2020, 44,000 clocks were produced and 35,000 were sold. Other information for the year includes: Direct materials Direct manufacturing labor Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$44 per unit $9 per unit $4.50 per unit $14.00 per part $4.00 per unit $39.00 per unit
What is the inventoriable cost per unit using absorption costing? A) $53.00 B) $57.50 C) $61.50 D) $110.50 Answer: C Explanation: C) Absorption costing considers all variable manufacturing costs and all fixed manufacturing costs as inventoriable costs. Therefore, in this case, direct materials, direct manufacturing labor, variable manufacturing costs, and fixed manufacturing costs will be considered as inventoriable cost. The total inventoriable cost = ($44 + $9 + $4.50 + $4.00) = $61.50. Diff: 2 Objective: 1 AACSB: Application of knowledge
17) Fast Track Auto produces and sells an auto part for $80 per unit. In 2020, 130,000 parts were produced and 90,000 units were sold. Other information for the year includes: Direct materials Direct manufacturing labor Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$25 per unit $4 per unit $3 per unit $7 per part $750,000 per year $300,000 per year
What is the inventoriable cost per unit using variable costing? A) $25 B) $29 C) $32 D) $39 Answer: C Explanation: C) Variable costing considers all variable manufacturing costs as inventoriable costs. Therefore, in this case, direct materials, direct manufacturing labor, and variable manufacturing costs will be considered as inventoriable cost. The total inventoriable cost is $32 ($25 + $4 + $3). Diff: 2 Objective: 1 AACSB: Application of knowledge
591 richard@qwconsultancy.com
18) Fast Track Auto produces and sells an auto part for $85 per unit. In 2020, 125,000 parts were produced and 90,000 units were sold. Other information for the year includes: Direct materials Direct manufacturing labor Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$21 per unit $6 per unit $3 per unit $6 per part $760,000 per year $270,000 per year
What is the inventoriable cost per unit using absorption costing? A) $30.00 B) $36.00 C) $36.08 D) $38.24 Answer: C Explanation: C) Absorption costing considers all variable manufacturing costs and all fixed manufacturing costs as inventoriable costs. Therefore, in this case, direct materials, direct manufacturing labor, variable manufacturing costs, and fixed manufacturing costs will be considered as inventoriable cost. The total inventoriable cost is $36.08 ($21 + $6 + $3 + $6.08*). * $760,000/125,000= $6.08 per unit Diff: 2 Objective: 1 AACSB: Application of knowledge
19) Variable costing only includes direct manufacturing costs in inventoriable costs. Answer: FALSE Explanation: It includes only variable manufacturing costs in inventory costs. Diff: 1 Objective: 1 AACSB: Analytical thinking
20) The unit cost of a product is always higher in variable costing than in absorption costing. Answer: FALSE Explanation: The unit cost of a product is always higher in absorption costing than in variable costing as absorption costing treats fixed manufacturing overhead as an inventoriable costs whereas variable costing treats it as period costs. Diff: 1 Objective: 1 AACSB: Analytical thinking
21) Under variable costing, lease charges paid on the factory building is an inventoriable cost. Answer: FALSE Explanation: Variable costing excludes fixed manufacturing overhead from inventoriable costs and therefore, lease charges paid on factory building will not form part of inventoriable costs. Diff: 1 Objective: 1 AACSB: Analytical thinking
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22) Under both variable and absorption costing, research and development costs are period costs. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
23) Variable costing is also called direct costing because it considers other nonmanufacturing direct costs, such as direct marketing costs as inventoriable costs. Answer: FALSE Explanation: Variable costing is also sometimes called direct costing but that name is misleading as it excludes direct nonmanufacturing costs and only includes variable costs that are part of production and not outside of production in the value chain - as marketing costs would be. Diff: 1 Objective: 1 AACSB: Analytical thinking
24) Absorption costing is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs. Answer: FALSE Explanation: Absorption costing "absorbs" all manufacturing costs into inventory costs and therefore includes both variable and fixed manufacturing costs. Diff: 1 Objective: 1 AACSB: Analytical thinking
25) The term direct costing means that only direct variable costs are considered inventoriable under variable costing, whereas fixed direct costs, such as marketing costs, are considered period costs. Answer: FALSE Explanation: The term direct costing is an imprecise because variable manufacturing overhead (an indirect cost) is considered inventoriable under variable costing. Diff: 2 Objective: 1 AACSB: Analytical thinking
26) One commonality between absorption costing and variable costing is that under both costing methods, all variable manufacturing costs are inventoriable costs and all nonmanufacturing costs in the value chain (such as research and development and marketing), whether variable or fixed, are period costs. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
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27) Under both variable costing and absorption costing fixed manufacturing costs are not inventoried but are treated as a period expense. Answer: FALSE Explanation: The main difference between variable costing and absorption costing is the accounting for fixed manufacturing costs is that under variable costing, fixed manufacturing costs are not inventoried; they are treated as a period expense whereas under absorption costing fixed manufacturing costs are inventoriable costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
28) For 2020, Rockford, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included: Direct manufacturing labor Variable manufacturing overhead Direct materials Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead
$197,500 100,000 160,000 100,000 100,000 250,000
There was no beginning inventory. Required: a. Compute the ending finished goods inventory under both absorption and variable costing. b. Compute the cost of goods sold under both absorption and variable costing. Answer: a. Absorption Variable Direct materials $160,000 $160,000 Direct manufacturing labor 197,500 197,500 Variable manufacturing overhead 100,000 100,000 Fixed manufacturing overhead 250,000 0 Total $707,500 $457,500
b.
Unit costs: $707,500/200,000 units $457,500/200,000 units
$3.5375
Ending inventory: 50,000 units × $3.5375 50,000 units × $2.2875
$176,875
Cost of goods sold: 150,000 × $3.5375 150,000 × $2.2875
$530,625
$2.2875
$114,375
$343,125
Diff: 2 Objective: 1 AACSB: Application of knowledge
594 richard@qwconsultancy.com
29) Fisher Technology Corporation manufactures and sells laptop computers and uses standard costing. For the month of September there was no beginning inventory, there were 3,000 units produced and 2,500 units sold. The manufacturing variable cost per unit is $385 and the variable operating cost per unit was $312.50. The fixed manufacturing cost is $450,000 and the fixed operating cost is $75,000. The selling price per unit is $925. Required: Prepare the income statement for Fisher Technology Corporation for September under variable costing. Answer: Revenues (2,500 × $925) $2,312,500 Variable costs Beginning inventory $ 0 Variable manufacturing costs (3,000 × $385) 1,155,000 Cost of goods available 1,155,000 Deduct ending inventory (500 × $385) (192,500) Variable cost of goods sold 962,500 Variable operating costs (2,500 × $312.50) 781,250 Total variable costs 1,743,750 Contribution margin 568,750 Fixed costs Fixed manufacturing costs 450,000 Fixed operating costs 75,000 Total fixed costs 525,000 Operating income $ 43,750 Diff: 2 Objective: 1 AACSB: Application of knowledge
30) a. Explain the difference between the variable and absorption costing methods. b. Which method(s) are required for external reporting? For internal reporting? Answer: a. Absorption costing includes both fixed and variable manufacturing costs as inventoriable costs, whereas variable costing only includes variable manufacturing costs as inventoriable costs. b. Absorption costing is required for external reporting to shareholders and for income tax reporting. A company may use whichever method it chooses for internal reporting purposes. Diff: 2 Objective: 1 AACSB: Analytical thinking
595 richard@qwconsultancy.com
Objective 9.2 1) The contribution-margin format is used for: A) variable costing income statement B) mixed costing income statement C) absorption costing income statement D) job order costing income statement Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
2) The gross-margin format is used for: A) variable costing income statement B) mixed costing income statement C) absorption costing income statement D) standard costing income statement Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Which of the following statements is true of contribution-margin format of the income statement? A) It is used for absorption costing. B) It distinguishes between variable and fixed costs in its format. C) It distinguishes manufacturing costs from nonmanufacturing costs. D) It calculates gross margin. Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
4) Which of the following statements is true of gross-margin format of the income statement? A) It distinguishes between manufacturing and nonmanufacturing costs. B) It distinguishes variable costs from fixed costs. C) It is used for variable costing. D) It calculates the contribution margin from sales. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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5) Which of the following would be subtracted from sales while calculating contribution margin in a variable costing format of an operating income statement? A) direct labor in factory B) rent on factory building C) rent on the headquarters building D) sales commission on incremental sales Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
6) ________ are subtracted from sales to calculate gross margin. A) Variable and fixed manufacturing costs B) Fixed administrative costs C) Variable administrative costs D) Fixed selling costs Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
7) When reviewing the income statements of a firm prepared under both absorption costing and variable costing, which of the following observation would be made? A) Ending finished goods will differ between the two methods due to the different handling of fixed production costs. B) Ending finished goods to be reported under the two methods will be equal. C) Cost of goods sold will be the same under both methods however, operating income will differ. D) Gross margin will differ under both methods but operating income will be the same. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
597 richard@qwconsultancy.com
8) Somerset Finishing produces and sells a decorative pillow for $104.00 per unit. In the first month of operation, 2,200 units were produced and 1,750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes: Variable manufacturing costs Variable marketing costs Fixed manufacturing costs Administrative expenses, all fixed Ending inventories: Direct materials WIP Finished goods
$24.00 per unit $3.90 per unit $13 per unit $23.00 per unit -0-0450 units
What is cost of goods sold per unit using variable costing? A) $24.00 B) $40.90 C) $63.90 D) $27.90 Answer: A Explanation: A) $24.00, only variable manufacturing costs are included when using variable costing for cost of goods sold. Diff: 2 Objective: 2 AACSB: Application of knowledge
9) Somerset Finishing produces and sells a decorative pillow for $104.00 per unit. In the first month of operation, 2,300 units were produced and 1,800 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes: Variable manufacturing costs Variable marketing costs Fixed manufacturing costs Administrative expenses, all fixed Ending inventories: Direct materials WIP Finished goods
$24.00 per unit $5.00 per unit $15 per unit $19.50 per unit -0-0500 units
What is cost of goods sold using variable costing? A) $43,200 B) $79,200 C) $146,050 D) $66,700 Answer: A Explanation: A) The variable cost of goods sold = $24.00 × 1,800 units = $43,200 Diff: 2 Objective: 2 AACSB: Application of knowledge
598 richard@qwconsultancy.com
10) Swan Textiles Inc. produces and sells a decorative pillow for $97.50 per unit. In the first month of operation, 2,300 units were produced and 1,900 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes: Variable manufacturing costs Variable marketing costs Fixed manufacturing costs Administrative expenses, all fixed Ending inventories: Direct materials WIP Finished goods
$22.00 per unit $7.00 per unit $16 per unit $20.00 per unit -0-0400 units
What is the contribution margin using variable costing? A) $143,450 B) $130,150 C) $171,950 D) $134,650 Answer: B Explanation: B) Total sales = $97.50 × 1,900 = $185,250 Variable cost of goods sold = $22.00 × 1,900 = $41,800 Variable marketing costs = $7.00 × 1,900 = $13,300 Total variable costs = $55,100 Contribution margin = $185,250 - $55,100 = $130,150 Diff: 3 Objective: 2 AACSB: Application of knowledge
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11) Swan Textiles Inc. produces and sells a decorative pillow for $103.00 per unit. In the first month of operation, 2,300 units were produced and 1,900 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes: Variable manufacturing costs Variable marketing costs Fixed manufacturing costs Administrative expenses, all fixed Ending inventories: Direct materials WIP Finished goods
$24.00 per unit $6.00 per unit $14 per unit $19.50 per unit -0-0400 units
What is the operating income using variable costing? A) $138,700 B) $75,050 C) $112,100 D) $61,650 Answer: D Explanation: D) Total sales = $103.00 × $1,900 = $195,700 Total variable costs = ($24.00 × $1,900) + ($6.00 × $1,900) = $57,000 Contribution margin = $195,700 - $57,000 = $138,700 The fixed costs component = (2,300 units × ($14 + $19.50) = $77,050 Therefore, the operating income under variable costing = $138,700 - $77,050 = $61,650 Diff: 3 Objective: 2 AACSB: Application of knowledge
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12) Jean Peck's Furniture manufactures tables for hospitality sector. It takes only bulk orders and each table is sold for $300 after negotiations. In the month of January, it manufactures 3,200 tables and sells 2,400 tables. Actual fixed costs are the same as the amount of fixed costs budgeted for the month. The following information is provided for the month of January: Variable manufacturing costs Fixed manufacturing costs Fixed Administrative expenses
$140 per unit $105,000 per month $27,000 per month
At the end of the month Jean Peck's Furniture has an ending inventory of finished goods of 800 units. The company also incurs a sales commission of $14 per unit. What is the cost of goods sold per unit when using absorption costing? A) $140.00 B) $107.19 C) $172.81 D) $186.81 Answer: C Explanation: C) The variable manufacturing costs per unit is $140. Fixed manufacturing costs attributable to 3,200 tables is $105,000. Therefore, the fixed manufacturing cost per unit = ($105,000/3,200) = $32.81 The total cost of goods sold per unit = ($140.00 + $32.81) = $172.81 Diff: 2 Objective: 2 AACSB: Application of knowledge
601 richard@qwconsultancy.com
13) Jean Peck's Furniture manufactures tables for hospitality sector. It takes only bulk orders and each table is sold for $400 after negotiations. In the month of January, it manufactures 3,200 tables and sells 2,400 tables. Actual fixed costs are the same as the amount of fixed costs budgeted for the month. The following information is provided for the month of January: Variable manufacturing costs Fixed manufacturing costs Fixed Administrative expenses
$120 per unit $90,000 per month $30,000 per month
At the end of the month Jean Peck's Furniture has an ending inventory of finished goods of 800 units. The company also incurs a sales commission of $14 per unit. What is the gross margin when using absorption costing? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $627,200 B) $806,400 C) $485,984 D) $604,488 Answer: D Explanation: D) Total sales: $400 × 2,400 units = $960,000 Total cost of goods sold: ($120 + ($90,000/ 3,200 units) ) × 2,400 units = $355,512 Gross margin under absorption costing: $960,000 - $355,512 = $604,488 Diff: 2 Objective: 2 AACSB: Application of knowledge
602 richard@qwconsultancy.com
14) Jean Peck's Furniture manufactures tables for hospitality sector. It takes only bulk orders and each table is sold for $600 after negotiations. In the month of January, it manufactures 3,200 tables and sells 2,600 tables. Actual fixed costs are the same as the amount of fixed costs budgeted for the month. The following information is provided for the month of January: Variable manufacturing costs Fixed manufacturing costs Fixed Administrative expenses
$120 per unit $95,000 per month $27,000 per month
At the end of the month Jean Peck's Furniture has an ending inventory of finished goods of 600 units. The company also incurs a sales commission of $13 per unit. What is the operating income when using absorption costing? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $1,143,806 B) $1,170,806 C) $1,110,006 D) $1,137,006 Answer: C Explanation: C) Sales ($600 × 2,600) $1,560,000 Cost of goods sold (($120+ ($95,000/ 3,200) ) × 2,600 units) $(389,194) Gross margin $1,170,806 Administrative expenses $(27,000) Variable selling expenses ($13 × 2,600) $(33,800) Operating income $1,110,006 Diff: 3 Objective: 2 AACSB: Application of knowledge
15) Speedy Supplies sells a product at a price of $150. Its variable manufactured cost is $24 and the variable marketing cost per unit is $17.50 with fixed cost per period of $80,000. What would be the change in operating income under variable costs if sales increase from 10,000 to 10,100 units? A) $12,600 B) $10,850 C) $13,250 D) Loss of $69,150 Answer: B Explanation: B) The contribution margin is $108.50 per unit ($150 - 24 - 17.50) × (10,000 - 10,100) = $10,850 Diff: 2 Objective: 2 AACSB: Application of knowledge
603 richard@qwconsultancy.com
16) If the unit level of inventory increases during an accounting period, then: A) less operating income will be reported under absorption costing than variable costing B) more operating income will be reported under absorption costing than variable costing C) operating income will be the same under absorption costing and variable costing D) the exact effect on operating income cannot be determined Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
17) Which of the following statements is true? A) When production is equal to sales, operating income will be greater under variable costing than under absorption costing. B) When production is greater than sales, operating income will be lower under variable costing than absorption costing. C) When production is less than sales, operating income is higher under absorption costing than variable costing. D) When production is greater than sales, operating income is greater under variable costing than under variable costing. Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
18) One possible means of determining the difference between operating incomes for absorption costing and variable costing is by: A) subtracting sales of the previous period from sales of this period B) subtracting fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory C) multiplying the number of units produced by the budgeted fixed manufacturing cost rate D) adding fixed manufacturing costs to the production-volume variance Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
19) When comparing the operating incomes between absorption costing and variable costing, and ending finished inventory exceeds beginning finished inventory, it may be assumed that: A) sales decreased during the period B) variable cost per unit is more than fixed cost per unit C) there is a favorable production-volume variance D) absorption costing operating income exceeds variable costing operating income Answer: D Diff: 3 Objective: 2 AACSB: Analytical thinking
604 richard@qwconsultancy.com
20) Which of the following statements is true of absorption costing? A) Absorption costing allocates fixed manufacturing overhead to actual units produced during the period. B) Absorption costing carries over nonmanufacturing costs to the future periods. C) Absorption costing shows the same level of profit as variable costing irrespective of the level of inventories. D) Absorption costing allocates total manufacturing cost using the budgeted level of production for a particular year. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
21) Garfield Company has the following information for the current year: Beginning fixed manufacturing overhead in inventory Fixed manufacturing overhead in production Ending fixed manufacturing overhead in inventory
$250,000 800,000 90,000
Beginning variable manufacturing overhead in inventory Variable manufacturing overhead in production Ending variable manufacturing overhead in inventory
$50,000 110,000 30,000
What is the difference between operating incomes under absorption costing and variable costing? A) $160,000 B) $110,000 C) $20,000 D) $80,000 Answer: A Explanation: A) $250,000 - $90,000 = $160,000 Diff: 3 Objective: 2 AACSB: Application of knowledge
605 richard@qwconsultancy.com
22) The following information pertains to Stone Wall Corporation: Beginning fixed manufacturing overhead in inventory Ending fixed manufacturing overhead in inventory Beginning variable manufacturing overhead in inventory Ending variable manufacturing overhead in inventory Fixed selling and administrative costs Units produced Units sold
$75,000 47,000 $34,000 17,000 $77,000 5,100 units 4,200 units
What is the difference between operating incomes under absorption costing and variable costing? A) $11,000 B) $45,000 C) $28,000 D) $14,000 Answer: C Explanation: C) $75,000 - $47,000 = $28,000 Diff: 3 Objective: 2 AACSB: Application of knowledge
23) Freetown Corporation incurred fixed manufacturing costs of $32,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,400 units. Units produced total 1,600 units. Units sold total 1,300 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $17,329 B) $26,000 C) $32,000 D) $0 Answer: A Explanation: A) The fixed manufacturing expense attributable to each unit produced is $13.33($32,000/2,400 units). Since only 1,300 units have been sold during the period, the total manufacturing costs to be expensed is $17,329 ($13.33 × 1,300 units). Diff: 3 Objective: 2 AACSB: Application of knowledge
606 richard@qwconsultancy.com
24) Freetown Corporation incurred fixed manufacturing costs of $36,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,600 units. Units produced total 1,500 units. Units sold total 1,300 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Fixed manufacturing costs included in ending inventory total: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $4,800 B) $5,538 C) $2,770 D) $0 Answer: C Explanation: C) The fixed manufacturing expense attributable to each unit produced is $13.85($36,000/2,600 units. The number of units in the ending inventory is 200 units (1,500 - 1,300). Therefore, the total fixed manufacturing costs included in the ending inventory is Diff: 3 Objective: 2 AACSB: Application of knowledge
25) Freetown Corporation budgeted fixed manufacturing costs of $34,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,400 units. Units produced total 1,500 units. Units sold total 1,300 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. The production-volume variance is: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $2,834 B) $12,753 C) $15,587 D) $0 Answer: B Explanation: B) The fixed manufacturing expense attributable to each unit produced is $14.17 ($34,000/2,400 units). The total quantity budgeted to be produced during the period was 2,400 units, whereas only 1,500 units were produced. Therefore there was a variance of 900 units. The production-volume variance is $12,753 ($14.17 × 900 units). Diff: 3 Objective: 2 AACSB: Application of knowledge
607 richard@qwconsultancy.com
26) Freetown Corporation incurred fixed manufacturing costs of $34,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,600 units. Units produced total 1,800 units. Units sold total 1,200 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Operating income using absorption costing will be ________ than operating income if using variable costing. (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $18,312 higher B) $11,333 lower C) $7,848 higher D) $15,692 lower Answer: C Explanation: C) The fixed manufacturing expense attributable to each unit produced is $13.08 ($34,000/2,600 units). Different operating incomes are reported because the unit level of inventory increased during the accounting period by 600 units × $13.08 denominator rate = $7,848. Therefore, operating income is $7,848 higher under absorption costing because $7,848 of fixed manufacturing costs remains in inventory. Diff: 3 Objective: 2 AACSB: Application of knowledge
27) Venus Corporation incurred fixed manufacturing costs of $6,600 during 2020. Other information for 2020 includes: The budgeted denominator level is 1,600 units. Units produced total 770 units. Units sold total 640 units. Beginning inventory was zero. The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) $2,640 B) $5,486 C) $6,600 D) $0 Answer: C Explanation: C) $6,600 of actual fixed manufacturing costs is expensed as a lump sum. Diff: 3 Objective: 2 AACSB: Application of knowledge
608 richard@qwconsultancy.com
28) Venus Corporation incurred fixed manufacturing costs of $6,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 1,000 units. Units produced total 770 units. Units sold total 640 units. Beginning inventory was zero. The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Fixed manufacturing costs included in ending inventory total: A) $1,013 B) $1,380 C) $780 D) $0 Answer: D Explanation: D) Under variable costing no fixed manufacturing costs are included in inventory, and all are expensed on the income statement as a lump sum. Diff: 3 Objective: 2 AACSB: Application of knowledge
29) Venus Corporation incurred fixed manufacturing costs of $6,100 during 2020. Other information for 2020 includes: The budgeted denominator level is 1,400 units. Units produced total 750 units. Units sold total 600 units. Beginning inventory was zero. The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. The production-volume variance totals: A) $1,220 B) $654 C) $2,832 D) $0 Answer: D Explanation: D) Variable costing has no production-volume variance. Diff: 3 Objective: 2 AACSB: Application of knowledge
609 richard@qwconsultancy.com
30) Venus Corporation incurred fixed manufacturing costs of $6,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 1,000 units. Units produced total 760 units. Units sold total 630 units. Beginning inventory was zero. The company uses variable costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. Operating income using variable costing will be ________ than operating income if using absorption costing. A) $1,440 higher B) $1,440 lower C) $3,780 higher D) $780 lower Answer: D Explanation: D) The fixed manufacturing expense attributable to each unit produced is $6 ($6,000/1,000 units). Different operating incomes are reported because the unit level of inventory increased during the accounting period by 130 units × $6 denominator rate = $780. Therefore, operating income is $780 lower under variable costing because $780 of fixed manufacturing costs remains in inventory under absorption costing. Diff: 3 Objective: 2 AACSB: Application of knowledge
610 richard@qwconsultancy.com
31) Jupiter Corporation incurred fixed manufacturing costs of $19,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,100 units. Units produced total 2,400 units. Units sold total 1,900 units. Variable cost per unit is $5 Beginning inventory is zero. The fixed manufacturing cost rate is based on the budgeted denominator level. Under absorption costing, total manufacturing costs expensed on the income statement (excluding adjustments for variances) total: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $33,720 B) $26,695 C) $29,195 D) $17,195 Answer: B Explanation: B) The fixed manufacturing expense attributable to each unit produced is $9.05($19,000/2,100 units). Since only 1,900 units have been sold during the period, the total manufacturing costs to be expensed is $26,695(($9.05 + $5) × 1,900 units). Diff: 3 Objective: 2 AACSB: Application of knowledge
611 richard@qwconsultancy.com
32) Jupiter Corporation incurred fixed manufacturing costs of $18,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,200 units. Units produced total 2,500 units. Units sold total 1,700 units. Variable cost per unit is $6 Beginning inventory is zero. The fixed manufacturing cost rate is based on the budgeted denominator level. Under absorption costing, the production-volume variance is: (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $4,254 B) $2,200 C) $2,454 D) $0 Answer: C Explanation: C) The fixed manufacturing expense attributable to each unit produced is The total quantity budgeted to be produced during the period is 2,200 units, whereas 2,500 units were produced. Therefore, there is a variance of 300 units. The production-volume variance is $2,454($8.18 × 300 units). Diff: 3 Objective: 2 AACSB: Application of knowledge
33) Jupiter Corporation incurred fixed manufacturing costs of $20,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,000 units. Units produced total 2,200 units. Units sold total 1,900 units. Variable cost per unit is $5 Beginning inventory is zero. The fixed manufacturing cost rate is based on the budgeted denominator level. Under variable costing, the fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) $20,000 B) $19,000 C) $30,000 D) $0 Answer: A Explanation: A) $20,000 of actual fixed manufacturing costs is expensed as a lump sum. Diff: 2 Objective: 2 AACSB: Application of knowledge
612 richard@qwconsultancy.com
34) Jupiter Corporation incurred fixed manufacturing costs of $17,000 during 2020. Other information for 2020 includes: The budgeted denominator level is 2,400 units. Units produced total 2,600 units. Units sold total 1,800 units. Variable cost per unit is $6 Beginning inventory is zero. The fixed manufacturing cost rate is based on the budgeted denominator level. The operating income using variable costing will be ________ as compared to the operating income under absorption costing. (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) lower by $5,664.00 B) lower by $1,416.00 C) higher by $5,664.00 D) higher by $1,416.00 Answer: A Explanation: A) The fixed manufacturing expense attributable to each unit produced is Different operating incomes are reported because the unit level of inventory increased during the accounting period by 800 units × $7.08 denominator rate for fixed manufacturing costs = $5,664.00. Therefore, the operating income is $5,664.00 higher under absorption costing because $5,664.00 of fixed manufacturing costs remains in inventory under absorption which are expensed under variable costing. Diff: 3 Objective: 2 AACSB: Application of knowledge
35) In general, if inventory increases during an accounting period: A) variable costing will report less operating income than absorption costing B) absorption costing will report less operating income than variable costing C) variable costing and absorption costing will report the same operating income D) both variable costing and absorption costing will show losses Answer: A Diff: 3 Objective: 2 AACSB: Application of knowledge
613 richard@qwconsultancy.com
36) At the end of the accounting period, Armstrong Corporation reports operating income of $30,000. Which of the following statements is true, if Armstrong's inventory levels decrease during the accounting period? A) Variable costing will report less operating income than absorption costing. B) Absorption costing will report less operating income than variable costing. C) Variable costing and absorption costing will report the same operating income since the cost of goods sold is the same. D) Variable costing and absorption costing will report the same operating income since the total costs are the same. Answer: B Diff: 3 Objective: 2 AACSB: Application of knowledge
37) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by: A) changes in the quantity of units actually sold B) changes in the quantity of units produced C) changes in ending inventory D) changes in sales price per unit Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
38) The contribution-margin format of the income statement is used with absorption costing. Answer: FALSE Explanation: The contribution-margin format of the income statement is used with variable costing. Diff: 1 Objective: 2 AACSB: Analytical thinking
39) The contribution-margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs. Answer: FALSE Explanation: The contribution-margin format of the income statement distinguishes variable costs from fixed costs. Diff: 1 Objective: 2 AACSB: Analytical thinking
40) Fixed manufacturing overhead is a period cost both under variable costing and under absorption costing. Answer: FALSE Explanation: Under variable costing, fixed manufacturing costs are not inventoried; they are treated as period costs, however under absorption costing they are treated as inventoriable costs. Diff: 2 Objective: 2 AACSB: Analytical thinking
614 richard@qwconsultancy.com
41) In variable costing, all nonmanufacturing costs are subtracted from contribution margin. Answer: FALSE Explanation: In variable costing, all fixed costs are subtracted from contribution margin. Diff: 1 Objective: 2 AACSB: Analytical thinking
42) In absorption costing, fixed manufacturing overhead is treated as a period cost. Answer: FALSE Explanation: In absorption costing, fixed manufacturing overhead costs are inventoried. Diff: 2 Objective: 2 AACSB: Analytical thinking
43) The basis of the difference between variable costing and absorption costing is how fixed manufacturing costs are accounted for. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
44) When production is less than sales, operating income will be the same regardless of whether variable cost or absorption costing is used. Answer: FALSE Explanation: When production is less than sales, the operating income will be higher under variable costing than under absorption costing. Diff: 2 Objective: 2 AACSB: Analytical thinking
45) Absorption costing enables managers to increase operating income by increasing the unit level of sales, as well as by producing more units. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
46) Beginning inventory + cost of goods manufactured = Cost of goods sold + Ending inventory. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
47) When production is greater than sales, operating income under variable costing will be less than what it would be under absorption costing. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
615 richard@qwconsultancy.com
48) The production-volume variance only exists under variable costing and not under absorption costing. Answer: FALSE Explanation: The production-volume variance only exists under absorption costing and not under variable costing. Diff: 1 Objective: 2 AACSB: Analytical thinking
49) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually manufactured. Answer: FALSE Explanation: Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually sold. Diff: 2 Objective: 2 AACSB: Analytical thinking
50) Absorption-costing income statements usually do not differentiate between variable and fixed costs. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
51) The production-volume variance, which relates only to fixed manufacturing overhead, exists under absorption costing but not under variable costing. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
52) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by such variables as changes in the quantity of units actually sold and fluctuations in actual selling prices. Answer: FALSE Explanation: Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating income under variable costing is driven solely by changes in the quantity of units actually sold. Diff: 2 Objective: 2 AACSB: Analytical thinking
616 richard@qwconsultancy.com
53) Aspen Manufacturing Company sells its products for $33 each. The current production level is 50,000 units, although only 40,000 units are anticipated to be sold. Unit manufacturing costs are: Direct materials Direct manufacturing labor Variable manufacturing costs Total fixed manufacturing costs Marketing expenses
$6.00 $9.00 $4.50 $180,000 $3.00 per unit, plus $100,000 per year
Required: a. Prepare an income statement using absorption costing. b. Prepare an income statement using variable costing. Answer: a. Absorption-costing income statement: Sales (40,000 × $33) Cost of goods sold (40,000 × $23.10*) Gross margin Marketing: Variable (40,000 × $3) Fixed
$1,320,000 924,000 396,000 $120,000 100,000
Operating income
220,000 $176,000
* $6.00 + $9.00 + $4.50 + ($180,000/50,000) = $23.10 b.
Variable-costing income statement:
Sales (40,000 × $33) Variable costs: Cost of goods sold (40,000 × $19.50*) Marketing (40,000 × $3) Contribution margin Fixed costs: Manufacturing Marketing
$1,320,000 $780,000 120,000
900,000 420,000
$180,000 100,000
Operating income
280,000 $140,000
* $6.00 + $9.00 + $4.50 = $19.50 Diff: 2 Objective: 2 AACSB: Application of knowledge
617 richard@qwconsultancy.com
54) Ireland Corporation planned to be in operation for three years. ∙ During the first year, 2018, it had no sales but incurred $240,000 in variable manufacturing expenses and $80,000 in fixed manufacturing expenses. ∙ In 2019, it sold half of the finished goods inventory from 2018 for $200,000 but it had no manufacturing costs. ∙ In 2020, it sold the remainder of the inventory for $240,000, had no manufacturing expenses and went out of business. ∙ Marketing and administrative expenses were fixed and totaled $40,000 each year. Required: a. Prepare an income statement for each year using absorption costing. b. Prepare an income statement for each year using variable costing. Answer: a. Absorption-costing income statements: 2018 2019 2020 Sales $0 $200,000 $240,000 Cost of goods sold 0 160,000 160,000 Gross margin Marketing and administrative
0 40,000
40,000 40,000
80,000 40,000
$(40,000)
$0
$40,000
2018 $0 0
2019 $200,000 120,000
2020 $240,000 120,000
0
80,000
120,000
$80,000 40,000
$0 40,000
$0 40,000
Total fixed
120,000
40,000
40,000
Operating income
$(120,000)
$40,000
$80,000
Operating income b. Variable-costing income statements: Sales Variable expenses Contribution margin
Fixed expenses: Manufacturing Marketing and administrative
Diff: 3 Objective: 2 AACSB: Application of knowledge
618 richard@qwconsultancy.com
55) Jarvis Golf Company sells a special putter for $20 each. In March, it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on March 1. Production information for March was: Direct manufacturing labor per unit Fixed selling and administrative costs Fixed manufacturing overhead Direct materials cost per unit Direct manufacturing labor per hour Variable manufacturing overhead per unit Variable selling expenses per unit
15 minutes $ 40,000 132,000 2 24 4 2
Required: a. Compute the cost per unit under both absorption and variable costing. b. Compute the ending inventories under both absorption and variable costing. c. Compute operating income under both absorption and variable costing. Answer: a. Absorption Variable Direct manufacturing labor ($24/4) $ 6.00 $ 6.00 Direct materials 2.00 2.00 Variable manufacturing overhead 4.00 4.00 Fixed manufacturing overhead ($132,000/30,000) 4.40 0 Total cost per unit
$16.40
$12.00
Absorption $0
Variable $0
Cost of goods manufactured: 30,000 × $16.40 30,000 × $12.00
$492,000 ________
$360,000
Cost of goods available for sale
$492,000
$360,000
Cost of goods sold: 28,000 × $16.40 28,000 × $12.00
$459,200 ________
$336,000
$ 32,800
$ 24,000
b. Beginning inventory
Ending inventory
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c.
Absorption-costing income statement: Sales (28,000 × $20) Cost of goods sold (28,000 × $16.40)
$560,000 459,200
Gross margin Less: Variable selling and administrative Fixed selling and administrative
100,800 $56,000 40,000
Operating income
96,000 $ 4,800
Variable-costing income statement: Sales (28,000 × $20) Variable COGS (28,000 × $12) Variable selling expenses (28,000 × $2)
$560,000 $336,000 56,000
Contribution margin Fixed costs: Manufacturing Selling and administrative
392,000 168,000
$132,000 40,000
Operating income
172,000 $ (4,000)
Diff: 3 Objective: 2 AACSB: Application of knowledge
620 richard@qwconsultancy.com
56) Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200 equal size lots. As the lots are sold, they are cleared at an average cost of $5,000. Storm drains and driveways are installed at an average cost of $8,000 per site. Sales commissions are 10% of selling price. Administrative costs are $850,000 per year. The average selling price was $160,000 per lot during 2019 when 50 lots were sold. During 2020, the company bought another 2,000-acre island and developed it exactly the same way. Lot sales in 2020 totaled 300 with an average selling price of $160,000. All costs were the same as in 2019. Required: Prepare income statements for both years using both absorption and variable costing methods. Answer: Cost per site: Absorption Variable Land cost $10,000,000/200 sites $50,000 $0 Clearing costs 5,000 5,000 Improvements 8,000 8,000 Total
$63,000
$13,000
Absorption-costing income statements: Sales Cost of goods sold: 50 × ($50,000 + $8,000 + $5,000) 300 × ($50,000 + $8,000 + $5,000)
2019 $8,000,000
2020 $48,000,000
3,150,000 ________
18,900,000
Gross margin Variable marketing Fixed administrative Operating income
$4,850,000 800,000 850,000 $3,200,000
$29,100,000 4,800,000 850,000 $23,450,000
Variable-costing income statements: Sales Variable expenses: Cost of operations: 50 × $13,000 300 × $13,000 Selling expenses
2019 $8,000,000
2020 $48,000,000
800,000
3,900,000 4,800,000
Contribution margin Fixed expenses: Land Administrative Operating income
$6,550,000
$39,300,000
10,000,000 850,000 $(4,300,000)
10,000,000 850,000 $28,450,000
650,000
Diff: 3 Objective: 2 AACSB: Application of knowledge
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57) Aspen Popular Company prepared the following absorption-costing income statement for the year ended May 31, 2020. Sales (8,000 units) Cost of goods sold Gross margin Selling and administrative expenses Operating income
$160,000 108,000 $52,000 18,000 $ 29,000
Additional information follows: Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 8,750 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs Required: Prepare a variable-costing income statement for the same period. Answer: Sales $160,000 Variable expenses: Manufacturing cost of goods sold1 $88,000 Selling and administrative2 Contribution margin Fixed expenses: Fixed factory overhead3 Fixed selling and administrative4 Operating income
12,000
100,000 $ 60,000
$21,875 6,000
1
8,000 units × $11 = $88,000
2
8,000 units × $1.50 = $12,000
3
[($108,000/8,000 units) - $11] × 8,750 units = $21,875
4
$18,000 - $12,000 = $6,000
27,875 $ 32,125
Diff: 3 Objective: 2 AACSB: Application of knowledge
622 richard@qwconsultancy.com
58) The following data are available for Brennan Soft Toys Company for the year ended September 30, 2020. Sales: Expected and actual production: Manufacturing costs incurred: Variable: Fixed: Nonmanufacturing costs incurred: Variable: Fixed: Beginning inventories:
24,000 units at $50 each 30,000 units $525,000 $372,000 $144,800 $77,400 none
Required: a. Determine operating income using the variable-costing approach. b. Determine operating income using the absorption-costing approach. c. Explain why operating income is not the same under the two approaches. Answer: a. Sales = 24,000 × $50 = $1,200,000 Variable manufacturing cost = ($525,000/30,000) × 24,000 = $420,000 Contribution margin = $1,200,000 - $420,000 - $144,800 = $635,200 Operating income = $635,200 - $372,000 - $77,400 = $185,800 b.
Manufacturing fixed cost = ($372,000/30,000) × 24,000 = $297,600 Gross margin = $1,200,000 - $420,000 - $297,600 = $482,400 Operating income = $482,400 - $144,800 - $77,400 = $260,200
c. Absorption-costing considers fixed manufacturing cost as product cost, whereas variable-costing approach treats fixed manufacturing costs as period costs. In case of Brennan, production is 30,000 units, whereas sales is only 24,000 and hence 6,000 units are likely to remain as ending inventory. These 6,000 units will have fixed manufacturing cost of $12.40 per unit ($372,000/30,000). The total fixed manufacturing cost in ending inventory under absorption-costing approach is $74,400 ($12.40 × 6,000 units). Since this cost is inventoried, and not expensed, under absorption-costing approach, the profit is higher by $74,400 ($260,200 − $185,800) compared to profits under variable-costing approach. Diff: 3 Objective: 2 AACSB: Application of knowledge
623 richard@qwconsultancy.com
59) Raul Technologies is concerned that increased sales did not result in increased profits for 2020. Both variable unit and total fixed manufacturing costs for 2019 and 2020 remained constant at $35 and $3,500,000, respectively. In 2019, the company produced 100,000 units and sold 80,000 units at a price of $87.50 per unit. There was no beginning inventory in 2019. In 2020, the company made 70,000 units and sold 90,000 units at a price of $87.50. Selling and administrative expenses were all fixed at $350,000 each year. Required: a. Prepare income statements for each year using absorption costing. b. Prepare income statements for each year using variable costing. c. Explain why the income was different each year using the two methods. Show computations. Answer: a. Absorption-costing income statements: 2019 2020 Sales $7,000,000 $7,875,000 Cost of goods sold: Beginning inventory 0 1,400,000 Variable 3,500,000 2,450,000 Fixed 3,500,000 3,500,000 Subtotal 7,000,000 7,350,000 Ending inventory 1,400,000 0 Total COGS 5,600,000 7,350,000
b.
c.
Gross margin Selling and administrative
1,400,000 350,000
525,000 350,000
Operating income
$1,050,000
$ 175,000
Sales Variable expenses
2019 $7,000,000 2,800,000
2020 $7,875,000 3,150,000
Contribution margin
4,200,000
4,725,000
Fixed expenses: Manufacturing Selling and administrative
3,500,000 350,000
3,500,000 350,000
Operating income
$ 350,000
$ 875,000
Variable-costing income statements:
Budgeted fixed manufacturing overhead rate for 2019 = $3,500,000 / 100,000 = $35 2019 difference of $700,000 = (100,000 - 80,000) × $35 = $700,000 (favors absorption method) 2020 difference of $700,000 = (70,000 - 90,000) × $35 = $700,000 (favors variable method)
Diff: 3 Objective: 2 AACSB: Application of knowledge
624 richard@qwconsultancy.com
60) The manager of the manufacturing division of Iowa Windows does not understand why income went down when sales went up. Some of the information he has selected for evaluation include:
Units produced Units sold
January 40,000 30,000
February 30,000 40,000
Sales Beginning inventory Cost of production Ending inventory Operating income
$600,000 0 600,000 150,000 70,000
$800,000 150,000 550,000 0 35,000
The division operated at normal capacity during January. Variable manufacturing cost per unit was $5, and the fixed costs were $400,000. Selling and administrative expenses were all fixed. Required: Explain the profit differences. How would variable costing income statements help the manager understand the division's operating income? Answer: The 10,000 units in inventory being assigned fixed manufacturing costs cause the operating income difference. The fixed manufacturing cost assigned to the inventory is carried into the next month. The fixed costs per unit were $10 per unit ($400,000/40,000), therefore, $100,000 (10,000 × $10) were carried into February. Variable costing helps avoid confusion by relating variations in expenses to sales rather than to inventory fluctuations. Under variable costing, the total fixed amount ($400,000) would be expensed in January and none carried forward into February. Therefore, January's income would be $100,000 less than reported and February's $100,000 more than reported. Diff: 2 Objective: 2 AACSB: Application of knowledge
61) Explain the difference between the gross margin format and the contribution margin format for the income statement. What information is highlighted with each? Answer: The gross margin format divides costs into product and period costs while the contribution format divides costs into variable and fixed costs. The gross margin format highlights cost function while the contribution format highlights cost behavior. Diff: 2 Objective: 2 AACSB: Analytical thinking
625 richard@qwconsultancy.com
62) Gagnon Company has two identical divisions, East and West. Their sales, production volume, and fixed manufacturing costs have been the same for the last five years. The amounts for each division were as follows: 2016 2017 2018 2019 2020 Units produced 50,000 55,000 55,000 44,000 44,000 Units sold 45,000 45,000 50,000 50,000 50,000 Fixed manufacturing costs $55,000 $55,000 $55,000 $55,000 $55,000 East Division uses absorption costing and West Division uses variable costing. Both use FIFO inventory methods. Variable manufacturing costs are $5 per unit. Selling and administrative expenses were identical for each division. There were no inventories at the beginning of 2016. Which division reports the highest income each year? Explain. Answer: East Division had the higher income during the first three years because production exceeded sales; this stored some of the fixed manufacturing costs each year in the ending inventory balances. West had the higher income during the last two years because sales exceeded production. During these years, East incurred all of the year's fixed manufacturing costs plus those costs that were in inventory from the prior years. Diff: 2 Objective: 2 AACSB: Application of knowledge
Objective 9.3 1) Which of the following is a reason for companies to use absorption costing for internal accounting? A) It is the required inventory method for internal accounting as per GAAP. B) It measures the cost of all resources, whether manufacturing or nonmanufacturing, necessary to produce inventory. C) It does not take into account fixed manufacturing overhead while valuing inventory and hence is more suited for decision making. D) It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
2) Many companies have switched from absorption costing to variable costing for internal reporting: A) to comply with external reporting requirements as required by GAAP B) to increase bonuses for managers C) to reduce the undesirable incentive to build up inventories that would show higher operating income D) so the denominator level is more accurate Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
626 richard@qwconsultancy.com
3) Ways to "produce for inventory" that result in increasing operating income include: A) switching production to products that absorb the least amounts of fixed manufacturing costs B) delaying items that absorb the greatest amount of fixed manufacturing costs C) switching production to products that absorb the most amounts of fixed manufacturing costs D) undervaluing ending inventory by not recording certain costs that have been incurred Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
4) Switching production to products that absorb the highest amount of fixed manufacturing costs is also called: A) cost reduction B) cherry picking C) producing for sales D) throughput costing Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
5) To discourage producing for inventory, management can: A) discourage using nonfinancial measures such as units in ending inventory compared to units in sales as nonfinancial measures may not be congruent with management performance goals B) evaluate performance over a quarterly period rather than a single year C) develop budgeting and planning activities that reduce management's freedom to inappropriately build inventory through increased production D) implement absorption costing across all departments Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
6) Which of the following steps can a management take to reduce the undesirable effects of absorption costing? A) It can evaluate managers on quarterly basis rather than the usual yearly period thereby mitigating the undesirable effects of absorption costing. B) It can delegate powers to managers to decide which orders they want to accept so that any order which will lead to inventory build-up can be rejected. C) It can empower managers to decide the timings of maintenance of plants thereby ensuring that the production is not affected. D) It can encourage using nonfinancial measures such as units in ending inventory compared to units in sales. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
627 richard@qwconsultancy.com
7) Under absorption costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in: A) greater operating income and therefore increasing the manager's bonus B) less operating income and therefore decreasing the manager's bonus C) not affecting the manager's bonus D) being unable to determine the manager's bonus using only the above information Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
8) Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in: A) increasing the manager's bonus B) decreasing the manager's bonus C) not affecting the manager's bonus D) being unable to determine the manager's bonus using only the above information Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
9) Which of the following is NOT one of the reasons why absorption costing might also be used for internal reporting? A) It is more useful for managerial decision making than variable costing. B) It is cost effective and less confusing for managers to use one common method for both internal and external reporting. C) It can help prevent managers from making decisions that make their performance look good to the detriment of income reported to shareholders. D) For long-term decision making both variable and fixed costs must be considered for inventory related decisions. Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
10) Which of the following is a reason for companies adopting variable costing for internal reporting purposes? A) It is cost-effective to use variable costing for both internal and external reporting. B) It reduces the incentives for undesirable buildup of inventories. C) It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory. D) It assists in accurate pricing decisions in case of long-run pricing. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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11) Which of the following is true of absorption costing? A) It enables a manager to decrease margins and operating income by producing more beginning inventory. B) It enables a manager to increase margins and operating income by producing more beginning inventory. C) It enables a manager to decrease margins and operating income by producing more and building ending inventory. D) It enables a manager to increase margins and operating income by producing more and building ending inventory. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
12) Which of the following would NOT lead to a buildup inventory as a strategy to increase operating income? A) cutting overhead costs as year-end approaches B) plant manager switching to make products that absorb the highest amounts of fixed cists C) plant manager accepting an order to increase production and build up inventory when another plant in the same company would be better suited to take on the order D) allocating resources to production by deferring maintenance of equipment and building beyond the current period Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
13) Under absorption costing, managers can increase operating income by holding less inventories at the end of the period. Answer: FALSE Explanation: Under absorption costing, managers can increase operating income by holding more inventories at the end of the period. Diff: 2 Objective: 3 AACSB: Analytical thinking
14) To reduce the undesirable incentives to build up inventories that absorption costing can create, a number of companies use variable costing for internal reporting. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
15) Evaluating performance of managers over a long period, say over three-to five-years, helps to reduce undesirable buildup of inventories. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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16) Absorption costing is the required inventory method for external financial reporting in most countries. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
17) One of the most common problems reported by companies using variable costing is the difficulty of classifying costs into fixed or variable categories. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
18) Absorption costing helps managers to artificially inflate profits by encouraging the production of products that absorb the highest amount of fixed manufacturing costs. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
19) To reduce the undesirable incentives to build up inventories management can institute planning, budgeting, and other controls. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
20) Absorption cost data, because it measures the cost of all manufacturing resources, is often used as an input for long-run decisions. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
630 richard@qwconsultancy.com
21) Kaiser Company just hired its fourth production manager in three years. All three previous managers had quit because they could not get the company above the break-even point, even though sales had increased somewhat each year. The company was operating at about 60 % of plant capacity. The flatware industry was growing, so increased sales were not out of the question. I. R. Thinking took the job as manager of the production division with a very attractive salary package. After interviewing for the position, he proposed a salary and bonus package that would give him a very small salary but a large bonus if he took the operating income (using absorption costing) above the breakeven point during his very first year. Required: What do you think Mr. Thinking had in mind for increasing the company's operating income? Answer: Mr. Thinking realized that he could probably increase both production and sales during the coming year. If he substantially overproduced he knew that the extra costs would be hidden in unsold inventory. If the new production level could be sold by the sales force in the growing market, the profits would increase anyway and everybody would be happy. Also, he could combine increased production with reduced fixed manufacturing costs such as maintenance. In the short run, several combinations could be undertaken by Mr. Thinking to ensure that the profit picture would improve. Diff: 3 Objective: 3 AACSB: Application of knowledge
22) Explain three methods under absorption costing that managers can use to improve operating income. Answer: 1) A plant manager may switch to manufacturing products that absorb the highest amount of fixed manufacturing costs, regardless of the demand for the product. 2) A plant manager may accept a particular order to increase production, even though another plant in the same company may be better suited to handle the order. 3) To increase production, a manager may defer maintenance beyond the current period. Diff: 3 Objective: 3 AACSB: Analytical thinking
631 richard@qwconsultancy.com
23) Briefly explain why many companies use absorption costing for external reporting as well as internal accounting. Answer: Absorption costing is the required inventory method for external financial reporting in most countries. Many companies use absorption costing for internal accounting as well because: 1) It is cost-effective and less confusing for managers to use one common method of inventory costing for both external and internal reporting and performance evaluation. 2) It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders. 3) It measures the cost of all manufacturing resources, whether variable or fixed, necessary to produce inventory. Many companies use inventory costing information for long-run decisions, such as pricing and choosing a product mix. For these long-run decisions, inventory costs should include both variable and fixed costs. Diff: 3 Objective: 3 AACSB: Analytical thinking
24) Discuss the pros and cons of using absorption costing for both internal and external reporting. Answer: Absorption costing is the required inventory method for external reporting in the United States (U.S. GAAP) and most other countries however, many companies also use absorption costing for internal accounting as well. The use of one method is seen as cost effective and less confusing for managers to utilize with one common method for inventory reporting and decision-making. However, one motivation for an undesirable buildup of inventories could be due to the fact that a manager's bonus (and other performance based rewards ) based on absorption-costing operating income (which increases as production increases). Companies that use absorption costing and ignore variable costing may miss the benefits of variable costing. Companies that use both methods for internal reporting–variable costing for short-run decisions and performance evaluation and absorption costing for long-run decisions–benefit from the advantages of both methods. Diff: 3 Objective: 3 AACSB: Analytical thinking
632 richard@qwconsultancy.com
Objective 9.4 1) Throughput is a variation of which of the following systems? A) absorption costing B) variable costing C) job costing D) standard costing Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
2) Advocates of throughput costing argue that: A) fixed manufacturing costs must be included as inventoriable costs and provide less incentive than absorption costing to build-up inventory to increase profits B) direct manufacturing labor is relatively fixed and therefore should not be included in inventory costs C) direct materials costs are a cost of the period and therefore should not be included in inventoriable costs D) including only direct materials as inventoriable costs provides less incentive than absorption costing to produce a build-up of inventory merely to increase profits Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
3) Assume a manufacturing company that has started production in the current year. Which of the following would result in the highest profit being reported if the company has 1,000 units of ending inventory? A) throughput costing B) variable costing C) absorption costing D) standard costing Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
4) Throughput contribution equals: A) variable costs minus fixed costs B) revenues minus all direct labor costs C) revenues minus all direct material cost of goods sold D) revenues minus manufacturing overhead Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
633 richard@qwconsultancy.com
5) If 1,000 units are produced and only 700 units are sold, ________ results in the greatest amount of expense reported on the income statement. A) throughput costing B) variable costing C) absorption costing D) job costing Answer: A Diff: 2 Objective: 4 AACSB: Application of knowledge
6) If 800 units are produced and 1,200 units are sold, the costing method which will result in the greatest operating income is: A) throughput costing B) variable costing C) absorption costing D) period costing Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
7) Advocates of throughput costing maintain that: A) both variable and fixed are necessary to produce goods; therefore, both types of costs should be inventoried B) all manufacturing costs plus some design costs should be inventoried C) fixed manufacturing costs are related to the capacity to produce rather than to the actual production of specific units D) except direct labor no other costs are truly variable in output Answer: C Diff: 3 Objective: 4 AACSB: Analytical thinking
634 richard@qwconsultancy.com
8) Glossier Images Inc., produces decorative statues. Management has provided the following information: Actual sales Budgeted production Selling price Direct material costs Variable manufacturing costs Variable administrative costs Fixed manufacturing overhead
35,000 statues 51,000 statues $48 per statue $7.20 per statue $3.50 per statue $5.95 per statue $4.80 per statue
What is the cost per statue if throughput costing is used? A) $21.45 B) $16.65 C) $10.70 D) $7.20 Answer: D Explanation: D) Equal to direct material costs of $7.20 Diff: 2 Objective: 4 AACSB: Application of knowledge
9) Glossier Images Inc., produces decorative statues. Management has provided the following information: Actual sales Budgeted production Selling price Direct material costs Variable manufacturing costs Variable administrative costs Fixed manufacturing overhead
30,000 statues 53,000 statues $47 per statue $7.30 per statue $3.45 per statue $5.85 per statue $4.80 per statue
What is the total throughput contribution? A) $2,104,100 B) $1,087,500 C) $1,191,000 D) $912,000 Answer: C Explanation: C) Throughput contribution = 30,000 statues × ($47 - $7.30) = $1,191,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
635 richard@qwconsultancy.com
10) Answer the following question using the information below: Jason Novelty Company produces a specialty item. Management has provided the following information: Actual sales Budgeted production Selling price
160,000 units 104,000 units $41 per unit
Direct material costs Variable manufacturing overhead Variable administrative costs Fixed manufacturing overhead
$10 per unit $4 per unit $5 per unit $6 per unit
What is the cost per unit if throughput costing is used? A) $25 B) $14 C) $19 D) $10 Answer: D Explanation: D) Direct material costs of $10 Diff: 1 Objective: 4 AACSB: Application of knowledge
11) Answer the following question using the information below: Jason Novelty Company produces a specialty item. Management has provided the following information: Actual sales Budgeted production Selling price
130,000 units 101,000 units $41 per unit
Direct material costs Variable manufacturing overhead Variable administrative costs Fixed manufacturing overhead
$10 per unit $4 per unit $7 per unit $6 per unit
What is the total throughput contribution? A) $3,131,000 B) $2,600,000 C) $4,030,000 D) $1,820,000 Answer: C Explanation: C) Selling price per unit is $41 and the direct material costs is $10. Under throughput costing, contribution is calculated by deducting direct materials cost from the sale amount, the throughput contribution, in this case, is $31. Total throughput contribution for 130,000 units sold is [130,000 × $31 = $4,030,000] Diff: 3 Objective: 4 AACSB: Application of knowledge
636 richard@qwconsultancy.com
12) Which of the following inventory costing methods results in the least amount of costs being inventoried? A) absorption costing B) variable costing C) throughput costing D) direct costing Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
13) A product is sold for $130. Its cost consists of $15 of direct materials, $25 of direct labor, and $10 of manufacturing overhead. What is the throughput margin? A) $115 B) $90 C) $130 D) $80 Answer: A Explanation: A) $130 - $15 = $115 Diff: 2 Objective: 4 AACSB: Analytical thinking
14) Throughput costing considers only direct materials and direct manufacturing labor to be truly variable costs. Answer: FALSE Explanation: Throughput costing considers only direct materials to be truly variable costs. Diff: 1 Objective: 4 AACSB: Analytical thinking
15) Absorption costing is also referred to as super-variable costing. Answer: FALSE Explanation: Throughput costing is also referred to as super-variable costing. Diff: 1 Objective: 4 AACSB: Analytical thinking
16) When production quantity exceeds sales, throughput costing results in reporting lower operating income than variable costing. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
637 richard@qwconsultancy.com
17) Throughput costing provides less incentive to produce for inventory than either variable costing or, especially, absorption costing. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
18) A company may use absorption costing for external reporting and still choose to use throughput costing for internal reports. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
19) Throughput margin equals revenues minus all product costs. Answer: FALSE Explanation: Throughput margin equals revenues minus all direct material cost of the goods sold. Diff: 1 Objective: 4 AACSB: Analytical thinking
20) Throughput costing results in a higher amount of manufacturing costs being placed in inventory than either variable or absorption costing. Answer: FALSE Explanation: Throughput costing results in a lower amount of manufacturing costs being placed in inventory than either variable or absorption costing. Diff: 2 Objective: 4 AACSB: Analytical thinking
21) Which of the following inventory costing methods shown below is required by GAAP (Generally Accepted Accounting Principles) for external financial reporting? A) absorption costing B) variable costing C) throughput costing D) direct costing Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
638 richard@qwconsultancy.com
22) Universal Specialty Group produces a sports theme chair. The following information has been provided by management: Actual sales Budgeted production Selling price Direct material costs Fixed manufacturing costs Variable manufacturing costs Variable administrative costs
10,000 units 12,000 units $425 per unit $90.00 per unit $64.00 per unit $50.00 per unit $25.00 per unit
Required: a. What is the cost per statue if absorption costing is used? b. What is the cost per statue if "super-variable costing" is used? c. What is the total throughput contribution? Answer: a. The cost per statue = $90+ $64 + $50 = $204 b.
The cost per statue = Equal to direct material costs of $90.00
c.
The total throughput contribution = 10,000 × ($425 - $90.00) = $3,350,000
Diff: 3 Objective: 4 AACSB: Application of knowledge
23) What is throughput costing? What advantages does it have over variable and absorption costing? Answer: Throughput costing is an inventory method which treats all costs except direct materials as costs of the period in which they are incurred. Throughput costing results in a lower amount of manufacturing cost put into inventory than either variable or absorption costing. Supporters of throughput costing claim that it provides less incentive to produce for inventory than absorption costing or even variable costing. Diff: 2 Objective: 4 AACSB: Analytical thinking
639 richard@qwconsultancy.com
Objective 9.5 1) Practical capacity is the denominator-level concept that: A) reduces theoretical capacity for unavoidable operating interruptions B) is the maximum level of operations at maximum efficiency C) is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year D) is based on anticipated levels of capacity utilization for the coming budget period Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
2) ________ reduces theoretical capacity for unavoidable operating interruptions. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
3) ________ is based on the level of capacity utilization that satisfies average customer demand over periods generally longer than one year. A) Practical capacity B) Theoretical capacity C) Master-budget capacity utilization D) Normal capacity utilization Answer: D Diff: 1 Objective: 5 AACSB: Analytical thinking
4) ________ is the level of capacity utilization that managers expect for the current budget period, which is typically one year. A) Practical capacity B) Master-budget capacity utilization C) Theoretical capacity D) Normal capacity utilization Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
640 richard@qwconsultancy.com
5) ________ is the level of capacity based on producing at full efficiency all the time. A) Practical capacity B) Theoretical capacity C) Normal capacity D) Demand capacity Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Which of the following measures capacity levels in terms of demand for the output of the plant? A) practical capacity and theoretical capacity B) theoretical capacity and normal capacity utilization C) normal capacity utilization and master-budget capacity utilization D) master-budget capacity utilization and practical capacity Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
7) Which of the following best describes practical capacity? A) It is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions, such as scheduled maintenance time and shutdowns for holidays. B) It is the level of capacity based on producing at full efficiency all the time. C) It is the level of capacity utilization that satisfies average customer demand over a period that includes seasonal, cyclical, and trend factors. D) It is the level of capacity utilization that managers expect for the current budget period, which is typically one year. Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
8) The budgeted fixed manufacturing cost rate is the lowest for: A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
641 richard@qwconsultancy.com
9) Which of the following assumes that capacity will be decreased because of slowdowns due to plant maintenance or other interruptions of the production lines? A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
10) Kennywood Inc., a manufacturing firm, is able to produce 1,500 pairs of pants per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. The plant actually operates only 27 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 504,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 515,000. Assume the month has 30 days. What is the master-budget capacity utilization level for this budget period? A) 504,000 units B) 515,000 units C) 525,600 units D) 555,500 units Answer: A Explanation: A) Master-budget capacity utilization is the level of capacity utilization that managers expect for the current budget period. In this case, the level of capacity utilization is estimated to be 504,000 units. Diff: 2 Objective: 5 AACSB: Application of knowledge
11) Kennywood Inc., a manufacturing firm, is able to produce 1,100 pairs of pants per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 825 units per hour. The plant actually operates only 28 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 504,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 515,000. Assume the month has 30 days. What is the theoretical capacity for the month? A) 222,750 units B) 792,000 units C) 554,400 units D) 739,200 units Answer: B Explanation: B) Theoretical capacity is 792,000 units (1,100 × 3 × 8 × 30). Diff: 2 Objective: 5 AACSB: Application of knowledge
642 richard@qwconsultancy.com
12) Kennywood Inc., a manufacturing firm, is able to produce 1,400 pairs of pants per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 900 units per hour. The plant actually operates only 27 days per month. Based on the current budget, Kennywood estimates that it will be able to sell only 502,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 520,000. Assume the month has 30 days. What is the practical capacity for the month? A) 243,000 units B) 1,008,000 units C) 583,200 units D) 907,200 units Answer: C Explanation: C) Practical capacity for the month is 583,200 units (900 × 8 × 3 × 27). Diff: 2 Objective: 5 AACSB: Application of knowledge
13) The throughput margin is calculated as: A) Sales — Direct materials cost — direct labor costs B) Sales — Cost of Goods sold less fixed overhead costs C) Sales — Direct materials costs D) Sales — total variable costs Answer: C Diff: 2 Objective: 5 AACSB: Application of knowledge
14) Under throughput costing, which of the following is considered a variable cost in the short run? A) direct labor B) manufacturing overhead C) direct materials D) all manufacturing related costs Answer: C Diff: 2 Objective: 5 AACSB: Application of knowledge
15) Normal capacity utilization is the level of capacity that satisfies average customer demand over a period and takes into account seasonal, cyclical, and trend factors. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
643 richard@qwconsultancy.com
16) Both theoretical capacity and master-budget capacity measure capacity levels in terms of demand for the output of the plant. Answer: FALSE Explanation: Only master-budget capacity utilization measure capacity levels in terms of demand for the output of the plant. Theoretical capacity measures capacity in terms of what the plant can supply. Diff: 2 Objective: 5 AACSB: Analytical thinking
17) If the variable manufacturing overhead is $50 per unit for a company, the lowest budgeted manufacturing cost per unit can be obtained by using normal capacity utilization as the denominator level capacity. Answer: FALSE Explanation: Lowest budgeted fixed manufacturing cost can be obtained by using theoretical capacity as the denominator-level capacity. Diff: 1 Objective: 5 AACSB: Analytical thinking
18) The choice of the capacity level used to allocate budgeted fixed manufacturing costs to products can greatly affect the product-cost information available to managers. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
19) Engineering and human resource factors are both important when estimating theoretical or practical capacity. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
20) Practical capacity is the level of capacity that reduces theoretical capacity by considering unavoidable operating interruptions, such as scheduled maintenance time and shutdowns for holidays. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
21) To achieve consistency in reporting, a U.S. based company must use the same capacity-level concept for internal reporting and control as it uses for external reporting and tax reporting. Answer: FALSE Explanation: For tax reporting in the United States, managers must take direct production costs, as well as fixed and variable indirect production costs, into account in the computation of inventoriable costs in accordance with the "full absorption" method of inventory costing. Diff: 2 Objective: 5 AACSB: Analytical thinking
644 richard@qwconsultancy.com
22) For tax reporting in the United States, managers must use the "full absorption" method of inventory costing. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
23) Theoretical capacity is unattainable in the real world. Answer: FALSE Diff: 1 Objective: 5 AACSB: Analytical thinking
24) A company should use the same denominator level capacity for all the budgets and other purposes so as to facilitate comparability and avoid misrepresentation. Answer: FALSE Explanation: A company is not required to use the same capacity-level concept for different purposes. It can use different denominator level capacity, say, for management planning and control, external reporting to shareholders, and income tax purposes. Diff: 2 Objective: 5 AACSB: Analytical thinking
645 richard@qwconsultancy.com
25) Match each of the following items with one or more of the denominator-level capacity concepts by putting the appropriate letter(s) by each item: a. Theoretical capacity b. Practical capacity c. Normal capacity utilization d. Master-budget capacity utilization 1. Reduces theoretical capacity by considering unavoidable operating interruptions 2. Producing at full efficiency all the time 3. Measures capacity levels in terms of demand 4. Level of capacity utilization that satisfies average customer demand over a period 5. Does not allow for plant maintenance 6. Engineering and human resource factors are important when estimating capacity 7. Level of capacity utilization that managers expect for the current budget period 8. Ideal goal of capacity utilization 9. Takes into account seasonal, cyclical, and trend factors 10. Measures capacity levels in terms of what a plant can supply Answer: 1. b 2. a 3. c, d 4. c 5. a 6. a, b 7. d 8. a 9. c 10. a, b Diff: 2 Objective: 5 AACSB: Application of knowledge
646 richard@qwconsultancy.com
26) Soul Socket Inc. manufactures socket wrenches. ∙ For next month, the vice president of production plans on producing 4,450 wrenches per day. ∙ The company can produce as many as 5,000 wrenches per day, but is more likely to produce 4,500 per day. ∙ The demand for wrenches for the next three years is expected to average 4,250 wrenches per day. ∙ Fixed manufacturing costs per month total $374,000. ∙ The company works 22 days a month. ∙ Fixed manufacturing overhead is charged on a per-wrench basis. Required: a. What is the theoretical fixed manufacturing overhead rate per wrench for the next month? b. What is the practical fixed manufacturing overhead rate per wrench for the next month? c. What is the normal fixed manufacturing overhead rate per wrench for the next month? d. What is the master-budget fixed manufacturing overhead rate per wrench for the next month? Answer: a. Theoretical overhead rate = $374,000 / (5,000 × 22) = $3.40 b.
Practical overhead rate = $374,000 / (4,500 × 22) = $3.78
c.
Normal overhead rate = $374,000 / (4,250 × 22) = $4.00
d. Master-budget overhead rate = $374,000 / (4,450 × 22) = $3.82 Diff: 3 Objective: 5 AACSB: Application of knowledge
647 richard@qwconsultancy.com
Objective 9.6 1) Yellow Mountain Manufacturing factors practical capacity as a denominator to calculate budgeted fixed overhead. Theoretical capacity is 15,000 units per year with practical capacity of 12,000 units per year. Budgeted fixed overhead costs were $620,000 and actual overhead costs were $660,000 with actual output of 11,000 units. Which of the following statements is true? A) The budgeted cost per unit of supplying the capacity was $56.36. B) The actual cost of supplying capacity was $51.67 per unit. C) The budgeted cost of supplying the capacity was $51.67 per unit. D) The budgeted cost of supplying the capacity was $41.33 per unit. Answer: C Explanation: C) $620,000 / 12,000 units = $51.67 per unit Diff: 2 Objective: 6 AACSB: Analytical thinking
2) The use of theoretical capacity results in an unrealistically low fixed manufacturing cost per unit because it is based on: A) real available capacity B) an unattainable and idealistic level of capacity C) normal capacity utilization D) normal costing Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
3) The level of capacity that considers unavoidable operating interruptions such as unplanned downtime of an assembly line at manufacturing plant is called: A) theoretical capacity B) practical capacity C) normal capacity utilization D) master-budget capacity utilization Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
4) The average level of output that can be completed over a period of time is: A) theoretical capacity B) practical capacity C) normal capacity utilization D) master-budget capacity utilization Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
648 richard@qwconsultancy.com
5) Hyland Resources Inc. uses practical capacity as the denominator to set the cost of supplying capacity and for the current period the budgeted cost per unit of supplying capacity was $42. Practical capacity was set at 10,000 units with theoretical capacity at 14,000 units. During the period, only 4,000 units were produced while the master budget assumed that the company would produce 9,000 units. What is the value of the manufacturing resources NOT used during the period? A) $252,000 B) $210,000 C) $420,000 D) $42,000 Answer: A Explanation: A) (10,000 - 4,000) × $42 = $252,000 Diff: 2 Objective: 6 AACSB: Analytical thinking
6) Which of the following is true of normal capacity utilization? A) It will almost always show results that are very close to that of practical capacity utilization. B) It can result in setting selling prices that are not competitive. C) It results in the lowest cost estimate of the four capacity options when used for product costing. D) It is also called master-budget capacity utilization. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
7) Which of the following is true of master-budget capacity utilization? A) It hides the amount of unused capacity. B) It represents the maximum units of production intended for current capacity. C) It provides the best cost estimate for benchmarking purposes. D) It is an average that provides no meaningful feedback to a firm's marketing manager for a particular year. Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
8) Which of the following capacity levels should a company choose, from a long-run product costing perspective, to allocate budgeted fixed manufacturing costs to products? A) master-budget capacity utilization to highlight unused capacity B) normal capacity utilization for benchmarking purposes C) practical capacity for pricing decisions D) theoretical capacity for performance evaluation Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
649 richard@qwconsultancy.com
9) Customers expect to pay a price that includes: A) the cost of unused capacity B) only the cost of actual capacity used C) variable costs but not capacity costs D) the cost of direct materials, direct labor, and fixed overhead Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
10) The marketing manager's performance evaluation is most fair when based on a denominator level using ________ as it is the principal short-run planning and control tool. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
11) ________ is the continuing reduction in the demand for a company's products that occurs when competitor prices are not met. A) Downward demand spiral B) Competitor pricing pressure C) Continuous step down demand D) Super-demand cutback Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
12) Using master-budget capacity to allocate budgeted fixed manufacturing costs can result in a: A) stable measure; avoiding the recalculation of unit costs when expected demand levels change B) fixed costs spread over available capacity C) can result in a downward demand spiral D) in fixed overhead costs calculated based on capacity available Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
650 richard@qwconsultancy.com
13) Using ________ as the denominator level also gives the manager a more accurate idea of the resources needed and used to produce a unit by excluding the cost of unused capacity. A) practical capacity B) normal capacity utilization C) theoretical capacity D) master-budget capacity utilization Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
14) The effect of spreading fixed manufacturing costs over a shrinking master-budget capacity utilization amount results in: A) greater utilization of capacity B) increased unit costs C) more competitive selling prices D) greater demand for the product Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
15) For financial reporting, SFAS 151 requires: A) the allocation of fixed manufacturing overhead to production must be based on theoretical capacity of the facilities B) the allocation of fixed manufacturing overhead to production must be based on normal capacity of the facilities C) the allocation of fixed manufacturing overhead to production must be based on practical capacity of the facilities D) the allocation of fixed manufacturing overhead to production must be based on the average of the capacity of the facilities over the three most recent period Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
16) Operating income reported on the end-of-period financial statements is changed when ________ is used to handle the production-volume variance at the end of the accounting period. A) the adjusted allocation-rate approach B) the proration approach C) the write-off variances to cost of goods sold approach D) the reinstatement approach Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
651 richard@qwconsultancy.com
17) Which of the following approaches spreads underallocated or overallocated overhead among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold? A) the adjusted allocation-rate approach B) the proration approach C) the write-off variances to cost of goods sold approach D) the reinstatement approach Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
18) Which of the following is true about what the Internal Revenue Service requires for calculating indirect manufacturing costs per unit? A) a method of which fairly apportions indirect production costs among the various items produced B) requires that theoretical capacity be used as a means of allocating indirect manufacturing costs C) requires the use of master-budget capacity utilization D) requires the use of normal capacity utilization Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
19) Use of practical capacity results in an unrealistically small fixed manufacturing cost per unit because it is based on an idealistic and unattainable level of capacity. Answer: FALSE Explanation: Use of theoretical capacity results in an unrealistically small fixed manufacturing cost per unit because it is based on an idealistic and unattainable level of capacity. Diff: 2 Objective: 6 AACSB: Analytical thinking
20) Using master budget capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity. Answer: FALSE Explanation: Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity. Diff: 2 Objective: 6 AACSB: Analytical thinking
21) The downward demand spiral happens when a company cannot meet competitors prices are not met as because of underutilized capacity, higher and higher unit costs result is a greater reluctance to meet competitors' prices. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
652 richard@qwconsultancy.com
22) Proration approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates. Answer: FALSE Explanation: Adjusted allocation-rate approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates. Diff: 2 Objective: 6 AACSB: Analytical thinking
23) Using practical capacity as the denominator level sets the cost of capacity at the cost of supplying the capacity, regardless of the demand for the capacity. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
24) For benchmarking purposes for long-range planning, it is best to use master-budget capacity because all competitors use about the same about of capacity for production. Answer: FALSE Explanation: For benchmarking purposes it is best to use PRACTICAL capacity because it best represents the long-run cost of capacity. Diff: 2 Objective: 6 AACSB: Analytical thinking
25) Practical capacity rather than master-budget volume is a better way to price product and avoid downward demand spiral. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
26) Adjusted allocation-rate approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
27) Using practical capacity is best for evaluating the marketing manager's performance for a particular year. Answer: FALSE Explanation: Using master-budget capacity is best for evaluating the marketing manager's performance. Diff: 2 Objective: 6 AACSB: Analytical thinking
653 richard@qwconsultancy.com
28) U.S. tax reporting requires end-of-period reconciliation between actual and applied indirect costs using the adjusted allocation-rate method or the proration method. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
29) The proration approach restates only the ending balances of two inventory accounts: work-in-process and finished goods, to what they would have been if actual rates had been used. Answer: FALSE Explanation: The proration approach restates the ending balances of three inventory related accounts: Work-in-Process, Finished Goods, and Cost of Goods sold to what they would have been if actual rates had been used. Diff: 2 Objective: 6 AACSB: Analytical thinking
30) The amount of fixed manufacturing costs inventoried depends on two factors: the number of units in ending inventory and the rate at which fixed manufacturing overhead costs are allocated to each unit. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
31) Usually there is no production-volume variance when normal capacity utilization is used as the denominator level. Answer: FALSE Explanation: The master-budget capacity utilization method is the only method with no production-volume variance. Diff: 1 Objective: 6 AACSB: Analytical thinking
654 richard@qwconsultancy.com
32) Cape Cod Technology Inc. manufactures heavy duty flash lights. January and February operations were identical in every way except for the planned production. January had a production denominator of 80,000 units. February had a production denominator of 60,000 units. Fixed manufacturing costs totaled $200,000. Sales for both months totaled 62,000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.60 per unit variable and $51,000 of fixed. The selling price was $10 per unit. Required: Compute the operating income for both months using absorption costing. Answer: January manufacturing cost per unit: Variable costs: $4.00 Fixed costs ($200,000/80,000) 2.50 Total per unit $6.50 February manufacturing cost per unit: Variable costs Fixed costs ($200,000/60,000 Total per unit
$4.00 3.33 $7.33
January Income Statement Sales (62,000 × $10) Cost of goods sold (62,000 × $6.50) Gross margin Other costs: Variable selling and administrative Fixed selling and administrative
$620,000 403,000 $217,000 $37,200 51,000
Operating income
88,200 $128,000
February Income Statement Sales (62,000 × $10) Cost of goods sold (62,000 × $7.33)
$620,000 454,460
Gross margin Other costs: Variable selling and administrative Fixed selling and administrative Operating income
$165,540 $37,200 51,000
88,200 $77,340
Diff: 3 Objective: 6 AACSB: Application of knowledge
655 richard@qwconsultancy.com
33) Explain the three alternative approaches to dispose of the production-volume variance. Answer: 1. Adjusted allocation-rate approach: This approach restates all amounts in the general and subsidiary ledgers by using actual rather than budgeted cost rates. In effect, actual costing is adopted at the end of the fiscal year. 2. Proration approach: Under this approach, the underallocated or overallocated overhead is spread among ending balances in Work-in-Process Control, Finished Goods Control, and Cost of Goods Sold. The proration restates the ending balances in these accounts to what they would have been if actual cost rates had been used rather than budgeted cost rates. 3. Write-off variances to cost of goods sold approach: Under this approach, production-volume variance is adjusted to the cost of goods sold for that period. Diff: 2 Objective: 6 AACSB: Analytical thinking
34) Briefly explain what SFAS states about allocating fixed overhead to production. Answer: For financial reporting, SFAS 151 requires that the allocation of fixed manufacturing overhead to production be based on the normal capacity. Normal capacity refers to a range of production levels expected to be achieved over a number of periods or seasons under normal circumstances. Diff: 2 Objective: 6 AACSB: Analytical thinking
Objective 9.7 1) It is most difficult to estimate ________ because of the need to predict demand for the next few years. A) practical capacity B) theoretical capacity C) master-budget capacity utilization D) normal capacity utilization Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
2) Which of the following capacity levels do proponents of activity-based costing recommend to be used as the denominator level to calculate activity cost rates? A) practical capacity B) normal capacity utilization C) theoretical capacity D) master-budget capacity utilization Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
656 richard@qwconsultancy.com
3) Top management at Gifford manufacturing are planning capacity levels and how to assign capacity costs for an upcoming period. Which of the following factors should be considered while developing this plan so that proper control can be achieved? A) the IRS tax implications of such decisions B) the level of uncertainty of expected costs and demand C) the GAAP rules requiring absorption costing D) the requirements of SFAS 151 Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
4) In planning and control of capacity costs, managers must consider possible capacity measures. Which of the following measures the available supply of capacity in a factory? A) theoretical capacity B) practical capacity C) normal capacity D) master-budget capacity Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
5) What is the capacity level generally utilized by the proponents of ABC? A) theoretical capacity B) practical capacity C) normal capacity D) master-budget capacity Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
6) Product-sustaining costs in activity-based costing are similar to: A) mixed costs B) variable costs C) semi-variable costs D) fixed costs Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
657 richard@qwconsultancy.com
7) There is no output-level variance for variable costing, when: A) the inventory level decreases during the period B) the inventory level increases during the period C) fixed manufacturing overhead is allocated to work in process D) fixed manufacturing overhead is not allocated to work in process Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
8) When actual production is below practical capacity, there will be unused-capacity cost only in the manufacturing function while unused capacity is not a factor in nonmanufacturing links of the value chair such as in the marketing function. Answer: FALSE Explanation: Capacity costs also arise in nonmanufacturing parts of the value chain. When actual production is below practical capacity, there will be unused-capacity cost issues with the marketing function and even in other areas such as distribution, as well as with the manufacturing function. Diff: 2 Objective: 7 AACSB: Analytical thinking
9) The only real challenge in planning and controlling capacity costs is with the denominator as the numerator of a budgeted fixed manufacturing cost allocation rate is rarely the issue. Answer: FALSE Explanation: Many challenging issues arise when forecasting budgeted fixed costs (numerator) such as unexpected rising energy cost and increased emphasis on sustainability and environmental issues within a particular budget period. Diff: 1 Objective: 7 AACSB: Analytical thinking
10) If activity based cost accounting is used to allocate capacity related costs, normal capacity measures should be used. Answer: FALSE Explanation: Proponents of ABC believe that practical capacity measures should be used as the denominator level to calculate activity cost rates. Diff: 2 Objective: 7 AACSB: Analytical thinking
658 richard@qwconsultancy.com
11) Explain how using master-budget capacity utilization for setting prices can lead to a downward demand spiral. Answer: If master-budget capacity utilization is used as the denominator level for determining fixed manufacturing costs per unit, the cost includes a charge for unused capacity. If prices are based on this cost, the product may be priced higher than competitor's products. With a higher selling price, volume of sales will probably decrease reducing the expected number of future sales. Lower expected sales leads to a lower denominator level, which in turn results in an even higher selling price and even lower sales volume. Diff: 2 Objective: 7 AACSB: Analytical thinking
12) Should a company with high fixed costs and unused capacity raise selling prices to try to fully recoup its costs? Answer: No, companies in this situation might experience greater reductions in the demand of their products if they continue to raise selling prices. This would result in the fixed capacity costs being spread over fewer and fewer units, increasing reported costs, resulting in more pressure to raise prices. Diff: 3 Objective: 7 AACSB: Analytical thinking
13) How does the capacity level chosen to compute the budgeted fixed overhead cost rate affect the production-volume variance? Answer: The chosen capacity level is directly related to the size and direction of the production-volume variance. When the chosen capacity level exceeds the actual production level, there will be an unfavorable production-volume variance; when the chosen capacity level is less than the actual production level, there will be a favorable production-volume variance. Diff: 3 Objective: 7 AACSB: Analytical thinking
14) Discuss the three methods to dispose of production volume variance. Answer: 1) Adjusted allocation-rate approach - This approach restates all amounts by using actual, rather than budgeted, cost rates. 2) Proration approach - The underallocated or overallocated overhead is spread among the ending balances in work-in-Process Control, finished Goods Control, and Cost of Goods Sold. 3) Write-off variances to cost of goods sold approach - The variance is written off to cost of goods sold. Diff: 3 Objective: 7 AACSB: Analytical thinking
659 richard@qwconsultancy.com
Objective 9.A 1) Ms. Sophia Jones, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 2020 is as follows: Total fixed manufacturing overhead Total other fixed expenses Total variable manufacturing expenses Total other variable expenses Units produced Budgeted production Units sold Selling price
$183,000 $202,000 $260,000 $290,000 70,000 units 70,000 units 50,000 units $42
What are breakeven sales in units using variable costing? (Round any intermediary calculations to the nearest cent and your final answer UP to the next whole unit.) A) 12,420 units B) 6,406 units C) 11,274 units D) 10,056 units Answer: C Explanation: C) Breakeven units = ($183,000 + $202,000) / ($42 - (260,000 / 70,000) - (290,000 / 70,000)) = 11,274 units Diff: 2 Objective: A AACSB: Application of knowledge
660 richard@qwconsultancy.com
2) Ms. Sophia Jones, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 2020 is as follows: Total fixed manufacturing overhead Total other fixed expenses Total variable manufacturing expenses Total other variable expenses Units produced Budgeted production Units sold Selling price
$180,000 $205,000 $270,000 $250,000 60,000 units 60,000 units 55,000 units $42
What are breakeven sales in units using absorption costing? (Round any intermediary calculations to the nearest cent and your final answer UP to the next whole unit.) A) 5,400 units B) 5,467 units C) 6,759 units D) 11,550 units Answer: C Explanation: C) Total fixed costs: $180,000 + $205,000 = $385,000 Breakeven units N =
N = (385,000 + 3.00N - 180,000)/33.33 33.33N = 205,000 + 3.00N (33.33- 3.00)N = 205,000 N = 6,759 units Diff: 2 Objective: A AACSB: Application of knowledge
661 richard@qwconsultancy.com
3) Ms. Sophia Jones, the company president, has heard that there are multiple breakeven points for every product. She does not believe this and has asked you to provide the evidence of such a possibility. Some information about the company for 2020 is as follows: Total fixed manufacturing overhead Total other fixed expenses Total variable manufacturing expenses Total other variable expenses Units produced Budgeted production Units sold Selling price
$181,000 $205,000 $250,000 $290,000 70,000 units 70,000 units 55,000 units $42
What are breakeven sales in units using absorption costing if the production units are actually 55,000? (Round any intermediary calculations to the nearest cent and your final answer UP to the next whole unit.) A) 11,995 units B) 5,327 units C) 7,103 units D) 7,683 units Answer: D Explanation: D) Breakeven units N =
N = ($386,000 + $2.59N - $142,450.00)/$34.29 $34.29N = $243,550.00 + $2.59N $31.70N = $243,550.00 N = 7,683 units Diff: 2 Objective: A AACSB: Application of knowledge
662 richard@qwconsultancy.com
4) Jenkins Corporation sells one product. The following information is available for the current month: Selling price per unit Standard fixed manufacturing costs per unit Variable selling and administrative costs per unit Standard variable manufacturing costs per unit Fixed selling and administrative costs Units produced Units sold
$108 $48 $8 $2 $44,000 12,000 units 9,600 units
What is the variable costing breakeven point in units? (Round your final answer UP to the next whole unit.) A) 5,878 units B) 6,546 units C) 6,200 units D) 6,327 units Answer: D Explanation: D) Standard fixed manufacturing cost is $48 and hence the total fixed manufacturing cost is $576,000 ($48 × 12,000 units). Fixed selling and administrative overhead is $44,000. Therefore, the total fixed expense is $620,000 ($576,000 + $44,000). The contribution per unit is $98 ($108 - $8 - $2). Therefore, the breakeven point in units is 6,327 units ($620,000 / $98). Diff: 2 Objective: A AACSB: Application of knowledge
5) Jenkins Corporation sells one product. The following information is available for the current month: Selling price per unit Standard fixed manufacturing costs per unit Variable selling and administrative costs per unit Standard variable manufacturing costs per unit Fixed selling and administrative costs Units produced Units sold
$103 $48 $9 $3 $44,000 10,000 units 9,800 units
What is the absorption costing breakeven point in units? (Round your final answer UP to the next whole unit.) A) 224 units B) 1,024 units C) 379 units D) 5,759 units Answer: B Explanation: B) Breakeven units N = [($524,000 + ($48 × (N - 10,000))] / ($103 - $9 - $3) = 1,024 units Diff: 2 Objective: A AACSB: Application of knowledge
663 richard@qwconsultancy.com
6) Henry Chapman Manufacturing Inc. incurred the following expenses during 2020: Fixed manufacturing costs Fixed nonmanufacturing costs Unit selling price Total unit cost Variable manufacturing cost rate Units produced
$150,000 $88,000 $310 $100 $40 1,340 units
What will be the breakeven point if variable costing is used? (Round your final answer UP to the next whole unit.) A) 1,134 units B) 1,500 units C) 882 units D) 556 units Answer: C Explanation: C) Total fixed costs = $150,000 + $88,000 = $238,000 Contribution per unit = $310 - $40 = $270 Breakeven point = $238,000 / $270 = 882 units Diff: 2 Objective: A AACSB: Application of knowledge
7) Henry Chapman Manufacturing Inc. incurred the following expenses during 2020: Fixed manufacturing costs Fixed nonmanufacturing costs Unit selling price Total unit cost Variable manufacturing cost rate Units produced
$160,000 $90,000 $250 $110 $40 1,340 units
What will be the breakeven point in units if absorption costing is used? (Round your final answer UP to the next whole unit.) A) 1,786 units B) 1,191 units C) 1,156 units D) 762 units Answer: C Explanation: C) Breakeven units N = [($160,000 + $90,000) + ($40 × (N - 1,340))] / ($250 − $40) N = 1,156 units Diff: 2 Objective: A AACSB: Application of knowledge
664 richard@qwconsultancy.com
8) Pitta Manufacturing incurred the following expenses during 2020: Fixed manufacturing costs Fixed nonmanufacturing costs Unit selling price Total unit cost Variable manufacturing cost rate Units produced
$120,000 $90,000 $250 $120 $40 1,370 units
What is the breakeven point in units using absorption costing if the units produced are actually 2,240? (Round your final answer UP to the next whole unit.) A) 1,294 units B) 1,000 units C) 913 units D) 709 units Answer: D Explanation: D) Breakeven units N = [($120,000 + $90,000) + ($40 × (N - 2,240))] / ($250 − $40) N = 709 units Diff: 2 Objective: A AACSB: Application of knowledge
9) Francis Corporation is having trouble selling its inventory because of its ongoing dispute with its logistical partner. The company was not able to sell any inventory in the month of January because of the dispute. It manufactured 8,000 units in January. Francis had no other fixed costs commitment other than fixed manufacturing costs of $100,000. It follows absorption costing. If actual production in January was equal to the denominator level, what is the amount of sales required to attain breakeven point? A) 1250 units B) 125 units C) 10 units D) 0 units Answer: D Explanation: D) All the units produced would be placed in inventory, so all the fixed manufacturing costs would be included in inventory. There would be no production-volume variance. Under these conditions, the company could break even under absorption costing with no sales whatsoever. Diff: 2 Objective: A AACSB: Application of knowledge
665 richard@qwconsultancy.com
10) Banta Corporation is in the business of selling computers. The following expenses were incurred in March 2020: Fixed manufacturing costs Fixed nonmanufacturing costs Unit selling price Variable manufacturing cost rate Units produced
$90,000 $35,000 $1,400 $800 1,800 units
What will be the breakeven point if variable costing is used? (Round your final answer UP to the next whole unit.) A) 90 units B) 209 units C) 157 units D) 150 units Answer: B Explanation: B) ($90,000 + $35,000)/($1,400 – $800) = 209 units Diff: 2 Objective: A AACSB: Application of knowledge
11) The breakeven points are the same under both variable costing and absorption costing. Answer: FALSE Explanation: The breakeven points are generally different under both variable costing and absorption costing. If variable costing is used, the breakeven point (that's where operating income is $0) is computed in the usual manner. If absorption costing is used, the required number of units to be sold to earn a specific target operating income is not unique because of the number of variables involved. The breakeven point under absorption costing depends on (1) fixed manufacturing costs, (2) fixed operating (marketing) costs, (3) contribution margin per unit, (4) unit level of production, and (5) the capacity level chosen as the denominator to set the fixed manufacturing cost rate. Diff: 2 Objective: A AACSB: Analytical thinking
12) The breakeven point under absorption costing depends on fixed manufacturing costs, fixed operating (marketing) costs, contribution margin per unit, unit level of production, and the capacity level chosen as the denominator to set the fixed manufacturing cost rate. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
666 richard@qwconsultancy.com
13) Sutton Hot Dog Stand sells hot dogs for $1.35. Variable costs are $1.05 per unit with fixed production costs of $90,000 per month at a level of 400,000 units. Fixed administrative costs total $30,000. Sales average 400,000 units per month, with planned production of 400,000 hot dogs. Required: a. What are breakeven unit sales under variable costing? b. What are breakeven unit sales under absorption costing if she sells everything she prepares? c. What are breakeven unit sales under absorption costing if average sales are 498,000 and planned production is changed to 500,000? Answer: a. Breakeven units = ($90,000 + $30,000) / ($1.35 - $1.05) = 400,000 b.
Breakeven units (N) =
N = ($120,000 + $0.225N - $90,000) / $0.30 $0.30N = $30,000 + $0.225N $0.075N = $30,000 N = 400,000 units c.
Breakeven units (N) =
N = ($120,000 + $0.18N - $90,000) / $0.30 $0.3N = $30,000 + $0.18N $0.12N = $30,000 N = 250,000 units Diff: 3 Objective: A AACSB: Application of knowledge
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 10 Determining How Costs Behave Objective 10.1 1) A cost function is a: A) process of calculating present value of projected cash flows B) process of allocating costs to cost centers or cost objects C) mathematical description of how a cost changes with changes in the level of an activity relating to that cost D) is a very thorough and detailed way to identifying a cost object when there is a physical relationship between inputs and outputs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
2) Bennet Company employs 20 individuals. Eighteen employees are paid $18 per hour and the rest are
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salaried employees paid $3,000 a month. Which of the following is the total cost function of personnel? A) y = a + bX B) y = b C) y = bX D) y = a Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Crimson Services, Inc., employs 8 individuals. They are all paid $16.50 per hour. How would total costs of personnel be classified? A) variable cost B) mixed cost C) irrelevant cost D) fixed cost Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
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4) For February, the cost components of a picture frame include $0.37 for the glass, $0.62 for the wooden frame, and $0.87 for assembly. The assembly desk and tools cost $590. Two hundred fifty frames are expected to be produced in the coming year. What cost function best represents these costs? A) y = 1.86 + 590X B) y = 590 + 1.86X C) y = 590 + 0.99X D) y = 0.99 + 590X Answer: B Explanation: B) Per unit costs: 0.37 + 0.62 + 0.87 = 1.86 Diff: 2 Objective: 1 AACSB: Analytical thinking
5) The cost components of a heater include $38 for the compressor, $14 for the sheet molded compound frame, and $70 per unit for assembly. The factory machines and tools cost is $53,000. The company expects to produce 1,400 heaters in the coming year. What cost function best represents these costs? A) y = 53,000 + 122X B) y = 1,400 + 53,000X C) y = 53,000 + 1,400X D) y = 1,400 + 122X Answer: A Explanation: A) Per unit costs: 38 + 14 + 70 = 122 Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Which of the following statements is true of a linear cost function? A) It presents variable cost as a slope coefficient. B) It presents total cost as an intercept. C) It presents variable cost as an intercept. D) It presents total cost as slope coefficient. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
7) A finance manager has to select one of the four different suppliers of raw materials. The total cost functions under the four options are given below. Assume the quality of the raw material to be the same, which of the following is preferred by the finance manager? A) y = 550 + 4.93X B) y = 550 + 5.46X C) y = 550 + 4.43X D) y = 550 + 4.70X Answer: C Diff: 3 Objective: 1 AACSB: Analytical thinking
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8) If the total cost function is y = 6,400 + 9X, calculate the variable cost for 4,900 units. A) $50,500 B) $44,100 C) $57,600 D) $6,400 Answer: B Explanation: B) Explanation: Variable cost for 4,900 units = $9 × 4,900 units = $44,100 Diff: 2 Objective: 1 AACSB: Application of knowledge
9) The cost function y = 2,300 + 6X: A) has a slope coefficient of 2,300 B) has an intercept of 6 C) is a straight line D) represents a fixed cost Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
10) The cost function y = 190 + 8X: A) has a slope coefficient of 190 B) has an intercept of 190 C) is a nonlinear D) represents a fixed cost Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
11) The cost function y = 12,000 + 4X: A) represents a mixed cost B) will intersect the y-axis at 4 C) has a slope coefficient of 12,000 D) is a curved line Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
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12) Which of the following functions represents the least total cost assuming the number of units is equal in each case? A) y = 240 + 9X B) y = 100 + 6X C) y = 100 + 9X D) y = 240 + 6X Answer: B Diff: 3 Objective: 1 AACSB: Analytical thinking
13) Which of the following is an equation of a FIXED cost function? A) y = (a + b)X B) y = a + bX C) y = bX D) y = a Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
14) Relevant range cost-behavior patterns are: A) applicable only over the long-run. B) not linear over the short-run. C) not relevant outside a specified range as they are always still linear but at a different linear slope. D) valid for linear cost functions only within a specified range. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
15) One assumption frequently made in cost behavior estimation is that changes in total costs can be explained by changes in the level of a single activity. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
16) A cost function is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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17) A cost function is a cost object that whose costs are mostly variable. Answer: FALSE Explanation: A cost function is a mathematical description of how a cost changes with changes in the level of an activity relating to that cost. Diff: 1 Objective: 1 AACSB: Analytical thinking
18) All cost functions are linear. Answer: FALSE Explanation: All cost functions are not linear, but for cost-behavior estimation we assume some are linear within a relevant range. Diff: 1 Objective: 1 AACSB: Analytical thinking
19) In a cost function y = 18,000, the slope coefficient is zero. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
20) When estimating a cost function, cost behavior can be approximated by a linear cost function within the relevant range. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
21) If a cost item is fixed for one cost object, it will be fixed for all cost objects for which it is associated. Answer: FALSE Explanation: A particular cost item could be variable for one cost object and fixed for another cost object. Diff: 1 Objective: 1 AACSB: Analytical thinking
22) All other things being equal, the longer the time horizon the more likely a cost will be fixed. Answer: FALSE Explanation: All other things being equal, the longer the time horizon, the more likely the cost will be variable. Diff: 1 Objective: 1 AACSB: Analytical thinking
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23) Outside of the relevant range, variable and fixed cost-behavior patterns change, causing costs to become nonlinear. Answer: TRUE Explanation: Diff: 2 Objective: 1 AACSB: Analytical thinking
24) A particular cost item could be variable for one cost object and fixed for another cost object. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
25) A linear cost function can only represent fixed cost behavior. Answer: FALSE Explanation: A linear cost function can represent fixed, mixed, or variable cost behavior. Diff: 1 Objective: 2 AACSB: Analytical thinking
26) In a graphical display of a cost function, the steepness of a line represents the total amount of fixed costs. Answer: FALSE Explanation: In a graphical display of a cost function, the constant or the y-intercept represents the amount of fixed costs whereas the steepness of a line represents the variable cost. Diff: 2 Objective: 2 AACSB: Analytical thinking
27) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct manufacturing labor is $15 per hour. b. Direct materials cost $25.60 per cubic yard. c. Utilities have a minimum charge of $500, plus a charge of $0.25 per kilowatt-hour. d. Machine operating costs include $250,000 of machine depreciation per year, plus $100 of utility costs for each day the machinery is in operation. Answer: a. y = $15X b. y = $25.60X c. y = $500 + $0.25X d. y = $250,000 + $100 X Diff: 2 Objective: 1 AACSB: Analytical thinking
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28) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct materials cost is $2.70 per pound b. Total cost is fixed at $800 per month regardless of the number of units produced. c. Auto rental has a fixed fee of $90.00 per day plus $1.75 per mile driven. d. Machine operating costs include $1,000 of maintenance per month, and $15.00 of coolant usage costs for each day the machinery is in operation. Answer: a. y = $2.70X b. y = $800 c. y = $90 + $1.75X d. y = $1,000 + $15X Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 10.2 1) Which of the following is NOT true about the cause-and-effect criterion when estimating a cost function? A) correlation of variables proves cause-and-effect B) managers must be careful not to equate high correlation between two variables to mean that either variable causes the other C) knowledge of operations can help managers discover cause-and-effect relationships D) contractual arrangements may show a direct cause and effect between two variables Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Which of the following would most likely exhibit a cause and effect relationship? A) The use of materials in the production of bookcases. B) The awarding of CEO fringe benefits and a new client contact. C) The use of janitorial services of a subcontractor and providing client services of a CPA firm. D) Square footage occupied in administrative offices and resources expended in the field to support sales representatives. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
3) It can be inferred that when there is a high correlation between two variables, one is the cause of the other. Answer: FALSE Explanation: It cannot be inferred that a high correlation between two variables indicates that one is the cause of the other. A high correlation simply indicates that the variables move together. Diff: 2 Objective: 2 AACSB: Analytical thinking
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4) The high causality between two variables, is the most important factor in determining the cost function of the related cost object. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
5) An example of a physical cause-and-effect relationship is when additional units of production increase total direct material costs. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Managers should use past data to create a cost function and then use the exact information provided by that cost function to create the budgetary forecast for the next year. Answer: FALSE Explanation: Managers are interested in estimating past cost-behavior functions because the estimates can help them make more accurate cost predictions, or forecasts, about future costs. But better management decisions, cost predictions, and estimation of cost functions can be achieved only if managers correctly identify the factors that affect costs. Diff: 2 Objective: 2 AACSB: Analytical thinking
7) A contractual agreement that specifies a fee per mile driven, such as with a rental of a truck, is not considered a cause-and-effect relationship between an activity and a cost. Answer: FALSE Explanation: A contractual agreement is a common example of a cause-and-effect relationship between an activity and cost incurrence. Diff: 2 Objective: 2 AACSB: Analytical thinking
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8) What are the two assumptions behind a simple linear cost function? Briefly explain the three ways that a linear cost function may behave? Answer: The two usual assumptions behind a simple linear cost function are: 1) Variations in the level of a single activity (the cost driver) explain the variations in the related total costs; and 2) Cost behavior is approximated by a linear cost function within the relevant range. This means that total cost versus the level of a single activity that is related to that cost is a straight line within the relevant range. Once linearity is established, there are three possible types of linearity: 1) A strictly variable cost of the form Y = bX, where b is the slope of the straight line and is the variable cost per unit of the cost driver; 2) A strictly constant cost of the form Y = a, where a is the total fixed cost or constant; and 3) A mixed or semivariable cost of the form Y = a + bX, where a is the total fixed cost or constant, and b is the variable cost per unit of the driver or the slope of the straight line. Diff: 2 Objective: 2 AACSB: Analytical thinking
9) The ability to understanding how costs behave is a valuable skill of a management accountant. Briefly explain what an accountant must be able to do, to understand cost behavior in an organization. Answer: One a cost object is identified, a management accountant must be able to identify cost drivers by identifying cause-and-effect relationships, estimating cost relationships, and determine the fixed and variable components of costs. Diff: 1 Objective: 2 AACSB: Analytical thinking
Objective 10.3 1) The conference method estimates cost functions: A) using quantitative methods that can be very time consuming and costly B) based on analysis and opinions gathered from various departments C) using time-and-motion studies D) by mathematically analyzing the relationship between inputs and outputs in physical terms Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
2) The account analysis method estimates cost functions: A) by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis B) using time-and-motion studies C) at a high cost, which renders it seldom used D) in a manner that cannot be usefully combined with any other cost estimation methods Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
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3) Quantitative analysis methods estimate cost functions: A) using the time-and-motion studies B) based on analysis and opinions gathered from various departments C) using a formal mathematical method to fit cost functions to past data observations D) using the pooling of knowledge from each value chain function Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
4) The four methods of cost estimation: industrial engineering, conference, account analysis, and quantitative analysis: A) differ in how expensive they are to implement. B) work from the same set of assumptions. C) produce similar levels of accuracy. D) are mutually exclusive; one method is usually adopted. Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
5) Variable cost per labor-hour is $0.91 Fixed cost is $19,500. Machine hours during the period are 80. Calculate the total cost for 340 labor hours. A) $19,573 B) $19,809 C) $19,882 D) $382 Answer: B Explanation: B) Total cost = $19,500 + ($0.91 × 340) = $19,809 Diff: 2 Objective: 3 AACSB: Application of knowledge
6) Which cost estimation method would involve analyzing direct labor subsidiary accounts and classifying costs as variable, fixed, or mixed to derive cost estimation formulas? A) the account analysis method B) the conference method C) the marginal costing method D) the incremental costing method Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
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7) Which cost estimation method uses a formal statistical method such as regression analysis to develop cost functions based on past data? A) the cash accounting method B) the conference method C) the accrual accounting method D) the quantitative analysis method Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
8) Which cost estimation method uses time-and-motion studies to reveal that to make a high quality men's suit jacket, it takes of 3 hours of direct labor effort per jacket and 5 minutes of a salaried manager to perform quality control? A) the accrual accounting method B) the high-low method C) the industrial engineering method D) the cash accounting method Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
9) At the Spring Valley Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs. Total personnel department costs are $294,000. Department Number of employees Number of new hires
A 70 15
B 260 13
C 205 11
If the number of employees is considered the cost driver, what amount of personnel costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $38,220 B) $7,683 C) $142,879 D) $43,537 Answer: A Explanation: A) 70 / (70 + 260 + 205) = 0.13 0.13 × $294,000 = $38,220 Diff: 2 Objective: 3 AACSB: Application of knowledge
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10) At the Spring Valley Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs. Total personnel department costs are $283,000. Department Number of employees Number of new hires
A 55 15
B 295 12
C 210 10
If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $27,795 B) $7,111 C) $116,030 D) $33,183 Answer: C Explanation: C) Personnel costs of Department A = 15 / (15 + 12 + 10) = 0.41 0.41 × $283,000 = $116,030 Diff: 2 Objective: 3 AACSB: Application of knowledge
11) At the Spring Valley Company, the cost of the personnel department has always been charged to production departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of new hires might be a better predictor of personnel costs. Total personnel department costs are $288,000. Department Number of employees Number of new hires
A 60 20
B 280 16
C 225 15
Which cost estimation method is being used by Spring Valley Company? A) the simple regression method B) the conference method C) the account analysis method D) the marginal costing method Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
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12) At the Wild Cat Group Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs. Total library and information center costs are $208,000. Department Number of employees Number of engineers
A 140 30
B 510 85
C 160 35
Which cost estimation method is being used by Wild Cat Group Company? A) the regression analysis method B) the marginal costing method C) the conference method D) the operating costing method Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
13) At the Wild Cat Group Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs. Total library and information center costs are $204,000. Department Number of employees Number of engineers
A 160 10
B 500 80
C 175 25
If the number of employees is considered the cost driver, what amount of library and information center costs will be allocated to Department A? (Round any intermediary calculations to two decimal places and your final answer to the nearest dollar.) A) $36,505 B) $38,760 C) $17,739 D) $122,156 Answer: B Explanation: B) 160 / (160 + 500 + 175) = 0.19 0.19 × $204,000 = $38,760 Diff: 2 Objective: 3 AACSB: Application of knowledge
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14) At the Wild Cat Group Company, the cost of the library and information center has always been charged to the various departments based upon number of employees. Recently, opinions gathered from the department managers indicate that the number of engineers within a department might be a better predictor of library and information center costs. Total library and information center costs are $204,000. Department Number of employees Number of engineers
A 135 5
B 520 70
C 150 20
If the number of engineers is considered the cost driver, what amount of library and information center costs will be allocated to Department A? (Round any intermediary calculations two decimal places and your final answer to the nearest dollar.) A) $31,733 B) $34,211 C) $10,200 D) $131,776 Answer: C Explanation: C) 5 / (5 + 70 + 20) = 0.05 0.05 × $204,000 = $10,200 Diff: 2 Objective: 3 AACSB: Application of knowledge
15) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (1,400 televisions) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (3.5% of sales)
$1,400,000 602,000 209,000 230,000 30,000 49,000
What was the variable cost per unit sold for 2020? A) $35 B) $465 C) $800 D) $430 Answer: B Explanation: B) Variable cost per unit = ($602,000 + $49,000) / 1,400 = $465 per unit Diff: 2 Objective: 3 AACSB: Application of knowledge
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16) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (1,500 televisions) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (2.8% of sales)
$1,500,000 555,000 120,000 210,000 18,000 42,000
What were total fixed costs for 2020? A) $945,000 B) $597,000 C) $348,000 D) $330,000 Answer: C Explanation: C) Fixed costs = $120,000 + $210,000 + $18,000 = $348,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
17) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (1,500 televisions) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (2.8% of sales)
$1,500,000 555,000 120,000 210,000 18,000 42,000
What are the estimated total costs if the company expects to sell 3,100 units next year? A) $1,581,800 B) $2,898,000 C) $2,550,000 D) $434,800 Answer: A Explanation: A) Variable costs per unit = ($555,000 + $42,000) / 1,500 = $398 per unit Total cost = fixed costs ($120,000 + $210,000 + $18,000) + variable costs (3,100 units × $398 variable costs per unit) = $1,233,800 = $1,581,800 total estimated costs. Diff: 3 Objective: 3 AACSB: Application of knowledge
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18) M & G TV and Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (1,700 televisions) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (5.0% of sales)
$1,700,000 595,000 152,000 247,000 26,000 85,000
Which cost estimation method is being used by M & G TV and Appliance Store? A) the operating costing method B) the marginal costing method C) the account analysis method D) the cost-volume-profit analysis method Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
19) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (5,300 microwave ovens) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (4.0% of sales)
$5,300,000 821,500 140,000 170,000 26,020 212,000
Which cost estimation method is being used by South Coast Appliance Store? A) the account analysis method B) the operating costing method C) the marginal costing method D) the cost-volume-profit analysis method Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
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20) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (5,000 microwave ovens) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (3.8% of sales)
$5,000,000 700,000 115,000 245,000 33,000 190,000
What was the variable cost per unit sold for 2020? A) $38.00 B) $140 C) $178.00 D) $256.60 Answer: C Explanation: C) Variable cost per unit = ($700,000 + $190,000) / 5,000 = $178.00 per unit Diff: 2 Objective: 3 AACSB: Application of knowledge
21) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (4,500 microwave ovens) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (3.5% of sales)
$4,500,000 765,000 120,000 275,000 31,825 157,500
What were the total fixed costs for 2020? A) $1,349,325 B) $426,825 C) $395,000 D) $922,500 Answer: B Explanation: B) Total fixed costs = $120,000 + $275,000 + $31,825 = $426,825 Diff: 2 Objective: 3 AACSB: Application of knowledge
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22) South Coast Appliance Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2020 operations. Sales (5,000 microwave ovens) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (4.0% of sales)
$5,000,000 825,000 110,000 230,000 30,000 200,000
What are the estimated total costs if South Coast's store expects to sell 8,800 units next year? A) $3,480,200 B) $2,174,000 C) $3,850,200 D) $722,000 Answer: B Explanation: B) Total cost = fixed cost ($110,000 + $230,000 + $30,000) + variable costs (8,800 units × $205.00 variable costs per unit) = $1,804,000 = $2,174,000. Diff: 3 Objective: 3 AACSB: Application of knowledge
23) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $510,000. The company is labor intensive. Total labor hours during the period were 4,000. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($130,000 based on 8,900 hours of labor) and costs that are variable ($380,000) based on the number of labor-hours used. The company has estimated 7,500 labor hours during the next period. Which of the following represents the correct linear cost function? A) y = $380,000 + $42.70X B) y = $130,000 + $127.50X C) y = $130,000 + $95.00X D) y = $380,000 + $57.30X Answer: C Explanation: C) Fixed costs are given at $130,000 based on 8,900 hours of labor; variable costs are $380,000 during the period divided by 4,000 labor hours during the period = $95.00 variable cost per labor hour. Diff: 2 Objective: 3 AACSB: Analytical thinking
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24) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $490,000. The company is labor intensive. Total labor hours during the period were 4,800. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($190,000 based on 9,000 hours of labor) and costs that are variable ($300,000) based on the number of labor-hours used. The company has estimated 7,200 labor hours during the next period. What will be the variable cost per hour? A) $62.50 B) $33.33 C) $54.44 D) $102.08 Answer: A Explanation: A) Variable cost per hour = ($300,000/4,800) = $62.50 Diff: 2 Objective: 3 AACSB: Application of knowledge
25) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is labor intensive. Total labor hours during the period were 4,800. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($100,000 based on 9,000 hours of labor) and costs that are variable ($400,000) based on the number of labor-hours used. The company has estimated 7,500 labor hours during the next period. What will be the total variable cost for the estimated 7,500 hours? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $333,333 B) $624,975 C) $781,250 D) $416,667 Answer: B Explanation: B) $400,000 / 4,800 = $83.33 $83.33 × 7,500 = $624,975 Diff: 2 Objective: 3 AACSB: Application of knowledge
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26) High Tech Manufacturing Inc., incurred total indirect manufacturing labor costs of $510,000. The company is labor intensive. Total labor hours during the period were 4,900. Using qualitative analysis, the manager and the management accountant determine that over the period the indirect manufacturing labor costs are mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor costs into costs that are fixed ($200,000 based on 8,100 hours of labor) and costs that are variable based on the number of labor-hours used. The company has estimated 7,900 labor hours during the next period. What will be the total cost for the estimated 7,900 hours? (Round any intermediary calculations to the nearest cent and your final answer to the nearest dollar.) A) $502,346 B) $697,407 C) $822,245 D) $699,833 Answer: D Explanation: D) $310,000 / 4,900 = $63.27 $200,000 + ($63.27 × 7,900) = $699,833 Diff: 2 Objective: 3 AACSB: Application of knowledge
27) Which of the following cost estimation methods involves determination of cost functions based on analysis and opinions about costs and their drivers gathered from various departments of a company? A) Industrial engineering method. B) Conference method. C) Account analysis method. D) Quantitative analysis method Answer: B Diff: 2 Objective: 3 AACSB: Application of knowledge
28) When management develops cost estimations, they must choose one method, such as industrial engineering, conference, account analysis, or quantitative analysis, and stay consistently with that method as each method is mutually exclusive of the others. Answer: FALSE Explanation: The methods are not mutually exclusive rather, many organizations use combination of methods to estimate costs. Diff: 1 Objective: 3 AACSB: Analytical thinking
29) The account analysis method of cost estimation classifies account costs as fixed, mixed, or variable using qualitative judgments. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
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30) The account analysis method estimates cost functions by classifying various cost accounts as variable, fixed, or mixed with respect to the identified level of activity. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
31) The quantitative analysis method uses a formal mathematical method to identify cause-and-effect relationships among past data observations. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
32) The cost of the personnel department at the Speedy Process Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $200.000.
Cost Driver Number of employees The number of new hires
Department A 390 30
Department B 325 40
Department C 65 25
Required: Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is: a. number of employees. b. the number of new hires. c. Which cost estimation method is being used by Speedy Company? Answer: Department Department Department Cost Driver A B C a. Number of employees 390/780 × 200,000 325/780 × 200,000 65/780 × 200,000 $100,000 $83,333 $16,667 b. The number of new hires 30/95 × 180,000 40/95 × 200,000 25/95 × 200,000 $63,158 $84,211 $52,631 c. The Speedy Company is using the conference method for cost estimation. Diff: 3 Objective: 3 AACSB: Application of knowledge
688 richard@qwconsultancy.com
33) June Lockett, controller, gathered data on overhead costs and direct labor-hours over the past 12 months. List and discuss the different approaches June can use to estimate a cost function for overhead costs using direct labor-hours as the cost driver. Answer: The four approaches to cost estimation are: 1. 2. 3. 4.
industrial engineering method conference method account analysis method quantitative analysis of current or past cost relationships
The industrial engineering method, also called the work-measurement method, estimates cost functions by analyzing the relationship between inputs and outputs in physical terms. The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organization (purchasing, process engineering, manufacturing, employee relations, etc.). The account analysis method estimates cost functions by classifying cost accounts in the ledger as variable, fixed, or mixed with respect to the identified cost driver. Quantitative analysis of cost relationships are formal methods, such as the high-low method or regression analysis, to fit linear cost functions to past data observations. Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 10.4 1) The cost to be predicted and managed is referred to as the: A) independent variable B) dependent variable C) cost driver D) regression Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
2) In the estimation of a cost function using quantitative analysis, the independent variable: A) is the cost to be predicted B) is the product of fixed costs and slope coefficient C) is the factor used to predict the dependent variable D) is the product of total costs and slope coefficient Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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3) A cost driver should be measurable and have an economically plausible relationship with the dependent variable which means: A) that the cost driver can be identified in an economically feasible way B) that the relationship is based on correlation C) that the relationship is based on a cause -and-effect criterion and makes economic sense to management D) that the relationship must be based on a physical relationship Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
4) Place the following steps in order for estimating a cost function using quantitative analysis. A = Plot the data B = Collect data on the dependent variable and the cost driver. C = Choose the dependent variable D = Identify the independent variable, or cost driver E = Estimate the cost function A) D C E A B B) C D B A E C) A D C E B D) E D C B A Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
5) Which of the following is an example of time-series data? A) loan processing times in each of 26 similar branch offices over the last 12 months B) direct labor hours in the Boston, Massachusetts and the New York City facility for each of the last 12 months C) indirect labor costs and machine-hours in a manufacturer's assembly department each month for the last 12 months D) store sales for each U.S. based Wal-Mart for each the last 10 years Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
6) Which of the following represents cross-sectional data? A) indirect manufacturing labor costs for the past 5 years B) number of machine-hours used for the past 10 years C) personnel costs of a month at 10 different organizations D) maintenance cost of machine in a plant for the past 3 years Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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7) A plot of cost driver data and cost data may show all but the following: A) a strong relationship B) cause-and-effect relationship C) a positive relationship D) linear relationship Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
8) A plot of data that results in one extreme observation most likely indicates that: A) more than one cost pool should be used B) an unusual event such as a plant shutdown occurred during that month C) the cost-allocation base has been incorrectly identified D) individual cost items do not have the same cost driver Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
9) Cross-sectional data analysis includes: A) using a variety of time periods to measure the dependent variable B) using the highest and lowest observation C) observing different entities during the same time period D) comparing information in different cost pools Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
10) Time-series data analysis includes: A) using a variety of time periods to measure the dependent variable of the same entity (organization, plant, or activity) B) using the highest and lowest observation for the same entity (organization, plant, or activity) C) observing different entities during the same time period for the same entity (organization, plant, or activity) D) comparing information in different cost pools for the same entity (organization, plant, or activity) Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
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11) When using the high-low method, the two observations used are the high and low observations of the: A) cost driver B) fixed cost component C) slope coefficient D) direct cost Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
12) When using the high-low method, the numerator of the equation that determines the slope is the: A) difference between the positive and negative values of dependent and independent variables B) difference between the fixed cost and variable cost associated with the cost driver C) difference between the high and low observations of the cost driver D) difference between the costs associated with highest and lowest observations of the cost driver Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
13) The high-low method: A) measures the difference between actual cost and estimated cost for each observation of the cost driver B) calculates the standard deviation of residuals C) calculates the slope coefficient using only two observed values within the relevant range and their respective costs D) measures how well the predicted values, y, based on the cost driver, X, match actual cost observations, Y Answer: C Diff: 3 Objective: 4 AACSB: Analytical thinking
14) Put the following steps in order for using the high-low method of estimating a cost function: A = Identify the cost function B = Calculate the constant C = Calculate the slope coefficient D = Identify the highest and lowest observed values A) D C A B B) C D A B C) A D C B D) D C B A Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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15) Regression analysis: A) calculates the slope coefficient using only two observed values within the relevant range and their respective costs B) measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables C) estimates the cost functions using the time-and-motion studies D) measures the variability or dispersion in a set of data points Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
16) Which of the following statements shows a difference between simple regression and multiple regression? A) Simple regression uses more than one dependent and independent variables, whereas multiple regression uses only one dependent and independent variable. B) Simple regression uses only the independent variables, whereas multiple regression uses only dependent variables. C) Simple regression uses only one dependent and one independent variable, whereas multiple regression uses one dependent and more than one independent variable. D) Simple regression uses only one dependent variable and more than one independent variables, whereas multiple regression uses more than one dependent variable and only one independent variable. Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
17) The slope of the line of regression is the: A) rate at which the dependent variable varies B) rate at which the independent variable varies C) difference between the fixed cost and variable cost associated with the cost driver D) difference between actual cost and estimated cost for each observation of the cost driver Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
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18) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 600 400
Labor Costs $36,000 $26,000
What is the slope coefficient? A) $65.00 B) $62.00 C) $50.00 D) $60.00 Answer: C Explanation: C) Slope = ($36,000 − $26,000) / (600 − 400) = $50.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
19) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below: Machine-hours Labor Costs Highest observation of cost driver 400 $20,000 Lowest observation of cost driver 100 $8,000 What is the constant for the estimated cost equation? A) $4,000 B) $8,000 C) $16,000 D) $20,000 Answer: A Explanation: A) Slope ($20,000 - $8,000) / ($400 - 100) = $40.00 Using highest observation: Constant = $20,000 − ($40.00 × 400 hours) = $4,000 OR: Using lowest observation: Constant = $8,000 − ($40.00 × 100 hours) = $4,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
694 richard@qwconsultancy.com
20) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below: Machine-hours Labor Costs Highest observation of cost driver 500 $25,000 Lowest observation of cost driver 100 $11,000 What is the estimated cost function for the above data? A) y = 11,000 + 60.00X B) y = 7,500 + 35.00X C) y = 25,000 + 50.00X D) y = 17,500 + 110.00X Answer: B Explanation: B) Slope = ($25,000 - $11,000) / (500 - 100) = $35.00 Constant (using highest observation): $25,000 - ($35.00 × 500) hours = $7,500 Constant (using lowest observation): $11,000 - ($35.00 × 100) hours = $7,500 Diff: 2 Objective: 4 AACSB: Application of knowledge
21) Quantum Company uses the high-low method to estimate the cost function. The information for 2020 is provided below: Machine-hours Labor Costs Highest observation of cost driver 500 $25,000 Lowest observation of cost driver 100 $11,000 What is the estimated total cost when 300 machine-hours are used? A) $33,000 B) $26,000 C) $15,000 D) $18,000 Answer: D Explanation: D) Slope = ($25,000 - $11,000) / (500 - 100) = $35.00 Constant (using highest observation): $25,000 - ($35.00 × 500) hours = $7,500 Constant (using lowest observation): $11,000- ($35.00 × 100) hours = $7,500 The total cost, y = $7,500 + ($35.00 × 300) = $18,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
695 richard@qwconsultancy.com
22) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 3,000 2,500
Costs $300,000 $277,500
What is the slope coefficient? A) $100.00 B) $111.00 C) $45.00 D) $105.00 Answer: C Explanation: C) Slope = ($300,000 − $277,500) / (3,000 − 2,500) = $45.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
23) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 2,500 2,000
Costs $290,000 $250,000
What is the constant for the estimated cost equation? A) $250,000 B) $290,000 C) $90,000 D) $200,000 Answer: C Explanation: C) Slope = ($290,000 - $250,000) / (2,500 - 2,000) = $80.00 Constant (using highest observation) = $290,000 − ($80.00 × 2,500 hours) = $90,000 Constant (using lowest observation) = $250,000 − ($80.00 × 2,000 hours) = $90,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
696 richard@qwconsultancy.com
24) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 3,000 2,500
Costs $345,000 $315,000
What is the estimated cost function for the above data? A) y = 345,000 + 115X B) y = 315,000 + 126X C) y = 165,000 + 60.00X D) y = 120.00X Answer: C Explanation: C) Slope = ($345,000 - $315,000) / (3,000 - 2,500) = $60.00 Constant (using highest observation): $345,000 - ($60.00 × 3,000) hours = $165,000 Constant (using lowest observation): $315,000 - ($60.00 × 2,500) hours = $165,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
25) Taunton Company uses the high-low method to estimate its cost function. The information for 2020 is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 2,000 1,500
Costs $310,000 $285,000
What is the estimated total cost when 1,500 machine-hours are used? A) $570,000 B) $285,000 C) $542,500 D) $232,500 Answer: B Explanation: B) Slope = ($310,000 - $285,000) / (2,000 - 1,500) = $50.00 Constant (using highest observation): $310,000 - ($50.00 × 2,000) hours = $210,000 Constant (using lowest observation): $285,000 - ($50.00 × 1,500) hours = $210,000 The total cost, y = $210,000 + ($50.00 × 1,500) = $285,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
697 richard@qwconsultancy.com
26) For Heavy Manufacturing Company, labor-hours are 48,000 and wages $156,000 at the high point of the relevant range, and labor-hours are 32,000 and wages $112,000 at the low point of the relevant range. What is the slope coefficient? A) $3.35 B) $2.75 C) $3.25 D) $3.50 Answer: B Explanation: B) Slope = ($156,000 − $112,000) / (48,000 − 32,000) = $2.75 per labor-hour Diff: 2 Objective: 4 AACSB: Application of knowledge
27) For Heavy Manufacturing Company, labor-hours are 40,000 and wages $144,000 at the high point of the relevant range, and labor-hours are 24,000 and wages $96,000 at the low point of the relevant range. What is the constant? A) $24,000 B) $48,000 C) $96,000 D) $144,000 Answer: A Explanation: A) Slope = ($144,000 - $96,000) / (40,000 - 24,000) = $3.00 Constant (using highest observation): $144,000 − ($3.00 × 40,000) = $24,000 Constant (using lowest observation): $96,000 − ($3.00 × 24,000) = $24,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
28) For Heavy Manufacturing Company, labor-hours are 50,000 and wages $148,000 at the high point of the relevant range, and labor-hours are 30,000 and wages $108,000 at the low point of the relevant range. What is the estimated total labor costs at Heavy Manufacturing Company when 11,500 labor-hours are used? A) $36,800 B) $71,000 C) $41,400 D) $34,040 Answer: B Explanation: B) Slope = ($148,000 - $108,000) / (50,000 - 30,000) = $2.00 Constant (using highest observation): $148,000 − ($2.00 × 50,000) = $48,000 Constant (using lowest observation): $108,000 − ($2.00 × 30,000) = $48,000 Total labor costs, y = $48,000 + ($2.00 × 11,500) = $71,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
698 richard@qwconsultancy.com
29) The Connors Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Connors Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Cost $24,360 $26,400 $35,000 $42,360 $38,100
Hours 5,800 6,150 7,650 13,000 9,750
What is the cost function? A) y = $42,360 + $4.20X B) y = $24,360 + $3.26X C) y = $35,000 + $4.20X D) y = $9,860 + $2.50X Answer: D Explanation: D) b = ($42,360 − $24,360) / (13,000 − 5,800) = $2.50 for the highest and lowest values of the cost driver Using highest observation: $42,360 = a + ($2.50 × 13,000) a = $9,860 Cost function is Y = $9,860 + $2.50X Diff: 3 Objective: 4 AACSB: Application of knowledge
699 richard@qwconsultancy.com
30) The Connors Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Connors Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Cost $24,360 $26,200 $34,700 $42,360 $38,600
Hours 5,800 6,100 7,500 13,000 9,750
What is the estimated total cost at an operating level of 8,400 hours? A) $21,000 B) $30,860 C) $35,280 D) $27,371 Answer: B Explanation: B) b = ($42,360 − $24,360) / (13,000 − 5,800) = $2.50 for the highest and lowest values of the cost driver $42,360 = a + ($2.50 × 13,000) a = $9,860 Cost function is Y = $9,860 + $2.50X Y = $9,860 + ($2.50 × 8,400) Y = $30,860 Diff: 3 Objective: 4 AACSB: Application of knowledge
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31) Presented below are the production data for the first six months of the year for the mixed costs incurred by Venus Company. Month January February March April May June
Cost $5,310 $4,550 $6,760 $10,200 $5,900 $7,440
Units 4,100 3,500 5,530 8,500 5,010 6,530
Venus Company uses the high-low method to analyze mixed costs. How would the cost function be stated? A) y = $595 + $1.13X B) y = $5,650 + $1.30X C) y = $2,760 + $1.13X D) y = $10,200 + $1.20X Answer: A Explanation: A) b = ($10,200 − $4,550) / (8,500 − 3,500) = $1.13 $10,200 = a + $1.13 × 8,500 a = $595 Cost function is Y = $595 + $1.13X Diff: 3 Objective: 4 AACSB: Application of knowledge
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32) Presented below are the production data for the first six months of the year for the mixed costs incurred by Venus Company. Month January February March April May June
Cost $5,280 $4,620 $6,830 $11,160 $5,900 $7,390
Units 4,100 3,300 5,510 9,300 5,000 6,630
Venus Company uses the high-low method to analyze mixed costs. What is the estimated total cost at an operating level of 6,700 units? A) $9,380 B) $8,326 C) $7,303 D) $8,040 Answer: B Explanation: B) b = ($11,160 − $4,620) / (9,300 − 3,300) = $1.09 $11,160 = a + $1.09 × 9,300 a = $1,023 Cost function is: Y = $1,023 + $1.09X Y = $1,023 + $1.09 × 6,700 = $8,326 Diff: 3 Objective: 4 AACSB: Application of knowledge
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33) The White Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. White Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Month January February March April May June
Cost $40,000 $36,060 $43,000 $50,700 $70,400 $61,400
Units 3,700 3,000 3,550 5,090 6,400 4,250
How is the cost function stated? A) y = $36,060 + $11.00X B) y = $70,400 + $10.10X C) y = $34,340 + $12.02X D) y = $5,760 + $10.10X Answer: D Explanation: D) b = ($70,400 − $36,060) / (6,400 − 3,000) = $10.10 $70,400 = a + ($10.10 × 6,400) a = $5,760 Diff: 3 Objective: 4 AACSB: Application of knowledge
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34) The White Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. White Company has heard about a method of measuring cost functions called the high-low method and has decided to use it in this situation. Month January February March April May June
Cost $40,000 $34,320 $43,500 $50,900 $68,340 $61,300
Units 3,610 3,300 3,460 5,130 6,800 4,250
What is the estimated total cost at an operating level of 3,200 hours? A) $67,300 B) $33,348 C) $31,104 D) $34,418 Answer: B Explanation: B) b = ($68,340 − $34,320) / (6,800 − 3,300) = $9.72 $68,340 = a + ($9.72 × $6,800) a = $2,244 y = $2,244 + ($9.72 × 3,200) = $33,348 Diff: 3 Objective: 4 AACSB: Application of knowledge
35) Because the cost driver is the same for the fringe benefits of life insurance and pension benefits cost is the same, those costs can be aggregated into one homogeneous cost pool. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
36) The first step in estimating a cost function using quantitative analysis is to plot the data. Answer: FALSE Explanation: The first step in estimating a cost function using quantitative analysis is to choose the dependent variable. Diff: 2 Objective: 4 AACSB: Analytical thinking
37) In estimating a cost function using quantitative analysis, the dependent variable is the factor used to predict the independent variable. Answer: FALSE Explanation: In estimating a cost function using quantitative analysis, the independent variable is the factor used to predict the dependent variable. Diff: 2 Objective: 4 AACSB: Analytical thinking
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38) Cross-sectional data pertain to the same entity (organization, plant, activity, and so on) over successive past periods. Answer: FALSE Explanation: Time-series data pertain to the same entity (organization, plant, activity, and so on) over successive past periods. Diff: 1 Objective: 4 AACSB: Analytical thinking
39) Simple regression analysis estimates the relationship between the dependent variable and one independent variable. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
40) Two common forms of quantitative analysis methods of cost estimation are the high-low method and regression analysis. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
41) The high-low method relies on only two observations, the highest and lowest, to estimate a linear cost function. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
42) The dependent variable is a cost to be predicted and managed, whereas an independent variable or cost driver is the factor used to predict the dependent variable. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
43) The vertical difference, called the residual term, measures the distance between actual cost of one period and estimated cost of the next period. Answer: FALSE Explanation: The vertical difference, called the residual term, measures the distance between actual cost and estimated cost for each observation of the cost driver. Diff: 2 Objective: 4 AACSB: Analytical thinking
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44) Regression analysis is a statistical method that measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
45) In using high-low method, the slope coefficient is calculated by dividing the difference between highest and lowest observations of the cost driver by the difference between costs associated with highest and lowest observations of the cost driver. Answer: FALSE Explanation: In high-low method, slope coefficient is calculated by dividing the difference between costs associated with highest and lowest observations of the cost driver by the difference between highest and lowest observations of the cost driver. Diff: 2 Objective: 4 AACSB: Analytical thinking
46) Simple regression analysis estimates the relationship between the dependent variable and one independent variable. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
47) The advantages of the high-low method to estimate a cost function is that it is easy and accurate. Answer: FALSE Explanation: The method is easy to use but it produces an estimate , provides quick initial insight however it is not necessarily accurate and is dangerous for managers to rely on only two observations to estimate a cost function. Diff: 2 Objective: 4 AACSB: Analytical thinking
48) Multiple regression analysis uses only independent variables and not dependent variables. Answer: FALSE Explanation: Multiple regression analysis estimates the relationship between the dependent variable and two or more independent variables. Diff: 2 Objective: 4 AACSB: Analytical thinking
49) Regression analysis is a statistical technique that measures the average amount of change in the independent variable associated with a unit change in one or more dependent variables. Answer: FALSE Explanation: Regression analysis is a statistical technique that measures the average amount of change in the dependent variable associated with a unit change in one or more independent variables. Diff: 2 Objective: 4 AACSB: Analytical thinking
706 richard@qwconsultancy.com
50) In regression analysis, the term "goodness of fit" indicates the strength of the relationship between the cost driver and the costs. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
51) Multiple regression analysis estimates the relationship between the dependent variable and two or more independent variables. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
52) With a cost driver, cost accounts should be able to identify a relationship based on a physical relationship, a contract, or knowledge of operations and makes economic sense to the operating manager and the management accountant. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
53) The managers of the production department have decided to use the production levels of 2019 and 2020 as examples of the highest and lowest years of operating levels. Data for those years are as follows: Year 2019 2020
Chemicals used 336,000 gallons 288,000 gallons
Overhead Costs $292,800 $254,400
Required: What is the cost estimating equation for the department if gallons of chemicals are used as the cost driver? Answer: Slope (variable cost) = ($292,800 − $254,400) / (336,000 − 288,000) = $0.80 Constant (fixed cost) = $292,800 - ($0.80 × 336,000) = $24,000 Estimating equation = $24,000 + ($0.80 per gallon of direct material × total number of gallons) Diff: 2 Objective: 4 AACSB: Application of knowledge
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54) Mountain Manufacturing Inc. ran its machines in March, a slow month, for 410 hours for a total cost of $63,000. In July, a peak month, the freezer ran for 756 hours for a total cost of $92,800. Required: a. What is the cost estimating equation for the department if hours of freezer use are used as the cost driver? b. What is the estimated total cost at an operating level of 600 hours? Answer: a. Slope (variable costs) = ($92,800 − $63,000) / (756 − 410) = $86.13 Constant (fixed cost) = $92,800 − (756 × $86.13) = $27,688 Estimating equation = $27,688 + ($86.13 per direct labor hour × number of direct labor hours) b. Total costs of 600 hours = $27,688 + ($86.13 × 600) = $79,364 Diff: 2 Objective: 4 AACSB: Application of knowledge
55) The Michigan Manufacturing Company has provided the following information: Units of Output Direct materials Workers' wages Supervisors' salaries Equipment depreciation Maintenance Utilities Total
31,000 Units $ 316,800 1,188,000 361,000 166,320 75,000 422,400 $2,528,720
45,000 Units $ 443,520 1,663,200 322,000 166,320 86,000 580,800 $3,261,840
Using the high-low method and the information provided above, a. identify the linear cost function equation and b. estimate the total cost at 38,000 units of output. Answer: a. Variable cost = ($3,261,840 − $2,528,720) / (45,000 − 31,000) = $52.37 Fixed cost = $3,261,840 - ($52.37 × 45,000) = $905,190 Cost function is y = $905,190 + $52.37X b. Output level of 38,000 units = $905.190 + ($52.37 × 38,000) = = $2,895,250 total cost Diff: 2 Objective: 4 AACSB: Application of knowledge
708 richard@qwconsultancy.com
56) As part of his job as cost analyst, John Kelly collected the following information concerning the operations of the Machining Department: Observation January February March April May
Machine-hours 4,700 5,060 4,180 4,500 4,250
Total Operating Costs $43,000 45,395 42,535 43,600 42,890
Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. If June's estimated machine-hours are 4,300, calculate the total estimated costs of the Machining Department? Answer: a. Slope coefficient = ($45,395 − $42,535) / (5,060 − 4,180) = $3.25 per machine-hour Constant = $45,395 − ($3.25 × 5,060) = $28,950 Estimating equation = $28,950 + $3.25X b. June's estimated costs = $28,950 + ($3.25 × 4,300) = $42,925 Diff: 2 Objective: 4 AACSB: Application of knowledge
709 richard@qwconsultancy.com
57) Salter Manufacturing Company produces inventory in a highly automated assembly plant in Fall River, Massachusetts. The automated system is in its first year of operation and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations, the following data were collected:
January February March April May June
Machine-hours 4,560 4,380 4,680 3,960 3,900 3,720
Kilowatt-hours Total Overhead Costs 5,424,000 $405,600 5,208,000 404,160 5,400,000 407,040 5,148,000 404,160 5,040,000 391,200 4,944,000 384,000
Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver. c. For July, the company ran the machines for 4,000 hours and used 4,550,000 kilowatt-hours of power. The overhead costs totaled $365,000. Which cost driver was the best predictor for July? Answer: a. Machine-hours: Slope coefficient = ($407,040 − $384,000) / (4,680 − 3,720) = $24.00 per machine-hour Constant = $384,000 − ($24 × 3,720) = $294,720 Machine-hour estimating equation = $294,720 + $24X b. Kilowatt-hours: Slope coefficient = ($407,040 − $384,000) / (5,400,000 − 4,944,000) = $0.0505 per kilowatt-hour Constant = $407,040 − ($0.0505 × 5,400,000) = $134,198 Kilowatt-hour estimating equation =$134,198 + ($0.0505 per KWH × number of KWH) c. Julyʹs estimated costs: with machine-hours = $294,720 + ($24 × 4,000) = $390,720 with kilowatt-hours = $134,198 + ($0.0505 × 4,550,000) = $363,973 The best estimator for July was the kilowatt-hour cost driver. Diff: 3 Objective: 4 AACSB: Application of knowledge
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58) Patrick Ross, the president of M & M Materials Company, has asked for information about the cost behavior of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available: Month February March April May June
Machine-hours 1,870 3,080 1,100 2,750 3,850
Overhead Costs $22,500 24,475 24,321 23,650 31,196
Required: Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver. Answer: High: June 3,850 $31,196 Low: April 1,100 24,321 Difference 2,750 $ 6,875 Variable cost per MH: $6,875/2,750 = $2.50 per MH Fixed cost: $24,321 = a + $2.50 × 1,100 a = $21,571 Cost function is Y = $21,571 + $2.50X Diff: 2 Objective: 4 AACSB: Application of knowledge
59) List and briefly describe the six steps in estimating a cost function under quantitative analysis. Answer: The first step is to select the dependent variable. Selection of which dependent variable to use will depend on the cost function being estimated. Once the dependent variable has been selected, it is necessary to identify the independent variable or cost driver. The cost driver is the factor that is used to predict the dependent variable costs. The cost driver should have an economically plausible relationship with the dependent variable and be measurable. The third step involves collecting data on the dependent variable and the cost driver. The data may be time-series data or they may be cross-sectional data. Once the data are collected, they need to be plotted, which is step four. Plotting the data allows for the relationship between the cost driver and the dependent variable to be more readily observed. This also allows for the identification of extreme observations that should be further investigated. The fifth step is to estimate the cost function, using some form of quantitative analysis. The last step is to evaluate the cost driver of the estimated cost function to determine if the cost function provides a good estimation. Diff: 2 Objective: 4 AACSB: Analytical thinking
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60) Identify one advantage and one disadvantage of the hi low method. Answer: Advantages of the high-low method are that it is simple to compute and understand, and it can give a quick insight into cost-activity relationships. This disadvantage is that the method only utilizes two data points, therefore ignoring a great deal of valid data that could help refine the cost function and make it more accurate. Diff: 2 Objective: 4 AACSB: Analytical thinking
Objective 10.5 1) If cost accountants decide to use production of prior periods as a cost driver for repair cost of the current period they understand that: A) there is no correlation between repair costs and levels of production B) repair costs tend to lag periods of high production C) cost accountants do not need to understand operations D) there is no cause-and-effect between production and repair costs Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
2) Why is choosing the correct cost driver to estimate indirect manufacturing costs important? A) identifying the wrong driver can lead management to incorrect and costly decisions B) identifying the wrong driver can increase actual overhead costs C) identifying the wrong driver can increase the usage of the correct driver D) identifying the wrong driver can increase the direct costs of the cost object Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
3) One of the reasons ABC systems may be popular is that they typically have a small number of cost drivers and cost pools, making it less expensive and more accurate to estimate cost relationships. Answer: FALSE Explanation: ABC systems have a large number of cost drivers and cost pools, requiring many cost relationships to be estimated. As a part of this process, the manager must pay careful attention to the cost hierarchy (unit, batch, product, or factory level). Diff: 2 Objective: 5 AACSB: Analytical thinking
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4) What is a plausible explanation of a cost function has a slope coefficient of $30 for purchases of 1 to 1,000 units and $25 for production of 1,100 - 2,000 units, and $20 for production of 2,001 - 3,000 units? A) the fixed cost per unit has decreased because of efficiencies B) economies of scale allowing for lower cost purchases with larger orders C) their is a linear cost function in effect D) contribution margins are decreasing Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
5) If machine maintenance is scheduled at a time when production is at a low level, then: A) low production is the cost driver of high repair costs B) an understanding of operations is needed to determine an appropriate cost driver C) low production should be avoided since it is the cause of machine maintenance D) machine maintenance cannot be accurately predicted Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
6) Goodness-of-fit measures how well the predicted values in a cost estimating equation: A) match the cost driver B) determine the level of activity C) match the actual cost observations D) rely on the independent variable Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
7) A step cost functions indicates that there are: A) costs that remain the same over various ranges of activity but increases by discrete amounts as the level of activity increases B) greater proportions of fixed costs than variable costs at lower levels of activities C) increases in the number of units produced during the each month of the period D) strong relationships between fixed costs and variable costs Answer: A Diff: 3 Objective: 5 AACSB: Analytical thinking
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8) Which of the following best describes a step variable-cost function? A) a step cost function in which cost remains the same over narrow ranges of the level of activity in each relevant range B) a step cost function in which cost remains the same over narrow ranges of the level of activity outside the relevant range C) step cost function where the cost remains the same over wide ranges of the activity in each relevant range D) step cost function where the cost remains the same over wide ranges of the activity outside the relevant range Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
9) Which of the following statements is true of activity-based costing? A) There is a clear cause-and-effect relationship between costs and the cost driver in the long run. B) There is no variety of cost drivers and cost pools. C) The system focuses on activities in together and not on individual activities. D) A single cost driver should be identified for all the activities. Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
10) Which of the following statements is true of choosing cost drivers under activity-based costing? A) All the cost drivers should be unit-level cost drivers. B) There should be a clear cause-and-effect relationship between cost drivers and cost pools. C) Cost drivers are independent variables. D) A single cost driver should be identified for all the activities. Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
11) Machine-hours is a more economically plausible cost driver of machine maintenance than number of direct manufacturing labor-hours. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
12) The larger the vertical difference between actual costs and predicted costs the better the goodness of fit. Answer: FALSE Explanation: The smaller the vertical difference between actual costs and predicted costs the better the goodness of fit. Diff: 2 Objective: 5 AACSB: Analytical thinking
13) The major advantages of quantitative methods are that they are objective, so managers can use them to
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evaluate different cost drivers. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
14) A flat or slightly sloped regression line indicates a strong relationship between the cost driver and costs. Answer: FALSE Explanation: A flat or slightly sloped regression line indicates a weak relationship between the cost driver and costs. Diff: 2 Objective: 5 AACSB: Analytical thinking
15) When choosing among cost drivers, managers trade off level of detail, accuracy, feasibility, and costs of estimating functions. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
16) Activity-based costing systems use the quantitative analysis method exclusively for cost estimation because of its accuracy. Answer: FALSE Explanation: Because ABC systems have a great number and variety of cost drivers and cost pools it requires many cost relationships to be estimated. ABC systems use a variety of estimation methods industrial engineering, conference, and quantitative analysis. In making the choice of method to use, managers trade off detail, accuracy, feasibility, and costs of estimating cost functions. Diff: 2 Objective: 5 AACSB: Analytical thinking
17) When estimating the cost function for each cost pool, the manager must pay careful attention to the cost hierarchy because the cost pool may have more than one cost driver from different levels of the cost hierarchy. Answer: TRUE Diff: 3 Objective: 5 AACSB: Analytical thinking
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18) What are the three criteria a company should use to evaluate and choose a cost driver? Briefly explain each of the three criteria. Answer: The three criteria a company should use to evaluate a cost driver are economic plausibility, goodness of fit, and significance of the independent variable. Economic plausibility involves the theoretical existence of a causal relationship between a driver and the costs it is supposed to drive. Goodness of fit involves the observed differences between predictions of costs based on the cost driver and the actual costs that occurred. Significance of the independent variable involves the steepness of the slope of the cost driver relative to the slope of other possible cost drivers. The steeper the slope (given the same goodness of fit) the stronger is the relationship between the cost driver and the related costs. Diff: 2 Objective: 5 AACSB: Analytical thinking
Objective 10.6 1) Which of the following is NOT a nonlinear cost function? A) increase of $20,000 revenues with increase in sales in units B) total fixed cost of $25,000 C) variable cost of $5 per unit D) a step cost function Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
2) Which of the following is an example of nonlinear cost function? A) variable-cost functions B) fixed-cost functions C) learning curves D) mixed cost functions Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
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3) Lucy and Company is a large bakery. When purchasing flour, it takes advantage of volume discounts, which are granted at percentage discounts that increase at levels such as 100, 500, 1,000, 2,000, and 3,000 pound increments. Lucy and Company would use which type of function for the cost of flour? A) decreasing cost function B) linear cost functions C) nonlinear cost function D) stationary cost function Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
4) With a step fixed-cost function: A) the cost varies with the changes in the activity B) fixed cost is often approximated with a continuous variable-cost function C) fixed cost changes proportionally with the level of activity D) the cost remains the same over wide ranges of the activity in each relevant range Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
5) A step variable-cost function: A) is fixed over the long run but not over the short run B) is often approximated with a continuous variable-cost function C) remains the same over a wide range of activity D) example includes adding additional warehouse space Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
6) A learning curve is a function: A) that measures the decline in labor-hours per unit due to workers becoming better at a job B) that increases at a greater rate as workers become more familiar with their tasks C) where unit costs increase as productivity increases D) that is linear Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
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7) An experience curve: A) is a narrower application of the learning curve B) measures the decline in cost per unit as production decreases for various value-chain functions such as marketing as production increases C) only measures the decline in labor-hours per unit as units produced increases D) measures the increase in cost per unit as productivity increases Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
8) To complete the first setup on a new machine took an employee 350 minutes. Using an 84% cumulative average-time learning curve indicates that the second setup on the new machine is expected to take: A) 147 minutes B) 238 minutes C) 322 minutes D) 294 minutes Answer: B Explanation: B) The time taken for the second set up on machine = 350 × 0.84 = 294; (350 + X) / 2 = 294; X = 238 minutes Diff: 3 Objective: 6 AACSB: Application of knowledge
9) To complete the first setup on a new machine took an employee 180 minutes. Using an 90% incremental unit-time learning model indicates that the second setup on the new machine is expected to take: A) 162.0 minutes B) 200.0 minutes C) 342.0 minutes D) 18.0 minutes Answer: A Explanation: A) The time taken for the second set up on machine = 180 × 0.9 = 162.0 minutes Diff: 2 Objective: 6 AACSB: Application of knowledge
10) As a result of learning curve: A) unit costs increase as productivity increases and the unit-cost function behaves nonlinearly B) unit costs decrease as productivity increases and the unit-cost function behaves nonlinearly C) unit costs increase as productivity increases and the unit-cost function behaves linearly D) unit costs decrease as productivity increases and the unit-cost function behaves linearly Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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11) The learning-curve models presented in the text examine: A) how quality increases over time B) how efficiency increases as more units are produced C) how setup costs decline as more workers are added D) the change in variable costs when quantity discounts are available Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
12) Which of the following is a learning-curve model? A) the cumulative average-time learning model and the incremental unit-time learning model B) the simple regression model and the multiple regression model C) the multicollinearity learning model and the goodness of fit learning model D) the account analysis learning model and the conference learning method model Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
13) An "economy of scale" function is an example of a linear cost function. Answer: FALSE Explanation: A nonlinear cost function is a cost function for which the graph of total costs is not a straight line within the relevant range. In an economy of scale situation, where there is a possibility of producing double the product for less than double the cost; the function would be nonlinear. Diff: 1 Objective: 6 AACSB: Analytical thinking
14) A step cost function is an example of a linear cost function. Answer: FALSE Explanation: A step cost function is an example of a nonlinear cost function. Diff: 1 Objective: 6 AACSB: Analytical thinking
15) Step fixed-cost functions are variable over the long run. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
16) An experience curve is a function that measures the decline in cost per unit in various business functions of the value chain as the amount of these activities increases. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
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17) Nonlinear cost functions can result because of learning curves. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
18) In the cumulative average-time learning model, cumulative average time per unit declines by a constant percentage each time the cumulative quantity of units produced doubles. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
19) When new products are introduced, learning-curve effects can have a major influence on production scheduling. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
20) It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
21) The cumulative average-time learning model with a 85% learning curve indicates that if it takes 200 minutes to manufacture the first unit of a new model, then the second unit will take only 170 minutes to manufacture. Answer: FALSE Explanation: Second unit set up time = 200 × .85 = 170; (200 + X)/2 = 170; X = 140 minutes Diff: 2 Objective: 6 AACSB: Application of knowledge
22) The incremental unit-time learning model with a 80% learning curve indicates that if it takes 150 minutes to manufacture the first unit of a new model, then the second unit will take only 120 minutes to manufacture. Answer: TRUE Explanation: Second unit set up time = 150 ×.80 = 120 minutes Diff: 2 Objective: 6 AACSB: Application of knowledge
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23) A learning curve is a function that measures how labor-hours per unit decrease, as units of production decrease. Answer: FALSE Explanation: A learning curve is a function that measures how labor-hours per unit decrease, as units of production increase. Diff: 2 Objective: 6 AACSB: Analytical thinking
24) One of the most commonly used tools for building models in a world of "big data" is logistic regression. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
25) The essential difference between these two is that Logistic regression is used when the dependent variable is binary in nature. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
26) Logistic regression is another form of linear regression. Answer: FALSE Explanation: Rather than fit data to a line, logistic regression fits an S curve to the data. Diff: 2 Objective: 6 AACSB: Analytical thinking
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27) Harold's Picture manufactures various picture frames. Each new employee takes 6 hours to make the first picture frame and 4.8 hours to make the second. The manufacturing overhead charge per hour is $25. Required: a. What is the learning-curve percentage, assuming the cumulative average method? b. What is the time needed to build 8 picture frames by a new employee using the cumulative average-time method? You may use an index of −0.1520. c. What is the time needed to produce the 16th frame by a new employee using the incremental unit-time method? You may use an index of −0.3219. d. How much manufacturing overhead would be charged to the 16 picture frames using the average-time approach? Answer: a. Job Hours Cumulative Cumulative Average 1 6 6 6 2 4.8 10.8 5.4 Learning percentage = 4.8/6 = 0.90 b. Y = p × q
c.
= 6 × 8− 0.1520 = 4.37 hours or 1 unit = 6 2 units = 6 × 0.9 = 5.4 4 units = 5.4 × 0.9 = 4.86 8 units = 4.86 × 0.9 = 4.37 hours Time to build 8 units: 8 × 4.37 = 35 hours Y =p×q
= 6 × 16−.0.3219 = 2.458 hours or 1 unit = 6 2 units = 6 × 0.8 = 4.8 4 units = 4.8 × 0.8 = 3.84 8 units = 3.84 × 0.8 = 3.072 16 units = 3.072 × .8 = 2.458 hours d. Total time = 2.458 × 16 = 39.328 hours Overhead charge = 39.328 × $25 = $983.20 Diff: 3 Objective: 6 AACSB: Application of knowledge
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28) Each time Mayberry Nursery hires a new employee, it must wait for some period of time before the employee can meet production standards. Management is unsure of the learning curve in its operations but it knows the first job by a new employee averages 40 hours and the second job averages 32 hours. Assume all jobs to be equal in size. Required: a. What is the learning-curve percentage, assuming the cumulative average-time method? b. What is the time for a new employee to build 16 units with this learning curve using the cumulative average-time method? You may use an index of −0.1520. Answer: a. Job Hours Cumulative Cumulative Average 1 40 40 40 2 32 72 36 Learning percentage = 36/40 = 0.90 b. Y = p × q = 40 × 16−.1520 = 26.244 hours or 1 unit = 40 2 units = 40 × 0.9 = 36 4 units = 36 × 0.9 = 32.4 8 units = 32.4 × 0.9 = 29.16 16 units = 29.16 × 0.9 = 26.244 hours 16 × 26.244 = 419.904 hours Diff: 3 Objective: 6 AACSB: Application of knowledge
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29) Jake's Copy Center hires a new employee. Jake knows he has to be patient with the employee until the employee gains enough experience to meet production standards. Jake is unsure of the learning curve in his operation, but he knows the first job by a new employee averages 50 minutes and the second job averages 40 minutes. Assume all jobs to be equal in size. Required: a. What is the learning-curve percentage, assuming the cumulative average-time method? b. What is the time for a new employee to do 32 jobs with this learning curve using the cumulative average-time method? You may use an index of −0.1520. Answer: a. Job Minutes Cumulative Cumulative Average 1 50 50 50 2 40 90 45 Learning percentage = 45/50 = 0.90 b. Y = p × q = 50 × 16−.1520 = 29.525 minutes or 1 unit = 50 2 units = 50 × 0.9 = 45 4 units = 45 × 0.9 = 40.5 8 units = 40.5 × 0.9 = 36.45 16 units = 36.45 × 0.9 = 32.805 32 units = 32.805 × 0.9 = 29.525 minutes 32 × 29.525 = 944.784 minutes = Approximately 15 hours and 45 minutes Diff: 3 Objective: 6 AACSB: Application of knowledge
30) Discuss the potential use of nonlinear curves in cost functions and cost analysis. Give some examples. Answer: Cost functions are not always linear. A nonlinear cost function is a cost function for which the graph of total costs is not a straight line within the relevant range of operations. One example is a series of straight line segments that change their slopes at critical intersection points within the range of operation. Another example would be a step function. A step function is a function where the cost remains the same over various ranges of the level of activity, but the cost increases by discrete amounts (or steps) as the level of activity advances from one range to another. In addition to the examples mentioned above, there are situations where the cost or use of resources can be represented by a curve instead of a single straight line or a group of segmented straight lines. One example of a curve is a learning curve. A learning curve is a function that measures how labor-hours per unit decline as units of production increase because workers are learning and becoming better at their jobs. Diff: 2 Objective: 6 AACSB: Application of knowledge
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31) Explain the difference between the cumulative average-time learning model and the incremental unit-time learning model. Answer: In the cumulative average-time learning model, cumulative average time per unit declines by a constant percentage each time the cumulative quantity of units produced doubles. In the incremental unit-time learning model, incremental time needed to produce the last unit declines by a constant percentage each time the cumulative quantity of units produced doubles. Diff: 2 Objective: 6 AACSB: Analytical thinking
Objective 10.7 1) The ideal database for estimating cost functions contains: A) numerous cost driver observations B) only the independent variable and not the dependent variable C) cost driver observations spanning a narrow range D) a few values of the cost driver that are grouped closely together Answer: A Diff: 1 Objective: 7 AACSB: Analytical thinking
2) Data collection problems arise when: A) data are recorded electronically rather than manually B) accrual-basis costs are used rather than cash-basis costs C) fixed and variable costs are not separately identified and both are allocated to products on a per unit basis D) purely inflationary price effects are removed Answer: C Diff: 3 Objective: 7 AACSB: Analytical thinking
3) Which of the following is a step to overcome problems related to data collection for estimating cost function? A) The analyst should remove the inflationary effects. B) The analyst should consider fixed costs as variable. C) The analyst should also use extreme values while calculating cost functions. D) The analyst should not use accrual accounting. Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
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4) Which of the following is a step followed by an analyst to overcome problems related to data collection for estimating cost function? A) to use cash accounting B) to consider fixed costs as variable costs and treat allocated fixed cost per unit as a variable cost C) to eliminate unusual observations if extreme values of observations occur D) to include the inflationary price effects in the data Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
5) Which of the following is a problem related to cost analysis? A) fixed costs are allocated as if they are variable costs B) extreme observations are adjusted or removed C) a company keeps accounting records on the accrual basis D) inflationary effects are removed Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
6) Which of the following is considered the best approach to collecting data for the purposes of estimating cost functions? A) Measure numerous and wide ranging observations of cost driver activity and the related costs on the accrual basis of accounting. B) Measure two extreme highly accurate data points for cost driver activity and the related cash equivalent costs. C) Measure many values spanning a wide range for the cost driver and the associated costs. D) Measure numerous observations of cost driver activity and the related costs on a cash basis of accounting. Answer: A Diff: 2 Objective: 7 AACSB: Application of knowledge
7) Data collection problems can arise when extreme values of observations occur. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
8) Misinterpretation of data can arise when fixed costs are reported on a per unit basis. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
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9) Inflation can distort data that are compared over time so purely inflationary effects should be removed. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
10) Fixed costs are sometimes allocated to individual products as part of the standard costing system. When this is the case, they should be treated as variable costs for purposes of future cost estimation. Answer: FALSE Explanation: The danger is to regard these costs as variable rather than fixed. The analyst should distinguish carefully fixed costs from variable costs and not treat allocated fixed cost per unit as a variable cost. Diff: 2 Objective: 7 AACSB: Analytical thinking
11) When building a database of cost driver activity and related costs, if necessary, costs should be modified to assure that fixed costs are allocated as if they are variable. Answer: FALSE Explanation: One problem encountered by management accountants when compiling a data base of cost driver activity and related costs is that fixed costs should not be allocated as if they are variable. To avoid this problem, accountants must to distinguish between fixed and variable costs and do not treat unitized fixed cost as a variable cost. Diff: 2 Objective: 7 AACSB: Analytical thinking
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12) Jack Williams has just purchased the film studio of a movie company that specializes in comedies. He found that the company did not try to estimate the cost of making a movie. Instead, it just gave the producer a budget and told him/her to make a movie within budget. Mr. Williams does not like the former movie-budget concept and desires to establish a formal cost estimation system. Required: What are some of the potential problems that may be encountered in changing from a budget to a cost estimation movie making system? Answer: One of the first problems will be the timing of matching the cost drivers with the actual movie production process. Under the former budget system, the relationships with many of the cost drivers were probably forced to meet budget, or else poorly kept because they were substantially under budget and control over them was weak. Next will be the problem of determining which costs are fixed and which are variable under the budget system. It may be difficult to determine those that are truly variable. Timing problems will also have to be reconciled. Some costs may be incurred monthly rather than by movie, and some type of accrual will have to be made to keep the costs allocated to the proper cost driver. Finally, there may be gaps in the historical data because only total costs had to be maintained within the budget. There was probably little attention paid to cost categories, thereby causing reliable cost data to be scarce. Diff: 2 Objective: 7 AACSB: Analytical thinking
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Objective 10.A 1) The coefficient of determination is important in explaining variances in estimating equations. For a certain estimating equation, the unexplained variation was given as 52,000. The total variation was given as 65,000. What is the coefficient of determination for the equation? A) 1.25 B) 0.80 C) 0.20 D) 1.80 Answer: C Explanation: C) Coefficient of determination = r2 = 1 − (52,000 / 65,000) = 0.20 Diff: 2 Objective: A AACSB: Application of knowledge
2) The H.W. Grant Corporation used regression analysis to predict the annual cost of indirect materials. The results were as follows: Indirect Materials Cost Explained by Units Produced Constant Standard error of Y estimate
$15,620 $3,800
Number of observations X coefficient(s) Standard error of coefficient(s)
0.784,8 21 10.25 2.2
What is the cost estimation equation? A) Y = $15,620 + $10.25X B) Y = $3,800 + $8.04X C) Y = $19,420 + $4.66X D) Y = $11,820 + $10.25X Answer: A Diff: 2 Objective: A AACSB: Application of knowledge
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3) Grandy's Beer was to manufacture 460 cases of ale next week. The accountant provided the following analysis of total manufacturing costs. Variable Constant Independent variable = 0.85
Coefficient 115 240
Standard Error 82.15 109.25
t-Value 1.40 2.21
What is the estimated cost of producing the 460 cases of ale? A) $110,515 B) $53,140 C) $50,255 D) $37,789 Answer: A Explanation: A) y = $115 + ($240 × 460) = $110,515 Diff: 2 Objective: A AACSB: Application of knowledge
4) Ben and Mildred's Stables used two different independent variables (trainer hours and number of horses) in two different equations to evaluate the cost of training horses. The most recent results of the two regressions are as follows: Trainer's hours: Variable Constant Independent variable = 0.56
Coefficient $1,005.65 $22.90
Standard Error $217.80 $3.23
t-Value 4.61 7.14
Number of horses: Variable Constant Independent variable = 0.63
Coefficient $5,241.65 $951.59
Standard Error $1,180.28 $271.85
t-Value 4.44 6.00
What is the estimated total cost for the coming year if 15,300 trainer hours are incurred and the stable has 400 horses to be trained, based upon the best cost driver? A) $10,165.65 B) $385,877.65 C) $351,375.65 D) $2,097,611.59 Answer: B Explanation: B) y = $5,241.65 + ($951.59 × 400) = $385,877.65 based on highest r 2, which uses # of horses as the cost driver Diff: 3 Objective: A AACSB: Application of knowledge
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5) A major concern that arises with multiple regression is multicollinearity, which exists when: A) the dependent variable is not normally distributed B) the standard errors of the coefficients of the individual variables decrease C) the R2 statistic is low D) two or more independent variables are highly correlated with one another Answer: D Diff: 2 Objective: A AACSB: Analytical thinking
6) In multiple regression, when two or more independent variables are highly correlated with one another, the situation is known as: A) heteroscedasticity B) homoscedasticity C) multicollinearity D) autocorrelation Answer: C Diff: 2 Objective: A AACSB: Analytical thinking
7) Which of the following is the mathematical expression to calculate the coefficient of determination? A) coefficient of determination = 1 - (Unexplained variation / Total variation) B) coefficient of determination = (1 + Total variation) / Unexplained variation) C) coefficient of determination = (1 - Unexplained variation) / Total variation) D) coefficient of determination = 1 - Unexplained variation + Total variation) Answer: A Diff: 2 Objective: A AACSB: Analytical thinking
8) The coefficient of determination (r2) measures the percentage of variation in X (the independent variable) explained by Y (the dependent variable). Answer: FALSE Explanation: The coefficient of determination (r2) measures the percentage of variation in Y (the dependent variable) explained by X (the independent variable). Diff: 1 Objective: A AACSB: Analytical thinking
9) Generally a coefficient of determination (r2) of 0.30 or higher passes a goodness of fit test. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
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10) Goodness of fit has meaning only if the relationship between the cost drivers and costs is economically plausible. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
11) Multicollinearity exists in multiple regression when two or more independent variables are highly correlated with each other. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
12) A coefficient of correlation between independent variables of .85 indicates multicollinearity. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
13) The t-value of a coefficient measures how large the value of the estimated coefficient is relative to its standard error. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
14) The standard error of the estimated coefficient indicates how much the estimated value, b, is likely to be affected by random factors. Answer: TRUE Diff: 1 Objective: A AACSB: Analytical thinking
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15) The new cost analyst in your accounting department has just received a computer-generated report that contains the results of a simple regression program for cost estimation. The summary results of the report appear as follows: Variable Coefficient Constant $74.79 Independent variable $1,081.76 r2 = 0.75
Standard Error $16.82 $215.67
t-Value 4.45 5.02
Required: a. What is the cost estimation equation according to the report? b. What is the goodness of fit? What does it tell about the estimating equation? Answer: a. y = $74.79 + $1,081.76X b. Goodness of fit is 0.75. It measures how well the predicted values match the actual observations. In this case, the equation passes the goodness of fit test because it is substantially above 0.30, the threshold of acceptance. Diff: 1 Objective: A AACSB: Application of knowledge
16) South by Southwest Company used least squares regression analysis to obtain the following output: Payroll Department Cost Explained by Number of Employees Constant $7,540 Standard error of Y estimate 819 2 r 0.8924 Number of observations X coefficient(s) Standard error of coefficient(s)
20 $2.473 0.0966
Required: a. What is the total fixed cost? b. What is the variable cost per employee? c. Prepare the linear cost function. d. What is the coefficient of determination? Comment on the goodness of fit. Answer: a. The constant or intercept is the total fixed cost of $7,540. b. The variable cost per employee is the X coefficient of $2.473. c. y = $7,540 + $2.473X d. The coefficient of determination is the r2 of 0.8924. This represents a very high goodness of fit. The closer to 1.0, the better the cost driver explains the cost. Therefore, the conclusion can be drawn that there is a significant relationship between the cost of the payroll department and the number of employees. Diff: 2 Objective: A AACSB: Analytical thinking
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17) Dandy Manufacturing Company uses two different independent variables (machine-hours and number of packages) in two different equations to evaluate costs of the packaging department. The most recent results of the two regressions are as follows: Machine-hours: Variable Coefficient Constant $748.30 Independent Variable $52.90
Standard Error $341.20 $35.20
t-Value 2.19 1.50
Standard Error $75.04 $2.00
t-Value 3.24 2.80
r2 = 0.33 Number of packages: Variable Coefficient Constant $242.90 Independent Variable $5.60 r2 = 0.73 Required: a. What are the estimating equations for each cost driver? b. Which cost driver is best and why? Answer: a. Machine-hours y = $748.30 + $52.90X Number of packages y = $242.90 + $5.60X b. Machine-hours has a low r2 which implies that a small proportion of the variance is explained by machine-hours, thereby making it less attractive than number of packages as a cost predictor. Also, for the independent variable, number of packages, the t-value of 2.80 indicates that a relationship exists between the independent and dependent variables. For machine-hours, the t-value (1.50) is below 2.00, indicating that the coefficient is not significantly different from zero and that there may not be a relationship between the independent and dependent variables. The t-values of the constant terms (g) for both drivers is greater than 2.00, therefore, there is no distinguishing characteristic between the constants. Given the above findings, it appears that number of packages is the best predictor of costs of the packing department. Diff: 2 Objective: A AACSB: Analytical thinking
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18) Yancy Company manufactures chairs. Because the efforts of manufacturing are approximately equal between labor and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r2 values have been determined for 2020: 1.
X = cutting time
y = $19,500 + $20X
2.
X = labor
y = $5,000 + $25X
r2 = 0.65 r2 = 0.49
3.
X = machinery
y = $44,500 + $5X
r2 = 0.55
Required: a. Which equation should be selected for the analysis? b. What other factors should be included in the selection of the estimating equation? Answer: Equation 1 for cutting time is slightly better than the other two equations based on r 2 values. Generally, an r2 above 0.30 indicates a goodness of fit that is acceptable for most situations. Therefore, all a.
three equations are acceptable when considering only the coefficient of determination. However, because the values are so close together, other factors should be considered. b. Other factors to be considered are economic plausibility, the significance of independent variables, and specification analysis. The best cost drivers of the dependent variables are those that meet all these criteria plus that of best coefficient of determination. Diff: 2 Objective: A AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 11 Data Analytic Thinking and Prediction Objective 11.1 1) Which of the following best describes data science? A) Any activity that activity that reveals deeper insight into a dataset. B) The process of analyzing numerical data to infer conclusions about the whole from those in a representative sample. C) The use of data analytics to draw conclusions from data. D) The practice of measuring, analyzing, and interpreting information for managers in pursuit an organization's goals. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
2) Which of the following would be the most compelling reasons why data scientists are able to create and train sophisticated algorithms? A) existence of huge amounts of data B) inexpensive data storage and Web-based (cloud) computing power C) inexpensive computers and software
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D) networking capabilities and inexpensive servers Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
3) The ability to accurately predict outcomes can directly impact how an organization develops its: A) strategy B) objectives C) mission D) plan Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
4) Data science sits at the intersection of computer science and data skills, math and statistics, and: A) hardware B) software C) networks D) substantive expertise Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
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5) Management accountants need to understand some of the computer science and statistics tools used in data science so that they: A) can adapt the accounting information system B) certify the financial statements with a higher degree of certainty C) can effectively interact with members of the data science team to create value D) can comply with generally accepted accounting principles Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
6) The data science framework is a: A) four-step decision-making process for applying machine learning techniques to aid decision making B) two-step process that involves understanding the problem and applying machine learning to aid decision making C) three-step process for applying machine learning techniques to aid decision making D) two-step process involving preparing the data and building a model to aid decision making Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Which of the following is the first step on the data science framework? A) obtain and explore data B) understand the problem C) prepare data D) build a model Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Which of the following best describes data analytics? A) Examining big data and drawing conclusions. B) Examining raw data and drawing conclusions. C) Examining data and removing excess "noise" to draw conclusions. D) Examining big data, removing excess "noise" and organizing the data to draw conclusions. Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
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9) Which of the following actions would address a limiting factor when working with big data in the context of data analytics? A) utilization of cloud platforms B) utilization of data analytics software C) acquisition of state of the art hardware D) extraction and transformation of large amounts of data. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
10) With big data and data analytics techniques, management can discover ________ to identify future opportunity and risks. A) historical data and decisions B) cost savings C) patterns and anomalies D) opportunity costs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
11) The marriage of data science and management accounting can result in in the use of very large datasets to ________ sophisticated algorithmic models. A) construct B) formulate C) exploit D) train Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
12) Management accountants need to understand some of the computer science and ________ tools used in data science to work with data analytics in support of management decision making. A) statistical B) financial C) accounting D) software Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
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13) When management accountants partner with data science professionals to create value for a company, the impact should be: A) focused on production B) realized in the supply chain C) concentrated in the production through distribution segment of the value chain D) potentially realized across all parts of the value chain Answer: D Diff: 2 Objective: 1 AACSB: Application of knowledge
14) Exploratory data analysis could encompass all of the following, EXCEPT: A) using statistic measures like mean and mode B) using an Excel model to prepare a forecast C) embark on activities that reveals deeper insight D) calculate the difference between the highest and lowest values Answer: B Diff: 2 Objective: 1 AACSB: Application of knowledge
15) How does a management accountant gain an understanding of a business problem for which data analytics may help solve? A) By considering questions that arise from many sources. B) Knowing everything about the data that he or she anticipates working with. C) Identifying relationships within the data such as independent and dependent variables. D) Evaluating the data that can be accessed via exploratory techniques. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
16) Which of the following best defines the management accountants' initial data analytics role in facilitating the transformation of data into information that can help add value to an organization? A) Obtaining and exploring relevant data for decision making. B) Developing a data exploratory analysis C) Deciding which questions to ask and what data to gather. D) Preparing data for analysis. Answer: C Diff: 2 Objective: 1 AACSB: Application of knowledge
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17) Examining a data set to understand its size and content would be an example of: A) exploratory data analysis B) exploratory visualization C) data dictionary development D) accessing the potential of data leakage Answer: A Diff: 1 Objective: 1 AACSB: Application of knowledge
18) Which of the following would most likely not be the reason for utilizing data analytics? A) Investigate customer buying patterns. B) Delve into surprising variances from budget. C) Forecast future impactful events. D) Fine-tune direct cost allocations. Answer: D Diff: 1 Objective: 1 AACSB: Application of knowledge
19) Exploratory data analysis reveals deeper insight into a dataset. Answer: TRUE Diff: 1 Objective: 1 AACSB: Application of knowledge
20) Algorithmic models "learn" from the feedback of experts. Answer: FALSE Explanation: Data scientists use very large datasets to train sophisticated algorithmic models; the models learn from training data (thousands or millions of records and not expert feedback or input) and can then predict a new record according to some feature of interest. Diff: 1 Objective: 1 AACSB: Application of knowledge
21) Predictive modeling is a data science technique used to make Estimates based on past or current data. Answer: TRUE Diff: 1 Objective: 1 AACSB: Application of knowledge
22) A binary outcome implies there are more than two possible outcomes to a certain situation such as a revenue that can produce a profit, a loss, or equal expenses. Answer: FALSE Explanation: A binary outcome implies there are only two possible outcomes to a certain situation. Diff: 1 Objective: 1 AACSB: Application of knowledge
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23) Calculation of a mean, median and mode on a new data set could be an activity of an overall exploratory analysis as part of a management accountant's role of obtaining and exploring relevant data while working a data analytics process. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
24) Numeric analysis is a type of exploratory data analysis. Answer: TRUE Diff: 1 Objective: 1 AACSB: Application of knowledge
25) Define exploratory data analysis and give some examples of exploratory data analysis. Answer: Exploratory data analysis refers to any activity that reveals deeper insight into a dataset. This activity may include numeric analysis, such as the use of descriptive statistics such as the mean, median, minimum, and maximum values of test scores in an accounting course or the visualization of data such as with a line chart or a histogram that might reveal patterns or trends from revenues earned or expenses incurred over time. Various acceptable examples could be offered by the student and be correct. Diff: 2 Objective: 1 AACSB: Analytical thinking
26) When data science is depicted at the center of a Venn diagram, the intersecting circles are representative of such things as computer science skill, math and statistics, and substantive knowledge. Discuss what is meant by substantive knowledge (domain knowledge) and why it is a critical piece data analytics as a decision making tool. Answer: Data science sits at the intersection of computer science and data skills, math and statistics, and, critically, substantive expertise in a particular area of interest or domain, such as industry and management accounting knowledge. To ask the right questions to be answered by data science and to obtain valuable insights related analytics to products and services, and make good decisions, subject matter experts in business and accounting must be involved. When one has solid domain knowledge, one can ask good questions which is the most critical element of a data science project. The ability to ask good questions requires domain understanding. Diff: 2 Objective: 1 AACSB: Application of knowledge
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27) Explain what is meant by the following statement: "Data analytics allows accountants to assist managers to work with data that is too large and possibly too complex for traditional systems and tools to extract value." Answer: Managers can now access unprecedented amounts of data; vast amounts of data now populates the databases of companies including datasets revealing customer preferences, supplier behavior, and other data that is the result of daily operations and activities. Managers use data analytic techniques to make predictions based on this large volume and complex data. This is the age big data, machine learning, and artificial intelligence and the management accountant helps companies derive value from big data by helping managers to use data-analytic techniques to transform the company to better serve its customers, unlock significant cost-saving opportunities and identify revenue-generating prospects. Diff: 2 Objective: 1 AACSB: Application of knowledge
Objective 11.2 1) Which of the following is the proper order (sequence) of the steps in the data science framework? A = Visualize and communicate insights B = Deploy the model. C = Prepare data D = Obtain and explore data E = Build a model F = Gain a business understanding of the problem G = Evaluate the model A) E,C, G,F,D,B,A B) B,D,F,E,C,A,G C) F,D,C,E,G,A,B D) F,C,D,G,A,B,E Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
2) Which of the following would be first and foremost question asked when working within the data science framework? A) How objective is the data? B) Can careful and accurate measurement be attained? C) What might we learn? D) What are the relevant cost of gathering and analyzing the data? Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
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3) An a priori reason to conduct data analytics would be: A) thousands of rejected loan applications may reveal low credit scores as the main reason for rejected credit card applications B) after data is entered into a statistical software package, the numbers reveal a correlation between a loan purpose, noted on thousands of loan applications, and the decision to reject a loan C) same facts as part but further evidence indicates causation D) experience seems to indicate that certain phrasing of a loan's applications purpose leads to the rejection of the loan proposal Answer: D Diff: 2 Objective: 2 AACSB: Application of knowledge
4) In which phase of the data science framework might data issues such as access, availability, reliability, and timeliness be a consideration? A) gain understanding of the problem B) obtain and explore data C) prepare data D) visualize insights Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
5) Which one of the following questions would NOT be asked while performing Step 3: Prepare the Data? A) What additional data might be needed? B) How should different variables be measured? C) What variables should be excluded? D) How objective is the data? Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
6) It could be said that auditors have greater confidence when testing for fraud because data analytics enables the analysis of complete: A) sample B) datasets C) value chains D) transactions Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
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7) Which of the following is the best example of the use of substantive expertise in the "Prepare the Data" step of the data science framework? A) knowing how the statistical concepts of mean, mode, and median help explain the data B) understanding how variance and standard deviation are calculated C) referring to the data dictionary of the data base to understand the concept of annual income and to see if it aligns well with U.S. GAAP D) understanding the dataset structure of a general ledger database Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
8) Correcting inconsistencies across the dataset is an example of which of the following? A) assure that the data is complete B) validating that the data is objective C) scrubbing the data D) extracting the data Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
9) In the data analytics world, Web scraping usually primarily involves the: A) process of "cleaning" data before analyzing it B) analysis of large amounts of complex data derived from the web C) process of copying data from the web and storing it for retrieval or analysis D) activities involving scouring the web for information that will help validate internally generated data Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
10) Which of the following best summarizes the most series a legal or ethical issue faced by management accountants when practicing web scrapping? A) Scrapping bots might replacing humans and bots lack the qualitative judgements needed to perform this type of data gathering. B) Web scrapping may violate the terms of use of a particular target web site. C) Authorization of all web scrapping by an accountant violates specific professional ethical standards. D) Web scraping processes significantly affect the performance bandwidth of the accountant's company's web server. Answer: B Diff: 2 Objective: 2 AACSB: Application of knowledge
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11) Management accountants could include many independent features in an analytical model because with technology, it is easy and inexpensive to handle large quantities of data. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
12) Data dictionary is information describing the contents, format, and structure of a database and the relationship between its elements. Answer: TRUE Diff: 1 Objective: 2 AACSB: Application of knowledge
13) In carrying out the data science framework, data leakage happens when some data is inappropriately disclosed to external parties. Answer: FALSE Explanation: Data scientists use the term target leakage to refer to data that is not available at the time of the analysis but is known after a decision has been made (future data) and that should be excluded from the data analytics model. Diff: 1 Objective: 2 AACSB: Application of knowledge
14) A listing of descriptions of the data attributes of a dataset is called a data index and is a reference for both data base administrators and analysts who are building decision support models. Answer: FALSE Explanation: A listing of descriptions of the data attributes of a dataset is called a data dictionary. Diff: 1 Objective: 2 AACSB: Application of knowledge
15) Briefly describe what is meant by gaining an understanding of a business problem within the framework of data analytics. Answer: It means fully comprehending a business situation or problem that need to be addressed by management decision makers. That deep understanding of the problem can only be gained by asking many questions. Having concrete and specific questions that can potentially be answered by data analytics is the first step in utilizing the tools of data science. Diff: 2 Objective: 2 AACSB: Application of knowledge
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16) A management accountant may be heavily involved in obtaining, exploring, and preparing data for further analysis. Explain what is meant by assuring that the data is relevant and clean. Answer: One you have obtained the data; you want to assure that it is relevant. Relevant data is data that can be applied to solve a problem. It must be complete, objective, accurate and help answer the questions that are being asked. Clean data, also referred to a scrubbed data, is data that has had all irrelevant fields deleted such as incorrect, incomplete, improperly formatted, or duplicate data that will create "noise" and results upon which decisions should not be based. Diff: 2 Objective: 2 AACSB: Application of knowledge
17) Contrast these two concepts: scrubbing data versus assuring data quality. Answer: Scrubbing data (also referred to as cleaning the data) is a process that involves activities such as amending or removing data in a database, correcting incorrect data, fixing improperly formatting and deleting duplicate data. Data quality is often improved by scrubbing and data quality is achieved by executing procedures that assure that the data is complete, reliable and valid. Data quality assurance procedures might involve further data scrubbing such as amending or adding data to achieve completeness, accuracy checks to assure reliability, and examination of source data to judge validity. Diff: 2 Objective: 2 AACSB: Application of knowledge
Objective 11.3 1) A decision tree would most likely be utilized during which of the following steps? A) Step 1: Gain a Business Understanding of the Problem B) Step 2: Obtain and Explore Relevant Data C) Step 3: Prepare the Data D) Step 4 Building the Model Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge
2) All of the following describes a decision tree EXCEPT: A) It is an information flowchart. B) It is a type of decision model showing possible consequences. C) It can be "learned" by splitting the source set into subsets by using an algorithm. D) It is a model that generates very complex rules and perform classifications via numerous and elaborate computations. Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge
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3) In constructing a decision tree, which of the following best describes splits? A) Splits are separate decision trees. B) Splits are the roots of the decision tree. C) Splits (branches) are made which result in most homogeneous sub-nodes. D) Splits are removals of sub-nodes of a decision node as the result of running an algorithm. Answer: C Diff: 2 Objective: 3 AACSB: Application of knowledge
4) Strengths of a decision tree model include all of the following EXCEPT: A) Save time since only one iteration of the decision tree is necessary. B) It is a visual representation that users can related to. C) Can be used to generate understandable rules. D) They are easily interpretable as a set of questions or business rules. Answer: A Diff: 2 Objective: 3 AACSB: Application of knowledge
5) A decision tree is simply a set of cascading: A) database B) questions C) costs D) revenues Answer: B Diff: 2 Objective: 3 AACSB: Application of knowledge
6) In a decision tree, which of the following are indicated by circles? A) decision nodes B) leafs C) cuts D) terminal nodes Answer: A Diff: 2 Objective: 3 AACSB: Application of knowledge
7) A "cut" of a scatter plot created from a decision tree exercise creates a rectangle where decision A is made 12 times and decision B is made 16 times and results in a Gini Impurity of: A) .4 B) 1 C) .48 D) .6 Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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8) If the first "cut" of a scatter plot results in a rectangle with a Gini Impurity measure is .4 and an algorithm chooses a second "cut" of the same plot results in a Gini Impurity of .32, it could be said that: A) the second cut has more purity than the first cut B) the first cut has more purity than the second cut C) the first cut of .4 means there is a 40% chance of a particular occurrence D) the second cut of .32 means that there is a 72% chance of a particular occurrence Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
9) Which of the following attempts to assign each unit in a dataset into a small set of categories? A) classification B) regression C) similarity matching D) pruning Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
10) A target variable is a value to be predicted by a model that utilizes feature variables. Answer: TRUE Diff: 2 Objective: 3 AACSB: Application of knowledge
11) A logistic regression model to estimate the relationship between independent feature variables and the target variable would result in a straight-line fit through a through a scatter plot of data points. Answer: FALSE Explanation: A logistic regression model is considered more "flexible" in that the data may not fit a straight-line and its line is often curved such as in a S shape. Diff: 2 Objective: 3 AACSB: Analytical thinking
12) A functional relationship describes precisely how two variables relate. Answer: TRUE Diff: 2 Objective: 3 AACSB: Application of knowledge
13) When building a decision tree, you use each attribute to answer a question. The answer to each question decides the next question. Answer: TRUE Diff: 2 Objective: 3 AACSB: Application of knowledge
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14) Decision trees are a complex, but powerful form of multiple variable analysis and supplement, complement, or substitute for traditional statistical forms of analysis, such as multiple linear regression. Answer: FALSE Explanation: Decision trees are considered a simple, not complex form of multiple variable analysis. Diff: 2 Objective: 3 AACSB: Application of knowledge
15) Gini Impurity is the probability of incorrectly classifying a randomly chosen element in the dataset if it were randomly labeled according to the class distribution in the dataset. Answer: TRUE Diff: 2 Objective: 3 AACSB: Application of knowledge
16) What is the connection between algorithms and decision trees? Answer: The goal of building a decision tree is to create a training model that can be used to predict the class or value of the target variable by learning simple decision rules inferred from prior data. The decision tree emerges from an algorithmic process of subdividing the data and seeking to minimize impure groupings of data. Diff: 2 Objective: 3 AACSB: Application of knowledge
17) Explain Gini impurity and what it means if a dataset is mixed. Answer: Gini impurity is a way to measure the purity of a collection of observations in a rectangle (set). If a rectangle is very mixed it is "impure" and the Gini impurity is high. As a rectangle becomes more pure, that is, it contains more members of one class than another, the Gini impurity decreases. Diff: 2 Objective: 3 AACSB: Application of knowledge
18) A management accountant is working with data science professionals to develop a decision tree to create predictive analysis of accounts receivable write-offs. In speaking with the management science experts, discuss your knowledge as a domain expertise to help define the functional form of the relationship between feature variables and the target variable. Answer: A management accountant would explain to the management science experts that the model may want to consider such potential feature data variables as accounts receivable aging, customer payment histories, current credit scores, and other timely indicators of creditworthiness in predicting the target variable of estimated bad debts. Diff: 2 Objective: 3 AACSB: Application of knowledge
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Objective 11.4 1) In general, the more complex the model, the greater the chance of: A) overfitting the data B) underfitting the data C) pruning the data D) needing to reduce the amount of data considered Answer: A Diff: 1 Objective: 4 AACSB: Application of knowledge
2) Overfitting results in which of the following? A) information gain B) increased accuracy C) increased purity D) noise capture Answer: D Diff: 1 Objective: 4 AACSB: Application of knowledge
3) A solution to overfitting is: A) iteration B) pruning C) underfitting D) algorithm Answer: B Diff: 1 Objective: 4 AACSB: Application of knowledge
4) To choose among models and to decide where to prune, data scientists ________ the model to assess the predictive performance of the mode A) overfit B) replicate C) train D) cross-validate Answer: D Diff: 2 Objective: 4 AACSB: Application of knowledge
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5) Pruning to a decision tree is done to: A) reduce complexity B) improve predictions C) shrink a dataset D) diminish data leakage Answer: B Diff: 2 Objective: 4 AACSB: Application of knowledge
6) Refining a decision tree model means to: A) reduce its complexity B) increase its complexity C) decrease its cost D) ensure the data represents the business context Answer: D Diff: 2 Objective: 4 AACSB: Application of knowledge
7) The decision tree is a technique for segmenting the target variable into different ________ based on a set of rules. A) regions B) databases C) datasets D) cost pools Answer: A Diff: 2 Objective: 4 AACSB: Application of knowledge
8) Pruning a decision tree will sharpen the model's predictive powers. Answer: TRUE Diff: 1 Objective: 4 AACSB: Application of knowledge
9) Overfitting will most likely increase the predictive power of a model. Answer: FALSE Explanation: Overfitting occurs when a model adheres too closely to the specific details of a dataset such that it captures noise from random chance, making it less effective at accurately classifying observations from a new dataset. Overfitting limits a model's ability to predict future outcomes. Diff: 1 Objective: 4 AACSB: Application of knowledge
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10) The decision tree algorithm simply prepares a linear regression. Answer: FALSE Explanation: The decision tree algorithm attempts to partition the data to separate it into homogenous subsets. Diff: 2 Objective: 4 AACSB: Application of knowledge
11) Reading a decision tree involves a series of "If-then-else" statements. Answer: TRUE Diff: 2 Objective: 4 AACSB: Application of knowledge
12) One disadvantage of a decision tree is its inflexibility. Answer: FALSE Explanation: A distinctive characteristic of decision trees is their flexibility. Diff: 2 Objective: 4 AACSB: Application of knowledge
13) Overfitting is addressed when a model doesn't match the specific details of a dataset too closely and therefore limits its predictive powers. Answer: FALSE Explanation: Overfitting is addressed when a model matches the specific details of a dataset too closely therefore limiting its predictive powers. Diff: 2 Objective: 4 AACSB: Application of knowledge
14) Decision trees are used to divide data into smaller groups by splitting the data at each branch into two or more groups. However, after splitting the data, the tree may need to be pruned. Briefly describe the pruning process and the benefits of pruning. Answer: Pruning removes branches from a decision tree to avoid overfitting the model. Pruning can stop creating new branches when the information usefulness of an additional branch is low. After an iteration of the model, an evaluation of the decision tree may involve more pruning. Diff: 2 Objective: 4 AACSB: Application of knowledge
15) Explain what us meant by recursive partitioning of an algorithm that is seeking to reduce Gini impurity. Answer: An algorithm that evaluates all possible horizontal or vertical cuts of a data set in an attempt to reduce Gini impurity, continues this process over and over (iterations) until all rectangles (formed by the cuts) are pure. The technical term for this process is recursive partitioning. Recursion means to apply a procedure again and again. Diff: 2 Objective: 4 AACSB: Application of knowledge
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Objective 11.5 1) Cross-validation is the process of: A) comparing predictions of different models on a new set of data for which the actual outcomes are already known B) comparing predictions of different models on a new set of data for which the actual outcomes are not yet known C) comparing actual results to predictions to determine significant variances D) comparing information on source documents to a trail of information Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
2) The main point of cross validation is that it: A) tells you to prune the tree B) specifies where to C) gives you an estimate of the performance of your trained model D) calculates an impurity factor of your trained model when used on different data Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
3) All of the following are true regarding full versus pruned decision trees EXCEPT: A) pruning is a technique in machine learning that reduces the size of decision trees B) pruning removing sections of the tree that provide little power to classify instances C) pruning reduces the complexity D) pruning increases overfitting and therefore increases accuracy Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
4) Comparing the performance of a full decision tree to a pruned one could be done via all of the following approaches EXCEPT: A) cross-validation using prediction accuracy B) cross-validation using maximum likelihood value C) using the present value of likely results D) using a technique called testing holdout sample Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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5) Which of the following techniques compares the performance of a full decision tree to its pruned version by utilizing probabilities? A) cross-validation using prediction accuracy B) cross-validation using maximum likelihood value C) A and B both use probabilities D) using a technique called testing holdout sample Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Machine learning utilizes algorithms that can: A) learn from training data B) provide data scientists with rules of thumb to guide their pruning C) consistently produce zero bias D) automatically produce hyperparameters Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
7) Which of the following is true EXCEPT: A) The more complex the model, the lower the bias. B) The less complex the model, the higher the bias. C) The less complex the model the lower the variance. D) The more complex the model the lower the variance. Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
8) Cross-validation techniques could be used to test prediction accuracy. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
9) Cross-validation is used to choose between full and pruned decision trees to improve the prediction accuracy of a model. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
10) Cross Validation techniques allows you to alternate between training and testing an algorithm. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
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11) The goal is to build a fully grown decision tree as that version will be the most accurate. Answer: FALSE Explanation: A fully grown tree is likely to overfit data, leading to poor accuracy on unseen data. Diff: 1 Objective: 5 AACSB: Analytical thinking
12) A feedback loop occurs when predicted outputs are reused to train new versions of the model. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
13) The benefit of pruning is that it avoids overfitting the model to noise. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
14) A hyperparameter is a parameter that can be learned by running the model. Answer: FALSE Explanation: A hyperparameter is a parameter that cannot be learned by running the model. It must be chosen prior to doing the analysis. Diff: 2 Objective: 5 AACSB: Analytical thinking
15) The more complex the model, the higher the bias and the lower the variance. Answer: FALSE Explanation: The more complex the model, the lower the bias and the higher the variance. Inversely, the less complex the model, the higher the bias and the lower the variance. Diff: 2 Objective: 5 AACSB: Analytical thinking
16) When a management accountant and data scientist work with large data sets, can the management accountant rely on data scientists, statistics, and algorithms to make such decisions as to how large to grow a decision tree or if additional pruning is necessary? Explain. Answer: Management accountants must provide important insights into the models that data scientists evaluate. Although a practice such as pruning can help increase the performance of a decision tree model, management accountants may have to develop rules of thumb to determine how far to grow the tree and where to stop growing a tree past certain nodes that have fewer data points. These rules of thumb would be the result of the business insights gained by the management accountant as a result of accounting, finance, and general business experience. Diff: 2 Objective: 5 AACSB: Analytical thinking
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17) Explain the difference between training data sets and test data sets? Answer: Data science model development relies on historical data to predict future outcomes. A subset of that dataset is used to train the model (training data) which means that analysis of the historical training data is performed to identify the attributes that are the best predictors of a class or value. Once the model has been developed, another subset of the historical dataset (test data) is extracted to test the model to see which value the model predicts for that data. Then an analysis compares the predicted values from the test datasets to the actual values in the test data set to evaluate the model for accuracy. A historical dataset can be portioned or partitioned many ways into training and testing data sets. Diff: 2 Objective: 5 AACSB: Analytical thinking
18) How might classification be used in building a model, to assist a company's credit granting decision making process (approving or denying) when a potential customer requests a significant line of credit to purchase goods on account? Answer: In this analysis, the class assigned to a transaction would be either "write-off" or "paid". Historical records would be assigned one of these two classes, based on write-offs taken. A classification model would use part of this historical data to train a model to identify the attributes that are the best predicters of a seriously delinquent accounts that were written off. The remaining data would be used to validate the model and test for accuracy. Diff: 2 Objective: 5 AACSB: Analytical thinking
Objective 11.6 1) Management accountants use their knowledge of account, finance, and general business to judge if the ________ used to make predictions make economic sense. A) feature variables B) target variables C) variances D) impurities Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
2) The ________ plots the false positive rate on the x-axis and the true positive rate on the y-axis. A) confusion matrix B) gini impurity C) Receiver-Operating-Characteristic (ROC) Curve D) hyperparameter Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
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3) All of the following are the of plotting of the Receiver-Operating-Characteristic (ROC) curve EXCEPT: A) plots the false positive rate on the x-axis B) plots the true positive rate on the y-axis C) the closer the curve comes to a 45-degree diagonal the less accurate the test D) the closer the curve comes to a 45-degree diagonal the more accurate the test Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
4) Which of the following can be said about a ROC curve? A) The more accurate the predictions of a model are, the closer the ROC curve will be to a 45-degree diagonal line on the chart. B) The more accurate the predictions of a model are, the closer the ROC curve will go up along the y-axis on and then move horizontally across the top of the chart. C) It only plots the false positives. D) The further the curve away from the left-hand border of the chart and the further it is from the top border of the ROC space, the more accurate the test. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
5) A confusion matrix is a: A) line plot that allows interpretation of the performance of an algorithm B) bar chart that allows interpretation of the performance of management C) table that allows visualization of the performance of an algorithm D) table that allows visualization of the performance of a management Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
6) Both the visualization of the insights of data science models can be achieved by which of the following tools? A) decision tree and ROC curve B) confusion matrix and Gini impurity C) confusion matrix and hyperparameter D) partitions and overfitting Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
757 richard@qwconsultancy.com
7) Which of the following help managers visualize performance of a model by identifying tradeoffs between false positives and true positives? A) Confusion Matrix and Decision Tree B) ROC Curve and Confusion Matrix C) Decision Tree and ROC Curve D) Decision Tree and Gini Impurity Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
8) Management accountants must determine if the results of a model make intuitive sense and reflect underlying economic reality. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
9) The Receiver-Operating-Characteristic curve plots the true positive rate on the x-axis and the false positive rate on the y-axis. Answer: FALSE Explanation: The Receiver-Operating-Characteristic curve plots the false positive rate on the x-axis and the true positive rate on the y-axis. Diff: 2 Objective: 6 AACSB: Analytical thinking
10) The closer Receiver-Operating-Characteristic (ROC) curve comes to the 45-degree diagonal of the ROC space (chart), the less accurate the test. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
11) A confusion matrix shows just the predicted classifications at a given threshold value. Answer: FALSE Explanation: A confusion matrix shows the predicted and actual classifications at a given threshold value. Diff: 1 Objective: 6 AACSB: Analytical thinking
12) The image of visualization of a decision tree is a series of decision nodes and connecting lines. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
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13) Both a ROC Curve and a decision tree can help a manager visualize the performance of a model by identifying the tradeoff between false positives and true positives. Answer: FALSE Explanation: Both a ROC Curve and the Confusion Matrix can help a manager visualize the performance of a model by identifying the tradeoff between false positives and true positives. Diff: 2 Objective: 6 AACSB: Analytical thinking
14) Describe the purpose the Receiver-Operating-Characteristic (ROC) curve and briefly explain how the curve is interpreted. Answer: The ROC curve a commonly used tool that illustrates the diagnostic ability of a binary classifier system. It is a plot of the true positive rate against the false positive rate. The closer the curve follows the left-hand border (y-axis) and then the top border of the ROC space, the more accurate the test. The closer the curve comes to the 45-degree diagonal of the ROC space, the less accurate the test. Diff: 2 Objective: 6 AACSB: Analytical thinking
15) Data analytics can provide results that provide valuable insights. Explain how data visualization may add more value to data analytics. Answer: Data visualization represents data in a graphical context which may make insights such as trends and patterns inherent in the dataset, more explicit to the users. To many decision makers, pattern and trends may not be as noticeable and insightful as text-based data. Data visualization such as scatter charts, line graphs, and 3D visualizations can be highly insightful and more effective as communication tools. The combination of data analytics and data visualization should help managers analytics go a step deeper, identifying or discovering the trends and patterns inherent in the data. Data visualizations, while allowing users to make sense of the data, need not give the complete picture. Visualizations are only as effective as the data used to prepare the visualization in the first place. Feeding visualization engine with incomplete data will render half-baked, obsolete, or erroneous visualization. Diff: 2 Objective: 6 AACSB: Analytical thinking
759 richard@qwconsultancy.com
Objective 11.7 1) To ________ a data science mode, management accountants must balance quantitative and qualitative assessments. A) operationalize B) evaluate C) judge D) construct Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
2) Which of the following is the most important judgement to be made when deploying a model? A) The model is powerful enough to handle less than perfect data. B) The data is reasonably adequate and accurate. C) All data must be verified as accurate. D) The volume of data is adequate Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
3) Deployment of a data science model is: A) working with the model to understand its potential B) applying the model for prediction using a new data C) training the model D) evaluating the magnitude of likelihood values and feature variables Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
4) The concept of deployment in data science refers to the application of a model for prediction using a new data. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
5) How can accountants work to operationalize a data science model to be used to support decision making? Answer: An important role that accountants play is to help managers understand the critical inputs to be monitored and evaluated in order to implement effective data science models. Accountants must also help bring about the critical combination of quantitative and qualitative judgment when utilizing data and the model so as to reach conclusions that add value. Diff: 2 Objective: 7 AACSB: Analytical thinking
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6) Explain the connection that data analytics creates between data, information, and knowledge. Answer: Data analytics through its ability to process big data gives companies the ability to transform raw data into information that becomes strategic knowledge at adds value. Diff: 2 Objective: 7 AACSB: Analytical thinking
7) Explain how Is the deployment of a data science model and the use of big data and its related technologies can be both an opportunity and a threat to the management accounting profession as business partners. Answer: The deployment of this data and the technologies that exploit it present both opportunities and threats to the management accounting profession. Accountants have an opportunity to use big data and related technologies to deploy solutions and tools that help decisions makers create value. If management accountants are at the leading edge of the data analytics movement, they can be valuable partners, using data to gain insights into business trends and the operations and taking on a more strategic role. Data analytics can also help enhance an organization's risk management activities. These technologies do present a risk to management accountants as machine learning, AI, and algorithms could replace human accountants however, management accounting can progress to higher value-added activities by using and exploiting the power of big data. For example, management accountants have a background of working with source data and financial information and can help establish rules to assure high levels of trust in the quality and source of the data. There are also data concerns from a regulatory risk angle that management accountants should help mitigate around issues such as data privacy. Diff: 2 Objective: 7 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 12 Decision Making and Relevant Information Objective 12.1 1) A decision model involves a(n): A) informal method of making a choice at the lower level management using sensitivity analysis B) formal method of making a choice that often involves both quantitative and qualitative analyses C) informal method of making a choice which is discussed in detailed in the financial reports D) formal method of making a choice at the lower level management using advanced management techniques such as balance scorecard Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Feedback regarding previous actions may affect: A) future predictions B) implementation of the decision C) the decision model D) All of these answers are correct. Answer: D Diff: 2 Objective: 1
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AACSB: Analytical thinking
3) Place the following steps from the five-step decision process in order: A= B= C= D= E=
Obtain information including historical costs Evaluate performance to provide feedback Make decisions choosing among alternatives Make predictions about the future Identify the problem and uncertainties
A) A, E, D, B, C B) E, A, D, B, C C) E, A, D, C, B D) D, C, B, A, E Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
762 richard@qwconsultancy.com
4) The formal process of choosing between alternatives is known as a(n): A) relevant model B) decision model C) alternative model D) prediction model Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
5) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.
Demand Selling price Incremental cost per unit
Current 79,000 units $8.75 $5.80
Projected 72,000 units $9.50 $5.80
If the price increase is implemented, operating profit is projected to: A) increase by $33,350 B) decrease by $5250 C) increase by $5250 D) decrease by $7000 Answer: A Explanation: A) Change in operating income = [72,000 × ($9.50 - $5.80)] - [79,000 × ($8.75 - $5.80)] = Increase of $33,350 Diff: 2 Objective: 1 AACSB: Application of knowledge
6) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.
Demand Selling price Incremental cost per unit
Current 76,000 units $8.75 $4.80
Projected 69,000 units $9.50 $4.80
Would you recommend the 75-cent price increase? A) No, because demand decreased. B) No, because the selling price increases. C) Yes, because contribution margin per unit increases. D) Yes, because operating profits increase. Answer: D Diff: 2 Objective: 1 AACSB: Application of knowledge
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7) When using the five-step decision process, which one of the following steps should be done last? A) obtain information B) choose an alternative C) evaluation and feedback D) implementing the decision Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
8) When using the five-step decision process, which one of the following steps should be done first? A) obtain information B) choose an alternative C) evaluation and feedback D) implementing the decision Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
9) A decision model is an informal method for making a choice, using simpler methods like surveying. Answer: FALSE Explanation: A decision model is a formal method of making a choice that often involves both quantitative and qualitative analyses. Diff: 1 Objective: 1 AACSB: Analytical thinking
10) A decision model is a formal method of making a choice, and can include quantitative as well as qualitative analysis. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
11) Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions. Answer: FALSE Explanation: Historical costs may be helpful in making future predictions, but are not relevant costs for decision making. Diff: 1 Objective: 1 AACSB: Analytical thinking
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12) Explain the five-step decision process that managers can use to make decisions. Answer: The five step decision process is (a) Identify the problem and uncertainties, (b) Obtain information, (c) Make predictions, (d) Make decisions by choosing among alternatives, and (e) Implement the decision, evaluate performance to provide feedback. Identifying the problem and uncertainties involves finding risks, uncertainties, or other failures associated with a business which will affect the internal and external prospects of the firm. Obtaining information involves collecting all data pertinent to the decision situation, both quantitative and qualitative, and determining which information is relevant to the decision, and determining which alternatives are being considered. Making predictions involves using the information obtained above and attempting to predict what the future costs and benefits will be for each of the various alternatives. Choosing an alternative involves comparing the predicted benefits of each alternative with each of the predicted costs (as well as other non-quantitative factors), and selecting an alternative that maximizes the difference between the expected benefits and the expected costs. Implementing the decision involves actually doing the alternative selected above and making all the necessary changes in operations to support the decision. Evaluating the performance of the decision involves learning from the results of the decision and seeing which predictions were accurate and determining how to avoid any difficulties encountered in either the decision-process or the implementation. Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 12.2 1) Which of the following is NOT true with regards to relevant costs and relevant revenues? A) They are sunk costs and historical revenues. B) They are expected costs and expected revenues. C) They occur in the future. D) The differ among alternative courses of action. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Which of the following statements is true with regards to relevant information? A) When judging alternatives, differences between expected future results are relevant to a decision. B) Past (historical) costs relevant when making decisions. C) All expected future revenues and expected future costs are relevant when making decisions. D) A heavier weight should be given to quantitative nonfinancial factors than to qualitative factors. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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3) Sunk costs: A) are future costs for decision making B) are avoidable costs C) are irrelevant for decision making D) are foregone contribution by not using a limited resource in its next-best alternative use Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
4) Sunk costs: A) are relevant B) are differential C) have future implications D) are ignored when evaluating alternatives Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
5) Which of the following is an example of sunk costs? A) book value of equipment B) cost of purchasing raw materials C) cost of an alternative investment D) wages payable to skilled laborers to make a product Answer: A Diff: 1 Objective: 2 AACSB: Application of knowledge
6) In evaluating different alternatives, it is useful to concentrate on: A) variable costs B) fixed costs C) total costs D) relevant costs Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
7) Which of the following costs always differ among future alternatives? A) fixed costs B) historical costs C) relevant costs D) variable costs Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
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8) Management is considering two alternatives. Alternative A has projected revenue per year of $100,000 and costs of $70,000 while Alternative B has revenue of $100,000 and costs of $60,000. Both projects require an initial investment of $250,000 of which $75,000 has already been set aside and will be used as a down payment on the project that is chosen. There are also other qualitative factors that management must consider before making a final choice. Which of the following statements is correct about relevant costs and relevant revenues? A) The sunk cost of $75,000 is relevant. B) The projected revenues are relevant to the decision. C) The initial investment of $250,000, the projected revenues, and the projected costs are all relevant. D) The only relevant item are the costs as they differ between alternatives. Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
9) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $9000 to make it road worthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $9000 cash. Sherry estimated the following costs for the two cars:
Acquisition cost Repairs Annual operating costs (Gas, maintenance, insurance)
Trail Blazer $28,000 $9000
Grand Cherokee $9000 —
$2480
$1600
The cost NOT relevant for this decision is the: A) acquisition cost of the Trail Blazer B) acquisition cost of the Grand Cherokee C) repairs to the Trail Blazer D) annual operating costs of the Grand Cherokee Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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10) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $11,000 to make it road worthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $11,000 cash. Sherry estimated the following costs for the two cars:
Acquisition cost Repairs Annual operating costs (Gas, maintenance, insurance)
Trail Blazer $30,000 $11,000
Grand Cherokee $11,000 —
$2480
$2000
What should John do? What are his savings in the first year? A) Buy the Grand Cherokee; $13,000 B) Fix the Trail Blazer; $5980 C) Buy the Grand Cherokee; $480 D) Fix the Trail Blazer; $9813 Answer: C Explanation: C) Trail Blazer ($11,000 + $2480) - Grand Cherokee ($11,000 + $2000) = $480 cost savings when choosing the Grand Cherokee option Diff: 2 Objective: 2 AACSB: Application of knowledge
11) A relevant revenue is revenue that is a(n): A) past revenue that differs among alternative courses of action B) future revenue that differs among alternative courses of action C) in-hand revenue D) earned revenue Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
12) A relevant cost is a cost that is a(n): A) future cost B) past cost C) sunk cost D) non-cash expense Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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13) Which of the following is true of relevant information? A) all fixed costs are relevant B) all Future revenues and expenses are relevant C) future D) all fixed costs are not relevant Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
14) Quantitative factors: A) include financial information, but not nonfinancial information B) include both financial and nonfinancial information C) are always relevant when making decisions D) include employee morale Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
15) All of the following are examples of quantitative factors EXCEPT: A) cost of direct materials B) budget for marketing activities C) product development time D) employee morale Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
16) Which of the following is true of historical costs? A) They are useful for making future predictions. B) They are relevant for decision making. C) They are always accounted as opportunity costs. D) They cannot be fixed costs. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
17) When making decisions: A) qualitative factors are not relevant as they can't be quantified B) more weight should be given to quantitative factors C) appropriate weight must be given to both quantitative and qualitative factors D) quantitative factors are relevant but qualitative factors are rarely relevant Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
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18) Employee morale at Dos Santos, Inc., is very high. This type of information is an example of: A) qualitative factors B) quantitative factors C) irrelevant factors D) financial factors Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
19) Each of the following are true of relevant information EXCEPT: A) past costs are helpful when making predictions but not relevant when making decisions B) different alternatives can be compared by examining differences in expected future revenues and expected total future costs C) significant past investment amounts are relevant to decision making D) not all future revenues and expenses are relevant Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
20) One-time-only special orders should only be accepted if: A) incremental revenues exceed incremental costs B) differential revenues exceed variable costs C) incremental revenues exceed fixed costs D) total revenues exceed total costs Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
21) When deciding to accept a one-time-only special order from a wholesaler, management should: A) consider the sunk costs and opportunity costs B) not consider the special order's impact on future prices of their products C) determine whether excess capacity is available D) verify past design costs for the product Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
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22) When there is an excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price if: A) incremental revenues exceed incremental costs B) additional fixed costs is incurred to accommodate the order C) the company placing the order is in the same market segment as your current customers D) incremental revenue equals incremental operating income Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
23) Which of the following is true of special order pricing? A) It represents a short-run pricing decision. B) The special pricing should not be set below the regular price. C) It represents a long-term pricing decision. D) The special price should assure that incremental revenue covers fixed costs. Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
24) A product cost is composed of the following: Direct materials Direct labor Manufacturing overhead
$10 $1 $8
The product sells for $65 and a 10% commission is paid to a salesperson for every unit sold. Management accountants also estimate that storage cost per unit averages $0.25 per unit. What is the full cost of the product? A) $11 B) $19 C) $25.75 D) $25.50 Answer: C Explanation: C) $10 + $1 + $8 + ($65 × 10%) + $0.25 = $25.75 Diff: 2 Objective: 2 AACSB: Analytical thinking
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25) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labor Manufacturing support Marketing costs Fixed costs: Manufacturing support Marketing costs Total costs Markup (40%) Targeted selling price
$120 100 115 85 155 55 630 252 $882
What is the full cost of the product per unit? A) $420 B) $882 C) $630 D) $252 Answer: C Explanation: C) Full cost = $120 + $100 + $115 + $85 + $155 + $55 = $630 Diff: 3 Objective: 2 AACSB: Application of knowledge
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26) Red Rose Manufacturers Inc. is approached by a potential new customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labor Manufacturing support Marketing costs Fixed costs: Manufacturing support Marketing costs Total costs Markup (40%) Targeted selling price
$160 90 115 65 135 55 620 248 $868
What is the contribution margin per unit? A) $190 B) $248 C) $438 D) $620 Answer: C Explanation: C) Contribution margin per unit = $868 - ($160 + $90 + $115 + $65) = $438 Diff: 3 Objective: 2 AACSB: Application of knowledge
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27) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labor Manufacturing support Marketing costs Fixed costs: Manufacturing support Marketing costs Total costs Markup (45%) Targeted selling price
$120 90 155 75 175 65 680 306 $986
For Red Rose Manufacturers Inc., what is the minimum acceptable price of this special order? A) $440 B) $306 C) $450 D) $680 Answer: A Explanation: A) Minimum acceptable price = $120 + $90 + $155 + $75 = $440 Diff: 3 Objective: 2 AACSB: Analytical thinking
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28) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labor Manufacturing support Marketing costs Fixed costs: Manufacturing support Marketing costs Total costs Markup (40%) Targeted selling price
$170 70 125 75 175 55 670 268 $938
What is the change in operating profits if the one-time-only special order for 1000 units is accepted for $580 a unit by Red Rose? A) $140,000 increase in operating profits B) $139,330 increase in operating profits C) $139,330 decrease in operating profits D) $140,000 decrease in operating profits Answer: A Explanation: A) Contribution margin per unit = $580 - ($170 + $70 + $125 + $75) = $140 Change in operating profit = 1000 × $140 = $140,000 increase Diff: 3 Objective: 2 AACSB: Analytical thinking
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29) Excellent Manufacturers Inc. has a current production level of 20,000 units per month. Unit costs at this level are: Direct materials Direct labor Variable overhead Fixed overhead Marketing - fixed Marketing/distribution - variable
$0.29 0.45 0.16 0.22 0.21 0.44
Current monthly sales are 18,000 units. Jax Company has contacted Excellent about purchasing 1600 units at $2.30 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted? A) $5584.00 increase in operating profits B) $5584.00 decrease in operating profits C) $2240.00 increase in operating profits D) $2240.00 decrease in operating profits Answer: C Explanation: C) Manufacturing cost per unit = $0.29 + $0.45 + $0.16 = $0.9 Increase in operating profits = 1600 × ($2.30 - $0.9) = $2240.00 increase Diff: 3 Objective: 2 AACSB: Application of knowledge
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30) Snapper Tool Company has plenty of excess capacity to accept a special order. Shown below is the special order "what-if" analysis. Which of the following is the correct decision and reason?
Sales variable costs: Manufacturing Selling and administrative Contribution margin Fixed cost Operating profit
Status Quo $128,000
With Special Order $133,000
51,200
54,400
25,600
26,600
$51,200 19,200
$52,000 19,200
$32,000
$32,800
A) Yes, since the goal is to fill capacity as much as possible to keep fixed overhead variances as low as possible. B) No, the company will only break even. C) No, since only the employees will benefit from this in that they will earn more overtime. D) Yes, since operating profits will most likely increase. Answer: D Diff: 3 Objective: 2 AACSB: Application of knowledge
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31) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labor
$552 370
Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%) Targeted selling price
60 130 1112 556 $1668
Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $68 per unit. The average marketing cost of Kitchens Sales' product is $172 per order. For Kitchens, what is the full cost of the one-time-only special order? A) $1044 B) $1180 C) $1112 D) $1352 Answer: B Explanation: B) Full cost = $552 + $370 + $60 + $130 + $68 = $1180 Diff: 2 Objective: 2 AACSB: Application of knowledge
778 richard@qwconsultancy.com
32) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labor
$546 360
Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%) Targeted selling price
56 128 1090 545 $1635
Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $63 per unit. The average marketing cost of Kitchens Sales' product is $171 per order. Other than price, what other items should Kitchens Sales consider before accepting this one-time-only special order? A) reaction of shareholders B) reaction of existing customers to the lower price offered to Mr. Louis Cifer C) demand for cherry cabinets D) price is the only consideration Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
779 richard@qwconsultancy.com
33) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labor
$548 360
Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (50%) Targeted selling price
60 128 1096 548 $1644
Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $63 per unit. The average marketing cost of Kitchens Sales' product is $179 per order. Which of the following costs is NOT considered to calculate the minimum acceptable price of a one-time-only special order? A) marketing costs B) direct material costs C) indirect material costs D) special design costs Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
34) An example of a qualitative factor for the decision-making process is: A) customer satisfaction as determined by written responses given by customers to survey questions B) employee wages paid this week C) number of clicks on a web site during a month D) manufacturing overhead allocated to WIP Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
780 richard@qwconsultancy.com
35) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $180 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's policy to add a 55% markup to full costs. Dantley's Furniture is invited to bid on a one-time-only special order to supply 120 rustic tables. What is the lowest price Dantley's Furniture should bid on this special order? A) $16,200 B) $17,280 C) $21,600 D) $29,160 Answer: B Explanation: B) $180 × 80% × 120 tables = $17,280 Diff: 2 Objective: 2 AACSB: Application of knowledge
36) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $220 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's policy to add a 50% markup to full costs. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Dantley's Furniture Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Dantley's Furniture should bid on this long-term order? (Round answer to the nearest dollar.) A) $154 B) $176 C) $220 D) $330 Answer: D Explanation: D) $220 + ($220 × 50%) = $330 Diff: 2 Objective: 2 AACSB: Application of knowledge
781 richard@qwconsultancy.com
37) Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are: Direct materials Direct labor Variable overhead Fixed overhead Marketing—fixed Marketing/distribution—variable
$6.00 5.00 2.00 1.00 8.00 4.60
Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about purchasing 2300 units at $26.00 each. Current sales would not be affected by the one-time-only special order. What is Zephram's change in operating profits if the one-time-only special order is accepted? A) $19,320 increase B) $26,680 increase C) $29,900 increase D) $40,480 increase Answer: A Explanation: A) ($6.00 + $5.00 + $2.00 + $4.60) = $17.60 ($26.00 - $17.60) × 2300 = $19,320 increase Diff: 3 Objective: 2 AACSB: Application of knowledge
38) Which of the following is NOT true about one-time-only special orders? A) special orders would be accepted if they result in an increase in the contribution margin regardless of capacity and long-term implications B) along with other criteria, there must be excess capacity to accept an order C) along with other criteria, there must not be significant long-term negative implications of accepting a special order D) the impact on operating income of the acceptance of a special-order must be analyzed by management before making a final decision Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
39) Which of the following are potential problems managers face in relevant-cost analysis? A) including only relevant costs and relevant revenues in an analysis B) incorrect assumptions such as all variable costs are relevant and all fixed costs are not C) considering past historical costs when making predictions about future costs D) examining differences in expected total future revenues and expected total future costs among alternatives Answer: B Diff: 1 Objective: 2 AACSB: Analytical thinking
782 richard@qwconsultancy.com
40) Which of the following costs is irrelevant in the decision making of a special order when there is idle production capacity - enough excess capacity to accept the order? A) fixed manufacturing costs B) units sold C) material cost D) labor hours incurred Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
41) Which of the following is an appropriate step when identifying relevant costs to make a business decision? A) assuming all variable costs are relevant B) assuming all fixed costs are irrelevant C) separating total costs into business function costs and full costs D) separating total costs into variable and fixed components Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
42) The best way to avoid misidentification of relevant costs is to focus on: A) expected future costs that differ among the alternatives B) historical costs C) unit fixed costs D) total unit costs Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
43) Relevant costs are: A) sunk costs B) expected future costs C) actual present costs D) historical costs Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
783 richard@qwconsultancy.com
44) Direct materials are $600, direct labor is $150, variable overhead costs are $450, and fixed overhead costs are $300. The cost of one unit is: A) $450 B) $750 C) $1200 D) $1500 Answer: D Explanation: D) Incremental cost of one unit = $600 + $150 + $450 + $300 = $1500 Diff: 2 Objective: 2 AACSB: Application of knowledge
45) Unit cost data can most mislead decisions by: A) not computing fixed overhead costs B) computing labor and materials costs only C) computing administrative costs D) not computing unit costs at the same output level Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
46) McMurphy Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 13,000 units of this part are as follows: Direct materials Direct labor
$85,000 125,000
Variable factory overhead Fixed factory overhead Total costs
60,000 135,000 $405,000
Of the fixed factory overhead costs, $59,000 is avoidable. Conners Company has offered to sell 13,000 units of the same part to McMurphy Corporation for $36 per unit. Assuming there is no other use for the facilities, Schmidt should: A) make the part, as this would save $14 per unit B) buy the part, as this would save $14 per unit C) buy the part, as this would save the company $182,000 D) make the part, as this would save $11 per unit Answer: D Explanation: D) Avoidable costs total $329,000 = $85,000 + $125,000 + $60,000 + $59,000. $36 - ($329,000 / 13,000) = $11 Diff: 3 Objective: 2 AACSB: Analytical thinking
784 richard@qwconsultancy.com
47) Striker 44 Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 12,000 units of this part are as follows: Direct materials Direct labor
$89,000 125,000
Variable factory overhead Fixed factory overhead Total costs
59,000 139,000 $412,000
Of the fixed factory overhead costs, $58,000 is avoidable. Assuming no other use of their facilities, the highest price that McMurphy should be willing to pay for 12,000 units of the part is: A) $412,000 B) $273,000 C) $331,000 D) $353,000 Answer: C Explanation: C) $89,000 + $125,000 + $59,000 + $58,000 = $331,000 Diff: 3 Objective: 2 AACSB: Analytical thinking
48) Past costs themselves are always irrelevant when making decisions. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
49) Equal weight must be given to qualitative factors and quantitative nonfinancial factors while making decisions. Answer: FALSE Explanation: Appropriate, not equal, weight must be given to qualitative factors and quantitative nonfinancial factors while making decisions. Diff: 1 Objective: 2 AACSB: Analytical thinking
50) The rent paid for an already existing facility is an example of a sunk cost. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
51) A cost may be relevant for one decision, but NOT relevant for a different decision. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
785 richard@qwconsultancy.com
52) Revenues that remain the same for two alternatives being examined are relevant revenues. Answer: FALSE Explanation: Revenues that remain the same between two alternatives are irrelevant for that decision since they do not differ between alternatives. Diff: 1 Objective: 2 AACSB: Analytical thinking
53) Sunk costs are irrelevant to decision making. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
54) Marketing costs will be an irrelevant cost in the decision making of a one-time-only special order. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
55) A sunk cost is a relevant cost in a decision making. Answer: FALSE Explanation: Sunk costs are irrelevant to decision making because a decision cannot change something that has already happened. Diff: 1 Objective: 2 AACSB: Analytical thinking
56) Quantitative factors, such as direct material costs, are outcomes that are measured in numerical terms. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
57) Qualitative factors are outcomes that can be easily measured in numerical terms, such as the costs of direct labor. Answer: FALSE Explanation: Qualitative factors are outcomes that are difficult to measure accurately in numerical terms. Employee morale is an example. Diff: 1 Objective: 2 AACSB: Analytical thinking
786 richard@qwconsultancy.com
58) Business function costs are the sum of all variable and fixed costs in all business functions of the value chain. Answer: FALSE Explanation: Business function costs are the sum of all variable and fixed costs in a particular business function of the value chain. Diff: 1 Objective: 2 AACSB: Analytical thinking
59) Qualitative factors, as well as relevant revenues and relevant costs need to be considered when selecting among alternatives. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
60) Past costs are also called sunk costs because they are unavoidable and cannot be changed no matter what action is taken. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
61) Full costs of a product include variable and fixed costs in a particular business function in the value chain. Answer: FALSE Explanation: Full costs of a product include variable and fixed costs for all business functions in the value chain. Diff: 1 Objective: 2 AACSB: Analytical thinking
62) For one-time-only special orders, fixed costs may be relevant but NOT variable costs. Answer: FALSE Explanation: For one-time-only special orders, variable costs may be relevant but not fixed costs. Diff: 1 Objective: 2 AACSB: Analytical thinking
63) In the decision making of a one-time-only special order, it is assumed that accepting the special order is not expected to affect the selling price to other customers. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
787 richard@qwconsultancy.com
64) When there is idle capacity or when sales are low, you can accept special orders as long as the incremental revenue surpasses incremental costs. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
65) Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders. Answer: FALSE Explanation: Since long-term costs are relevant for regular orders and short-term costs are relevant for one-time-only special orders, the relevant costs differ. Diff: 1 Objective: 2 AACSB: Analytical thinking
66) Qualitative factors are important in the decision-making process even though they cannot be measured numerically. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
67) In a one-time special order situation, if the price offered by the buyer is less than the absorption cost per unit, the special order may still be profitable since absorption costs include allocated fixed manufacturing overhead. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
68) In relevant-cost analysis, managers should not consider all variable as relevant and all fixed costs as irrelevant. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
69) An incremental product cost is generally a fixed cost. Answer: FALSE Explanation: An incremental product cost is generally a variable cost. Diff: 1 Objective: 2 AACSB: Analytical thinking
70) If Option 1 costs $120 and Option 2 costs $90, then the differential cost is $30. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
788 richard@qwconsultancy.com
71) Variable cost per unit is the best product cost to use for one-time-only special order decisions. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
72) Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two alternative proposals related to these parts. The first proposal is for buying Part A. This would free up some of the plant space for the manufacture of more of Part B and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed. The second proposal is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero. Required: Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently. a. Total variable manufacturing overhead, Part A b. Total variable manufacturing overhead, Part B c. Cost of old equipment for manufacturing Part B d. Cost of new equipment for manufacturing Part B e. Total variable selling and administrative costs f. Sales revenue of the product g. Total variable costs of assembling final products h. Total direct manufacturing materials, Part A i. Total direct manufacturing materials, Part B j. Total direct manufacturing labor, Part A k. Total direct manufacturing labor, Part B Answer: Proposal 1 Proposal 2 a. R I b. R R c. I I d. I R e. R I f. R I g. R I h. R I i. R I j. R I k. R R Diff: 2 Objective: 2 AACSB: Application of knowledge
789 richard@qwconsultancy.com
73) Swan Manufacturing is approached by a customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Direct materials $1,825 Direct labor 900 Variable manufacturing support 1,300 Fixed manufacturing support 3,000 Total manufacturing costs $7,025.00 Markup (50%) 3,512.50 Targeted selling price $ 10,537.50 Swan Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit if the marketing costs is $3,000? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Swan Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of $5,400 per unit? Why or why not? Answer: a. Full cost of the product = $10,025 b. Contribution margin = $6,512.50 = Selling price $10,537.50 - Variable costs ($1,800 + $900 + $1,300). c. Relevant costs for decision making are those costs that differ between alternatives, which in this situation are the incremental costs. The incremental costs total $4,025 = Variable costs ($1,800+ $900 + $1,300). d. The minimum acceptable price is $4,025 = Variable costs (($1,800 + $900 + $1,300), which are the incremental costs in the short term. e. Yes, because this price is greater than the minimum acceptable price of this special order determined in (d). Diff: 3 Objective: 2 AACSB: Application of knowledge
790 richard@qwconsultancy.com
74) Loft Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (60%) Targeted selling price
$50.00 62.50 30.00 37.50 180.00 108.00 $288.00
Loft Lake Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry rather than oak, so direct material costs will increase by $15 per unit. Required: a. For Loft Lake Cabinets, what is the minimum acceptable price of this one-time-only special order? b. Other than price, what other items should Loft Lake Cabinets consider before accepting this one-time-only special order? c. How would the analysis differ if there was limited capacity? Answer: a. $157.70 = Variable costs ($50 + $62.50 + $30) + $15 additional cost for cherry. b. Loft Lake Cabinets should also consider the impact on current customers when these customers hear that another customer was offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price. c. Currently, the incremental costs total $157.50. If additional capacity is needed to process this order, these incremental costs will increase by the cost of adding capacity. Diff: 3 Objective: 2 AACSB: Application of knowledge
791 richard@qwconsultancy.com
75) Fairhaven Company needs 1,000 motors in its manufacture of boats. It can buy the motors from Asian Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following costs per unit: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total
$ 600 250 200 350 $1,400
If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied will not be avoided. Required: a. Should the company make or buy the motors? b. What additional factors should Southwestern consider in deciding whether or NOT to make or buy the motors? Answer: a. Cost to buy the part: (1,000 × $1,250) $1,250,000 Relevant costs to make: Variable costs: Direct materials (1,000 × $600) $600,000 Direct manufacturing. labor (1,000 × $250) 250,000 Variable manufacturing overhead (1,000 × $200) 200,000 Total $1,050,000 Avoidable fixed costs: ($350 × 1,000 × 0.30) 105,000 1,155,000 Savings if part is manufactured $ 95,000 b. Management should consider several qualitative factors in deciding whether to make or buy the motors. ∙ Quality controls - The company's ability to manufacture quality motors versus that of the supplier. ∙ Delivery - Can they make them when needed versus Jinx delivering them when needed? ∙ Reputation - What is the overall reputation of Jinx? ∙ Term - Is Jinx willing to make long-term commitments for delivery of the motors? ∙ Facilities - What are the opportunity costs of using the space and equipment to manufacture other items? Diff: 3 Objective: 2 AACSB: Application of knowledge
792 richard@qwconsultancy.com
76) Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products. Required: a. Prepare an incremental analysis for the decision to make or buy the wheels. b. Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer. Answer: a. Make Buy Direct materials (200,000 × $3.00) $600,000 -0Direct labor (200,000 × $3.60) 720,000 -0Variable manufacturing costs ($720,000 × 30%) 216,000 -0Purchase price (200,000 × $8) -01,600,000 Total annual cost $1,536,000 $1,600,000 b. The wheels should continue to be manufactured by Sarasota Bicycles. The company's net income would decrease $64,000 by purchasing the wheels. Diff: 3 Objective: 2 AACSB: Application of knowledge
77) Explain what revenues and costs are relevant when choosing among alternatives. Answer: Future amounts that differ among alternatives are considered relevant. Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. For example, the prepaid insurance costs paid by a company is not relevant is decision making since the cost has already incurred and cannot be eliminated. Diff: 2 Objective: 2 AACSB: Analytical thinking
78) Explain why sunk costs are not considered relevant when choosing among alternatives with example. Answer: Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. Sunk costs by definition are those costs that have already been committed, cannot be changed, and will never differ among alternatives. Some of the fixed costs such as wages for existing employees and existing rental expenses are irrelevant in decision making since a company cannot recover these costs whether the company accept or reject an alternative. Diff: 2 Objective: 2 AACSB: Analytical thinking
793 richard@qwconsultancy.com
79) Assume you are a sophomore in college and are committed to earning an undergraduate degree. Your current decision is whether to finish college in four consecutive years or take a year off and work for some extra cash. a. Identify at least two revenues or costs that are relevant to making this decision. Explain why each is relevant. b. Identify at least two costs that would be considered sunk costs for this decision. c. Identify at least two opportunity costs for this decision. d. Comment on at least one qualitative consideration for this decision. Answer: a. Relevant revenues/costs are those that differ between the alternatives of continuing with college or taking a year off from college and working. Relevant costs for continuing your college education without a break include: 1. Earnings lost next year due to the hours you are not able to work because of classes and homework. 2. As a result of graduating a year earlier, higher wages will be earned a year earlier as well. b. Sunk costs for this decision include: 1. Amounts paid for college tuition and books during the past two years. 2. Accommodation costs c. Opportunity costs for this decision: 1. Earnings from the employment 2. Return from the investment of tuition fees and other college expenses d. A qualitative consideration would include having different activities and priorities than your friends who are students, graduating later than students who started college the same time you did, and retaining information over the year off from school. Diff: 3 Objective: 2 AACSB: Application of knowledge
794 richard@qwconsultancy.com
80) A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated decor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers. Identify for the restaurant management a. those costs that are relevant to this decision, b. those costs that are not differential, c. and qualitative considerations. Answer: For the decision of whether to update the restaurant's image: a. Relevant costs include a one-time cost of the renovation for the updated image, and a change in future sales which includes an increase in sales due to the updated image, decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed or having a limited serving area during renovation. b. Costs that are not differential include replacing the menus and the carpet since they need to be replaced whether the image is updated or not. c. Qualitative considerations include whether the restaurant will lose that cozy appeal it currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and new customers may not be the type of customer they want to attract. Diff: 3 Objective: 2 AACSB: Application of knowledge
81) Are relevant revenues and relevant costs the only information needed by managers to select among alternatives? Explain using examples. Answer: No, relevant revenues and costs provide a financial analysis but do not take into consideration qualitative factors. Qualitative factors are outcomes that are difficult to measure accurately in numerical terms. In a make-or-buy decision, examples of qualitative issues include the supplier's ability to meet expected quality and delivery standards, and the likelihood that suppliers increase prices of the components in the future. While making a decision, appropriate weight must be given to qualitative factors and quantitative nonfinancial factors. Diff: 2 Objective: 2 AACSB: Analytical thinking
82) Under what conditions might a manufacturing firm sell a product for less than its long-term price? Why? Answer: The price for a short-term order may be less than the price offered to a long-term customer. If a firm has excess capacity that is idle, it is more profitable for the firm to accept a special order for a price below the long-run price than it is to let the capacity sit idle. In addition, the firm may use this strategy for market penetration and to obtain greater market share. Also, the sale of the product for less than its long-term price should not have an adverse impact on the existing customers. Diff: 2 Objective: 2 AACSB: Analytical thinking
795 richard@qwconsultancy.com
Objective 12.3 1) Relevant data in a make-or-buy decision of a part include which of the following? A) the portion of fixed costs that would be incurred whether the product is made or purchased B) some portion of fixed costs that would be saved if the product is outsourced C) annual plant insurance costs D) management consultant fees to restructure the organization framework of the company and improve overall strategic planning Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
2) In a make-or-buy decision, which of the following would NOT be relevant? A) the quality of the product B) the portion of fixed costs that could be eliminated by outsourcing C) a lease that could be discontinued upon accepting the "buy proposal" D) property taxes on the plant that will still be necessary even if the product is outsourced Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
3) An incremental cost is: A) an additional total cost for an activity B) a cost that has already been incurred C) the difference in total costs between two alternatives D) always related to fixed costs Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
4) Which of the following is a relevant cost to be included in a make-or-buy decision? A) fixed salaries that will not be incurred if the part is outsourced B) pension costs to the current employees C) increase in the cost of repairing of all equipment of the firm D) material-handling costs that cannot be eliminated even if the product is outsourced Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
796 richard@qwconsultancy.com
5) Which of following is a firm's risk of outsourcing the production of a part? A) fluctuation in the manufacturing costs B) leakage of intellectual property C) increased need of skilled workers D) scarcity of indirect labor Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
6) Which of the following minimizes the risks of outsourcing? A) the use of short-term contracts that specify price B) shifting the firm's responsibility for on-time delivery to the supplier C) building close partnerships with the supplier D) increasing the contract price Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
7) The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit. In 2014, Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision: A) incremental revenues are $4 per unit B) incremental costs are $2 per unit C) net relevant costs are $2 per unit D) differential costs are $4 per unit Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge
8) When evaluating a make-or-buy decision, which of the following needs to be considered? A) alternative uses of the production capacity B) the original cost of the production equipment C) pension costs to the current employees D) material-handling costs that cannot be eliminated Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
797 richard@qwconsultancy.com
9) For make-or-buy decisions, a supplier's ability to maintain secrecy of intellectual property is considered a(n): A) qualitative factor B) irrelevant cost C) differential factor D) opportunity cost Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
10) Vien's Fashion Company retains the services of Kennywood Textiles to perform stain control treatments on its women's dresses. This is practice is known as: A) insourcing B) outsourcing C) fragmentation D) in-housing Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
11) Producing on schedule, quality of supplier products or services, reliability, along with costs are all important considerations when: A) when deciding to insource B) making outsourcing decisions C) when executing right-shoring D) making decisions based on quantitative factors Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
12) Which of the following would be considered in a make-or-buy decision? A) fixed costs that will still be incurred B) prepaid rent expense for warehousing finished goods and inventories C) potential rental income from space occupied by the production area D) unchanged supervisory costs Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
798 richard@qwconsultancy.com
13) W.T. Ginsburg Engine Company manufactures part ACT30107 used in several of its engine models. Monthly production costs for 1100 units are as follows:
Direct materials Direct labor Variable overhead costs Fixed factory overhead Total costs
$44,000 9500 33,500 19,000 $106,000
It is estimated that 6% of the fixed overhead costs assigned to ACT30107 will no longer be incurred if the company purchases ACT30107 from the outside supplier. W.T Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $96.75 per unit. If the company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total: A) $88,140 B) $87,000 C) $106,000 D) $107,140 Answer: A Explanation: A) Monthly avoidable costs = $44,000 + $9500 + $33,500 + ($19,000 × 6%) = $88,140 Diff: 2 Objective: 3 AACSB: Analytical thinking
799 richard@qwconsultancy.com
14) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models. Monthly production costs for 1000 units are as follows: Direct materials Direct labor Variable overhead costs Fixed factory overhead Total costs
$45,000 9500 29,500 20,000 $104,000
It is estimated that 7% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $94.75 per unit. If W.T. Ginsburg Engine Company purchases 1000 ACT31107 parts from the outside supplier per month, then its monthly operating income will: (Round any intermediary calculations and your final answer to the nearest cent.) A) increase by $9350 B) increase by $21,650 C) decrease by $9350 D) decrease by $21,650 Answer: C Explanation: C) Total avoidable costs = $45,000 + $9500 + $29,500 + ($20,000 × 7%) = $85,400 Change in monthly operating income = Avoidable costs $85,400 - ($94.75 × 1000 units) = decrease of $9350 Diff: 2 Objective: 3 AACSB: Analytical thinking
800 richard@qwconsultancy.com
15) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models. Monthly production costs for 1050 units are as follows: Direct materials Direct labor Variable overhead costs Fixed factory overhead Total costs
$43,000 9500 34,500 18,000 $105,000
It is estimated that 8% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $95.75 per unit. The maximum price that W.T. Ginsburg Engine Company should be willing to pay the outside supplier is: A) $83 per ACT31107 part B) $84.23 per ACT31107 part C) $100 per ACT31107 part D) $101.37 per ACT31107 part Answer: B Explanation: B) Avoidable costs = $88,440 / 1050 units = $84.23 per part Diff: 2 Objective: 3 AACSB: Analytical thinking
16) If a company does not use one of its limited resources in the best possible way, the lost contribution to income could be called a(n): A) business function cost B) carrying cost C) opportunity cost D) sunk cost Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
17) Opportunity costs is defined as: A) the cost of manufacturing a one-time-only special order when a firm has excess capacity to make more products B) the contribution to operating income that is forgone by not using a limited resource in its next-best alternative use C) the sum of variable and fixed costs in a particular business function of the value chain, such as manufacturing costs or marketing costs D) the sum of variable and fixed costs in all business functions of the value chain, such as manufacturing costs or marketing costs Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
801 richard@qwconsultancy.com
18) Which of the following is true of an opportunity cost? A) It is the income foregone by not using a resource in an alternative way. B) The higher the opportunity costs, the lower is the relevant cost. C) It is recorded as an expense in the accounting records. D) It is an unavoidable cost that cannot be changed no matter what action is taken. Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
19) Which of the following is true regarding relevant costs? A) Carrying cost of inventory is a type of opportunity cost and is relevant to outsourcing. B) All variable costs are relevant. C) All fixed costs are irrelevant. D) Opportunity costs are relevant to financial accounting. Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
20) Which of the following would be a consideration in a make-or-buy decision? A) excess capacity B) wages to CEO C) marketing costs D) audit expenses Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
21) If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the: A) total variable cost of producing the product B) full cost of producing the product C) total cost of producing the product D) business function cost of the product Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
802 richard@qwconsultancy.com
22) For make-or-buy decisions, relevant costs include: A) incremental costs plus sunk costs B) incremental costs plus opportunity costs C) differential costs plus fixed costs D) incremental costs plus differential costs Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
23) A study by a consultant shows that a company that had $1,000,000 of inventory was holding excess inventory of $100,000 that could be eliminated with a few process improvements. It also has $400,000 in marketable securities that yield 4% per year. What is the estimated annual opportunity cost of holding the excess inventory? A) $4000 B) $40,000 C) $16,000 D) $20,000 Answer: A Explanation: A) $100,000 × 4% = $4000 Diff: 2 Objective: 3 AACSB: Analytical thinking
24) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$55.00 38.00 41.00 39.00 $173.00
Crayola Technologies Inc. has contacted Rubium with an offer to sell 6000 of the subassemblies for $141.00 each. Rubium will eliminate $92,000 of fixed overhead if it accepts the proposal. What are the relevant costs for Rubium? A) $656,000 B) $650,000 C) $896,000 D) $1,130,000 Answer: C Explanation: C) The relevant costs for Rubium = [($55.00 + $38.00 + $41.00) × 6000 + $92,000] = $896,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
803 richard@qwconsultancy.com
25) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$51.00 35.00 38.00 31.00 $155.00
Crayola Technologies Inc. has contacted Rubium with an offer to sell 10,000 of the subassemblies for $140.00 each. Rubium will eliminate $93,000 of fixed overhead if it accepts the proposal. Should Rubium make or buy the subassemblies? What is the difference between the two alternatives? A) buy; savings = $93,000 B) buy; savings = $107,000 C) make; savings = $67,000 D) make; savings = $243,000 Answer: C Explanation: C) Cost to buy: 10,000 × $140.00 = $1,400,000 Cost to make: [($51.00 + $35.00 + $38.00) × 10,000 + $93,000] = $1,333,000 Cost savings = $1,400,000 - $1,333,000 = $67,000; make the subassemblies Diff: 3 Objective: 3 AACSB: Application of knowledge
26) A recent college graduate has the choice of buying a new car for $37,500 or investing the money for four years with an 11% expected annual rate of return. He has an investment of $43,000 in equities and bonds which yields 10% expected annual rate of return. If the graduate decides to purchase the car, the best estimate of the opportunity cost of that decision is: A) $4300 B) $16,500 C) $43,000 D) $18,920 Answer: B Explanation: B) $37,500 × 11% × 4 years = $16,500 cost of the opportunity not chosen. Diff: 2 Objective: 3 AACSB: Application of knowledge
804 richard@qwconsultancy.com
27) A supplier offers to make Part A for $34. Altec Services Corporation has relevant costs of $45 a unit to manufacture 1010 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is: A) $0 B) $45,450 C) $34,340 D) $79,790 Answer: A Explanation: A) The opportunity cost is $0 as there is excess capacity. They will not forgo any profit they can make on other products if they making and selling any other products. Diff: 2 Objective: 3 AACSB: Application of knowledge
28) Altec Services Corporation has relevant costs of $41 per unit to manufacture 1090 units of Part A. A current supplier offers to make Part A for $30 per unit. Alternatively, the company can rent out the capacity for $28,000. If capacity is constrained, the opportunity cost of buying Part A from the supplier is: A) $0 B) $11,990 C) $39,990 D) $28,000 Answer: D Explanation: D) Alternative rent income = $28,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
29) Opportunity costs are not recorded in financial accounting systems because historical record keeping is limited to transactions involving alternatives that managers actually selected rather than alternatives that they rejected. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
30) For decision making, differential costs assist in choosing between alternatives. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
31) International outsourcing adds another factor to relevant cost analysis as the decision to outsource production to an overseas partner can increase exchange rate risk. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
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32) Differential revenue is the additional total revenue from an activity. Answer: FALSE Explanation: Incremental revenue is the additional total revenue from an activity. Differential revenue is the difference in total revenue between two alternatives. Diff: 1 Objective: 3 AACSB: Analytical thinking
33) Outsourcing is purchasing from outside vendors parts and other goods instead of producing your own and contracting for services instead of providing them yourself. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
34) Planet Furniture, Inc. is currently producing well below its full capacity. The Swansea Company has approached Plant with an offer to buy 5,000 tools at $17.50 each. Planet sells its end table for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed costs. If Planet accepts the order, the increase in operating income will be $7,500. Answer: FALSE Explanation: If Planet accepts the order, it will increase operating income by $9,500 ($17.50 - ($18.30 $2.70) × 5,000. Diff: 1 Objective: 3 AACSB: Analytical thinking
35) Outsourcing is risk free to the manufacturer because the supplier now has the responsibility of producing the part. Answer: FALSE Explanation: Outsourcing has risks since the manufacturer is dependent on the supplier for a quality product, delivered in a timely manner, for a reasonable price. It can also introduce the risk of fluctuating exchange rates if the outsourcing is to an international partner. Diff: 1 Objective: 3 AACSB: Analytical thinking
36) Decisions about whether a producer of goods or services will insource or outsource are also called make-or-buy decisions. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
37) In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is relevant. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
806 richard@qwconsultancy.com
38) An incremental cost is the difference in total irrelevant costs between two alternatives. Answer: FALSE Explanation: An incremental cost is the additional total cost incurred for an activity. A differential cost is the difference in total relevant cost between two alternatives. Diff: 1 Objective: 3 AACSB: Analytical thinking
39) Under the opportunity-cost approach, the relevant cost of any alternative is the incremental of the alternative plus the opportunity cost of the profit foregone from choosing the alternative. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
40) When capacity is constrained, relevant costs equal incremental costs plus opportunity costs. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
41) Incremental revenue is the sum of differential revenues of two alternatives. Answer: FALSE Explanation: Incremental revenue is the additional total revenue from an activity. Differential revenue is the difference in total revenue between two alternatives. Diff: 1 Objective: 3 AACSB: Analytical thinking
42) Under the opportunity cost approach, the cost of each alternative includes the incremental costs and the opportunity cost. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
43) When capacity is constrained, the relevant revenues and costs of any alternative equal the incremental future revenues and costs plus the opportunity cost. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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44) H.J. Manufacturing produces 10,000 units of a part that is used in their assembly process. The production costs are as follows: Direct materials Direct manufacturing labor Variable support costs Fixed support costs Total costs
$ 50,000 20,000 35,000 25,000 $130,000
H.J. Manufacturing has the option of purchasing these units from an outside supplier at $10.75 per unit. If the part is outsourced, 40% of the fixed costs cannot be immediately converted to other uses. a. Describe avoidable costs. What amount of the part's production costs is avoidable? b. Should H.J. outsource the part? Why or why not? c. What other items should H.J. consider before outsourcing any of the parts it currently manufactures? Answer: a. Avoidable costs are those costs eliminated when a part, product, product line, or business segmented is discontinued. Avoidable production costs for part total $120,000, which are all but the $10,000 ($25,000 × 40%) of fixed costs that cannot be immediately converted to other uses. b. Based on the financial considerations given, H/J should outsource the part because the $107,000 (10,000 units × $10.75 per part) outsourced cost is less than the $120,000 reduction in annual production costs. In other words, the outsourcing would save H.J an additional $12,500 annually. c. Other factors to consider include the supplier's ability to meet expected quality and delivery standards, and the likelihood of suppliers increasing prices of components in the future. Diff: 3 Objective: 3 AACSB: Application of knowledge
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45) Rockford Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total
$0.75 3.00 1.50 1.60 $6.85
Angel Company has offered to sell to Rockford Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Rockford accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Rockford Company? By how much? Answer: a. Direct materials $0.75 Direct manufacturing labor 3.00 Variable manufacturing overhead 1.50 Avoidable fixed manufacturing overhead 1.00 Total relevant per unit costs $6.25 b.
Make Purchase price Savings in space Direct materials Direct mfg. labor Variable overhead Fixed overhead saved Totals
Buy $60,000 (9,000)
$7,500 30,000 15,000 $52,500
(10,000) $41,000
Effect of Buying $(60,000) 9,000 7,500 30,000 15,000 10,000 $11,500
The best alternative is to buy the part. Diff: 2 Objective: 3 AACSB: Application of knowledge
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46) What are opportunity costs? Explain why opportunity costs are not recorded in financial accounting systems. Answer: Opportunity cost is the contribution to operating income that is forgone by not using a limited resource in its next-best alternative use. Managers must consider opportunity costs in decision making since deciding to use a resource one way means a manager must forgo the opportunity to use the resource in any other way. Opportunity costs are not recorded in financial accounting systems because historical record keeping is limited to transactions involving alternatives that managers actually selected rather than alternatives that they rejected. Rejected alternatives do not produce transactions and are not recorded. Diff: 2 Objective: 3 AACSB: Analytical thinking
47) Factors used to decide whether to outsource a part include: A) the supplier's cost of direct materials B) if the supplier is reliable C) the original cost of equipment currently used for production of that part D) past design costs used to develop the current composition of the part Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 12.4 1) Determining which products should be produced when the plant is operating at full capacity is referred to as a(n): A) outsourcing analysis B) total alternative approach C) product-mix decision D) short-run focus decision Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking
2) Product mix decisions: A) have a long-run focus B) help determine how to maximize operating profits C) focus on selling price per unit D) help maximizing opportunity costs Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
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3) Capacity constraints include: A) increased demand of warranty services for a pharmaceutical product B) increased need of display space for a retailer C) decreased demand for a pharmaceutical product D) increased fuel efficiency of cars Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
4) With a constraining resource, managers should choose the product with the: A) lowest contribution margin per unit of the constraining resource B) highest sales price C) highest contribution margin per unit of the constraining resource D) highest gross profit Answer: C Diff: 1 Objective: 4 AACSB: Analytical thinking
5) A company has three products possible products that it can produce in a machine intensive production process. Capacity is constrained by the number of hours the machines can run during a period and the products are so popular that all units produced will be sold. Here is additional information: Product A Contribution per unit $20 Machine hours per unit 2.5
Product B
Product C
$30
$40
3.25
4.5
Which of the following would be an accurate conclusion based on these facts? A) A balanced mix of 1/3 A, 1/3 B, and 1/3 C should be the goal when maximizing operating income in the short-run. B) Since Product C has the greatest contribution margin per unit and therefore emphasizing its production and sales will lead to the highest operating income in the short-run. C) Since A takes less time to produce, maximization of operating income will occur by emphasizing production and sales of A. D) Product B should be emphasized if the goal is to maximize contribution margin. Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
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6) For managers attempting to maximize operating income for a product offering with a great deal of variety, product-mix decisions must usually take into account: A) more than one constraining resource B) just those products with the greatest contribution margin per constraining resource C) products that produce a profit above the full costs of the product D) how to maximize the selling price of all the products Answer: A Diff: 3 Objective: 4 AACSB: Analytical thinking
7) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:
Selling price Direct materials Direct labor ($16 per hour) Variable support costs ($5 per machine-hour) Fixed support costs
Model X Model Y Model Z $51 $68 $77 10 10 10 16 16 32 5 10 10 15 15 15
Which model has the greatest contribution margin per unit? A) Model X B) Model Y C) Model Z D) Both Model X and Model Y have the highest and same contribution margin per unit Answer: B Explanation: B) Model X $51 - $10 - $16 - $5 = $20 Model Y $68 - $10 - $16 - $10 = $32 highest Model Z $77 - $10 - $32 - $10 = $25 Diff: 2 Objective: 4 AACSB: Application of knowledge
812 richard@qwconsultancy.com
8) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:
Selling price Direct materials Direct labor ($17 per hour) Variable support costs ($9 per machine-hour) Fixed support costs
Model X Model Y Model Z $55 $61 $78 8 8 8 17 17 34 9 18 18 13 13 13
Which model has the greatest contribution margin per machine-hour? A) Model X B) Model Y C) Model Z D) Both Model X and Model Y have the highest and same contribution margin per machine-hour Answer: A Explanation: A) Model X $55 - $8 - $17 - $9 = $21 / 1 = $21 highest Model Y $61 - $8 - $17 - $18 = $18 / 2 = $9 Model Z $78 - $8 - $34 - $18 = $18 / 2 = $9 Diff: 2 Objective: 4 AACSB: Application of knowledge
9) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:
Selling price Direct materials Direct labor ($12 per hour) Variable support costs ($5 per machine-hour) Fixed support costs
Model X Model Y Model Z $58 $70 $80 10 10 10 12 12 24 5 10 10 12 12 12
If there is excess capacity, which model is the most profitable to produce? A) Model X B) Model Y C) Model Z D) Both Model X and Model Y have same and highest profitability Answer: B Explanation: B) Model Y, since it has the greatest contribution margin per unit Model X $58 - $10 - $12 - $5 = $31 Model Y $70 - $10 - $12 - $10 = $38 highest Model Z $80 - $10 - $24 - $10 = $36 Diff: 3 Objective: 4 AACSB: Application of knowledge
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10) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:
Selling price Direct materials Direct labor ($17 per hour) Variable support costs ($5 per machine-hour) Fixed support costs
Model X Model Y Model Z $54 $70 $72 10 10 10 17 17 34 5 10 10 14 14 14
If there is a machine breakdown, which model is the most profitable to produce? A) Model X B) Model Y C) Model Z D) Both Model X and Model Y have same and highest profitability Answer: A Explanation: A) Model X since it has the greatest contribution margin per machine-hour Model X $54 - $10 - $17 - $5 = $22 / 1 = $22 highest Model Y $70 - $10 - $17 - $10 = $33 / 2 = $17 Model Z $72 - $10 - $34 - $10 = $18 / 2 = $9 Diff: 3 Objective: 4 AACSB: Application of knowledge
11) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:
Selling price Direct materials Direct labor ($15 per hour) Variable support costs ($6 per machine-hour) Fixed support costs
Model X Model Y Model Z $59 $70 $78 6 6 6 15 15 30 6 12 12 10 10 10
How can Lisa Dynondo encourage her salespeople to promote the more profitable model? A) Put all sales persons on fixed salary. B) Provide higher sales commissions for higher priced items. C) Provide higher sales commissions for items with the greatest contribution margin per constrained resource. D) Provide higher sales commissions for items which has the lowest cost and lower sales commissions for items with highest cost. Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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12) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is estimated to be 110 units of the Standard Model and 72 units of the Premium Model. The following per unit data apply:
Contribution margin per unit Number of machine-hours required
Standard $24 6
Premium $30 5
The contribution per machine-hour is: A) $24 for Standard, $30 for Premium B) $144 for Standard, $150 for Premium C) $18 for Standard, $25 for Premium D) $4 for Standard, $6 for Premium Answer: D Explanation: D) Standard $24 / 6 = $4; Premium $30 / 5 = $6 Diff: 2 Objective: 4 AACSB: Application of knowledge
13) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 72 units of the Premium Model. The following per unit data apply:
Contribution margin per unit Number of machine-hours required
Standard $24 3
Premium $30 5
If there are 495 machine-hours available per week, how many rockers of each model should Kinnane produce to maximize profits? A) 100 units of Standard and 39 units of Premium B) 45 units of Standard and 72 units of Premium C) 100 units of Standard and 72 units of Premium D) 83 units of Standard and 50 units of Premium Answer: A Explanation: A) Standard (100 units × 3 mh) + Premium (39 units × 5 mh) = 495 machine-hours of the constrained resource Diff: 2 Objective: 4 AACSB: Application of knowledge
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14) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is estimated to be 103 units of the Standard Model and 71 units of the Premium Model. The following per unit data apply:
Contribution margin per unit Number of machine-hours required
Standard $18 3
Premium $20 4
If there are 720 machine-hours available per week, how many rockers of each model should Kinnane produce to maximize profits? A) 103 units of Standard and 47 units of Premium B) 71 units of Standard and 71 units of Premium C) 103 units of Standard and 71 units of Premium D) 83 units of Standard and 62 units of Premium Answer: C Explanation: C) Standard (103 units × 3 mh) + Premium (71 units × 4 mh) = 593 machine-hours for the current demand Diff: 2 Objective: 4 AACSB: Application of knowledge
15) A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below. Small $410
Medium $600
Large $1220
(240) (80)
(310) (140)
(510) (260)
Fixed selling and administrative Unit profit
(80 ) $10
(85) $65
(170) $280
Demand in units Machine-hours per unit
140 50
130 50
140 140
Unit selling price Unit costs: Variable manufacturing Fixed manufacturing
The maximum machine-hours available are 6500 per week. What is the contribution margin per machine-hour for a medium appliance? A) $0.50 B) $1.30 C) $5.80 D) $10.70 Answer: C Explanation: C) Contribution margin = $600 - $310 = $290 Contribution margin per machine hour = $290 / 50 = $5.80 Diff: 2 Objective: 4 AACSB: Application of knowledge
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16) A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.
Unit selling price Unit costs: Variable manufacturing Fixed manufacturing Fixed selling and administrative Unit profit Demand in units Machine-hours per unit
Small $420
Medium $610
Large $1220
(240) (40)
(290) (140)
(540) (280)
(110 ) $30
(125) $55
(140) $260
150 30
130 40
150 150
The maximum machine-hours available are 6500 per week. Which of the three product models should be produced first if management incorporates a short-run profit maximizing strategy? A) small appliance B) medium appliance C) large appliance D) both medium and large appliance Answer: B Explanation: B) Small ($420 - $240 ) = $180 / 30 = $6.00 Medium ($610 - $290 ) = $320 / 40 = $8.00 highest Large ($1220 - $540 ) = $680 / 150 = $4.53 Diff: 2 Objective: 4 AACSB: Application of knowledge
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17) A. C .Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below. Small $400
Medium $600
Large $1220
(220) (60)
(280) (140)
(720) (280)
Fixed selling and administrative Unit profit
(70 ) $50
(25) $155
(120) $100
Demand in units Machine-hours per unit
170 50
120 50
170 170
Unit selling price Unit costs: Variable manufacturing Fixed manufacturing
The maximum machine-hours available are 6200 per week. How many of each product should be produced per month using the short-run profit maximizing strategy? A) 0 120 7 B) 4 120 0 C) 170 170 0 D) 170 50 50 Answer: B Explanation: B) Small: (400 - 220) / 50 = 3.60 Medium: (600 - 280) / 50 = 6.40 Large: (1220 - 720) / 170 = 2.94 Medium (120 × 50) + Small (4 × 50) = 6200 total machine-hours Diff: 3 Objective: 4 AACSB: Application of knowledge
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18) Granfield Corporation manufactures two products, Product A and Product B. The following information was available:
Selling price per unit Variable cost per unit
Product A $37 31
Total fixed costs
Product B $26 17
$22,000
If Granfield Corporation could produce and sell either 10,600 units of Product A or 5800 units of Product B at full capacity, it should produce and sell: A) 10,600 units of A and none of B B) 3667 units of B and 2444 units of A C) 5800 units of B and none of A D) 8700 units of A and 5800 units of b Answer: A Explanation: A) 10,600 × ($37 - $31) = $63,600 Diff: 3 Objective: 4 AACSB: Application of knowledge
19) Product-mix decisions usually have only a short-run focus because they typically arise in the context of capacity constraints that can be relaxed in the long run. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
20) For short-run product-mix decisions, managers should focus on minimizing total fixed costs. Answer: FALSE Explanation: For short-run product mix decisions, managers should focus on MAXIMIZING total CONTRIBUTION MARGIN. Diff: 2 Objective: 4 AACSB: Analytical thinking
21) For short-run product-mix decisions, maximizing contribution margin will also result in maximizing operating income. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
22) To maximize profits, managers should produce more of the product with the greatest contribution margin per unit of the constraining resource. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
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23) When there is a constraining resource, a firm should attempt to maximize sales of the product or service with the greatest contribution margin per unit. Answer: FALSE Explanation: When there are constrained resources, a firm should attempt to maximize sales of the product or service with the GREATEST CONTRIBUTION MARGIN PER UNIT OF THE CONSTRAINING RESOURCE. Diff: 2 Objective: 4 AACSB: Analytical thinking
24) Lewis S. Gray Inc. manufactures a part for use in its production of art deco furniture. When 10,000 items are produced, the costs per unit are: Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Total
$ 15 60 25 32 $132
Colonial Accents Company has offered to sell to Lewis S. Gray 10,000 units of the part for $125 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis S. Gray accepts the supplier's offer. In addition, $30 per unit of fixed manufacturing overhead on the original part would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Lewis S. Gray Company? By how much? Answer: a. Direct materials $15 Direct manufacturing labor 60 Variable manufacturing overhead 25 Avoidable fixed manufacturing overhead 30 Total relevant per unit costs $130 b.
Make Purchase price Savings in space Direct materials $150,000 Direct manufacturing labor 600,000 Variable overhead 300,000 Fixed overhead saved Totals $1,050,000
Buy $1,250,000 (180,000)
(300,000) $770,000
Effect of Buying $(1,250,000) 180,000 150,000 600,000 300,000 300,000 $280,000
The best alternative is to buy the part. Diff: 2 Objective: 4 AACSB: Application of knowledge
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25) Canary's Products Inc. manufactures three different product lines, Basic, Better, and Best. Considerable market demand exists for all models. The following per unit data apply: Basic Selling price $170 Direct materials 60 Direct labor ($20 per hour) 30 Variable support costs ($10 per machine-hour) 10 Fixed support costs 40
Better $190 60 30 20 40
Best $210 60 40 20 40
a. For each model, compute the contribution margin per unit. b. For each model, compute the contribution margin per machine-hour. c. If there is excess capacity, which model is the most profitable to produce? Why? d. If there is a machine breakdown, which model is the most profitable to produce? Why? e. How can Canary encourage its sales people to promote the more profitable model? Answer: a. The contribution margin per unit is: $70 for Model X ($170 - $90 - $30 - $10), $80 for Model Y ($190 - $60 - $30 - $20), and $90 for Model Z ($210 - $60 - $40 - $20). b. The contribution margin per machine-hour is $70 for Model X ($70 contribution margin / 1.0 machine-hour per unit), $40 for Model Y ($80 / 2.0), and $45 for Model Z ($90 / 2.0). c. When there is excess capacity, the Best model is the most profitable because it has the greatest contribution margin per unit. d. When there are machine-hour capacity constraints, the Basic model is the most profitable because it has the greatest contribution margin per constrained resource. e. To encourage sales persons to promote specific products, Canary may want to provide marketing incentives such as higher sales commissions for products contributing the most to profits. Canary may also want to educate salespeople about the effects of constrained resources. Diff: 3 Objective: 4 AACSB: Application of knowledge
26) How does a manager go about choosing which of three products to produce and sell when each product uses a single machine with a limited capacity? Answer: Management should attempt to maximize output from the machine which is the limited resource. This involves maximizing the contribution margin per unit of the scarce resource. First of all, management needs to determine the contribution margin of each of the three products. Then, the time that it takes to produce a unit of each of the three products should be determined. Then, a contribution margin per machine hour can be calculated. The first product that should be produced is the one with the highest contribution margin per machine hour. Diff: 2 Objective: 4 AACSB: Analytical thinking
821 richard@qwconsultancy.com
27) A company is forecasting that demand for its various product will exceed its ability to meet the demand for many of its most popular offerings. Other than capital investment to add capacity, in the short-run briefly discuss what should management examine in light of this forecast? Answer: When a company is faced with more demand for its products and services than they can produce, they are faced with capacity constraints. These decisions are referred to as product-mix decisions, as management is faced with deciding how many of each product they should manufacture to maximize contribution margin. As all products are not equally profitable, when faced with capacity constraints, the company must decide which products to sell and in what quantities in order to maximize profits. The focus in these situations is to maximize the contribution margin per unit (revenue per unit less variable costs per unit) of the constrained resource; which management must define. Possibilities of constrained resources could be direct materials, direct labor (hours), machine hours or some other limiting factor. Diff: 2 Objective: 4 AACSB: Analytical thinking
28) A company is looking at strategies to decrease bottleneck constraints and considers the following actions: • Finding ways to decrease idle time in the factory • Providing additional training for direct laborers • Outsourcing some assembly work. • Spending more time to set up processes at the start of the manufacturing process as part of a quality control initiative Comment on how you think each if the possible actions might decrease constraints or if you think the action might not impact constraints. Answer: Decreasing idle time will increase machine and labor hours which will increase capacity and somewhat diminish the magnitude of a constraint. The same is true for the training (increase efficiency of labor) and outsourcing (freeing manufacturing resources) however, an initiative that increases set up time, even for a good cause such as higher quality, without a corresponding decrease in other manufacturing time, on its face (and in the short-term) does not add to capacity. Diff: 2 Objective: 4 AACSB: Application of knowledge
822 richard@qwconsultancy.com
Objective 12.5 1) The theory of constraints (TOC) defines throughput margin as: A) operating income minus the direct material costs of the goods sold B) operating income minus the direct labor costs of the goods sold C) revenues minus the direct material costs of the goods sold D) revenues minus the full costs of the goods sold Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
2) Based on the theory of constraints, investments equal: A) the sum of material costs in direct and indirect materials, work-in-process, and finished goods inventories; R&D costs; and business function costs B) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D costs; and capital costs of equipment and buildings C) the sum of material costs in direct and indirect materials, work-in-process, and finished goods inventories; R&D costs; and full costs D) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D costs; sunk costs, full costs, and business function costs Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
3) The objective of the Theory of Constraints is to increase throughput margin while increasing investment in plant and equipment. Answer: FALSE Explanation: The objective of the Theory of Constraints is to increase throughput margin while decreasing investments and operating costs. Diff: 1 Objective: 5 AACSB: Analytical thinking
4) The theory of constraints is more useful for the long-run management of costs since it takes a long-run perspective and focuses on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities. Answer: FALSE Explanation: The theory of constraints is less useful for the long-run management of costs since it regards operating costs as difficult to change in the short run, it does not identify individual activities and drivers of costs. Diff: 1 Objective: 5 AACSB: Analytical thinking
823 richard@qwconsultancy.com
5) Activity based costing (ABC) systems are less useful than the theory of constraints (TOC) for long-run pricing, cost control, and capacity management. Answer: FALSE Explanation: Activity based costing (ABC) systems take a long-run perspective and focus on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities. ABC systems are therefore more useful than TOC for long-run pricing, cost control, and capacity management. Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Compare and contrast the theory of constraints and activity based costing. Which is more useful in short-run and long-run management of costs? Answer: The theory of constraints emphasizes management of bottleneck operations as the key to improving performance of production operations as a whole. It focuses on short-run maximization of contribution margin. Because TOC regards operating costs as difficult to change in the short run, it does not identify individual activities and drivers of costs. Therefore, TOC is more useful for the short-run management of costs. In contrast, activity based costing (ABC) systems take a long-run perspective and focus on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities. ABC systems are therefore more useful than TOC for long-run pricing, cost control, and capacity management. The short-run TOC emphasis on maximizing contribution margin by managing bottlenecks complements the long-run strategic-cost-management focus of ABC. Diff: 2 Objective: 5 AACSB: Analytical thinking
7) Delicious Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars: Direct materials Direct labor Unit-related support costs Batch-related support costs Product-sustaining support costs Facility-sustaining support costs Total cost per jar
$0.57 0.07 0.27 0.29 0.44 0.59 $2.23
The relevant cost per jar is: A) $0.64 per jar B) $0.91 per jar C) $1.64 per jar D) $2.23 per jar Answer: D Explanation: D) All avoidable costs are relevant for this decision. Diff: 2 Objective: 5 AACSB: Application of knowledge
824 richard@qwconsultancy.com
8) Delicious Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars: Direct materials Direct labor Unit-related support costs Batch-related support costs Product-sustaining support costs Facility-sustaining support costs Total cost per jar
$0.56 0.14 0.20 0.26 0.46 0.57 $2.19
The maximum price that Delicious Preserves should be willing to pay for the decorative jars is: A) $0.70 per jar B) $0.90 per jar C) $0.46 per jar D) $2.19 per jar Answer: D Explanation: D) Considering only quantitative factors, the company should not pay more than the avoidable costs of $2.19 per jar. There may be qualitative factors that are also important. Diff: 2 Objective: 5 AACSB: Application of knowledge
9) Throughput margin is equal to revenues minus direct materials and direct labor of the cost of goods sold. Answer: FALSE Explanation: Throughput margin is equal to revenues minus direct materials of the cost of goods sold. Diff: 2 Objective: 5 AACSB: Analytical thinking
825 richard@qwconsultancy.com
Objective 12.6 1) Which of the following is an irrelevant cost when considering where to drop a customer? A) cost of goods sold B) marketing support C) depreciation D) sales order and delivery processing Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
2) When deciding to lease a new cutting machine or continue using the old machine, the irrelevant cost is: A) $50,000, cost of the old machine B) $20,000, cost of the new machine C) $10,000, selling price of the old machine D) $3,000, annual savings in operating costs if the new machine is purchased Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
3) Which of the following is true of depreciation cost? A) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment that has already been purchased is a past cost. B) Depreciation cost on equipment is relevant in decision making because depreciation on equipment that has already been purchased is an opportunity cost. C) Depreciation cost on equipment is irrelevant in decision making because there is no cash transaction. D) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment that has already been purchased is an opportunity cost. Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
4) When deciding whether to discontinue a segment of a business, relevant costs include: A) auditing expenses for the whole company B) fees paid to a management consultant to study the feasibility of the business segment C) annual insurance costs of the company D) future administrative costs that can be eliminated Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
826 richard@qwconsultancy.com
5) Colonial North Manufacturing, Inc. is considering eliminating one of its product lines. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. What financial effects occur if the product line is discontinued? A) net income will decrease by the amount of the contribution margin of the product line being discontinued B) the company's total fixed costs will increase by the amount of the contribution margin of the product line being discontinued C) the company's total fixed costs will decrease by the amount of the product line's fixed costs D) net income will decrease by the amount of the product line's fixed costs Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
6) Discontinuing unprofitable products will: A) increase profitability if the resources no longer required by the discontinued product can be eliminated B) increase profitability if capacity constraints are adjusted C) decrease profitability if the fixed costs does not change after discontinuing the particular business segment D) increase profitability when a large portion of the fixed costs are unavoidable Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
7) A segment has the following data: Sales Variable costs Fixed costs
$660,000 346,000 345,500
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs will be allocated to profitable segments? A) $314,500 increase B) $346,000 decrease C) $314,000 decrease D) $345,500 decrease Answer: C Explanation: C) Change in net income = $660,000 - $346,000 = $314,000 decrease Diff: 2 Objective: 6 AACSB: Application of knowledge
827 richard@qwconsultancy.com
8) State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized below: Sales (1200 units) Manufacturing costs: Direct materials
$400,000
Direct labor ($15 per hour) Overhead Operating loss
100,000 140,000 ($10,000)
170,000
Overhead costs are 60% variable and the remaining 40% is depreciation of special equipment for model A02777 that has no resale value. If Model A02777 is dropped from the product line, operating income will: A) increase by $10,000 B) decrease by $46,000 C) increase by $56,000 D) decrease by $10,000 Answer: B Explanation: B) $400,000 - $170,000 - $100,000 - $84,000 = $46,000 This product contributes $46,000 toward corporate profits, therefore, discontinuing this product will decrease operating income by $46,000. Diff: 3 Objective: 6 AACSB: Application of knowledge
828 richard@qwconsultancy.com
9) The management accountant for Giada's Book Store has prepared the following income statement for the most current year: Cookbook Travel Book Classics Total Sales $69,000 $198,000 $51,000 $318,000 Cost of goods sold 39,000 68,000 24,000 131,000 Contribution margin 30,000 130,000 27,000 187,000 Order and delivery processing Rent (per sq. foot used) Allocated corporate costs Corporate profit
20,000 5000 9000 $(4000)
25,000 4000 9000 $92,000
10,000 5000 9000 $3000
55,000 14,000 27,000 $91,000
If the cookbook product line had been discontinued prior to this year, the company would have reported: A) greater corporate profits B) the same amount of corporate profits C) less corporate profits D) resulting profits cannot be determined Answer: C Explanation: C) $69,000 - $39,000 - $20,000 - $5000 = $5000 The cookbook product line contributed $5000 toward corporate profits. Without the cookbooks, corporate profits would be $5000 less than currently reported. Diff: 3 Objective: 6 AACSB: Application of knowledge
10) The management accountant for Giada's Book Store has prepared the following income statement for the most current year: Cookbook Travel Book Classics Total Sales $60,000 $100,000 $60,000 $220,000 Cost of goods sold 40,000 67,000 22,000 129,000 Contribution margin 20,000 33,000 38,000 91,000 Order and delivery processing Rent (per sq. foot used) Allocated corporate costs Corporate profit
21,000 5000 8000 $(14,000)
22,000 1000 8000 $2000
10,000 5000 8000 $15,000
53,000 11,000 24,000 $3000
If the travel book line had been discontinued, corporate profits for the current year would have decreased by: (Assume there is not an alternative use for the space rented.) A) $33,000 B) $11,000 C) $10,000 D) $2000 Answer: C Explanation: C) $100,000 - $67,000 - $22,000 - $1000 = $10,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
829 richard@qwconsultancy.com
11) Giant Company has three products, A, B, and C. The following information is available:
Sales Variable costs Contribution margin Fixed costs: Avoidable Unavoidable Operating income
Product A $60,000 38,000 22,000
Product B $98,000 53,000 45,000
Product C $23,000 12,000 11,000
6000 11,000 $5000
19,000 12,000 $14,000
5000 9400 $(3400)
Giant Company is thinking of dropping Product C because it is reporting a loss. Assuming Giant drops Product C and does NOT replace it, operating income will: A) increase by $3400 B) increase by $5000 C) decrease by $6000 D) decrease by $14,400 Answer: C Explanation: C) Dropping Product C would mean Giant gives up $11,000 in contribution margin while only saving $5000 in avoidable fixed costs. Without Product C, operating income would be $6000 less than currently reported. Diff: 3 Objective: 6 AACSB: Application of knowledge
12) A company is analyzing whether to discontinuing selling its product to a particular customer. In performing its analysis, it considers the allocated cost of corporate headquarters it usually associates with each of its customers irrelevant and well as the cost of the space (rent) dedicated to the storage of the work-in-process products earmarked for the delivery to the customer. The company does consider the costs of deliveries and special customer services as relevant costs. Which of the following statements about the treatment of these cost are factual? A) Depreciation is not considered relevant because it is a noncash expense. B) The cost allocation of headquarter expenses is irrelevant because it those costs will be incurred whether the customer account is dropped or maintained. C) Delivery and customer services costs may not be relevant because they are not part of the production function or included in cost of goods sold. D) Rent, even though it is a measure of the cost of the space dedicated to storage of products to be shipped to the customer, unless the company can reduce its rental costs because of the loss of the customer. Answer: D Diff: 2 Objective: 6 AACSB: Application of knowledge
830 richard@qwconsultancy.com
13) Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer. Answer: FALSE Explanation: Overhead costs allocated to the sales office and individual customers are always irrelevant. Diff: 1 Objective: 6 AACSB: Analytical thinking
14) Avoidable variable and fixed costs should be considered relevant when deciding whether to discontinue a product, product line, business segment, or customer. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
15) Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product. Answer: FALSE Explanation: Depreciation is a sunk cost and never relevant. Diff: 2 Objective: 6 AACSB: Analytical thinking
16) In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
17) A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three. Answer: FALSE Explanation: It appears that corporate costs will not change in total, and therefore they are not relevant costs for deciding whether to add a fourth product. Diff: 3 Objective: 6 AACSB: Analytical thinking
18) A decision to drop products or customers may because the company does not have the capacity to meet all demand and therefore certain products may have to be discontinued or customers may have to be dropped. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
831 richard@qwconsultancy.com
19) Cassidy Products Inc.is considering eliminating Model EOS1 from its product line because of losses over the past quarter. The past three months of information for model EOS1 is summarized below: Sales (1,000 units) Manufacturing costs: Direct materials Direct labor ($15 per hour) Support Operating loss
$225,000 80,000 70,000 100,000 ($25,000)
Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model EOS1 that has no resale value. Should Cassidy eliminate Model EOS1 from its product line? Why or why not? Answer: No, Cassidy should not eliminate Model EOS1 from its product line because it contributes $5,000 toward fixed costs and profits. Sales (1,000 units) Manufacturing costs: Direct materials Direct labor Variable support ($100,000 × 70%) Contribution margin
$225,000 80,000 70,000 70,000 $5,000
Diff: 2 Objective: 6 AACSB: Application of knowledge
832 richard@qwconsultancy.com
20) The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year: Chocolate Sales $40,000 Cost of goods sold 26,000 Contribution margin 14,000 Delivery and ordering costs 2,000 Rent (per sq. foot used) 3,000 Allocated corporate costs 5,000 Corporate profit $4,000
Other Candy $25,000 15,000 10,000 3,000 3,000 5,000 $(1,000)
Fudge $35,000 19,000 16,000 2,000 2,000 5,000 $7,000
Total $100,000 60,000 40,000 7,000 8,000 15,000 $10,000
a. Do you recommend discontinuing the Other Candy product line? Why or why not? b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount? Answer: a. No, I would not recommend discontinuing the Other Candy product line because this product line contributes $4,000 towards corporate costs and profits. $25,000 - $15,000 - $3,000 - $3,000 = $4,000 Without the Other Candy product line, corporate profits would be $4,000 less than currently reported. b. If the Chocolate product line were discontinued, corporate profits would immediately decrease by $9,000. $40,000 - $26,000 - $2,000 - $3,000 = $9,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
833 richard@qwconsultancy.com
21) Biden Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $200 per month. The other existing equipment will be used for additional production of product A. One employee earning $500 per month can be terminated if product B production is dropped. Biden's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows:
Sales Direct materials Direct labor Equipment rental Other allocated overhead Operating income
Product A $10,000 2,500 2,000 300 1,000 $4,200
Product B $ 8,000 2,000 1,200 2,600 2,100 $ 100
Total $18,000 4,500 3,200 2,900 3,100 $ 4,300
Required: Prepare an incremental analysis to determine the financial effect of dropping product B. Answer: Incremental change in revenue: Product A increase in sales $10,000 × 40% $4,000 Product B decrease in sales (8,000) Incremental decrease in revenue ($4,000) Incremental change in variable costs: Direct materials: Product A increase $2,500 × 40% (1,000) Product B decrease 2,000 Direct labor: Product A increase $2,000 × 40% (800) Product B decrease 500 Incremental decrease in variable costs Equipment rental deduction Incremental decrease in profits if product B is dropped
700 200 ($3,100)
Diff: 3 Objective: 6 AACSB: Application of knowledge
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Objective 12.7 1) Managers are examining a possible replacement of a machine decision and generate the following numbers: Book value of old machine $1,000,000 Current disposal value of old machine $50,000 Loss on disposal of old machine $300,000 Cost of new machine $600,000 In performing an analysis and in attempt to answer the question, "should we replace the old machine", which of the following statements would be true? A) the book value of the old machine is relevant B) the book value of the old machine and the current disposal value of the old machine are both relevant C) the cost of the new machine and the current disposal value of the old machine are relevant D) the book value of the old machine and the current disposal value of the old machine are the only relevant items Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
2) Book value is defined as the: A) sum of the original cost of an asset and the accumulated depreciation B) difference between the market value of an asset and the accumulated depreciation C) difference between the original cost of an asset and the accumulated depreciation D) sum of the market value of an asset and the accumulated depreciation Answer: C Diff: 1 Objective: 7 AACSB: Analytical thinking
3) ________ is relevant in a decision to replace equipment. A) Warehouse rent costs B) Book value of old equipment C) Accumulated depreciation on old equipment D) Salvage value Answer: D Diff: 1 Objective: 7 AACSB: Analytical thinking
835 richard@qwconsultancy.com
4) Which of the following is true in a decision to keep or replace existing equipment? A) The book value of the old equipment is relevant. B) The disposal value of the old equipment is relevant. C) Property taxes is relevant. D) Depreciation on the new equipment is relevant. Answer: B Diff: 1 Objective: 7 AACSB: Analytical thinking
5) A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? A) the book value of the old equipment B) the depreciation expense on the old equipment C) the loss on the disposal of the old equipment D) the setup cost of the new equipment Answer: D Diff: 1 Objective: 7 AACSB: Analytical thinking
6) What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? A) It is relevant since it increases the cost of the new equipment. B) It is irrelevant since it reduces the cost of the old equipment. C) It is irrelevant to the decision since it does not impact the cost of the new equipment. D) It is relevant since it reduces the cost of the new equipment. Answer: D Diff: 1 Objective: 7 AACSB: Analytical thinking
836 richard@qwconsultancy.com
7) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:
Original cost Annual operating cost Accumulated depreciation
Existing van $50,000 $19,500 $34,000
New van $92,000 $14,000 —
$25,500 9 years $0 $1778
— 9 years $0 $10,222
Current salvage value of the existing van Remaining life Salvage value in 9 years Annual depreciation Sunk costs include: A) the accumulated depreciation of the existing van B) the original cost of the new van C) the current salvage value of the existing van D) the annual operating cost of the new van Answer: A Diff: 2 Objective: 7 AACSB: Application of knowledge
8) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:
Original cost Annual operating cost Accumulated depreciation
Existing van $50,000 $20,500 $33,000
New van $98,000 $13,000 —
$27,500 10 years $0 $1700
— 10 years $0 $9800
Current salvage value of the existing van Remaining life Salvage value in 10 years Annual depreciation Relevant costs for this decision include: A) the original cost of the existing van B) accumulated depreciation C) the annual operating cost D) the book value of the existing van Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
837 richard@qwconsultancy.com
9) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:
Original cost Annual operating cost Accumulated depreciation
Existing van $50,000 $19,500 $34,000
New van $92,000 $14,000 —
$25,500 9 years $0 $1778
— 9 years $0 $10,222
Current salvage value of the existing van Remaining life Salvage value in 9 years Annual depreciation
If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 8 years operating income will: A) decrease by $98,000 B) increase by $60,000 C) decrease by $60,000 D) increase by $98,000 Answer: B Explanation: B) New van ($10,000 × 8 years) - Existing van ($17,500 × 8 years) = $60,000 less in operating costs, which results in a $60,000 increase in operating income. Diff: 3 Objective: 7 AACSB: Application of knowledge
10) Planet Design Services, Inc., is considering replacing a machine. The following data are available:
Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs
Old Machine $660,000 10 5 $400,000 $132,000 0
Replacement Machine $520,000 5 0 — — 0
$98,000
$61,000
Which of the data provided in the table is a sunk cost? A) the annual cash operating costs of the old machine B) the annual cash operating costs of the replacement machine C) the disposal value of the old machine D) the original cost of the old machine Answer: D Diff: 2 Objective: 7 AACSB: Application of knowledge
838 richard@qwconsultancy.com
11) Planet Design Services, Inc., is considering replacing a machine. The following data are available:
Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs
Old Machine $630,000 10 5 $390,000 $112,000 0
Replacement Machine $530,000 5 0 — — 0
$103,000
$58,000
For the decision to keep the old machine, the relevant costs of keeping the old machine is: A) $965,000 B) $515,000 C) $627,000 D) $103,000 Answer: B Explanation: B) Relevant cost = $103,000 × 5 = $515,000 Diff: 3 Objective: 7 AACSB: Application of knowledge
12) Planet Design Services, Inc., is considering replacing a machine. The following data are available:
Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs
Old Machine $650,000 10 5 $380,000 $162,000 0
Replacement Machine $540,000 5 0 — — 0
$108,000
$60,000
The difference between keeping the old machine and replacing the old machine is: A) $920,000 in favor of keeping the old machine B) $138,000 in favor of keeping the old machine C) $920,000 in favor of replacing the old machine D) $138,000 in favor of replacing the old machine Answer: B Explanation: B) New [$540,000 + (5 × $60,000) - $162,000] - Old [(5 × $108,000)] = $138,000 Diff: 3 Objective: 7 AACSB: Application of knowledge
839 richard@qwconsultancy.com
13) A company's management team is considering replacing an old machine. It estimates that by keeping the old machine, the related operating costs will be $1,200,000 but will drop to $750,000 a year if the old machine is replaced with a new one. The disposal value of the old machine is $120,000, which is $10,000 below its book value ($10,000 loss on disposal.) The new machine will cost $520,000. Ignoring tax implications of a replacement, which of the followings statements is correct? A) The $10,000 loss on disposal is relevant. B) The difference in total costs between the two alternatives is $50,000. C) The relevant cost savings is $40,000. D) Without consideration of nonfinancial factors, the old machine should be kept. Answer: B Explanation: B) Keep Replace Difference Operating costs $1,200,000 $750,000 $450,000 Disposal value $0 $120,000 $120,000 Cost of New Machine ($520,000) ($520,000) $50,000 Replacing the old machine saves operating expenses of $450,000 and produces a $120,000 salvage value that is greater, by $50,000, than the cost of the new machine. Diff: 2 Objective: 7 AACSB: Application of knowledge
14) When replacing an old machine with a new machine, the new machine's depreciation expense is relevant. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
15) When replacing an old machine with a new machine, the book value of the old machine is a relevant cost. Answer: FALSE Explanation: The original price of the old machine and the related accumulated depreciation is a sunk cost and therefore an irrelevant cost. Diff: 1 Objective: 7 AACSB: Analytical thinking
16) When replacing an old machine with a new machine, the disposal value of the old machine is irrelevant. Answer: FALSE Explanation: The disposal value of the old machine is relevant and lowers the net cost of the decision to replace the old machine. Diff: 1 Objective: 7 AACSB: Analytical thinking
840 richard@qwconsultancy.com
17) Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:
Original cost Accumulated depreciation Current salvage value Remaining life Annual operating expenses Disposal value in 5 years
Existing $60,000 $ 5,000 $40,000 5 years $10,000 $0
New Turbo Oven $50,000 — — 5 years $ 7,500 $0
Required: a. What costs are sunk? b. What costs are relevant? c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven? d. What other items should Pat, as manager of the Pizzeria, consider when making this decision? Answer: a. Sunk costs include the original cost of the existing convection oven and the accompanying accumulated depreciation. b.
Relevant costs include: Acquisition cost of the new Turbo oven Current disposal value of the existing convection oven Differences in annual operating expenses for the existing and the new Turbo oven
c.
Net cash flows over 5 years with the new Turbo oven: Cash inflow: Decrease in annual operating expenses ($2,500 × 5) Sale of the existing oven Cash outflow: Acquisition of the new Turbo oven Net cash inflow (outflow)
$ 12,500 40,000 (50,000) $ 2,500
d. Other items the manager should consider when making this decision include: ∙ The Turbo oven's reliability and efficiency is still unknown since it is a brand-new product. ∙ If the Turbo oven bakes faster as it claims, the Pizzeria may be able to increase sales due to the quicker baking time. ∙ After purchasing another oven just six months prior, top management should consider the Turbo oven option, but instead may question the decision-making ability of Pat, the current manager. Diff: 2 Objective: 7 AACSB: Application of knowledge
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18) Why is the depreciation of an old equipment irrelevant to decision making? Answer: Depreciation expense is irrelevant in decision making because depreciation on equipment that has already been purchased is a past cost. But, the cost of purchasing new equipment in the future that will be written off as depreciation is relevant in decision making. Diff: 2 Objective: 7 AACSB: Analytical thinking
Objective 12.8 1) If management takes a multiple-year view in the decision model and judges success according to the current year's results, a problem will occur in the: A) decision model B) performance evaluation model C) production evaluation model D) quantitative model Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
2) Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is: A) focused on short-term performance B) based solely on quantitative factors C) consistent with the decision model D) based solely on qualitative factors Answer: C Diff: 2 Objective: 8 AACSB: Analytical thinking
3) The company's performance evaluation system rewards managers for meeting profitability targets. Which of the following actions could be considered unethical? A) A manager makes a decision to replace old machines with an energy efficient machines but over the short-run profits will suffer. B) A senior manager design performance evaluation models that are inconsistent with the personal goals of the middle managers. C) Same facts as part B but the lower-level managers will be evaluated on the expectation that the first year would be poor and the next year would be much better. D) Lower level managers refuse to upgrade machinery because the first year will show lower than expected profits despite significant long-term savings. Answer: D Diff: 2 Objective: 8 AACSB: Analytical thinking
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4) Performance evaluation focuses on responsibility centers for a specific period, not on projects or individual items of equipment over their useful lives. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
5) How can conflicts arise between the decision model and the performance evaluation model used to evaluate managers? Provide an example of this type of conflict. Answer: Since managers will act in their self-interest, they will make decisions that make their own performance look best. At times, this does not lead to the best decision for the firm. An example of this situation might include evaluating a managers performance on short-term results, when the firm would like decisions made that would maximize long term performance. Diff: 2 Objective: 8 AACSB: Analytical thinking
6) To minimize conflicts of interest because of performance evaluation models, managers should institute codes of conduct and create cultures that focus on "doing the right thing." Answer: TRUE Diff: 2 Objective: 8 AACSB: Application of knowledge
Objective 12.A 1) Linear programming is a tool that maximizes total contribution margin of a mix of products with multiple constraints. Answer: TRUE Diff: 1 Objective: A AACSB: Analytical thinking
2) Which of the following is an assumption of linear programming? A) Average variable costs remain constant throughout the year. B) Opportunity costs are irrelevant in decision making. C) Few sunk costs are relevant in decision making. D) All costs are either variable or fixed for a single cost driver. Answer: D Diff: 2 Objective: A AACSB: Analytical thinking
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3) In linear programming, the goals of management are expressed in: A) an objective function B) constraints C) operating policies D) business functions Answer: A Diff: 1 Objective: A AACSB: Analytical thinking
4) A mathematical inequality or equality that must be appeased is known as a(n): A) objective function B) constraint C) operating policy D) business function Answer: B Diff: 2 Objective: A AACSB: Analytical thinking
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5) Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Product's production capacity, which is limited by available machine-hours and direct manufacturing labor-hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits. Direct manufacturing labor is limited to 1,600 hours a month and machine-hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labor and 8 machine-hours. Special keyboards require 34 labor-hours and 20 machine-hours. Let R represent Regular keyboards and S represent Special keyboards. The correct set of equations for the keyboard production process is: A) Maximize: $128R + $720S Constraints: Labor-hours: 20R + 34S ≤ 1,600 Machine-hours: 8R + 20S ≤ 1,200 Special: S ≤ 80 S≥0 Regular: R≥0 B) Maximize: $128R + $720S Constraints: Labor-hours: 20R + 34S ≥ 1,600 Machine-hours: 8R + 20S ≥≤ 1,200 Special: S ≥ 80 S≥0 Regular: R≥0 C) Maximize: $720S + $128R Constraints: Labor-hours: 20R + 8S ≤ 1,600 Machine-hours: 34R + 20S ≤ 1,200 Special: S ≤ 80 S≥0 Regular: R≥0 D) Maximize: $128R + $720S Constraints: Labor-hours: 20R + 34S ≤ 1,600 Machine-hours: 8R + 20S ≤ 1,200 Special: S ≥ 80 S≤0 Regular: R≤0 Answer: A Diff: 3 Objective: A AACSB: Application of knowledge
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6) In linear programming, a constraint is a mathematical inequality or equality that must be satisfied by the variables in a mathematical model. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
7) Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand for steel beams exceeds Local Steel Construction Company's production capacity, which is limited by available direct labor and machine-hours. The maximum demand for wood beams is 90 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits. Direct manufacturing labor is limited to 3,000 hours a week and 1,000 hours is all that the company's outdated machines can run a week. The steel beams require 120 hours of labor and 60 machine-hours. Wood beams require 150 labor hours and 120 machine-hours. Required: Formulate the objective function and constraints necessary to determine the optimal product mix. Answer: S = steel beams W = wood beams Maximize:
$200S + $150W
Constraints:
Labor hours: Machine-hours: Wood beams: Steel beams:
120S + 150W ≤ 3,000 60S + 120W ≤ 1,000 W ≤ 90 W ≥ 0 S≥0
Diff: 2 Objective: A AACSB: Application of knowledge
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 13 Strategy, Balanced Scorecard, and Strategic Profitability Analysis Objective 13.1 1) Which of the following statements best define strategy? A) It describes how an organization can create value for its customers while differentiating itself from its competitors. B) It is an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. C) It is an organization's ability to offer products or services its customers perceive to be superior and unique relative to the products or services of its competitors. D) It describes how an organization motivates its employees to work for more hours without any increase in their wages. Answer: A Diff: 2
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Objective: 1 AACSB: Analytical thinking
2) In general, profit potential of an organization decreases with: A) lesser competition and stronger potential entrants B) greater competition and stronger potential entrants C) lesser competition and weaker potential entrants D) greater competition and weaker potential entrants Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Which of the following statements best define a product differentiation strategy? A) It describes how an organization can increase customer base by differentiating its' product prices from its competitors. B) It is an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. C) It describes how an organization can decrease product prices by differentiating its' raw materials from its competitors. D) It is an organization's ability to offer products or services its customers perceive to be superior and unique relative to the products or services of its competitors. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
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4) Which of the following focuses on these five factors: competitors, potential entrants to the market, equivalent products, bargaining power of customers, and bargaining power of suppliers? A) balanced scorecard B) product differentiation analysis C) industry analysis D) business process reengineering Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
5) What is the term that describes an organization's ability to offer products or services that are perceived by its customers as being superior and unique relative to those of its competitors? A) strategy B) product differentiation C) cost leadership D) the balanced scorecard Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
6) What is the term for an organization's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control? A) marketing strategy B) product differentiation C) cost leadership D) competitor differentiation Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
7) An organization that is using the product differentiation approach would most likely do which of the following? A) focus on tight cost control to create a reputation of saving its customers money B) use innovative research and development and develop effective promotional campaigns to increase customer loyalty and charge higher prices C) provide products that are similar to competitors D) offer products at a lower cost than competitors Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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8) An organization that is using the cost leadership approach would: A) incur costs for innovative R&D B) provide products at a higher cost than competitors C) focus on productivity through efficiency improvements D) bring products to market rapidly Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
9) Stewart Corporation plans to grow by offering a sound system, the SS3000, that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy. Which of the following terms best describes Stewart's strategy? A) product differentiation B) scalability C) product leadership D) cost leadership Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
10) Magic Corporation manufactures water toys. It plans to grow by producing high-quality water toys that are delivered in a timely manner. There are a number of other manufacturers who produce similar water toys. Magic believes that continuously improving its manufacturing processes and re-engineering processes to downsize and eliminate excess capacity are critical to implementing its strategy. Which of the following best describes Magic's strategy? A) product differentiation B) product leadership C) cost differentiation D) cost leadership Answer: D Diff: 2 Objective: 1 AACSB: Application of knowledge
11) Which of the following descriptions would align most closely with a company that is executing product differentiation strategy? A) A manufacturer of a consumer product for which economies if scale are critical to its success. B) Fast food restaurant chain that focuses on division of labor tactics to employ and train inexperienced staff. C) A food producer that employs highly skilled and experienced chefs in its R&D function. D) An auto repair garage that offers low-cost oil changes as a way to create traffic into its facility. Answer: C Diff: 1 Objective: 1 AACSB: Application of knowledge
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12) Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
13) One of the five forces of industry analysis is understand the bargaining power of customers. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
14) Higher selling prices, rather than unique products or services, provide a competitive advantage for the cost leader companies. Answer: FALSE Explanation: Lower selling prices, rather than unique products or services, provide a competitive advantage for the cost leader companies. Diff: 1 Objective: 1 AACSB: Analytical thinking
15) An organization which uses product differentiation strategy will charge higher prices. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
16) The cost leadership strategy is for products and services that are similar to a competitors products and services. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
17) The cost leadership strategy is best for a company if the engineering staff is more skilled at creatively designing new products than at making process improvements. Answer: FALSE Explanation: The cost leadership strategy is best for a company if the engineering staff is more skilled at making process improvements than at creatively designing new products. Diff: 2 Objective: 1 AACSB: Analytical thinking
18) Cost-leadership strategy usually focuses productivity and efficiency improvements, elimination of waste along with effective cost control systems. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
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19) McDonalds and Walmart are examples of companies that emphasize product differentiation over cost leadership. Answer: FALSE Explanation: Cost leadership is a strategy that companies use to achieve competitive advantage by creating a low-cost-options among its competitors. Both McDonald's and Walmart have a reputation as cost leaders. McDonald's keeps cost low by purchasing in volume, use of automation, and a division of labor that allows them to employ and train inexperienced staff instead of skilled more highly paid cooks. Walmart manages its supply chain and its store and distribution operations to compete based on low selling prices. Diff: 2 Objective: 1 AACSB: Analytical thinking
20) Wright Corporation is reviewing its business strategy. The first step for Wright is to perform an industry analysis. You have been hired to help the company go through the strategy formulation process. Required: To perform the industry analysis, what areas should Wright focus on and give at least one example of how Wright can effectively deal with each area. Answer: The industry analysis is composed of five areas: 1. Competitors - How competitive is the industry for Wright's particular product? They can differentiate the product to reduce competition. 2. Potential entrants to the market - How easy is it for new competitors to join the market? Create barriers to entry, such as high capital requirements. 3. Equivalent products - Is there a substitute product available? Make continuous product improvements to reduce likelihood of equivalent products. 4. Bargaining power of customers - How many suppliers can customers access? Try to negotiate long-term purchase agreements. 5. Bargaining power of input suppliers - How many raw material vendors are there? Try to find alternative suppliers and negotiate the best price for raw materials. Diff: 2 Objective: 1 AACSB: Analytical thinking
21) Explain the term cost leadership. What are the possible ways through which a company would try to become a cost leader? How far is it desirable to implement cost reduction measures? Answer: Cost leadership is an organization's ability to achieve lower costs relative to its competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. These companies provide products and services that are similar to—not differentiated from—their competitors, but at a lower cost to the customer. Lower selling prices, rather than unique products or services, provide a competitive advantage for these cost leaders. To achieve its cost-leadership strategy, companies would try to improve its own internal capabilities. It must enhance quality and also reengineer processes to downsize and eliminate excess capacity to reduce costs. At the same time, it is not desirable to implement cost reduction measures such as compromise in product quality, cuts in personnel etc, as these kind of measures would hurt company morale and hinder future growth. Diff: 3 Objective: 1 AACSB: Analytical thinking
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Objective 13.2 1) Feedback on how a company is doing from the perspectives of financial, customer, internal business processes, and learning and growth. A) master budget B) poduct differentiation C) differential report D) balanced scorecard Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
2) Which of the following is NOT correct about the balanced scorecard? A) profits and value created for shareholders are perspectives revealed on a balance scorecard B) nonfinancial and operational indicators are reported on a balance scorecard C) the balanced scorecard reveals information about the success of the company in its target market D) the balance scorecard increases managements emphasis on short-term results Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
3) The first step to successful balanced scorecard implementation is clarifying the: A) organization's vision and strategy B) elements that pertain to value-added aspects of the business C) owner's expectations about return on investment D) objectives of all four balanced scorecard measurement perspectives Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
4) In an effective balanced scorecard: A) net income serves as the best indicator for the hard-to measure long-run operational performance B) the sales budget serves as one of the leading indicator for the hard-to measure short-run financial performance C) the sales budget serves as a leading indicator for the hard-to measure short-run nonfinancial performance D) customer satisfaction serves as one of the leading indicator for the hard-to measure long-run financial performance such as the likelihood of higher sales and income Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
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5) Which of the following statements is true of a balanced scorecard? A) The balanced scorecard reduces managers' emphasis on long-run financial performance. B) The balanced scorecard reduces managers' emphasis on short-run financial performance. C) The primary goal of using the balanced scorecard is to sustain short-run financial performance. D) The primary goal of using the balanced scorecard is to sustain short-run nonfinancial performance. Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Which of the following statements is true of the internal-business-process perspective of a balanced scorecard? A) Internal-business-process perspective is composed of three subprocesses: innovation process; learning-and-growth process; and post sales-service process. B) Internal-business-process perspective evaluates the profitability of the strategy and the creation of shareholder value. C) Internal-business-process improvement targets are often determined after benchmarking against an organization's main competitors standards. D) Internal-business-process perspective is composed of three subprocesses: operations process; learning-and-growth process; and post sales-service process. Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
7) Which of the following statements best relates to the balanced scorecard's financial perspective? A) How can we maximize profits for the current year? B) How can we increase shareholder value? C) How will we achieve continuous improvements? D) How can we maximize customer satisfaction? Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
8) Which of the following questions best relates to the balanced scorecard's internal business processes perspective? A) How do we streamline operations to lower costs to increase profits? B) How do we motivate employees so that they can become more productive? C) How can we increase our market share? D) How can our processes be executed in such a way as to l increase value to customers? Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
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9) Which of the following statements best relates to the balanced scorecard's learning and growth perspective? A) How will we empower our employees? B) How do we lower costs? C) What processes will increase value to customers? D) How can we obtain greater profits? Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
10) Which of the following could be a measure of the balanced scorecard's financial perspective? A) service response time B) number of new patents C) operating income D) defect rates Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
11) Which of the following is a measure of the balanced scorecard's internal process perspective? A) service response time B) customer satisfaction C) gross profit percentage D) cost reduction Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
12) Which of the following is a measure of the balanced scorecard's customer perspective? A) number of client complaints B) defect rates C) number of process improvements D) revenue growth Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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13) Which of the strategic perspectives of the balanced scorecard focuses on a company's own operations that create value for customers that, in turn, help achieve financial objectives? A) financial B) customer C) internal-business-process D) learning-and-growth Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
14) ________ is a measure of the balanced scorecard's internal-business-process perspective. A) Market share B) Manufacturing downtime C) Return on investment D) Number of customer complaints Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
15) Which of the following statements is a benefit of measuring environmental and social performance? A) It limits the number of performance measures, identifying only the most critical ones. B) It helps to communicate the strategy to all members of the organization. C) It enhances the identification of cause-and-effect relationships to evaluate benefits. D) It uses financial measures to serve as leading indicators of future nonfinancial performance. Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
16) A company's balanced scorecard measures yield, order-delivery time, cycle time, and errors as part of which of the following perspectives? A) financial B) customer C) internal-business-process D) learning-and-growth Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
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17) Which of the following statements is true of successfully implementing a balanced scorecard? A) External auditors should design and implement the balanced scorecard. B) Balanced scorecard should never be communicated to all employees. C) Balanced scorecard should be formed exclusively by top management. D) Management accountants should determine the balanced scorecard measures. Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
18) Which of the following statements is a possible pitfall while implementing a balanced scorecard? A) Managers using cost-benefit considerations while designing a balanced scorecard. B) Managers ignoring objective measures as market share, manufacturing yield. C) Managers using subjective measures in the balanced scorecard. D) Top management ignoring nonfinancial measures when evaluating employee performance. Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
19) The percentage of processes with real-time feedback would be a measure of which perspective? A) marketing B) customer C) learning and growth D) internal-business-process Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
20) The gross margin percentage is an example of the ________ measure of a balanced-scorecard. A) internal business process perspective B) customer perspective C) learning and growth perspective D) financial perspective Answer: D Diff: 2 Objective: 2 AACSB: Application of knowledge
21) The time taken to fulfill clients' requests is an example of the ________ measure of a balanced-scorecard. A) internal business process perspective B) customer perspective C) learning and growth perspective D) financial perspective Answer: B Diff: 2 Objective: 2 AACSB: Application of knowledge
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22) In a strategy map, a strategic objective where many ties spur out from it resulting in the achievement of many strategic objectives is called: A) distinctive objectives B) trigger point C) focal points D) orphan objectives Answer: B Diff: 2 Objective: 2 AACSB: Application of knowledge
23) The employee turnover rates is an example of the ________ measure of a balanced-scorecard. A) internal business process perspective B) customer perspective C) learning and growth perspective D) financial perspective Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
24) Stewart Corporation plans to grow by offering a sound system, the SS3000, that is superior and unique from the competition. Stewart believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy. To further company strategy, measures on the balanced scorecard would most likely include: A) number of process improvements B) manufacturing quality C) yield D) an increase in operating income from productivity gains Answer: B Diff: 3 Objective: 2 AACSB: Application of knowledge
25) Terbium Corporation manufactures water toys. It plans to grow by producing high-quality water toys that are delivered in a timely manner. There are a number of other manufacturers who produce similar water toys. Terbium believes that continuously improving its manufacturing processes and reengineering processes to downsize and eliminate excess capacity are critical to implementing its strategy. To further company strategy, measures on the balanced scorecard would most likely include: A) number of process improvements B) price premium earned C) longer cycle times D) an increase in operating income from increased profit margins Answer: A Diff: 3 Objective: 2 AACSB: Application of knowledge
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26) Which of the following statements is a disadvantage of balanced scorecards? A) Balanced scorecards ignore short-run objectives. B) Balanced scorecards may become unwieldy and difficult to understand. C) Balanced scorecards use a lot of nonfinancial measures. D) Balanced scorecards are of little use in influencing managerial behavior. Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
27) What is 'strategy mapping'? A) identifying causal links between the four perspectives of the scorecard B) mapping the business' processes that add value C) setting the mission of the corporation D) flowcharting of critical decision making Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
28) The financial perspective of the balanced scorecard focuses on the profits and value created for shareholders. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
29) The balanced scorecard uses financial and nonfinancial performance measures to evaluate short-run and long-run performance in a single report. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
30) The customer perspective of the balanced scorecard focuses on the success of the company in its target market. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
31) To achieve success, it is important to set nonfinancial objectives as well as financial objectives. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
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32) An effective balanced scorecard helps to communicate the strategy to all members of the organization by translating the strategy into a coherent and linked set of understandable and measurable operational targets. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
33) Balanced scorecards show reveal as many measures as possible to connect objectives with measures and initiatives to help assure the success of the enterprise. Answer: FALSE Explanation: The scorecard must focus management's attention on the most critical measures. Using too many measures makes it difficult for managers to process relevant information. Diff: 2 Objective: 2 AACSB: Analytical thinking
34) Balanced scorecards are almost exclusively utilized in profit-seeking organizations as nonprofits cannot benefit from focusing on financial perspectives such as net income and shareholder value. Answer: FALSE Explanation: Not-for-profit organizations design the cause-and-effect chain to achieve their strategic service objectives such as reducing the number of people in poverty or raising graduation rates and these objectives can be part of the perspectives of the balanced scorecard. Diff: 2 Objective: 2 AACSB: Application of knowledge
35) The financial perspective of the balanced scorecard identifies targeted customers and market segments and measures the company's success in these segments. Answer: FALSE Explanation: The customer perspective of the balanced scorecard identifies targeted customers and market segments and measures the company's success in these segments. Diff: 2 Objective: 2 AACSB: Application of knowledge
36) The customer perspective under the balanced scorecard approach would include measures on cost reduction. Answer: FALSE Explanation: The financial perspective under the balanced scorecard approach would include measures on cost reduction. Diff: 2 Objective: 2 AACSB: Application of knowledge
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37) In the analysis of strategy maps, strong ties are those causal links where the impact of one strategic objective on realization of another is average when compared to the strength of the other ties in the map. Answer: FALSE Explanation: The statement describes moderate ties. Strong ties are those causal links where the impact of one strategic objective on the realization of another is very high relative to other ties in the map. Diff: 2 Objective: 2 AACSB: Analytical thinking
38) Buck Corporation plans to grow by offering a computer monitor, the CM3000 that is superior and unique from the competition. Buck believes that putting additional resources into R&D and staying ahead of the competition with technological innovations are critical to implementing its strategy. Required: a. Is Buck's strategy one of product differentiation or cost leadership? Explain briefly. Identify at least one key element that you would expect to see included in the balanced scorecard: b. for the financial perspective. c. for the customer perspective. d. for the internal business process perspective. e. for the learning and growth perspective. Answer: a. Buck's strategy is one of product differentiation because the company plans to offer a product that is superior and unique from the competition. The company's balanced scorecard should describe the product differentiation strategy. Key elements should include: b. operating income growth from charging higher margins for CM3000 for the financial perspective c. market share in the high-end monitor market, customer satisfaction, and new customers for the customer perspective d. manufacturing quality, new product features added, and order delivery time for the internal business perspective e. development time for new features, improvements in manufacturing technologies, employee education and skill levels, and employee satisfaction for the learning and growth perspective Diff: 3 Objective: 2 AACSB: Application of knowledge
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39) Maloney Corporation manufactures plastic water bottles. It plans to grow by producing high-quality water bottles at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar water bottles. Maloney believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy. Required: a.
Is Maloney's strategy one of product differentiation or cost leadership? Explain briefly.
Identify at least one key element that you would expect to see included in the balanced scorecard: b. for the financial perspective. c. for the customer perspective. d. for the internal business process perspective. e. for the learning and growth perspective. Answer: a. Maloney's strategy is one of cost leadership because there are a number of other manufacturers who produce similar water bottles. To succeed, Maloney will have to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost controls. The company's balanced scorecard should describe the product differentiation strategy. Key elements should include: b. operating income growth from productivity gains and growth for the financial perspective c. growth in market share, new customers, customer responsiveness, and customer satisfaction for the customer perspective d. yield, time to complete customer jobs, and order delivery time for the internal business perspective e. number of process improvements, hours of employee training, and employee satisfaction for the learning and growth perspective Diff: 3 Objective: 2 AACSB: Application of knowledge
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40) For each of the following measures, identify which perspective of the balanced scorecard it represents: financial, customer, internal-business-process, or learning-and growth. 1. service response time 2. market share 3. gross margin percentage 4. defect rates 5. customer satisfaction 6. information system availability 7. new-product development time 8. revenue growth 9. employee turnover rates 10. setup time Answer: 1. internal-business-process 2. customer 3. financial 4. internal-business-process 5. customer 6. learning-and-growth 7. internal-business-process 8. financial 9. learning-and-growth 10. internal-business-process Diff: 3 Objective: 2 AACSB: Analytical thinking
41) Heliem Corp. uses the balanced scorecard technique to achieve its long term objectives. Managers of Heliem came to know that all the balanced scorecards objectives were achieved other than financial perspective measures for the previous period. While the learning and growth and internal business processes perspective measures were achieved with relative ease, Heliem had to strive extremely hard to achieve customer oriented measures. The company had failed miserably in achieving its financial measures. Using the given information, evaluate the strategy of Heliem and its implementation. Answer: Heliem failed miserably in achieving its financial measures. It also had to strive extremely hard to achieve customer oriented measures. This means that there were problems with the set strategies. It could be that the management had failed to identify the correct causal links between various perspectives or the measures set were too difficult to achieve. Heliem met its targets on the two perspectives that are more internally focused: learning and growth and internal business processes. This implies that it had no problems in strategy implementation. Heliem's managers can conclude that they did a good job in implementation, as the various internal nonfinancial measures it targeted improved, but that its strategy was faulty because there was no effect on customers or on long-run financial performance and value creation. Management should reevaluate the strategy and the factors that drive it. Diff: 2 Objective: 2 AACSB: Application of knowledge
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42) What are the four key perspectives in the balanced scorecard? Answer: The four key perspectives in the balanced scorecard are: a. Financial perspective - This perspective evaluates the profitability of the strategy and the creation of shareholder value. b. Customer perspective - This perspective identifies targeted customer and market segments and measures the company's success in these segments. c. Internal business processes perspective - This perspective focuses on internal operations that create value for customers that, in turn, help achieve financial performance. Managers determine internal-business-process improvement targets after benchmarking against the company's main competitors. d. Learning and growth perspective - This perspective identifies the people and information capabilities necessary for an organization to learn, improve, and grow. These capabilities help achieve superior internal processes that in turn create value for customers and shareholders. Diff: 2 Objective: 2 AACSB: Analytical thinking
43) Briefly describe what is meant by a strategy map. Answer: A strategy map is a model, depiction, or diagram that shows how different elements (units, individuals, levels) of the organization combine to deliver value to the stakeholders in the firm. The depiction describes how an organization intends to create value by connecting strategic objectives in the financial, customer, internal-business-process, and learning-and-growth perspectives in explicit cause-and-effect relationships. Diff: 1 Objective: 2 AACSB: Analytical thinking
Objective 13.3 1) Which component of strategy measures the changes in operating income attributed solely to an increase in the quantity of output between Year 1 and Year 2? A) the growth component B) the price-recovery component C) the productivity component D) the cost leadership component Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
2) ________ are the subdivisions of income that management accountants use for the strategic analysis of operating income. A) Growth, price-recovery and cost leadership components B) Growth, price-recovery and productivity components C) Cost leadership, price-recovery and productivity components D) Growth, cost leadership and productivity components Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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3) Which component of strategy measures the reduction in costs attributable to a reduction in the quantity of inputs used in Year 2 relative to the quantity of inputs that would have been used in Year 1 to produce the Year 2 output? A) the growth component B) the price-recovery component C) the productivity component D) the cost leadership component Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
4) When analyzing the change in operating income, the strategy component of growth: A) calculations are similar to the selling-price variance calculations B) isolates the change attributed solely to an increase in market share C) isolates the change attributed solely to an increase in industry growth D) isolates the change attributed solely to an increase in the quantity of units sold Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
5) When analyzing the change in operating income, the strategy component of price-recovery: A) calculations are similar to the efficiency-variance calculations B) compares the change in output price with the changes in input prices C) will report a large positive amount when a company has successfully pursued the cost leadership strategy D) isolates the change attributed solely to an increase in production efficiencies Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
6) When analyzing the change in operating income, the strategy component of productivity: A) calculations are similar to the sales-volume variance calculations B) compares the change in output price with the changes in input prices C) will report a large positive amount when a company has successfully pursued the cost leadership strategy D) isolates the change attributed solely to an increase in the quantity of units sold Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
864 richard@qwconsultancy.com
7) Which of the following statements is true of strategic analysis of operating income? A) Management accountants compare budgeted operating performance over two different periods. B) Management accountants compare actual and budgeted operating performance over the same time periods. C) Management accountants compare actual operating performance of one year and budgeted operating performance of another year. D) Management accountants compare actual operating performance over two different periods. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
8) When analyzing the change in operating income, the strategy component of price-recovery will increase when: A) capacity is reduced B) market share is increased C) selling prices are increased D) more units are sold Answer: C Diff: 2 Objective: 3 AACSB: Application of knowledge
9) When analyzing the change in operating income, the strategy component of productivity will increase when: A) capacity is reduced B) quality is enhanced C) selling prices are increased D) more units are produced and sold Answer: A Diff: 2 Objective: 3 AACSB: Application of knowledge
10) Successful implementation of a cost leadership strategy will result in: A) large favorable growth and price-recovery components B) large favorable price-recovery and productivity components C) large favorable productivity and growth components D) only a large favorable growth component Answer: C Diff: 2 Objective: 3 AACSB: Application of knowledge
865 richard@qwconsultancy.com
11) Successful implementation of a product differentiation strategy will result in: A) a large favorable growth and price-recovery components B) a large favorable price-recovery and productivity components C) a large favorable productivity and growth components D) only a large favorable growth component Answer: A Diff: 2 Objective: 3 AACSB: Application of knowledge
12) In 2019, Smart Office Systems Inc. (SOSI) used 25,840 pounds of plastic (direct materials) to produce 8000 units as opposed to 2020 when SOSI produced 8500 units using 27,840 pounds of plastic. The type of plastic SOSI uses cost $5 per pound in 2019 and rose to $5.25 per pound in 2020. In comparing results for these two years, what would be the cost effect of growth for the plastic material? A) $8075 F B) $8479 U C) $8075 U D) $10,000 U Answer: C Explanation: C) ((25,840 / 8000) × (8500 - 8000) × $5 = $8075 U Diff: 3 Objective: 3 AACSB: Analytical thinking
13) Assuming previous year's production capacity was adequate to produce current year output, the cost effect of growth for fixed costs is calculated by multiplying the difference between ________ by price per unit of capacity in the previous year. A) actual units of capacity in current year and actual units of capacity in previous year B) capacity units required to produce current year output in previous year and the current year capacity units C) actual units of capacity in previous year and actual units of capacity in previous year D) capacity units required to produce previous year output in current year and the previous year capacity units Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
14) The revenue effect of price recovery is calculated by multiplying the difference in selling price (current year minus the previous year) by: A) actual units sold in the current year B) budgeted units sold in the previous year C) budgeted units sold in the current year D) actual units sold in the previous year Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
866 richard@qwconsultancy.com
15) An operating income analysis of Fast Processing Company revealed the following: Operating income for 2019 Add growth component Deduct price-recovery component Add productivity component Operating income for 2020
$1,207,000 102,000 (95,000) 90,000 $1,304,000
Fast's operating income gain is consistent with the: A) product differentiation strategy B) product leadership strategy C) cost differentiation strategy D) cost leadership strategy Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge
16) The cost effect of productivity for variable costs is calculated by multiplying the difference in actual input units used to produce current year output and units of input required to produce current year output in previous year by the: A) price per input unit of previous year B) price per unit of capacity in the previous year C) price per unit of capacity in the current year D) price per input unit of current year Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
867 richard@qwconsultancy.com
17) Foley Products Company makes a household appliance with model number X500. The goal for 2020 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of X500 units that can be produced. The industry market size for appliances increased 15% from 2019 to 2020. The following additional data are available for 2019 and 2020: 2019 2020 Units of X500 produced and sold 12,000 13,800 Selling price $145 $140 Direct materials (square feet) 36,000 34,800 Direct material costs per square foot $13 $15 Manufacturing capacity for X500 (units) 13,000 12,300 Total conversion costs $377,000 $356,700 Conversion costs per unit of capacity $29 $29 What is operating income for 2019? A) $895,000 B) $1,740,000 C) $1,363,000 D) $1,272,000 Answer: A Explanation: A) ($145 × 12,000) - [($13 × 36,000) + ($29 × 13,000)] = $895,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
868 richard@qwconsultancy.com
18) Foley Products Company makes a household appliance with model number X500. The goal for 2020 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of X500 units that can be produced. The industry market size for appliances increased 10% from 2019 to 2020. The following additional data are available for 2019 and 2020: 2019 12,000 $145 36,000 $13 13,000 $377,000 $29
Units of X500 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for X500 (units) Total conversion costs Conversion costs per unit of capacity
2020 13,800 $140 34,800 $15 12,300 $356,700 $29
What is operating income for 2020? A) $1,716,000 B) $1,127,200 C) $889,900 D) $875,200 Answer: C Explanation: C) ($120 × 14,300) - [($16 × 36,800) + ($21 × 11,300)] = $889,900 Diff: 2 Objective: 3 AACSB: Analytical thinking
19) Which of the following statements is true of strategic analysis of operating income? A) Change in operating income from one period to any future period can be subdivided into product differentiation, cost leadership, and growth components. B) Subdividing the change in operating income to evaluate the success of a strategy has no similarity to the variance analysis. C) Management accountants compare actual and budgeted operating performance over the same time periods. D) It focuses on differences in individual categories of costs (direct materials, direct manufacturing labor, and overheads). Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
869 richard@qwconsultancy.com
20) Trusted Products Company makes a household appliance with model number L800. The goal for 2020 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of L800 units that can be produced. The industry market size for appliances increased 15% from 2019 to 2020. The following additional data are available for 2019 and 2020: 2019 2020 Units of L800 produced and sold 12,000 37,950 Selling price $145 $345 Direct materials (square feet) 36,000 87,000 Direct material costs per square foot $13 $33 Manufacturing capacity for L800 (units) 13,000 39,850 Total conversion costs $866,250 $836,850 Conversion costs per unit of capacity $29 $29 What is the revenue effect of the growth component? A) $1,782,000 U B) $418,500 F C) $418,500 U D) $1,782,000 F Answer: D Explanation: D) Revenue effect of the growth component = (37,950 - 33,000) × $360 = $1,782,000 F Diff: 2 Objective: 3 AACSB: Application of knowledge
870 richard@qwconsultancy.com
21) Trusted Products Company makes a household appliance with model number L800. The goal for 2020 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of L800 units that can be produced. The industry market size for appliances increased 10% from 2019 to 2020. The following additional data are available for 2019 and 2020: 2019 2020 Units of L800 produced and sold 12,000 37,950 Selling price $145 $345 Direct materials (square feet) 36,000 87,000 Direct material costs per square foot $13 $33 Manufacturing capacity for L800 (units) 13,000 39,850 Total conversion costs $866,250 $836,850 Conversion costs per unit of capacity $29 $29 What is the cost effect of the growth component for direct materials? A) $291,400 U B) $1,326,000 F C) $1,326,000 U D) $291,400 F Answer: A Explanation: A) Units of input required to produce 2019 output in 2020 = 94,000 × 37,400/34,000 = 103,400 Cost effect of the growth component for direct materials = (103,400 - 94,000) × $31 = $291,400 U Diff: 3 Objective: 3 AACSB: Application of knowledge
871 richard@qwconsultancy.com
22) Trusted Products Company makes a household appliance with model number L800. The goal for 2020 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of L800 units that can be produced. The industry market size for appliances increased 15% from 2019 to 2020. The following additional data are available for 2019 and 2020: 2019 2020 Units of L800 produced and sold 12,000 37,950 Selling price $145 $345 Direct materials (square feet) 36,000 87,000 Direct material costs per square foot $13 $33 Manufacturing capacity for L800 (units) 13,000 39,850 Total conversion costs $866,250 $836,850 Conversion costs per unit of capacity $29 $29 What is the cost effect of the growth component for conversion costs? A) $1600 U B) $0 C) $40,000 U D) $40,000 F Answer: B Explanation: B) Cost effect of the growth component for conversion costs = (50,000 - 50,000) × $25 = $0 Diff: 3 Objective: 3 AACSB: Application of knowledge
872 richard@qwconsultancy.com
23) Trusted Products Company makes a household appliance with model number L800. The goal for 2020 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of L800 units that can be produced. The industry market size for appliances increased 2% from 2019 to 2020. The following additional data are available for 2019 and 2020: 2019 2020 Units of L800 produced and sold 12,000 37,950 Selling price $145 $345 Direct materials (square feet) 36,000 87,000 Direct material costs per square foot $13 $33 Manufacturing capacity for L800 (units) 13,000 39,850 Total conversion costs $866,250 $836,850 Conversion costs per unit of capacity $29 $29 Overall, was Trusted Products's strategy successful in 2020? A) Yes, because total revenues increased B) No, because operating income decreased C) No, because direct materials usage per unit increased D) No, because direct material cost per unit decreased Answer: B Explanation: B) Change in revenue (31,620 × $290) - (31,000 × 310) = $440,200 U Change in materials costs (96,500 × $36) - (98,000 × $34) = $142,000 U Change in conversion costs ($1,162,500 - $1,120,500) = $42,000 F Change in operating income $540,200 U Diff: 3 Objective: 3 AACSB: Application of knowledge
873 richard@qwconsultancy.com
24) Strategic Analysis of Profitability of King Philip Company:
Revenues ($) Costs Operating income
Income Statement Amounts in 2019 44,000 27,500
Revenue and Cost Effects of Growth Component in 2020 7000 F (a)
Revenue and Cost Effects of Price-Recovery Component in 2020 2300 U 800 U
Cost Effect of Productivity Component in 2020 (b) (c)
2500 F
3100 U
2600 F
16,500
Income Statement Amounts in 2020 (e) 30,200 (d)
What is the cost effect of the growth component (a)? A) $9500 F B) $4500 U C) $9500 U D) $4500 F Answer: B Explanation: B) Cost effect of the growth component = $7000 F - $2500 F = $4500 U Diff: 2 Objective: 3 AACSB: Application of knowledge
25) Strategic Analysis of Profitability of King Philip Company:
Revenues ($) Costs Operating income
Income Statement Amounts in 2019 40,000 29,500
Revenue and Cost Effects of Growth Component in 2020 14,000 F (a)
Revenue and Cost Effects of Price-Recovery Component in 2020 1100 U 300 U
Cost Effect of Productivity Component in 2020 (b) (c)
9000 F
1400 U
2600 F
10,500
Income Statement Amounts in 2020 (e) 32,200 (d)
What is the revenue effect of the productivity component (b)? A) $0 B) $2600 U C) $1200 F D) $2600 F Answer: A Explanation: A) The productivity component measures the change in costs attributable to a change in the quantity of inputs used. The revenues is not considered and therefore is always $0. Diff: 3 Objective: 3 AACSB: Application of knowledge
874 richard@qwconsultancy.com
26) Strategic Analysis of Profitability of King Philip Company:
Revenues ($) Costs Operating income
Income Statement Amounts in 2019 42,000 20,500
Revenue and Cost Effects of Growth Component in 2020 14,000 F (a)
Revenue and Cost Effects of Price-Recovery Component in 2020 1700 U 600 U
Cost Effect of Productivity Component in 2020 (b) (c)
9600 F
2300 U
2600 F
21,500
Income Statement Amounts in 2020 (e) 22,900 (d)
What is the cost effect of the productivity component (c)? A) $0 B) $1400 U C) $300 F D) $2600 F Answer: D Explanation: D) Cost effect of the productivity component = 2600 F + $0 = $2600 Or Cost effect of the productivity component = $20,500 + $4400 U + $600 U - $22,900 = $2600 Diff: 3 Objective: 3 AACSB: Application of knowledge
27) Strategic Analysis of Profitability of King Philip Company:
Revenues ($) Costs Operating income
Income Statement Amounts in 2019 39,000 26,500
Revenue and Cost Effects of Growth Component in 2020 9000 F (a)
Revenue and Cost Effects of Price-Recovery Component in 2020 2500 U 800 U
Cost Effect of Productivity Component in 2020 (b) (c)
3800 F
3300 U
2400 F
12,500
Income Statement Amounts in 2020 (e) 30,100
What is the operating income amount for 2020 (d)? A) $45,500 B) $32,500 C) $15,400 D) $9600 Answer: C Explanation: C) Operating income = $12,500 + $3800 F - $3300 U + $2400 F = $15,400 Diff: 3 Objective: 3 AACSB: Application of knowledge
875 richard@qwconsultancy.com
(d)
28) Strategic Analysis of Profitability of King Philip Company:
Revenues ($) Costs Operating income
Income Statement Amounts in 2019 40,000 23,500
Revenue and Cost Effects of Growth Component in 2020 13,000 F (a)
Revenue and Cost Effects of Price-Recovery Component in 2020 2400 U 600 U
Cost Effect of Productivity Component in 2020 (b) (c)
8700 F
3000 U
2500 F
16,500
What is the revenue amount for 2020 (e)? A) $1200 B) $40,000 C) $50,600 D) $24,700 Answer: C Explanation: C) Revenue = $40,000 + $13,000 F - $2400 U = $50,600 Or Operating income = $16,500 + $8700 F - $3000 U + $2500 F = $24,700 Revenue = $25,900 + 24,700 = $50,600 Diff: 3 Objective: 3 AACSB: Application of knowledge
876 richard@qwconsultancy.com
Income Statement Amounts in 2020 (e) 25,900 (d)
29) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 135 customers in 2019 and 140 customers in 2020. What is operating income for 2019? A) $4,974,000 B) $7,860,000 C) $7,269,000 D) $5,203,500 Answer: A Explanation: A) Total costs = [($51 × 154,000) + ($102 × 63,500) + ($15,300 × 150)] = $16,626,000 Operating income = ($400 × 54,000) - $16,626,000 = $4,974,000 Diff: 3 Objective: 3 AACSB: Application of knowledge
877 richard@qwconsultancy.com
30) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 140 customers in 2019 and 145 customers in 2020. What is operating income in 2020? A) $7,463,500 B) $15,841,900 C) $9,212,000 D) $15,921,775 Answer: B Explanation: B) Total costs = [($57 × 161,750) + ($109 × 62,900) + ($15,975 × 150)] = $18,472,100 Operating income = ($570 × 60,200) - $18,472,100 = $15,841,900 Diff: 3 Objective: 3 AACSB: Application of knowledge
878 richard@qwconsultancy.com
31) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 135 customers in 2019 and 140 customers in 2020. What is the change in operating income from 2019 to 2020? A) $2,418,350 U B) $3,740,000 F C) $2,418,350 F D) $3,740,000 U Answer: C Explanation: C) 2019 Total costs = [($51 × 150,000) + ($100 × 62,700) + ($15,500 × 150)] = $16,245,000 Operating income = ($400 × 55,000) - $16,245,000 = $5,755,000 2020 Total costs = [($55 × 153,300) + ($107 × 62,700) + ($16,175 × 150)] = $17,566,650 Operating income = ($440 × 58,500) - $17,566,650 = $8,173,350 Change in operating income =$5,755,000 - $8,173,350 = $2,418,350 F Diff: 3 Objective: 3 AACSB: Application of knowledge
879 richard@qwconsultancy.com
32) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 175 customers in 2019 and 180 customers in 2020. What is the revenue effect of the growth component? A) $3,780,000 F B) $1,200,000 U C) $3,780,000 U D) $1,200,000 F Answer: D Explanation: D) Revenue effect of the growth component = (54,000 - 52,000) × $600 = $1,200,000 F Diff: 2 Objective: 3 AACSB: Application of knowledge
880 richard@qwconsultancy.com
33) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 160 customers in 2019 and 165 customers in 2020. What is the cost effect of the growth component? (Round any intermediary calculations to two decimals and your final answer to the nearest dollar.) A) $280,500 U B) $1,449,700 U C) $1,449,700 F D) $280,500 F Answer: A Explanation: A) Units of output required to produce 2020 input in 2019 = (154,000/56,000) × 58,000 = 159,500 Cost effect of growth for direct materials = (159,500 - 154,000) × $51 = $280,500 U Cost effect of growth for conversion costs = (63,700 - 63,700) × $109 = 0 Cost effect of growth for selling and customer-service costs = (170 - 170) × $15,000 = 0 Cost effect of the growth component = $280,500 U + 0 + 0 = $280,500 U Diff: 3 Objective: 3 AACSB: Application of knowledge
881 richard@qwconsultancy.com
34) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 165 customers in 2019 and 170 customers in 2020. What is the net effect on operating income as a result of the growth component? (Round any intermediary calculations to two decimals and your final answer to the nearest dollar.) A) $2,977,094 F B) $473,600 F C) $473,600 U D) $2,977,094 U Answer: B Explanation: B) Revenue effect of the growth component = (52,000 - 50,000) × $400 = $800,000 F Units of input required to produce 2020 output in 2019 = (160,000 / 50,000) × $52,000 = 166,400 Cost effect of growth for direct materials = (166,400 - 160,000) × $51= $326,400 U Cost effect of growth for conversion costs = (62,500- 62,500) × $110 = $0 Cost effect of growth for selling and customer-service costs = (180 - 180) × $15,400 = $0 Cost effect of the growth component = $326,400 U + 0 + 0 = $326,400 U Net effect on operating income as a result of the growth component = $800,000 F + $326,400 U = $473,600 F Diff: 3 Objective: 3 AACSB: Application of knowledge
882 richard@qwconsultancy.com
35) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 180 customers in 2019 and 185 customers in 2020. What is the revenue effect of the price-recovery component? A) $3,132,000 U B) $1,320,000 U C) $1,320,000 F D) $3,132,000 F Answer: D Explanation: D) Revenue effect of the price-recovery component = ($660 - $600) × 52,200 = $3,132,000 F Diff: 2 Objective: 3 AACSB: Application of knowledge
883 richard@qwconsultancy.com
36) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 155 customers in 2019 and 160 customers in 2020. What is the cost effect of the price-recovery component? (Round any intermediary calculations to two decimals and your final answer to the nearest dollar.) A) $365,580 F B) $365,580 U C) $1,845,740 U D) $1,845,740 F Answer: C Explanation: C) Units of output required to produce 2020 input in 2019 = (159,000/58,000) × 60,500 = 165,770 Cost effect of price-recovery for direct materials = ($61 - $54) × 165,770 = $1,160,390 U Cost effect of price-recovery for conversion costs = ($115 - $106) × $63,400 = $570,600 U Cost effect of price-recovery for selling and customer-service costs = ($15,675 - $15,000) × 170 = $114,750 U Cost effect of the price-recovery component = $1,160,390 U + $570,600 U + $114,750 U = $1,845,740 U Diff: 3 Objective: 3 AACSB: Application of knowledge
884 richard@qwconsultancy.com
37) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 160 customers in 2019 and 165 customers in 2020. What is the net effect on operating income as a result of the price-recovery component? (Round any intermediary calculations to two decimals and your final answer to the nearest dollar.) A) $1,292,700 F B) $1,545,000 U C) $1,292,700 U D) $1,545,000 F Answer: A Explanation: A) Revenue effect of the price-recovery component = (650 - 600) × 62,500 = $3,125,000 F Units of input required to produce 2020 output in 2019 = (152,000 / 59,000) × 62,500 = 161,250 Cost effect of price-recovery for direct materials = ($68 - $60) × 161,250 = $1,290,000 U Cost effect of price-recovery for conversion costs = ($107 - $100) × 62,900 = $440,300 U Cost effect of price-recovery for selling and customer-service costs = Cost effect of the price-recovery component = $1,290,000 U + $440,300 U + $102,000 U = $1,832,300 U Net effect on operating income as a result of the price-recovery component = $3,125,000 F + $1,832,300 U = $1,292,700 F Diff: 3 Objective: 3 AACSB: Application of knowledge
885 richard@qwconsultancy.com
38) Following a strategy of product differentiation, Izzy's Limited Company makes a high-end Appliance, XT15. Izzy's Limited presents the following data for the years 2019 and 2020:
Units of XT15 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity in units of XT15 Total conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 54,000 $400 154,000 $51 63,500 $866,250 $102 150 $2,295,000 $15,300
2020 56,200 $470 157,750 $59 63,500 $836,850 $108 150 $2,388,750 $15,925
Izzy's Limited produces no defective units but it wants to reduce direct materials usage per unit of XT15. Manufacturing conversion costs in each year depend on production capacity defined in terms of XT15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Izzy's Limited had 145 customers in 2019 and 150 customers in 2020. What is the net effect on operating income as a result of the productivity component? (Round any intermediary calculations to two decimals and your final answer to the nearest dollar.) A) $1,664,016 U B) $124,672 F C) $1,664,016 F D) $124,672 U Answer: B Explanation: B) Units of input required to produce 2020 output in 2019 = (150,000 / 59,000) × $61,200 = 155,448 Cost effect of productivity for direct materials = (153,500 - 155,448) × $64 = $124,672 F Cost effect of productivity for conversion costs = (63,200- 63,200) × 114= 0 Cost effect of productivity for selling and customer-service costs = (160 - 160) × $16,150 = 0 Cost effect of the productivity component = $124,672 F + 0 + 0 = $124,672 F Diff: 3 Objective: 3 AACSB: Application of knowledge
886 richard@qwconsultancy.com
39) Smart Office Systems Inc, (SOSI) a manufacturer of office equipment, in 2020, one of its best years, SOSI sold 1,000,000 units of its YAZ1 calculator for $20 each. In 2019, it sold 930,000 of that same unit for $17.75 each. The cost of the calculator was $16 and $15.00 for 2020 and 2019 respectively. Using the data from 2020 and 2019, what was SOSI's revenue effect of growth? A) $1,242,500 U B) $192,500 F C) $1,242,500 F D) $280,000 U Answer: C Explanation: C) (1,000,000 - 930,000) × $17.75 = $1,242,500 F Diff: 3 Objective: 3 AACSB: Application of knowledge
40) Cobalt Company makes a household appliance with model number X500. The goal for 2020 is to improve product design and outlook. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of X500 units that can be produced. The industry market size for appliances increased 10% from 2019 to 2020. The following additional data are available for 2019 and 2020:
Units of X500 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for X500 (units) Total conversion costs Conversion costs per unit of capacity
2019 20,000 $150 30,000 $10 20,500 $451,000 $22
2020 20,000 $170 32,500 $10 20,500 $493,250 $22.5
Out of the two basic strategies, Cobalt's strategy is: A) product differentiation because Cobalt is able to produce a given quantity of output with a lower cost of inputs B) cost leadership because Cobalt is able to produce a given quantity of output with a lower cost of inputs C) cost leadership because Cobalt is able to increase its output price faster than the increase in its input prices D) product differentiation because Cobalt is able to increase its output price faster than the increase in its input prices Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge
887 richard@qwconsultancy.com
41) Jackson Corporation produced 1,000 units of a product in 2020 that required 25,000 pounds of material. The price for the material was $3.00 per pound in 2020 and $3.25 in 2019. Jackson's cost accountant has estimated that to produce the same 1,000 units in 2019 would have required 29,700 pounds of material. What was the cost effect of productivity for materials? A) $15,275 F B) $14,100 F C) $14,100 U D) $15,275 U Answer: B Explanation: B) (25,000 - 29,700) × $3.00 = $14,100 F Diff: 3 Objective: 3 AACSB: Analytical thinking
42) The price-recovery component of the change in operating income measures solely the effect of price changes on revenues but not costs. Answer: FALSE Explanation: It measures the change in operating income from the effect of price changes on revenue and costs. Diff: 1 Objective: 3 AACSB: Analytical thinking
43) When analyzing the change in operating income, the strategy component of growth will increase when more units are sold. Answer: TRUE Diff: 2 Objective: 3 AACSB: Application of knowledge
44) The revenue effect of growth is calculated by multiplying the difference in units sold (current year minus the previous year) by selling price in the current year. Answer: FALSE Explanation: The revenue effect of growth is calculated by multiplying the difference in units sold (current year minus the previous year) by selling price in the previous year. Diff: 2 Objective: 3 AACSB: Analytical thinking
45) Cost effect of productivity for fixed costs is calculated by multiplying the difference in units of capacity (current year capacity units minus the previous year capacity units) by price per unit of capacity of the previous year. Answer: FALSE Explanation: Cost effect of productivity for fixed costs is calculated by multiplying the difference in units of capacity, current year capacity units minus the previous year capacity units, by price per unit of capacity of the current year. Diff: 2 Objective: 3 AACSB: Analytical thinking
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46) The productivity component measures the amount by which operating income increases by using inputs efficiently to lower costs. Answer: TRUE Diff: 1 Objective: 3 AACSB: Application of knowledge
47) An increase in production capacity will always result in a favorable cost effect of productivity for variable costs in the short run. Answer: FALSE Explanation: An increase in production capacity will have no cost effect of productivity for variable costs, it may affect fixed costs productivity. Diff: 2 Objective: 3 AACSB: Application of knowledge
48) An analysis of Revere Beach Corporation's operating income changes between 2019 and 2020 show the following: Operating income for 2019 Add growth component Deduct price-recovery component Add productivity component Operating income for 2020
$4,750,000 180,000 (60,000) 285,000 $5,155,000
Required: Is Revere's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly. Answer: Revere's operating income gain is consistent with the cost leadership strategy because the increase in operating income was driven by the $285,000 gain in productivity. It appears that Revere's management took advantage of its productivity gain to reduce prices and to fuel growth. Diff: 3 Objective: 3 AACSB: Application of knowledge
889 richard@qwconsultancy.com
49) An analysis of Terbolt Corporation's operating income changes between 2019 and 2020 show the following: Operating income for 2019 Add growth component Add price-recovery component Deduct productivity component Operating income for 2020
$4,750,000 75,000 398,000 (50,000) $5,173,000
Required: Is Terbolt's operating income gain consistent with the product differentiation or cost leadership strategy? Explain briefly. Answer: Terbolt's operating income gain is consistent with the product differentiation strategy because the increase in operating income was driven by the $398,000 gain in the price-recovery component. It appears that Terbolt's superior quality stimulated slight growth and allowed it to charge a price premium for its products. Diff: 3 Objective: 3 AACSB: Application of knowledge
890 richard@qwconsultancy.com
50) Following a strategy of product differentiation, Somerset Corporation makes a high-end computer monitor, CM7. Somerset Corporation presents the following data for the years 2019 and 2020:
Units of CM 7 produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity for CM7 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 5,000 $400 16,000 $40 10,000 $1,000,000 $100 60 $360,000 $6,000
2020 6,500 $440 16,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250
Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2020. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Somerset Corporation has 100 customers in 2019 and 115 customers in 2020. The industry market size for high-end computer monitors increased 5% from 2017 to 2020. Required: a. What is operating income for 2019? b. What is operating income in 2020? c. What is the change in operating income from 2019 to 2020? Answer: a. ($400 × 6,000) - [($40 × 16,000) + ($100 × 10,000) + ($6,000 × 60)] = $400,000 b.
($440 × 6,500) - [($44 × 16,375) + ($110 × 10,000) + ($6,250 × 58)] = $677,500
c.
$400,000 - $677,500 = $277,500 F
Diff: 3 Objective: 3 AACSB: Application of knowledge
891 richard@qwconsultancy.com
51) Following a strategy of product differentiation, Americonic Corporation makes a high-end computer monitor. Americonic Corporation presents the following data for the years 2019 and 2020:
Units produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 6,000 $420 16,000 $40 10,000 $1,000,000 $100 60 $360,000 $6,000
2020 6,500 $440 16,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250
Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit in 2020. Manufacturing conversion costs in each year depend on production capacity defined in terms of units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 100 customers in 2019 and 115 customers in 2020. The industry market size for high-end computer monitors increased 5% from 2019 to 2020. Required: a. What is the revenue effect of the growth component? b. What is the cost effect of the growth component? c. What is the net effect on operating income as a result of the growth component? Answer: a. (6,500 - 6,000) × $420 = $210,000 F b. 16,000 × 6,500 / 6,000 = 17,333; [(17,333 - 16,000) × $40] + [(10,000 - 10,000) × $100] + [(60 - 60) × $6,000] = $53,320 U c.
$210,000 F + $53,320 U = $156,680 F
Diff: 3 Objective: 3 AACSB: Application of knowledge
892 richard@qwconsultancy.com
52) Following a strategy of product differentiation, Somerset Corporation makes a high-end computer monitor, CM7. Somerset Corporation presents the following data for the years 2019 and 2020:
Units of CM7 produced and sold Selling price Direct materials (pounds) Direct materials costs per pound Manufacturing capacity for CM12 (units) Conversion costs Conversion costs per unit of capacity Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
2019 5,000 $400 15,000 $40 10,000 $1,000,000 $100 60 $360,000 $6,000
2020 5,500 $440 15,375 $44 10,000 $1,100,000 $110 58 $362,500 $6,250
Somerset Corporation produces no defective units but it wants to reduce direct materials usage per unit of CM7 in 2019. Manufacturing conversion costs in each year depend on production capacity defined in terms of CM7 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Ernsting Corporation has 100 customers in 2019 and 115 customers in 2020. The industry market size for high-end computer monitors increased 5% from 2019 to 2020. Required: a. What is the revenue effect of the price-recovery component? b. What is the cost effect of the price-recovery component? c. What is the net effect on operating income as a result of the price-recovery component? d. What is the net effect on operating income as a result of the productivity component? Answer: a. ($440 - $400) × 5,500 = $220,000 F b. 15,000 × 5,500 / 5,000 = 16,500; [($44 - $40) × 16,500] + [($110 - $100) × 10,000] + [($6,250 - $6,000) × 60] = $181,000 U c.
$220,000 F + $181,000 U = $39,000 F
d. 15,000 × 5,500 / 5,000 = 16,500; [(15,375 - 16,500) × $44] + [(10,000 - 10,000) × $110] + [(58 - 60) × 6,250] = $62,000 F Diff: 3 Objective: 3 AACSB: Application of knowledge
893 richard@qwconsultancy.com
53) A company pursuing cost leadership may try to further analyze the change in operating income even when the growth component is highly favorable. Why? Answer: A company pursuing cost leadership may try to further analyze the change in operating income even when the growth component is highly favorable because growth might have been helped by an increase in industry market size. Therefore, at least part of the increase in operating income may be attributable to favorable economic conditions in the industry rather than to any successful implementation of strategy. Some of the growth might relate to a management decision to decrease selling price, made possible by the productivity gains. In this case, the increase in operating income from cost leadership must include operating income from productivity-related growth in market share in addition to the productivity gain. Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 13.4 1) Engineered costs: A) have a no repetitive relationship with output B) have no measurable cause-and-effect relationship between output and resources used C) include research and development and human resource costs D) include a high level of certainty Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
2) Which of the following statements is of true engineered costs? A) They arise from periodic (usually annual) decisions regarding the maximum amount to be incurred. B) They have a detailed, physically observable, and repetitive relationship with output. C) They include advertising, executive training, and R&D. D) They have high level of uncertainty. Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
3) Which of the following statements is true of discretionary costs? A) They arise from day-to-day operational decisions. B) They include conversion cost, direct material costs. C) They have measurable cause-and-effect relationship between output and resources used. D) They have high level of uncertainty. Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
894 richard@qwconsultancy.com
4) Which of the following is NOT a discretionary cost? A) the cost of social networking activities to promote a product B) the cost of total quality management training for executives C) legal costs D) the cost to train factory general managers to use a new activity based management system Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
5) Which of the following is NOT an engineered cost? A) direct material cost of a major component of the product B) advertising costs for a new product that the factory will start producing C) the cost of direct laborers who work in the factory D) depreciation of all factory tools Answer: B Diff: 2 Objective: 4 AACSB: Application of knowledge
6) Engineered costs: A) possess a high level of uncertainty but are significant costs when they are incurred B) are non repetitive but are physically observable C) are from physically observable activities and have a repetitive relationship with output D) are embedded in the manufacturing process but have no measurable cause-and-effect relationship between output and resources used Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
7) Conversion costs are an example of: A) direct engineered costs B) indirect engineered costs C) discretionary costs D) unused capacity costs Answer: B Diff: 2 Objective: 4 AACSB: Application of knowledge
8) Managers can reduce capacity-based fixed costs by measuring and managing: A) unused capacity B) variable costs C) engineered costs D) discretionary costs Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
895 richard@qwconsultancy.com
9) In 2020, Commodity Inc., processor of whole grain flour, had the capacity to produce 10,000,000 pounds of product at a conversion cost per pound of $0.20. The conversion cost per pound was $0.15 in 2019 (the previous year). The direct material cost per pound for both years was $0.07 per pound and in 2020, Commodity Inc. produced 9,300,000 pounds while actual production for the previous year was 8,600,000 pounds. What was the cost of unused capacity in 2020? A) $280,000 B) $140,000 C) $105,000 D) $210,000 Answer: B Explanation: B) (10,000,000 × 0.20) - (9,300,000 × 0.20) = $140,000 Diff: 2 Objective: 4 AACSB: Analytical thinking
10) BarGraphs Corp. had capacity to produce 12,000 units of L3 using 30,000 kg of direct materials. BarGraphs produced 11,650 units of L3 by processing 25,500 kg of direct materials. Conversion cost per unit is $7.50. BarGraphs can add or reduce manufacturing capacity in increments of 4500 kgs. What is the cost of unused capacity for conversion costs of BarGraphs? A) $3000 B) $4500 C) $13,500 D) $2625 Answer: C Explanation: C) Conversion costs per kg of direct material = $7.50 / (30,000/12,000) = $3.00 per kg Cost of unused capacity for conversion costs = (30,000 kgs × $3.00) - (25,500 kgs × $3.00) = $13,500 Diff: 2 Objective: 4 AACSB: Application of knowledge
11) BarGraphs Corp. had capacity to produce 4000 units of L3 using 40,000 kg of direct materials. BarGraphs produced 3850 units of L3 by processing 35,500 kg of direct materials. Conversion cost per unit is $7.00. BarGraphs can add or reduce manufacturing capacity in increments of 4500 kgs. What would be the cost savings if BarGraphs decides to reduce manufacturing capacity by 4500 kgs? A) $3150 B) $700 C) $1050 D) $4500 Answer: A Explanation: A) Conversion costs per kg of direct material: $7.00 / (40,000/4000) = $0.70 per kg Cost savings = 4500 kgs × $0.70 = $3150 Diff: 2 Objective: 4 AACSB: Application of knowledge
896 richard@qwconsultancy.com
12) Which of the following statements is a valid argument for BarGraphs to reduce its manufacturing capacity? A) BarGraphs's strategy is to grow its business as L3 have unlimited demand. B) BarGraphs can call back the expelled employees if the reduced capacity level proves to be insufficient. C) BarGraphs already has a high employee turnover rate and a few more will make no difference. D) BarGraphs wants to reduce product costs as they want to be the cost leaders. Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
13) Direct material cost is an example of: A) conversion costs B) discretionary costs C) engineered costs D) downsized costs Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
14) The amount of productive capacity available over and above the productive capacity employed to meet customer demand in the current period is the unused capacity. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
15) Discretionary costs arise from periodic (usually annual) decisions and have a measurable cause-and-effect relationship between output and resources used. Answer: FALSE Diff: 1 Objective: 4 AACSB: Analytical thinking
16) Discretionary costs are not easily controllable compared to engineered costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
17) Engineered costs contain a higher level of uncertainty than discretionary costs. Answer: FALSE Explanation: Discretionary costs contain a higher level of uncertainty than engineered costs. Diff: 2 Objective: 4 AACSB: Analytical thinking
897 richard@qwconsultancy.com
18) Engineered costs result from a cause-and-effect relationship between the cost driver output and the resources used to produce that output. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
19) Advertising cost is an example of a discretionary cost. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
20) It is relatively easy to identify unused capacity for discretionary costs. Answer: FALSE Explanation: It is DIFFICULT to identify unused capacity for discretionary costs because of the lack of a cause-and-effect relationship. Diff: 2 Objective: 4 AACSB: Analytical thinking
21) Downsizing is an integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
22) Manufacturing overhead cost is an example of indirect engineered costs. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
23) Identifying unused capacity for R&D costs is relatively easy once the impact of downsizing is estimated for engineered costs. Answer: FALSE Explanation: identifying unused capacity for discretionary costs is difficult and involves considerable judgement by management. Diff: 2 Objective: 4 AACSB: Analytical thinking
898 richard@qwconsultancy.com
24) Define engineered and discretionary costs and give two examples of each. Answer: An engineered cost results from a cause-and-effect relationship between the cost driver output and the resources used to produce that output. An example of an engineered cost would be direct materials in the production of products. Other examples of engineered costs might include shipping costs or electrical costs. A discretionary cost has two features. The first feature is that the cost arises from a periodic decision regarding the amount of cost to be incurred. The second feature is that no measurable cause-and-effect relationship exists between the output and the resources used. An example of a discretionary cost would be the cost of advertising for a product, the amount spent on researching new products, or employee training expenses. Diff: 2 Objective: 4 AACSB: Analytical thinking
25) Can a company identify unused capacity and, if so, how can unused capacity be managed? Answer: It is relatively easy for a company to recognize unused capacity for engineered costs, but it is more difficult for a company to recognize unused capacity for discretionary costs. Downsizing, or rightsizing, is an approach to managing unused capacity by matching costs to the activities that need to be performed. Diff: 2 Objective: 4 AACSB: Analytical thinking
Objective 13.A 1) The lower the inputs for a given set of outputs or the higher the outputs for a given set of inputs, the higher the level of: A) overallocation B) expenditure C) productivity D) labor costs Answer: C Diff: 1 Objective: A1 AACSB: Analytical thinking
2) Excellent Mugs Inc. produced 1,200,000 units in 2020 at a units of output per dollar of input cost was $0.10. Its cost of input at 2020 prices that would have been used in 2019 was $13,333,333. How much did the total factor productivity (TFP) increase as a result of 2020 operations? A) about 10.0% B) about 11.1% C) about 9% D) about 19% Answer: B Explanation: B) 1,200,000/13,333,333 = 0.09, (0.10 - 0.09)/0.09 = 0.1111 = 11.1% Diff: 3 Objective: A1 AACSB: Analytical thinking
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3) Partial productivity multiplied by the quantity of input used results in: A) expected production B) budgeted output C) actual output D) a ratio Answer: C Diff: 1 Objective: A1 AACSB: Analytical thinking
4) ________ measures the relationship between actual inputs used and actual outputs achieved. A) Strategy map B) Planning variance C) Productivity D) Discretionary costs Answer: C Diff: 1 Objective: A1 AACSB: Analytical thinking
5) Which of the following is the correct mathematical expression to calculate partial productivity? A) Sales value of output produced ÷ Quantity of all inputs used B) Quantity of output produced ÷ Quantity of input used C) Quantity of output produced ÷ Costs of all inputs used D) Sales value of output produced ÷ Cost of inputs required to produce current year production in previous year Answer: B Diff: 2 Objective: A1 AACSB: Analytical thinking
6) Kellogg Parts Company provided the following information: Budgeted input Actual input Budgeted production Actual production
81,000 gallons 82,000 gallons 78,600 units 80,500 units
What is the partial productivity ratio? A) 1.03 units per gallon B) 1.02 units per gallon C) 0.98 units per gallon D) 0.96 units per gallon Answer: C Explanation: C) Partial productivity = 80,500 / 82,000= 0.98 units per gallon Diff: 2 Objective: A1 AACSB: Application of knowledge
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7) Autocratic Company provided the following information: Budgeted input Actual input Budgeted production Actual production
81,000 gallons 82,000 gallons 78,600 units 80,500 units
What is the partial productivity ratio? A) 2.01 units per gallon B) 0.5 units per gallon C) 0.52 units per gallon D) 1.93 units per gallon Answer: C Explanation: C) Partial productivity = 46,000 / 88,700 = 0.52 units per gallon Diff: 2 Objective: A1 AACSB: Application of knowledge
8) Advanced Productivity Company provided the following information: Budgeted input Actual input Budgeted production Actual production
81,000 gallons 82,000 gallons 78,600 units 80,500 units
What is the partial productivity ratio? A) 0.34 units per gallon B) 0.42 units per gallon C) 0.35 units per gallon D) 0.43 units per gallon Answer: A Explanation: A) Partial productivity = 30,500 / 91,000 = 0.34 units per gallon Diff: 2 Objective: A1 AACSB: Application of knowledge
9) Which of the following statements is true of productivity? A) Partial productivity compares the quantity of output produced with the cost of all inputs used. B) Productivity will increase when the partial productivity is high. C) Prices of inputs are incorporated in the partial productivity ratio. D) Partial productivity compares the quantity of output produced with the quantity of all inputs used. Answer: B Diff: 2 Objective: A1 AACSB: Application of knowledge
901 richard@qwconsultancy.com
10) Davis Company produced 216,000 sport jackets during 2015 and 540,000 direct manufacturing labor-hours were used at $2 per hour. The conversion costs were $1.20 per jackets produced. What is the direct manufacturing labor partial productivity for Davis Company? A) 0.40 unit per direct manufacturing labor-hour B) 0.60 unit per direct manufacturing labor-hour C) 2.50 unit per direct manufacturing labor-hour D) 1.00 unit per direct manufacturing labor-hour Answer: A Explanation: A) Partial productivity = 216,000 / 540,000 = 0.40 Diff: 2 Objective: A1 AACSB: Application of knowledge
11) Davis Company produced 159,000 sport jackets during 2015 and 530,000 direct manufacturing labor-hours were used at $3 per hour. The conversion costs were $1.20 per jackets produced. What is the total factor productivity for Davis Company? A) 0.089 units of output per dollar B) 0.300 units of output per dollar C) 0.298 units of output per dollar D) 2.500 units of output per dollar Answer: A Explanation: A) Total factor productivity = 159,000 / ((530,000 × $3) + (159,000 × $1.20) = 0.089 Diff: 3 Objective: A1 AACSB: Application of knowledge
12) Which of the following statements is true of productivity factors? A) Partial-productivity focus on a multiple inputs simultaneously. B) Total factor productivity (TFP) focus on a single input. C) It is the ratio of the quantity of output produced to the costs of all inputs used based on current prices. D) Comparable data for total factor productivity measurements are easily available. Answer: C Diff: 2 Objective: A1 AACSB: Analytical thinking
13) Total factor productivity will increase if: A) technical productivity occurs B) the company uses more total inputs per output C) the company incurs fewer costs per input D) current technology becomes obsolete Answer: A Diff: 2 Objective: A1 AACSB: Application of knowledge
902 richard@qwconsultancy.com
14) Which of the following is the correct mathematical expression to calculate total factor productivity? A) Sales value of output produced ÷ Quantity of all inputs used B) Quantity of output produced ÷ Quantity of the input used C) Quantity of output produced ÷ Costs of all inputs used D) Sales value of output produced ÷ Cost of inputs required to produce current year production in previous year Answer: C Diff: 2 Objective: A1 AACSB: Analytical thinking
15) Which of the following is the correct mathematical expression to calculate a benchmark total factor productivity? A) Quantity of output produced in current year ÷ Costs of inputs at current year prices that would have been used in previous year to produce current year output B) Quantity of output produced in previous year ÷ Costs of inputs at current year prices that would have been used in previous year to produce current year output C) Quantity of output produced in current year ÷ Costs of inputs at previous year prices that would have been used in previous year to produce current year output D) Quantity of output produced in previous year ÷ Costs of inputs at previous year prices that would have been used in previous year to produce current year output Answer: A Diff: 2 Objective: A1 AACSB: Analytical thinking
16) The partial productivity of overhead resources can be measured by considering the cost driver as: A) budgeted input B) the denominator C) the fixed input D) the numerator Answer: D Diff: 3 Objective: A1 AACSB: Application of knowledge
17) Which of the following statements is true of productivity measures? A) Partial productivity and total factor productivity measures never work best together. B) Partial productivity explicitly considers gains from using fewer physical inputs as well as substitution among inputs. C) All productivity measures are physical measures lacking financial content. D) Total factor productivity considers the trade-offs across various inputs based on current input prices. Answer: D Diff: 2 Objective: A1 AACSB: Analytical thinking
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18) ________ is an example of a total factor productivity measure. A) The number of units produced per month B) The number of units produced per machine hour C) The number of units produced per labor hour D) The number of units produced per dollar of input cost Answer: D Diff: 2 Objective: A1 AACSB: Application of knowledge
19) Partial productivity and TFP measures work best together because the strengths of one offset the weaknesses of the other. Answer: TRUE Diff: 2 Objective: A1 AACSB: Analytical thinking
20) Partial productivity and total factor productivity measures work best together because both measures have the same kind of strengths and weaknesses. Answer: FALSE Explanation: Partial productivity and total factor productivity measures work best together because the strengths of one offset the weaknesses of the other. Diff: 2 Objective: A1 AACSB: Analytical thinking
21) One advantage of the total factor productivity is that operations managers can use it to easily understand specific labor productivity issues. Answer: FALSE Explanation: operations personnel find TFP measures more difficult to understand than physical-productivity measures. Diff: 2 Objective: A1 AACSB: Analytical thinking
22) Productivity describes the relationship between different quantities of inputs consumed and the quantities of output produced. Answer: TRUE Diff: 1 Objective: A1 AACSB: Analytical thinking
904 richard@qwconsultancy.com
23) Power Company has been unhappy with the financial accounting variances that its cost accounting system has been producing, because its managers believe that there is more to evaluating an operation than just examining accounting numbers. Therefore, it has started gathering data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of remote control units for televisions, radios, and stereo components: 2019 80,000 12,000 80,600 $18 $31
Remote control units produced and sold Direct manufacture labor-hours Direct materials used (sets) Direct manufacture cost per hour Direct materials cost per set
2020 100,000 13,200 100,500 $20 $32
Required: a. What is the partial productivity of direct materials for each year? b. What is the partial productivity of direct manufacturing labor for each year? c. Did each area improve between 2019 and 2020? Explain. d. What will be the projected direct material and labor needs for 2021 if remote control units increase by 12,000 units, assuming Power Company applies the constant returns to scale technology? Answer: a. 2019 Partial productivity of direct materials = 80,000/80,600 = 0.993 2020 Partial productivity of direct materials = 100,000/100,500 = 0.995 b.
2019 Partial productivity direct manufacturing labor = 80,000/12,000 = 6.67 2020 Partial productivity direct manufacturing labor = 100,000/13,200 = 7.58
c.
Yes, both areas showed improvement because the ratios went up.
d. Production increase = 12,000/100,000 = 12 percent Projected direct material sets = 100,500 × 1.12 = 112,560 sets Projected direct manufacturing labor = 13,200 × 1.12 = 14,784 hours Diff: 3 Objective: A1 AACSB: Application of knowledge
905 richard@qwconsultancy.com
24) Grader Company manufactures road graders. Because its managers all have engineering backgrounds, they prefer nonfinancial information for their decision-making models. Therefore, they require the accountants gather data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of a paver: 2019 6,800 136,000 29,000 $21 $431
Units produced and sold Direct manufacture labor-hours Direct materials used (tons) Direct manufacture cost per hour Direct materials cost per ton
2020 5,600 115,200 24,400 $22 $443
Required: a. What is the partial productivity for direct materials for each year? b. What is the partial productivity for direct manufacturing labor for each year? c. What is the total factor productivity for each year? Answer: a. 2019 Partial productivity of direct materials = 6,800/29,000 = 0.234 2020 Partial productivity of direct materials = 5,600/24,400 = 0.230 b.
2019 Partial productivity for direct manufacturing labor = 6,800/136,000 = 0.050 2020 Partial productivity for direct manufacturing labor =5,600/115,200 = 0.049
c.
2019 Direct materials = 29,000 × $431 = Direct manufacturing labor = 136,000 × $21 = Total
$12,499,000 2,856,000 $15,355,000
2020 Direct materials = 24,400 × $443 = Direct mfg. labor = 115,200 × $22 = Total
$10,809,200 2,534,400 $13,343,600
2019 Total factor productivity = 6,800/$15,355,000 =
0.00044
2020 Total factor productivity = 5,600/$13,343,600 =
0.00042
Diff: 3 Objective: A1 AACSB: Application of knowledge
906 richard@qwconsultancy.com
25) Fairytale Weddings manufactures wedding dresses. The following information relates to the manufacture of gowns in its Providence plant: 2019 43,000 22,000 130,000 $16 $10
Units produced and sold Direct manufacture labor-hours Direct materials used (square yards) Direct manufacture cost per hour Direct materials cost per yard
2020 52,600 26,000 152,000 $17 $11
Required: Prepare an analysis of change in annual costs from 2019 to 2020 including direct materials, direct manufacturing labor, and total inputs. Answer: Direct materials: Actual 2019 costs: 130,000 × $10 = $1,300,000 2019 input for 2020 output: 130,000 × 52,600/43,000 × $10 = 1,590,233 Output adjustment $ 290,233 U 2019 input for 2020 output: = 2019 input with 2020 costs: 130,000 × 52,600/43,000 × $11 = Input price change
$1,590,233 1,749,256 $ 159,023 U
2019 input with 2020 costs: = 2020 costs: 152,000 × $11 = Productivity change
$1,749,256 1,672,000 $ 77,256 F
Direct manufacturing labor: Actual 2019 costs: 22,000 × $16 = 2019 input for 2020 output: 22,000 × 52,600/43,000 × $16 = Output adjustment
$352,000 430,586 $ 78,586 U
2019 input for 2020 output: = 2019 input with 2020 costs: 22,000 × 52,600/43,000 × $17 = Input price change
$430,586 457,498 $ 26,912 U
2019 input with 2020 costs: = 2020 costs: 26,000 × $17 = Productivity change
$457,498 442,000 $ 15,498 F
All inputs: Output adjustment: $290,233 U + $78,586 U = Input price change: $159,023 U + $26,912 U = Productivity change: $77,256 F + $15,498 F =
$368,819 U $185,935 U $ 92,754 F
Diff: 3 Objective: A1 AACSB: Application of knowledge
907 richard@qwconsultancy.com
26) Ralph Company has been very aggressive in developing various types of financial and nonfinancial measurement schemes to help with the evaluation of its manufacturing processes. It appears that some of the managers are suboptimizing in that their decision processes are geared solely for their department's benefit, sometimes to the detriment of the organization as a whole. Required: What changes in the evaluation system could the company implement to help minimize the suboptimization of the managers' decision-making process? Answer: The company could implement a total factor productivity concept. Its major advantage is that it measures the combined productivity of all inputs to produce outputs and, therefore, explicitly evaluates substitution among inputs. For example, if buying a cheap material makes the cost of materials look favorable but causes more labor-hours, therefore causing labor costs to be unfavorable, suboptimization may be occurring. The total factor productivity takes into account both the materials costs and the labor costs and if they offset each other, that is fine, but if they do not offset, then the variance will be so noted. Diff: 2 Objective: A1 AACSB: Application of knowledge
27) Total factor productivity (TFP) is easy to compute for a single-product company. When dealing with a multiproduct company, one of two adjustments must be made. What are these potential adjustments? Answer: One of the following two adjustments must be made in the TFP calculations: 1. Convert the outputs from physical measures to a dollar value common denominator, analogous to the multiple input case. 2. Allocate the input costs to the different outputs. This is appropriate when the inputs can be reasonably allocated to the different outputs. Diff: 2 Objective: A1 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 14 Pricing Decisions and Cost Management Objective 14.1 1) In setting prices for products and services, managers may attempt to charge what the customer is willing to pay however, too high a price may: A) deter a customer from purchasing a product and seek alternatives B) increase demand and demand for the product C) indicate supply is too plentiful D) decrease a competitor's market share Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Companies must always examine their pricing: A) based on the supply of the product
908 richard@qwconsultancy.com
B) based on the full cost of producing the product and price to make a profit C) through the eyes of their customers and then manage costs to produce a profit D) based on the GAAP cost of producing the product and then add a mark-up Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Which of the following statements is true about the factors that affect pricing decisions? A) Information about competitors' technologies is not useful for pricing decisions. B) Information about a competitor in a perfect market affects pricing decisions. C) Increase in price of a substitute product does not affect pricing decisions. D) Managers must always be aware of the competition when pricing their products Answer: D Diff: 3 Objective: 1 AACSB: Analytical thinking
4) In a perfectly competitive market, which of the following is a primary factor influencing pricing decisions? A) cost of production B) availability of raw materials in the market C) information on competitor's cost structure D) value customers place on product Answer: D Diff: 3 Objective: 1 AACSB: Analytical thinking
909 richard@qwconsultancy.com
5) Which of the following statements is true of the cost of producing a product? A) It controls pricing in highly competitive markets. B) It affects the willingness of a company to supply a product. C) It includes manufacturing costs, but not product design costs for pricing decisions. D) It is not a factor to be taken into account while pricing a product. Answer: B Diff: 3 Objective: 1 AACSB: Analytical thinking
6) In a noncompetitive environment, the key factor affecting pricing decisions is the: A) customer's willingness to pay B) price charged for alternative products C) information on competitor's cost structure D) minimum price acceptable to the firm Answer: A Diff: 3 Objective: 1 AACSB: Analytical thinking
7) Which of the following statements is true of costs and pricing decisions? A) Companies get profit from selling products only when they are the price makers. B) Companies supply products as long as the price the customer is willing to pay for its products exceeds the price that is charged by the competitor. C) Companies supply products as long as there is a demand for the product in the market regardless of the price at which the products are sold. D) Companies supply products as long as the revenues from selling the additional units exceed the cost of producing them. Answer: D Diff: 3 Objective: 1 AACSB: Analytical thinking
8) Three major influences on pricing decisions are: A) competition, costs, and customers B) competition, demand, and production efficiency C) continuous improvement, customer satisfaction, and supply D) variable costs, fixed costs, and mixed costs Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
9) Cost of product is a major influence on prices set by most manufacturers. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
910 richard@qwconsultancy.com
10) Three equally weighted factors that most companies use to set prices for their products and services are competition, costs, and customers. Answer: FALSE Explanation: Surveys indicate that managers at different companies weigh customers, competitors, and costs differently when making pricing decisions. Diff: 1 Objective: 1 AACSB: Analytical thinking
11) Monopolists can charge prices without limitations as there is no competition for the product or service the monopolist provides. Answer: FALSE Explanation: The higher the price a monopolist sets, the lower the demand because customers will either seek substitute products or forgo buying the product and therefore although the monopolist has more leeway to set higher prices there are limits Diff: 2 Objective: 1 AACSB: Analytical thinking
12) A company operating in a perfectly competitive market has more leeway to set higher prices than a firm that is a monopolist. Answer: FALSE Explanation: A monopolist has no competitors and has much more leeway to set high prices than a firm operating in a perfectly competitive market. Diff: 2 Objective: 1 AACSB: Analytical thinking
13) For a company operating in a perfectly competitive market, cost information affects the pricing decisions of the company. Answer: FALSE Explanation: For a company operating in a perfectly competitive market, cost information does not affect the pricing decision of the company, it only helps managers decide the quantity of output to produce to maximize operating income. Diff: 3 Objective: 1 AACSB: Analytical thinking
14) Fluctuations in exchange rates between different countries' currencies affect costs and pricing decisions of a company. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
911 richard@qwconsultancy.com
15) In markets with little or no competition, the key factor affecting price is the cost of production to the company. Answer: FALSE Explanation: In markets with little or no competition, the key factor affecting price is the customers' willingness to pay, not costs or competitors. Diff: 2 Objective: 1 AACSB: Analytical thinking
16) The value customers place on a product and the prices charged for competing products affect demand and the cost of producing and delivering the product affect supply. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
17) If U.S dollar strengthens against the Japanese Yen, Japanese producers selling goods in U.S markets will have to increase the prices of products to recover the extra cost arising from currency fluctuation. Answer: FALSE Explanation: If U.S dollar strengthens against Japanese Yen, Japanese producers will be able to sell their goods at a cheaper rate in the U.S markets as they will now receive more Yen for the same dollar amount of sale and hence will be tempted to reduce prices. Diff: 3 Objective: 1 AACSB: Analytical thinking
18) Claudia Geer, controller, discusses the pricing of a new product with the sales manager, James Nolan. What major influences must Claudia and James consider in pricing the new product? Discuss each briefly. Answer: The major influences are customers, competitors, and costs. Customers: Managers must always examine pricing problems through the eyes of their customers. A price increase may cause customers to reject a company's product and choose a competing or substitute product. Competitors: Competitors' reactions influence pricing decisions. At one extreme, a rival's prices and products may force a business to lower its prices to be competitive. At the other extreme, a business without a rival in a given situation can set higher prices. A business with knowledge of its rivals' technology, plant capacity, and operating policies is able to estimate its rivals' costs, which is valuable information in setting competitive prices. Costs: Companies price products to exceed the costs of making them. The study of cost-behavior patterns gives insight into the income that results from different combinations of price and output quantities sold for a particular product. Diff: 2 Objective: 1 AACSB: Analytical thinking
912 richard@qwconsultancy.com
19) Provide a counter argument to the following statement made by a manger of a company that sells a one of a kind product and is the only producer: "We control the market and therefore we can set the product price at just about any level." Answer: Although a monopolistic situation allows a company more leeway than companies in competitive industries, to set high prices. Nevertheless, there are limits. At some point, the higher the price a monopolist sets, demand for the monopolist's product will lessen as customers will either seek substitute products or forgo buying the product. Therefore, there are limits to prices; even in a monopolistic situation. Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 14.2 1) Which of the following examples would have as its purpose the allocation of costs to motivate employees? A) deciding on a selling price for a product B) encouraging sales representatives to emphasize high-margin products C) to cost products a "fair" price under a government contract D) to cost inventories for reporting to external parties Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Which of the following are true regarding long-run pricing decisions? A) they result in maximizing return on investment B) they include adjusting product mix in a competitive environment C) the price needs to be sufficient enough to break-even D) use prices that include a reasonable return on invested capital Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Which of the following is true of long-run pricing? A) It is fixed at a level that recovers the variable cost of the company and a pre-determined profit markup. B) It is generally a function of the market factors and the cost involved in production is generally not a consideration. C) It is a strategic decision designed to build long-run relationships with customers based on stable and predictable prices. D) It is based only on internal requirements like cost and estimated rate of return as in the long run these requirements are the driving factors of any organization. Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
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4) For long-run pricing decisions, using stable prices has the advantage of: A) minimizing the need to monitor competitor's prices frequently B) reducing the need to change cost structures frequently C) reducing competition D) helping to build buyer-seller relationships Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
5) Jack's Back Porch manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $270 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Jack's Back Porch's policy to add a 60% markup to full costs. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Jack's Back Porch is invited to submit a bid to the hotel chain. What per unit price will Jack's Back Porch most likely bid on this long-term order? A) $86.40 per unit B) $162.00 per unit C) $345.60 per unit D) $432.00 per unit Answer: D Explanation: D) Most likely per unit bid = $270 + ($270 × 60%) = $432.00. Diff: 2 Objective: 2 AACSB: Application of knowledge
914 richard@qwconsultancy.com
6) Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (10% of total manufacturing costs) Estimated selling price
$470 120 50 220 860 86 $946
If Ms. Leila wanted a long-term commitment, and not a one-time-special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same? A) $860 B) $640 C) $590 D) $946 Answer: D Explanation: D) Most likely long-term price = $946. Diff: 2 Objective: 2 AACSB: Application of knowledge
7) Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (10% of total manufacturing costs) Estimated selling price
$230 140 270 130 770 77 $847
If Mr. Stephen wanted a long-term commitment, and not a one-time-only special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same? A) $640 B) $770 C) $847 D) $370 Answer: C Explanation: C) Long-run pricing is a strategic decision designed to build long-run relationships with customers based on stable and predictable prices. Therefore, the most likely long-term price = $847. Diff: 2 Objective: 2 AACSB: Application of knowledge
915 richard@qwconsultancy.com
8) Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labor Manufacturing overhead Marketing costs Fixed costs: Manufacturing overhead Marketing costs Total costs Markup (20% of total costs) Estimated selling price
$70 20 30 10 140 10 280 56 $336
If the European customer wanted a long-term commitment, and not a one-time-only special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same? A) $130 B) $280 C) $336 D) $196 Answer: C Explanation: C) Long-run pricing is a strategic decision designed to build long-run relationships with customers based on stable and predictable prices. Therefore, the most likely long-term price = $336. Diff: 2 Objective: 2 AACSB: Application of knowledge
916 richard@qwconsultancy.com
9) Grounded Coffee Products manufactures coffee tables. Grounded Coffee Products has a policy of adding a 10% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labor-hours Direct materials per unit Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
30,000 tables 4,000 hours 10,000 hours $90 $18.00 $255,000 $1,500,000 $900,000 $1,350,000
For long-run pricing of the coffee tables, what price will most likely be used by Grounded Coffee? (Round all calculations to the nearest cent.) A) $104.50 B) $125.00 C) $229.50 D) $252.45 Answer: D Explanation: D) Direct materials $90 $90 Direct manufacturing labor ($18.00 × 10,000/30,000) 6 Variable manufacturing ($255,000/30,000) 8.50 Fixed manufacturing ($1,500,000/30,000) 50 Product and process design costs ($900,000/30,000) 30 Marketing and distribution ($1,350,000/30,000) 45.00 Full cost per unit 229.50 Markup (10%) 22.95 Estimated selling price $252.45 Diff: 3 Objective: 2 AACSB: Application of knowledge
917 richard@qwconsultancy.com
10) Quick Connect manufactures high-tech cell phones. Quick Connect has a policy of adding a 10% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labor-hours Direct materials per unit Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
1,900 phones 700 hours 1,000 hours $20 $11.40 $20,425 $95,000 $57,000 $74,100
For long-run pricing of the cell phones, what price will most likely be used by Quick Connect? (Round all calculations to the nearest cent.) A) $36.75 B) $119.00 C) $155.75 D) $171.33 Answer: D Explanation: D) Direct materials $20 $20 Direct manufacturing labor ($11.40 × 1,000/1,900) 6 Variable manufacturing ($20,425/1,900) 10.75 Fixed manufacturing ($95,000/1,900) 50 Product and process design costs ($57,000/1,900) 30 Marketing and distribution ($74,100/1,900) 39.00 Full cost per unit 155.75 Markup (10%) 15.58 Estimated selling price $171.33 Diff: 3 Objective: 2 AACSB: Application of knowledge
11) Which one of the following activities would most likely be considered a long-run pricing decision? A) one-time-only special order pricing that would result in achieving the break-even point B) product mix adjustments in a competitive market C) setting prices to generate a reasonable rate of return on investment D) changing prices in response to weak demand Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
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12) Which of the following statements about pricing is true? A) pricing for products sold to the federal government can be priced to include all costs of the product including marketing costs B) companies that sell commodity-like items usually use the cost-plus approach to pricing C) companies in competitive markets use the market approach to pricing D) regulators will intervene in noncompetitive industries and markets but usually will not regulate company pricing policies in competitive industries Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
13) Which of the following is regarded as a purpose of cost allocation? A) It helps in identifying the potential customers for a product. B) It provides the profit margin earned. C) It helps in maintaining decorum among managers. D) It provides information for economic decisions. Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
14) Which of the following is true of price bidding with the federal government? A) the price can only cover direct costs B) the price can only cover direct costs and marketing costs C) the price is based on costs that include fully allocated manufacturing and design costs but not include marketing costs D) the price can include only fixed manufacturing costs and design costs but not include marketing costs Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
15) Which of the following actions might prompt a product redesign? A) identifying all costs of purchasing and ordering and allocating those to specific products B) offering a higher commission on certain high profit margin products C) utilizing absorption costing D) careful consideration of supply and demand forces when setting prices Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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16) In a long-run, it is worthwhile to sell a product only if the selling price exceeds: A) the total of all the direct costs of the product B) the total manufacturing costs of the product C) the total of the fixed costs of the value chain D) full cost of the product and a markup that provides an adequate return on capital Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
17) Jack's Back Porch manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $300 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Jack's Back Porch's policy to add a 70% markup to full costs. Jack's Back Porch is invited to bid on a one-time-only special order to supply 150 rustic tables. What is the lowest price Jack's Back Porch should bid on this special order? A) $45,000 B) $18,000 C) $27,000 D) $76,500 Answer: C Explanation: C) Lowest price = 150 × ($300 × 60%) = $27,000. Diff: 2 Objective: 2 AACSB: Application of knowledge
18) Cool Air Inc., manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $230 per air conditioner, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Cool Air Inc.'s policy to add a 30% markup to full costs. Cool Air Inc., is invited to bid on a one-time-only special order to supply 110 air conditioners. What is the lowest price Cool Air Inc. should bid on this special order? A) $15,180 B) $25,300 C) $35,420 D) $32,890 Answer: A Explanation: A) Lowest price for special order = 110 units × ($230 × 60%) = $15,180. Diff: 2 Objective: 2 AACSB: Application of knowledge
920 richard@qwconsultancy.com
19) Cool Air Inc., manufactures single room sized air conditioners. The cost accounting system estimates manufacturing costs to be $250 per air conditioner, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Cool Air Inc.'s policy to add a 30% markup to full costs. A medium sized motel chain is currently expanding and has decided to create more rooms and air condition all of its rooms, which are currently not air conditioned. Cool Air Inc. is invited to submit a bid to the motel chain. What per unit price will Cool Air Inc. most likely bid for this special order of 200 units? Assume that the price is being fixed for a long-term commitment. A) $250.00 per unit B) $200.00 per unit C) $325.00 per unit D) $300.00 per unit Answer: C Explanation: C) Most likely price = $250 + ($250 × 30%) = $325.00. Diff: 2 Objective: 2 AACSB: Application of knowledge
20) Zolas' Heaters is approached by Ms. Leila, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Zolas' Heaters has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (35% of total manufacturing costs) Estimated selling price
$420.00 160.00 70.00 230.00 880.00 308.00 $1,188.00
For Zolas' Heaters, what is the minimum acceptable price of this one-time-only special order? A) $650.00 B) $880.00 C) $580.00 D) $1,188.00 Answer: A Explanation: A) Price for special order = $420.00 + $160.00 + $70.00 = $650.00. Diff: 2 Objective: 2 AACSB: Application of knowledge
921 richard@qwconsultancy.com
21) Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (25% of total manufacturing costs) Estimated selling price
$2,100.00 110.00 250.00 160.00 2,620.00 655.00 $3,275.00
For Golden Generator Supply, what is the minimum acceptable price of this one-time-only special order? A) $2,210.00 B) $2,460.00 C) $2,620.00 D) $3,275.00 Answer: B Explanation: A) B) Price for special order = $2,100 + $110 + $250 = $2,460.00. Diff: 2 Objective: 2 AACSB: Application of knowledge
22) Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labor Variable manufacturing support Fixed manufacturing support Total manufacturing costs Markup (35% of total manufacturing costs) Estimated selling price
$1,900.00 100.00 240.00 160.00 2,400.00 840.00 $3,240.00
If Golden Generator Supply accepts the order at $2,790, what is the amount contributed towards fixed costs and profit on a sales order of 1,800 units? A) $702,000 B) $990,000 C) $1,800,000 D) $1,422,000 Answer: B Explanation: B) Contribution per unit = $550 ($2,790 - $2,240). Total contribution = $990,000 ($550 × 1,800). Diff: 2 Objective: 2 AACSB: Application of knowledge
23) Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order
922 richard@qwconsultancy.com
for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a 10% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labor Manufacturing overhead Marketing costs Fixed costs: Manufacturing overhead Marketing costs Total costs Markup (10% of total costs) Estimated selling price
$90 30 40 30 180 10 380 56 $336
For Gracius Manufacturing, what is the minimum acceptable price of this one-time-only special order? A) $120 B) $160 C) $190 D) $380 Answer: C Explanation: C) Price for special order = $90 + $30 + $40 + $30 = $190. Diff: 2 Objective: 2 AACSB: Application of knowledge
923 richard@qwconsultancy.com
24) Gracius Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Gracius Manufacturing has a policy of adding a 20% markup to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labor Manufacturing overhead Marketing costs Fixed costs: Manufacturing overhead Marketing costs Total costs Markup (10% of total costs) Estimated selling price
$90 30 40 30 180 10 380 56 $336
What is the full cost of the product per unit for Gracius Manufacturing? A) $90 B) $140 C) $360 D) $432 Answer: C Explanation: C) Full cost of the product = $60 + $30 + $40 + $10 + $180 + $40 = $360. Diff: 1 Objective: 2 AACSB: Application of knowledge
924 richard@qwconsultancy.com
25) Grounded Coffee Products manufactures coffee tables. Grounded Coffee Products has a policy of adding a 10% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labor-hours Direct materials per unit Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
30,000 tables 4,000 hours 14,000 hours $140 $20 $360,000 $1,500,000 $1,400,000 $1,000,000
Grounded Coffee Products is approached by an overseas customer to fulfill a one-time-only special order for 5000 units. All cost relationships remain the same except for a one-time setup charge of $60,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? (Round your final answer to the nearest cent.) A) $184.00 B) $484.00 C) $172.00 D) $238.00 Answer: A Explanation: A) Direct materials ($140 × 5000) $700,000 Direct manufacturing labor ((($20 × 14,000) / 20,000) × 5000) 70,000 Variable manufacturing overhead (($360,000 / 20,000) × 5000) 90,000 Setup charge 60,000 Minimum acceptable bid $920,000 Minimum acceptable bid per unit = $920,000 / 5000 units = 184.00 Diff: 3 Objective: 2 AACSB: Application of knowledge
925 richard@qwconsultancy.com
26) Quick Connect manufactures high-tech cell phones. Quick Connect has a policy of adding a 25% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labor-hours Direct materials per unit Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
1,900 phones 700 hours 1,200 hours $23 $9 $214,500 $126,700 $143,400 $154,045
Quick Connect Products is approached by an overseas customer to fulfill a one-time-only special order for 150 units. All cost relationships remain the same except for a one-time setup charge of $2025. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? A) $30.20 B) $173.20 C) $186.70 D) $188.50 Answer: C Explanation: C) Direct materials per unit $23.00 Direct manufacturing labor cost per unit (1200 / 1500) × $9 7.20 Variable manufacturing overhead cost per unit (214,500 / 1500) 143.00 Setup charges per unit ($2025/150) 13.50 Minimum acceptable bid per unit $186.70 Diff: 3 Objective: 2 AACSB: Application of knowledge
27) Which of the following explains the cost-plus approach to pricing decisions? A) arriving at a price for the product based on the competitive pricing prevalent in the market B) arriving at a price based on the perceived value to a customer given the cost of design and added features C) arriving at a price based on the demand and supply trends in the market D) arriving at a price that earns a target return on investment Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
926 richard@qwconsultancy.com
28) Cost allocation is not required to cost inventories for reporting to external parties. Answer: FALSE Explanation: Cost allocation helps in costing inventories for both internal and external users. Diff: 3 Objective: 2 AACSB: Analytical thinking
29) An example of why a manager would perform cost allocations for economic decisions would be to cost inventories for reporting to the tax authorities. Answer: FALSE Explanation: An example would be to use cost allocations to decide on the selling price for a product or a service. Another example would be to decide whether to add a new product or service. Diff: 2 Objective: 2 AACSB: Analytical thinking
30) One purpose of cost allocations is to justify costs to establish a "fair" price, often required by law and government contracts. Answer: TRUE Diff: 3 Objective: 2 AACSB: Analytical thinking
31) Two different approaches to pricing decisions are market based and cost-plus. Answer: TRUE Diff: 3 Objective: 2 AACSB: Analytical thinking
32) Long-run pricing is an operational decision and not a strategic decision as perceived by many. Answer: FALSE Explanation: Long-run pricing is a strategic decision designed to build long-run relationships with customers. Diff: 3 Objective: 2 AACSB: Analytical thinking
33) Long-run pricing is a strategic decision designed to build relationships with customers based on stable and predictable prices. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
34) In long-run pricing, decisions should consider all manufacturing and non-manufacturing costs but should consider all future direct and indirect costs as irrelevant. Answer: FALSE Explanation: Long-run costs include all future direct and indirect costs. Diff: 3 Objective: 2 AACSB: Analytical thinking
927 richard@qwconsultancy.com
35) Cost allocation data could be a valuable input to encourage design of products that are simpler to manufacture and less costly to service. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
36) Companies operating in competitive markets generally use the cost-plus approach to price products. Answer: FALSE Explanation: Companies in competitive markets generally use the market based approach to price products. Diff: 2 Objective: 2 AACSB: Analytical thinking
37) Companies operating in competitive markets should ideally use cost-plus approach to pricing. Answer: FALSE Explanation: Companies operating in competitive markets should ideally use market-plus approach to pricing. Diff: 2 Objective: 2 AACSB: Analytical thinking
38) The cost-based (cost-plus) approach computes price based a price that is influenced on what the market will bear and therefore forces the producer to manage costs to achieve the target profit per unit. Answer: FALSE Explanation: The cost-based (cost-plus) approach computes price based on the costs to produce the product plus a target return on investment. Diff: 2 Objective: 2 AACSB: Analytical thinking
39) Companies operating in competitive markets use the market-based approach whereas companies operating in noncompetitive markets favor the cost-based approach. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
928 richard@qwconsultancy.com
40) Greentree Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $120 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Greentree's policy to add a 30% markup to full costs. a. Greentree Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Greentree should bid on this one-time-only special order? b. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Greentree Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Greentree should bid on this long-term order? Answer: a. The lowest price on the one-time special order = $120 × .60 × 100 tables = $7,200. In other words, Greentreeʹs bid should allow for recovery of its variable costs at a minimum. b. The lowest price on the long-term hotel chain order is = $120 + (30% × $120) = $156. In other words, on this long-term order, Greentree should target obtaining a price which achieves their policy of adding a 30% markup to full costs. Diff: 2 Objective: 2 AACSB: Application of knowledge
929 richard@qwconsultancy.com
41) Longball Company manufactures basketball backboards. The following information pertains to the company's normal operations per month: Output units Machine-hours Direct manufacturing labor-hours
15,000 boards 4,000 hours 5,000 hours
Direct manufacturing labor per hour Direct materials per unit Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
$12 $100 $150,000 $300,000 $200,000 $250,000
Required: a. For long-run pricing, what is the full-cost base per unit? b. Longball Company is approached by an overseas city to fulfill a one-time-only special order for 1,000 units. All cost relationships remain the same except for an additional one-time setup charge of $40,000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? Answer: a. Direct materials $100.00 Direct manufacturing labor ($12 × 5,000)/15,000 4.00 Variable manufacturing ($150,000/15,000) 10.00 Fixed manufacturing ($300,000/15,000) 20.00 Marketing and distribution ($250,000/15,000) 16.67 Research and development ($200,000/15,000) 13.33 Total b.
$164.00
Direct materials Direct manufacturing labor Variable manufacturing Setup ($40,000 / 1,000)
$100.00 4.00 10.00 40.00
Total
$154.00
Diff: 2 Objective: 2 AACSB: Application of knowledge
930 richard@qwconsultancy.com
42) Explain the differences between short-run pricing decisions and long-run pricing decisions. Answer: Short-run pricing decisions typically have a time horizon of less than a year and include such decisions such as (a) pricing a one-time-only special order with no long-run implications and (b) adjusting product mix and output volume in a competitive market place. Two key differences affect pricing for the long-run versus the short-run. 1. Fixed costs are often irrelevant for the short-run and are generally relevant in the long-run because they can be altered in the long-run. 2. Profit Margins in the long-run pricing decisions are often set to earn a reasonable return on investment. Short-run pricing decisions is more opportunistic. Prices are decreased when demand is weak and increased when demand is strong. Diff: 2 Objective: 2 AACSB: Analytical thinking
Objective 14.3 1) Which of the following is true of target pricing? A) It is used for short-term pricing decisions. B) It is one form of cost-based pricing. C) A price is an estimate of customers' perceived value of the product. D) A price is calculated by adding a markup component to the cost base. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
2) Which of the following is true of value engineering? A) It is the process of building a new product by first determining the selling price of the product. B) It is the process by which a company analyzes its own process to reduce cost. C) It is the process by which a systematic evaluation of all aspects of the value chain, with the objective of reducing costs and achieving a predetermined quality level. D) It is the process by which the competitor's products are disassembled and analyzed. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
3) Short-run prices should at least recover: A) full cost of producing a product B) fixed manufacturing overhead C) variable cost of producing a product D) variable and fixed manufacturing overhead Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
931 richard@qwconsultancy.com
4) Relevant costs for target pricing are: A) variable manufacturing costs B) variable manufacturing and variable nonmanufacturing costs C) all fixed costs D) all future costs, both variable and fixed Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
5) Place the following steps for the implementation of target costing in order: A = Derive a target cost B = Develop a target price C = Perform value engineering D = Determine target operating income A) B D A C B) B A D C C) A D B C D) A B C D Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
6) Which of the following is an objective of value engineering? A) to reduce cost by eliminating all value-added activities B) to streamline and add non-value added activities C) to reduce the total cost of the product D) to understand competitors' product design Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
7) Managers need to understand customers because: A) they are the key in influencing the board decisions and help in formulating policies with the suppliers B) they guide the managers to formulate pricing policies C) they are more knowledgeable as they easy access to price and other information online D) they influence the costing decisions of the product Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
932 richard@qwconsultancy.com
8) Which of the following identifies an estimated price that customers are willing to pay and then computes the cost to be achieved to earn the desired profit? A) cost-plus pricing B) target costing C) kaizen costing D) peak-load costing Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
9) Which of the following is true of target costing? A) the target cost is the target price minus the target operating income per unit B) the target cost includes all past costs to produce the product C) input from suppliers and distributors are not relevant D) a key goal is to minimize value added activities of a product Answer: A Diff: 3 Objective: 3 AACSB: Analytical thinking
10) In relation to target costing, which of the following best describes target cost per unit? A) It is the targeted cost of producing one unit to achieve the current year's budgeted profit. B) It is the estimated long-run cost of a product that enables the company to achieve its target operating income. C) It is the cost that can be achieved by ensuring that the company produced its products at maximum efficiency. D) It is the budgeted cost that the company estimates in producing a unit in the current budget period. Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
11) When target costing and target pricing are used together: A) the target cost is established first, then the target price B) the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit C) the focus of target pricing is to undercut the competition D) target costs are generally higher than current costs Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
933 richard@qwconsultancy.com
12) The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating income is referred to as: A) cost-plus pricing B) target costing C) kaizen costing D) full costing Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
13) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $270. The annual target sales volume for interior doors is 29,000. Magnificent has target operating income of 40% of sales. What are target sales revenues? A) $3,132,000 B) $4,698,000 C) $7,830,000 D) $10,962,000 Answer: C Explanation: C) Target sales revenue = $270 × 29,000 = $7,830,000. Diff: 1 Objective: 3 AACSB: Application of knowledge
14) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $250. The annual target sales volume for interior doors is 28,000. Magnificent has target operating income of 40% of sales. What is the target operating income? A) $2,800,000 B) $4,200,000 C) $7,000,000 D) $9,800,000 Answer: A Explanation: A) Estimated sales revenue = $250 × 28,000 units = $7,000,000. Target operating income = $7,000,000 × 40% = $2,800,000. Diff: 2 Objective: 3 AACSB: Application of knowledge
934 richard@qwconsultancy.com
15) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $240. The annual target sales volume for interior doors is 21,000. Magnificent has target operating income of 20% of sales. What is the target cost? A) $6,048,000 B) $5,040,000 C) $4,032,000 D) $1,008,000 Answer: C Explanation: C) Estimated sales revenue = $240 × 21,000 units = $5,040,000. Target operating income = $5,040,000 × 20% = $1,008,000. Target cost = $5,040,000 - $1,008,000 = $4,032,000. Diff: 2 Objective: 3 AACSB: Analytical thinking
16) After conducting a market research study, Magnificent Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $260. The annual target sales volume for interior doors is 20,000. Magnificent has target operating income of 40% of sales. What is the target cost for each interior door? A) $364 B) $260 C) $156 D) $104 Answer: C Explanation: A) C) Estimated sales revenue = $260 × 20,000 units = $5,200,000. Target operating income = $5,200,000 × 40% = $2,080,000. Target cost = $5,200,000 - $2,080,000 = $3,120,000. Target cost per unit = $3,120,000 / 20,000 units = $156 . Diff: 2 Objective: 3 AACSB: Analytical thinking
935 richard@qwconsultancy.com
17) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $440 as opposed to the current market price charged of $540 per unit. Granite City Products Inc. has decided to revise its sales price to $440. The annual sales target volume of the product after price revision is 260 units. Granite City Products Inc. wants to earn 30% on its sales amount. What are the target sales revenues? A) $148,720 B) $114,400 C) $80,080 D) $42,120 Answer: B Explanation: B) The target sales revenues is $114,400 ($440 × 260). Diff: 2 Objective: 3 AACSB: Application of knowledge
18) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $420 as opposed to the current market price charged of $520 per unit. Granite City Products Inc. has decided to revise its sales price to $420. The annual sales target volume of the product after price revision is 280 units. Granite City Products Inc. wants to earn 30% on its sales amount. What is the target operating income? A) $82,320 B) $35,280 C) $117,600 D) $152,880 Answer: B Explanation: B) The target sales revenues is $117,600 ($420 × 280). The target operating income is $35,280 ($117,600 × 30%). Diff: 2 Objective: 3 AACSB: Application of knowledge
936 richard@qwconsultancy.com
19) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $500 as opposed to the current market price charged of $600 per unit. Granite City Products Inc. has decided to revise its sales price to $500. The annual sales target volume of the product after price revision is 200 units. Granite City Products Inc. wants to earn 40% on its sales amount. What is the total target cost? A) $140,000 B) $60,000 C) $100,000 D) $40,000 Answer: B Explanation: B) The target sales revenues is $100,000 ($500 × 200). The target operating income is $40,000 ($100,000 × 40%). The target cost is $60,000 ($100,000 - $40,000). Diff: 2 Objective: 3 AACSB: Application of knowledge
20) Sales of Granite City Products Inc. have been on a steady decline for the last 12 months. A market research study conducted revealed that the product of Granite City Products Inc. can be sold only for $480 as opposed to the current market price charged of $580 per unit. Granite City Products Inc. has decided to revise its sales price to $480. The annual sales target volume of the product after price revision is 280 units. Granite City Products Inc. wants to earn 30% on its sales amount. What is the target cost per unit? A) $625.00 B) $336.00 C) $480.00 D) $145.00 Answer: B Explanation: B) The target sales revenues is $134,400 ($480 × 280). The target operating income is $40,320 ($134,400 × 30%). The target cost is $94,080 ($134,400 - $40,320). The target cost per unit is $94,080 / 280 = $336.00 Diff: 2 Objective: 3 AACSB: Application of knowledge
937 richard@qwconsultancy.com
21) Block Island TV currently sells large televisions for $380. It has costs of $290. A competitor is bringing a new large television to market that will sell for $310. Management believes it must lower the price to $310 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 110,000 televisions per year. What is the target cost per unit if target operating income is 35% of sales? A) $108.50 B) $133.00 C) $201.50 D) $247.00 Answer: C Explanation: C) $310 - ($310 × 0.35) = $201.50 Diff: 2 Objective: 3 AACSB: Application of knowledge
22) Block Island TV currently sells large televisions for $380. It has costs of $320. A competitor is bringing a new large television to market that will sell for $360. Management believes it must lower the price to $360 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 150,000 televisions per year. What is the change in operating income if marketing is correct and only the sales price is changed? A) $6,600,000 B) $3,000,000 C) $(6,600,000) D) ($2,400,000) Answer: D Explanation: D) (165,000 × (360 - 320)) - (150,000 × (380- 320)) = $(2,400,000) Diff: 3 Objective: 3 AACSB: Application of knowledge
938 richard@qwconsultancy.com
23) Block Island TV currently sells large televisions for $380. It has costs of $290. A competitor is bringing a new large television to market that will sell for $320. Management believes it must lower the price to $320 to compete in the market for large televisions. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Block Island TV sales are currently 120,000 televisions per year. What is the target cost if the company wants to maintain its same income level, and marketing is correct (rounded to the nearest cent)? A) $224.00 B) $238.18 C) $230.00 D) $290.00 Answer: B Explanation: B) Increase in sales: 120,000 × (1 + 10%) = 132,000 Current income = 120,000 × ($380 - $290) = $10,800,000 Target cost y: $10,800,000 = (132,000 × $320) - 132,000y y = $31,440,000/132,000 = $238.18 Diff: 3 Objective: 3 AACSB: Application of knowledge
24) Twenty Technologies, currently sells 17" monitors for $280. It has costs of $220. A competitor is bringing a new 17" monitor to market that will sell for $230. Management believes it must lower the price to $230 to compete in the market for 17" monitors. Twenty Technologies believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Twenty Technologies' sales are currently 5100 monitors per year. What is the target cost if the target operating income is 25% of sales? A) $230.00 B) $210.00 C) $172.50 D) $165.00 Answer: C Explanation: C) Increase in sales: 5100 x (1 + 10%) = 5610 Operating income = $57.50 ($230 × 0.25) The target cost = $172.50 ($230 - $57.50). Diff: 2 Objective: 3 AACSB: Application of knowledge
939 richard@qwconsultancy.com
25) Twenty Technologies, currently sells 17" monitors for $270. It has costs of $230. A competitor is bringing a new 17" monitor to market that will sell for $245. Management believes it must lower the price to $245 to compete in the market for 17" monitors. Twenty Technologies believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Twenty Technologies's sales are currently 5200 monitors per year. What is the change in operating income if marketing manager is correct and only the sales price is changed? A) $130,000 B) $122,200 C) ($122,200) D) ($130,000) Answer: C Explanation: C) Increase in sales: 5200 × (1 + 10%) = 5720 Operating income with selling price of $270 = 208,000 (5200 × ($270 - $230). Operating income with new selling price of $230 = $85,800 (5720 × ($245 - $230). Therefore, Silicon's operating income will reduce by $122,200 ($208,000 - $85,800). Diff: 3 Objective: 3 AACSB: Application of knowledge
26) All of the following are typical results of value engineering EXCEPT: A) assembling and analyzing competitor's product. B) setting the target cost and then designing the product. C) changes in material specifications to reduce costs D) modifications in process methods Answer: A Diff: 3 Objective: 3 AACSB: Analytical thinking
27) When the firm uses the target-costing approach to pricing, the target cost per unit is the difference between the per unit target price and the per unit target: A) contribution margin B) operating income C) cost of goods sold D) gross margin Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
940 richard@qwconsultancy.com
28) Xtech Games Inc. has a new video game cassette for the upcoming holiday season. It is trying to determine the target cost for the game if the selling price per unit will be set at $70, the going price for video games, and the firm wants to earn a target operating income of 30% of sales. What will be the target cost per unit for the new game? A) $70 B) $49 C) $30 D) $21 Answer: B Explanation: B) The target operating income is $21 i.e. 30% of $70. Therefore, the target cost per unit will be $49 ($70 - $21 ). Diff: 2 Objective: 3 AACSB: Application of knowledge
29) Bouchard Company manufactures a product that currently has a full cost of $700. Its target operating income per unit is $80 and management's budgets assume that same target operating income per unit for the foreseeable future. To stay competitive, Bouchard management believes it must cut its price by 25%. What will be its new target cost? A) $700 B) $505.00 C) $585.00 D) $80 Answer: B Explanation: B) The price now is $780 ($700 + $80). A 25% drop would bring the price down to The new price of $585.00 less the target profit of $80 per unit would equal $505.00. Diff: 2 Objective: 3 AACSB: Application of knowledge
30) Bouchard Company manufactures a product that currently has a full cost of $700. Its target operating income per unit is $50 and management's budgets assume that same target operating income per unit for the foreseeable future. To stay competitive, Bouchard management believes it must cut its price by 15%. What will be its new target price? A) $700 B) $587.50 C) $637.50 D) $50 Answer: C Explanation: C) The price now is $750 ($700 + $50). A 15% cut would equal a target price of Diff: 2 Objective: 3 AACSB: Application of knowledge
941 richard@qwconsultancy.com
31) A target price is all of the following EXCEPT: A) an estimate of what customers are willing to pay B) based in customers' perception of value C) developed with an accurate current cost to produce as the primary factor D) takes into consideration how the competition currently prices and will price its product Answer: C Diff: 2 Objective: 3 AACSB: Application of knowledge
32) In case of pricing for special orders, managers include all future costs, variable costs, and costs that are fixed in the short run. Answer: FALSE Explanation: In case of pricing for special orders, managers consider only those costs that change in the short run. Diff: 2 Objective: 3 AACSB: Analytical thinking
33) Reverse engineering has the objective of reducing costs while still satisfying customer needs. Answer: FALSE Explanation: Value engineering has the objective of reducing costs while still satisfying customer needs. Reverse engineering is a means of obtaining information about a company's competitors by disassembling and analyzing the competitor products to determine the design, materials, and technology used. Diff: 1 Objective: 3 AACSB: Analytical thinking
34) Rework is an example of a value-added cost. Answer: FALSE Explanation: Rework is an example of a nonvalue-added cost. Diff: 1 Objective: 3 AACSB: Analytical thinking
35) A value-added cost is a cost that, if eliminated,would increase the actual or perceived value or utility (usefulness) customers experience from using the product or service. Answer: FALSE Explanation: A value-added cost is a cost that, if eliminated,would reduce the actual or perceived value or utility (usefulness) customers experience from using the product or service. Diff: 2 Objective: 3 AACSB: Analytical thinking
36) Value engineering seeks to reduce value-added costs as well as nonvalue-added costs. Answer: TRUE Diff: 3 Objective: 3 AACSB: Analytical thinking
942 richard@qwconsultancy.com
37) Value engineering entails improvements in product designs, and changes in materials specifications. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
38) Value engineering involves a detailed evaluation focused on the production "link" in the value chain, with the objective of reducing costs while still achieving a quality level that satisfies customers. Answer: FALSE Explanation: Value engineering is a systematic evaluation of all aspects of the value chain, with the objective of reducing costs and achieving a quality level that satisfies customers. Diff: 2 Objective: 3 AACSB: Analytical thinking
39) Market research can be an effective tool in understanding the features customers value. Answer: TRUE Diff: 3 Objective: 3 AACSB: Analytical thinking
40) Target cost per unit is arrived at by adding the target operating income to the target price of the product. Answer: FALSE Explanation: Target cost per unit is the target price minus target operating income per unit. Diff: 2 Objective: 3 AACSB: Analytical thinking
41) Reverse engineering can be used to analyze competitors' products to determine product designs and materials and to understand the technologies competitors use. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
42) Whether the firm uses the market-based approach or the cost-based approach for pricing decisions, the market forces must be considered. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
43) Developing a product that satisfies the need of the potential customers is the first step in implementing target pricing and target costing. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
943 richard@qwconsultancy.com
44) Fairhaven Composite Poles manufactures fishing poles that have a price of $125.00. It has costs of $90. A competitor is introducing a new fishing pole that will sell for $115.00. Management believes it must lower the price to $110.00 to compete in the highly cost-conscious fishing pole market. Marketing department believes that the new price will allow Carbon to maintain the current sales level of 200,000 poles per year. Required: a. What is the target cost for the new price if target operating income is 25% of sales? b. What is the change in operating income for the year if only the selling price is changed and costs remain the same? c. What is the target cost per unit if the selling price is reduced to $110.00 and the company wants to maintain its same income level? Answer: a. Target cost = $115 - ($115 × 25%) = $86.25. b. Change in operating income = [200,000 × ($125 -$90)] - [200,000 × ($115 - 90)] = − $2,000,000. c. Current operating income = [200,000 × (125 - 90)] = $7,000,000 Estimated sales revenue = 200,000 × $115 = 23,000,000 Target cost per unit = [($23,000,000 - $7,000,000) / 200,000] = $80. Diff: 2 Objective: 3 AACSB: Analytical thinking
944 richard@qwconsultancy.com
45) Julian Pharma manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,650 and fixed costs of $1,200 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds. A competitor is introducing a new hospital bed similar to Deluxe that will sell for $3,800. Management believes it must lower the price to compete. The marketing department believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce. Required: a. What is the annual operating income from Deluxe at the current price of $5,000? b. What is the annual operating income from Deluxe if the price is reduced to $3,800 and sales in units increase by 25%? c. What is the target cost per unit for the new price if target operating income is 30% of sales? Answer: a. Sales (20,000 × $5,000) 100,000,000 Costs: Variable costs ($2,650 × 20,000) 53,000,000 Fixed costs ($1,200 × 20,000) 24,000,000 Setup costs ($400,000 × 4) 1,600,000 78,600,000 Annual operating income 21,400,000 b. Current Sales (5,000 × 4) Increased sales [20,000 × (1+.25)] Sales (25,000 × $3,800) Costs: Variable costs ($2,650 × 25,000) Fixed costs (same as before) Setup costs ($400,000 × 5) Annual operating income
20,000 25,000 95,000,000 66,250,000 24,000,000 2,000,000
92,250,000 2,750,000
c. New selling price Target profit Target cost per unit
$3,800 $1,140 $2,660
Diff: 2 Objective: 3 AACSB: Application of knowledge
945 richard@qwconsultancy.com
46) Marcon Tech Corp., currently sells radios for $7,000. It has costs of $5,400. A competitor is bringing a new radio to market that will sell for $6,850. Management believes it must lower the price to $6,850 to compete in the market for radios. The marketing department believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Marcon's sales are currently 1,000 radios per year. Required: a. What is the target cost for the new target price if target operating income is 20% of sales? b. What is the change in operating income if marketing department is correct and only the sales price is changed? c. What is the target cost if the company wants to maintain its same income level, and marketing department is correct in its estimation? Answer: a. Target cost = $6,850 - ($6,850 × 0.20) = $5,480. b. Old operating income [1,000 × ($7,000 - $5,400)] New operating income [(1,000 × 1.10) ×($6,850 - $5,400] Change in operating income
$1,600,000.00 1,595,000 ($5,000)
c. Current income = 1,000 × ($7,000 - $5,400) = $1,600,000 Target cost y: $1,600,000 = (1,100 × $6,850) - 1,100y y = $5,935,000/1,100 y = $4395.45 Diff: 3 Objective: 3 AACSB: Application of knowledge
946 richard@qwconsultancy.com
47) Sail Safe currently sells motor boats for $60,000. It has costs of $46,500. A competitor is bringing a new motor boat to the market that will sell for $55,000. Management believes it must lower the price to $55,000 to compete in the market for motor boats. The marketing department believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Sail Safe's sales are currently 2,000 motor boats per year. 3 Required: a. What is the target cost for the new target price if target operating income is 20% of sales? b. What is the change in operating income if marketing department is correct and only the sales price is changed? c. What is the target cost if the company wants to maintain its same income level, and marketing department is correct? Answer: a. Target cost = $55,000 - ($55,000 × 0.20) = $44,000 b. Old operating income [2,000 × ($60,000 - $46,500] $27,000,000.00 New operating income [(2,000 × 1.125) × ($55,000 - $46,500)] $19,125,000.00 Change in operating income ($7,875,000.00) c. Current income = 2,000 × ($60,000 - $46,500) = $27,000,000 Target cost y: $27,000,000 = (2,250 × $55,000) - 2250y y = $96,750,000/2,250 y = $43,000 Diff: 3 Objective: 3 AACSB: Application of knowledge
48) What are the five steps that are followed while implementing target pricing and target costing? Answer: The following five steps are generally followed in implementing target pricing and target costing: 1) Develop a product that satisfies the needs of potential customers. 2) Choose a target price. 3) Derive a target cost per unit by subtracting target operating income per unit from the target price. 4) Perform cost analysis. 5) Perform value engineering to achieve target cost. Diff: 2 Objective: 3 AACSB: Analytical thinking
947 richard@qwconsultancy.com
49) What is the primary reason a firm would adopt target costing? Answer: The primary reason a firm would adopt target costing is to reduce costs. Its unique approach is to design costs out of products during the design stage in the product life cycle. Many firms are adopting this approach when they cannot reduce costs further using traditional costing methods, which focus on cost reductions in manufacturing. Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 14.4 1) Which of the following is a cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness) customers experience from using the product or service? A) non-value-added cost B) discretionary cost C) value-added cost D) committed cost Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
2) At what point are direct material costs per unit "locked in"? A) designed B) assembled C) sold D) delivered Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
3) When materials and supplies are used in a production facility to assemble and finish a product that will be sold to customers, the usage of the materials and supplies is described as: A) cost incurrence B) locked-in cost C) opportunity cost D) designed-in cost Answer: A Diff: 3 Objective: 4 AACSB: Analytical thinking
948 richard@qwconsultancy.com
4) Making design decisions is an example of managing costs: A) during planning phase; before they are incurred but are "locked in" B) during the production phase; when they are incurred C) after the production phase; after they are locked in D) after they are committed to during the budgeting phase Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
5) Which of the following is NOT a step of value-engineering? A) understanding customer requirements and value-added and non-value added costs B) set a price using the market approach C) anticipating how costs are locked in before they are incurred D) using cross-functional teams to redesign products and process to reduce costs while meeting customer needs Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
6) Which of the following methods focuses on reducing costs during the manufacturing stage? A) target costing B) kaizen costing C) cost-plus pricing D) life-cycle costing Answer: B Diff: 1 Objective: 4 AACSB: Analytical thinking
7) Which of the following is an example of value added cost? A) cost of machine breakdown B) cost of defective products C) rework costs D) direct machining costs Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
8) In some industries, such as legal and consulting, most costs are locked in: A) when they are incurred B) during the design stage C) during the customer-service stage D) during the marketing stage Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
949 richard@qwconsultancy.com
9) Which of the following costs can be classified into both value-added and non-value-added costs? A) production control costs B) machine breakdown costs C) rework costs D) direct material costs Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
10) A graph comparing locked-in costs with incurred costs will have: A) locked-in costs rising much faster initially, but dropping to zero after the product is manufactured B) the two cost lines running parallel until the end of the process, when they join C) locked-in costs rising much faster initially than the incurred cost, but joining the incurred cost line at the completion of the value-chain functions D) no differences unless the product is manufactured inefficiently Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
11) Which of the following is true of locked-in costs? A) Locked-in costs are the same as sunk costs. B) Locked-in costs are always fixed costs. C) Locked-in costs are incurred costs. D) Locked-in costs are also called designed-in costs. Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
12) Costing systems measure: A) locked in costs B) sunk costs C) cost incurrence D) out of pocked costs Answer: C Diff: 3 Objective: 4 AACSB: Analytical thinking
950 richard@qwconsultancy.com
13) A locked-in cost is a(n): A) opportunity cost that is fixed in the short run B) cost that can be changed in the short run C) cost that has not yet been incurred, but based on decisions that have already been made, will be incurred in the future D) cost that has been incurred, but based on decisions that have already been made, will be not incurred in the future Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
14) Value engineering cannot decrease value-added costs. Answer: FALSE Explanation: Value engineering decreases both value-added costs and non-value-added costs. Diff: 3 Objective: 4 AACSB: Analytical thinking
15) All costs are locked in at the design stage itself. Answer: FALSE Explanation: Companies focus on design decisions to reduce costs before costs get locked in. However, not all costs are locked in at the design stage. Diff: 2 Objective: 4 AACSB: Analytical thinking
16) A non-value-added cost is a cost that, if eliminated, would reduce the actual or perceived value or utility (usefulness) customers experience from using the product or service. Answer: FALSE Explanation: A non-value-added cost is a cost that, if eliminated, would not reduce the actual or perceived value or utility customers gain from using the product or service. Diff: 2 Objective: 4 AACSB: Analytical thinking
17) A re-design of a product so that it requires fewer components to decrease ordering, receiving, testing, and inspection costs is an example of value-engineering. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
18) Value engineering can have undesirable effects if the product remains in development for a long time as the reengineering team repeatedly evaluates alternative designs. Answer: TRUE Explanation: Companies seek to minimize non-value-added costs because they do not provide benefits to customers. Diff: 1 Objective: 4 AACSB: Analytical thinking
951 richard@qwconsultancy.com
19) Supervision costs can have both value-added and non-value-added components. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
20) Locked-in costs are costs that have already been incurred, based on decisions that have already been made and will impact future costs. Answer: FALSE Explanation: Locked-in costs, or designed-in costs, are costs that have not yet been incurred, but will be incurred in the future based on decisions that have already been made. Diff: 2 Objective: 4 AACSB: Analytical thinking
21) What are the undesirable effects of value engineering and target costing? How can these be reduced? Answer: Unless managed properly, value engineering and target costing can have the following undesirable effects: (1) Employees may feel frustrated if they fail to attain target costs. (2) The cross-functional team may add too many features just to accommodate the different wishes of team members. (3) A product may be in development for a long time as the team repeatedly evaluates alternative designs. (4) Organizational conflicts may develop as the burden of cutting costs falls unequally on different business functions in the company's value chain, for example, more on manufacturing than on marketing. To avoid these pitfalls, target-costing efforts should always (1) encourage employee participation and celebrate small improvements toward achieving the target cost, (2) focus on the customer, (3) pay attention to schedules, and (4) set cost-cutting targets for all value-chain functions to encourage a culture of teamwork and cooperation. Diff: 3 Objective: 4 AACSB: Analytical thinking
22) Explain the difference between locked in costs and costs incurred. Which of these types of costs does a traditional accounting system emphasize? At which stage of the value chain are most costs locked-in? At which stage of the value chain are most costs incurred? What implication does this have for good cost management? Answer: Locked-in costs are costs that have not been incurred yet, but based on decisions that have already been made, will be incurred in the future. Traditional accounting systems focus upon incurred costs, or costs as they happen. Most costs are actually locked-in at the design stage. but they are not incurred until the manufacturing stage. Good cost management depends, therefore, on a great deal of attention given to costs at the design stage since it may not be possible to influence costs at the manufacturing stage because the costs are locked-in at that time. Diff: 2 Objective: 4 AACSB: Analytical thinking
952 richard@qwconsultancy.com
Objective 14.5 1) The cost-plus pricing approach is generally in the form: A) Cost base + Markup component = Prospective selling price B) Prospective selling price - Cost base = Markup component C) Cost base + Gross margin = Prospective selling price D) Variable cost + Fixed cost + Contribution margin = Prospective selling price Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
2) A product costs $100 to manufacture and $40 to market and $20 to distribute (ship to customers.) R&D costs are allocated at $30 per unit. Based on a targeted rate of return, manager uses a mark-up of 60%. What is the markup component based on a Cost-Plus pricing approach? A) $60 B) $84 C) $96 D) $114 Answer: D Explanation: D) The cost base is the full cost. The full cost is $190 × 1.6 = $304 therefore the markup component is $114. Diff: 2 Objective: 5 AACSB: Analytical thinking
3) The production costs of X7101 are $180 to manufacture and the commission paid to a salesman is 5%. It costs $11 to distribute (ship to customers.); paid for by the customer. R&D costs are allocated at $8 per unit. Based on a targeted rate of return, manager uses a mark-up of 65% on full cost. What is the markup component based on a Cost-Plus pricing approach? A) $19.00 B) $122.20 C) $128.05 D) $135.20 Answer: C Explanation: C) The cost base is the full cost. The full cost is $197.00(1 + 0.65) = $325.05 therefore the markup component is $128.05 ($325.05 - $197.00)= $128.05.). Since the customer pays the shipping costs, those costs are not part of the full cost. Diff: 2 Objective: 5 AACSB: Analytical thinking
953 richard@qwconsultancy.com
4) Which of the following can be used to determine markup percentage in the case of cost-plus pricing? A) Target annual operating income / Invested capital B) Estimated annual dividend / Invested capital C) Target sales revenue / Target annual operating income D) Estimated annual dividend / Target annual operating income Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
5) A product costs $600 to manufacture and $20 to market and $10 to distribute (ship to customers.) R&D costs are allocated at $40 per unit. Based on a targeted rate of return, manager uses a mark-up of 30%. What is the prospective selling price based on a Cost-Plus pricing approach? A) $780 B) $806 C) $819 D) $871 Answer: D Explanation: D) The cost base is the full cost. The full cost is $670 × 1.3 = $871 Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Samuels Company is considering pricing its 10,000-gallon petroleum tanks using either variable manufacturing or full product costs as the base. The variable cost base provides a prospective price of $6,000 and the full cost base provides a prospective price of $6,100. Which of the following explains the difference in the two prices? A) the estimated amount of profit B) the variable cost base estimates fixed costs in the markup percentage while the full cost base includes an amount for fixed costs C) there is no explanation since this is known as price discrimination D) the difference is caused by the inability to estimate fixed cost per unit with any degree of reliability Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
954 richard@qwconsultancy.com
7) A company's invested capital is $13,000,000 and management has determined that the target rate of return on investment is 10%. Last year, the company produced 131,313 units and this year expects to units sales to be 10% above last year. The cost of the product is estimated to be $13 per unit. What is the target operating income per unit? (Round any intermediary calculations to the nearest unit and your final answer to the nearest cent.) A) $9.00 B) $9.90 C) $13.00 D) $6.50 Answer: A Explanation: A) Target return on investment: 13,000,000 × 10% = $1,300,000 Expected current year sales: 131,313 × (1 + 10%) = 144,444 units Targeted operating income per unit: $1,300,000 / 144,444 = $9 per unit Diff: 3 Objective: 5 AACSB: Analytical thinking
8) The amount of a markup percentage that customers are willing to pay is usually higher when which of the following conditions exist? A) there is idle capacity B) demand is strong C) competition is intense D) demand is elastic Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
9) When making pricing decisions managers should include fixed cost per unit in the cost because: A) it leads to reporting higher operating income for the period B) it allows managers to report positive contribution as long as prices are above variable costs C) in the long run, the price of a product must exceed the full cost of the product D) it requires the management accountant to perform a detailed analysis of cost-behavior patterns to separate product costs into variable and fixed components Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
10) Which of the following statements is true regarding cost-plus pricing? A) It starts with a target price which is the estimated price for a product. B) A company uses a markup percentage that estimates a product price that covers full product costs and earns the required return on investment. C) It first determines product characteristics and target price on the basis of customer preferences and then computes a target cost. D) The cost-plus price chosen has already been studied for customer reaction to the price. Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
955 richard@qwconsultancy.com
11) Which of the following is an advantage of using full cost of the product as the cost base? A) Managers are informed regarding the minimum long-run cost they need to recover to stay in business. B) Using the full cost of the product as a basis for pricing increases the temptation to cut prices below full costs. C) Fixed cost allocations can be arbitrary while using full cost of the product as the cost base. D) It requires a detailed analysis of cost behavior for computations and hence promotes a better understanding of the cost behavior. Answer: A Diff: 3 Objective: 5 AACSB: Analytical thinking
12) Real Wood Structures Company has invested $1,040,000 in a plant to build small tool sheds. The target operating income desired from the plant is $156,000 annually. The company plans annual sales of 1200 sheds at a selling price of $1100 each. What is the target rate of return on investment for Real Wood Structures Company? A) 18.0% B) 15.0% C) 11.8% D) 85.0% Answer: B Explanation: B) Target rate of return = $156,000 / $1,040,000 = 15% Diff: 2 Objective: 5 AACSB: Application of knowledge
13) Ocean Grove Vending Company has invested $1,450,000 in a plant to make vending machines. The target operating income desired from the plant is $362,500 annually. The company plans annual sales of 1500 vending machines at a selling price of $1000 each. What is the markup percentage as a percentage of cost for Ocean Grove Vending Company? A) 24.17% B) 31.87% C) 75.83% D) 25.00% Answer: B Explanation: B) Sales revenue = 1500 units × $1000 = $1,500,000 Markup percentage = [$362,500 / ($1,500,000 – $362,500)] = 31.87% Diff: 2 Objective: 5 AACSB: Application of knowledge
956 richard@qwconsultancy.com
14) Ocean Grove Vending Company has invested $980,000 in a plant to make vending machines. The target operating income desired from the plant is $196,000 annually. The company plans annual sales of 1600 vending machines at a selling price of $1100 each. What is the cost base of each vending machine for Ocean Grove Vending Company? A) $1100 B) $1422 C) $978 D) $613 Answer: C Explanation: C) Sales revenue = 1600 units × $1100 = $1,760,000. Cost base = [($1,760,000 – 196,000) / 1600] = $978. Diff: 3 Objective: 5 AACSB: Application of knowledge
15) Crimpson Company has invested $2,100,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $305,000 annually. The company plans annual sales of 7400 juicer machines at a selling price of $600 each. What is the target rate of return on investment for Crimpson Company? A) 6.9% B) 7.4% C) 14.5% D) 12.5% Answer: C Explanation: C) Target rate of return on investment = 305,000 / $2,100,000 = 14.5%. Diff: 2 Objective: 5 AACSB: Application of knowledge
16) Crimpson Company has invested $2,200,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $303,000 annually. The company plans annual sales of 7000 juicer machines at a selling price of $500 each. What is the markup percentage as a percentage of cost for Crimpson Company? A) 8.7% B) 13.8% C) 9.5% D) 0.9% Answer: C Explanation: C) Sales revenue = 7000 units × $500 = $3,500,000. Markup percentage = $303,000 / ($3,500,000 – $303,000) = 9.5%. Diff: 2 Objective: 5 AACSB: Application of knowledge
957 richard@qwconsultancy.com
17) Crimpson Company has invested $2,200,000 in a plant to make commercial juicer machines. The target operating income desired from the plant is $306,000 annually. The company plans annual sales of 7700 juicer machines at a selling price of $300 each. What is the cost base of each juicer machine for Crimpson Company? A) $260.26 B) $39.74 C) $300.00 D) $285.71 Answer: A Explanation: A) Sales revenue = 7700 units × $300 = $2,310,000 Cost base = [($2,310,000 – $306,000)/7700] = $260.26 Diff: 3 Objective: 5 AACSB: Application of knowledge
18) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year: Direct materials Direct labor Manufacturing overhead Variable Fixed Selling and administrative Variable Fixed Total costs
$1,145,000 795,000 880,000 650,000 370,000 520,000 $4,360,000
Wilde has an annual target operating income of $980,000. The markup percentage for setting prices as a percentage of total manufacturing costs is: A) 53.9% B) 80.4% C) 209.2% D) 43.2% Answer: A Explanation: A) Markup percentage = ($980,000 + $370,000 + $520,000) / ($1,145,000 + $795,000 + $880,000 + $650,000) = 53.9% Diff: 3 Objective: 5 AACSB: Application of knowledge
958 richard@qwconsultancy.com
19) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year: Direct materials Direct labor Manufacturing overhead Variable Fixed Selling and administrative Variable Fixed Total costs
$1,145,000 795,000 880,000 650,000 370,000 520,000 $4,360,000
Wilde has an annual target operating income of $920,000. The markup percentage for setting prices as a percentage of variable manufacturing costs is: A) 52.83% B) 89.73% C) 65.31% D) 21.17% Answer: B Explanation: B) Cost base = $1,150,000 + $775,000 + $850,000 = $2,775,000 Markup percentage = [($670,000 + $410,000 + $490,000 + $920,000) / $2,775,000] = 89.73% Diff: 3 Objective: 5 AACSB: Application of knowledge
959 richard@qwconsultancy.com
20) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year: Direct materials Direct labor Manufacturing overhead Variable Fixed Selling and administrative Variable Fixed Total costs
$1,150,000 785,000 870,000 670,000 370,000 490,000 $4,335,000
Wilde has an annual target operating income of $910,000. The markup percentage for setting prices as a percentage of the variable cost of the product is: A) 44.1% B) 36.5% C) 26.7% D) 65.2% Answer: D Explanation: D) Markup percentage = ($910,000 + $670,000 + $490,000) / ($1,150,000 + $785,000 + $870,000 + $370,000) = 65.2% Diff: 3 Objective: 5 AACSB: Application of knowledge
960 richard@qwconsultancy.com
21) Wilde Corporation budgeted the following costs for the production of its one and only product for the next fiscal year: Direct materials Direct labor Manufacturing overhead Variable Fixed Selling and administrative Variable Fixed Total costs
$1,145,000 795,000 880,000 650,000 370,000 520,000 $4,360,000
Wilde has an annual target operating income of $990,000. The markup percentage for setting prices as a percentage of the full cost of the product is: A) 31.9% B) 36.3% C) 45.8% D) 22.7% Answer: D Explanation: D) Markup percentage = $990,000 / $4,355,000 = 22.7% Diff: 3 Objective: 5 AACSB: Application of knowledge
22) Sandra Clothing Company has invested $51,000,000 in its business. The target rate of return for the company is 12%. It has long-term assets of $23,000,000. Cost of debt for the company is 8%. It expects to sell 12,000 units in the upcoming year. What will be the target operating income per unit for Sandra Clothing Company? A) $153 B) $230 C) $340 D) $510 Answer: D Explanation: D) Target operating income = $51,000,000 × 12% = $6,120,000 Target operating income per unit = $6,120,000 /12,000 units = $510 per unit Diff: 3 Objective: 5 AACSB: Application of knowledge
23) In cost-plus pricing, the markup definitively determines the actual selling price. Answer: FALSE Explanation: Managers use the cost-plus pricing formula as a starting point. The markup component is rarely a rigid number. Instead, it is flexible, depending on the behavior of customers and competitors. Diff: 2 Objective: 5 AACSB: Analytical thinking
961 richard@qwconsultancy.com
24) Using the cost-plus approach eliminates the need to consider other factors of pricing such as customers and competition. Answer: FALSE Explanation: The cost-plus formula is only a starting point for pricing decisions. Costs, customers, and competitors still play a role in price setting. Diff: 2 Objective: 5 AACSB: Analytical thinking
25) The target rate of return on investment the percentage used to markup the cost to an acceptable selling price. Answer: FALSE Explanation: The target rate of return on investment and the markup percentage are two different things. The target return on investment helps managers decide the profit per unit that must be achieved based on forecasted unit sales. With the profit per unit target known, management can determine a markup percentage under the cost-plus method of pricing. Diff: 2 Objective: 5 AACSB: Analytical thinking
26) Selling prices computed under cost-plus pricing are prospective prices that may or may not actually be charged to customers. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
27) Markups tend to be higher in more competitive markets. Answer: FALSE Explanation: Markups tend to be lower in more competitive markets. Diff: 2 Objective: 5 AACSB: Analytical thinking
28) One of the risks of using only the variable cost as a base may tempt managers to cut prices as long as prices are above variable cost. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
29) A full-cost formula for pricing does requires that the management accountant performs a detailed analysis of cost-behavior patterns to separate product costs into variable and fixed components. Answer: FALSE Diff: 2 Objective: 5 AACSB: Analytical thinking
962 richard@qwconsultancy.com
30) There are alternative ways of measuring the cost base when applying a cost-plus method to pricing but research shows that many managers prefer to use full cost as the cost base. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
31) A full-cost formula for pricing does not require the management accountant to perform a detailed analysis of cost-behavior patterns. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
32) The Big Tool Company has budgeted sales of $300,000 with the following budgeted costs: Direct materials Direct manufacturing labor Factory overhead Variable Fixed Selling and administrative expenses Variable Fixed
$60,000 35,000 30,000 45,000 20,000 25,000
Compute the average markup percentage for setting prices as a percentage of: a. The full cost of the product b. The variable cost of the product c. Variable manufacturing costs d. Total manufacturing costs Answer: a. $60,000 + $35,000 + $30,000 + $45,000 + $20,000 + $25,000 = $215,000 ($300,000 - $215,000)/$215,000 = 39.5% b.
$60,000 + $35,000 + $30,000 + $20,000 = $145,000 ($300,000 - $145,000)/$145,000 = 106.8%
c.
$60,000 + $35,000 + $30,000 = $125,000 ($300,000 - $125,000)/$125,000 = 140%
d. $60,000 + $35,000 + $30,000 + $45,000 = $170,000 ($300,000 - $170,000)/$170,000 = 76.5% Diff: 2 Objective: 5 AACSB: Analytical thinking
963 richard@qwconsultancy.com
33) Jackson Company has budgeted sales of $810,000 with the following budgeted costs: Direct materials Direct manufacturing labor Factory overhead Variable Fixed Selling and administrative expenses Variable Fixed
$168,000 140,000 98,000 108,000 72,000 100,000
Compute the average markup percentage for setting prices as a percentage of: a. Total manufacturing costs b. The variable cost of the product c. The full cost of the product d. Variable manufacturing costs Answer: a. $168,000 + $140,000 + $98,000 + $108,000 = $514,000 ($810,000 - $514,000)/$514,000 = 57.6% b.
$168,000 + $140,000 + $98,000 + $72,000 = $478,000 ($810,000 - $478,000)/$478,000 = 69.4%
c.
$168,000 + $140,000 + $98,000 + $108,000 + $72,000 + $100,000 = $686,000 ($810,000 - $686,000)/$686,000 = 18.07%
d. $168,000 + $140,000 + $98,000 = $406,000 ($810,000 - $406,000)/$406,000 = 99.5% Diff: 2 Objective: 5 AACSB: Analytical thinking
34) Some companies use a method of pricing called the time-and-materials method. Explain what this means and use at least two examples. Answer: Service companies such as home repair services, automobile repair services, and building contractors (carpenters, electricians, and plumbers) use a cost-plus pricing method called the time-and-materials method. This is a type of job costing system whereby jobs are priced based on materials and labor time. The price charged for materials equals the cost of materials plus a markup. The price charged for labor represents the cost of labor plus a markup. Therefore, the prices charged for each direct cost item includes its own markup so that the company recovers its overhead costs and earns a desired profit. Diff: 2 Objective: 5 AACSB: Analytical thinking
964 richard@qwconsultancy.com
Objective 14.6 1) Life-cycle costing is best described by which of the following? A) it is a method of cost planning to reduce manufacturing costs to targeted levels B) it is the process of tracking and accumulating costs that are incurred within the manufacturing and distribution links of the value chain C) it is the process of tacking and accumulating business function costs across the entire value chain D) it is a costing system that focuses on reducing costs during the manufacturing cycle Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
2) An understanding of life-cycle costs can lead to which of the following? A) additional costs during the manufacturing cycle B) less need for evaluation of the competition C) the accumulation of information for strategically evaluating pricing decisions D) mutually beneficial relationships between buyers and sellers Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
3) Which of the following best defines the term: product life cycle? A) the time span between when the company begins the initial R&D on a product till the time when the first unit is sold B) the span of time from initial R&D on a product to when the customer service and support for the product is no longer offered C) the time span between when the company begins the initial R&D on a product till the time when the last unit is sold D) the span of time from when the first unit of the product is sold until the last unit of the product is sold Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
4) Life-cycle budgeting and life-cycle costing can help highlight which of the following measures? A) an increase in customer-service costs due to using inferior materials B) high production costs caused by a complex design C) large ordering costs due to the great number of component parts used D) an increase in annual operating income resulting from the new product Answer: D Diff: 3 Objective: 6 AACSB: Analytical thinking
965 richard@qwconsultancy.com
5) Which of the following would make life-cycle budgeting particularly important to implement? A) a very short R&D period with minimal costs but with an emphasis on speed to market B) a product that will be brought to market very quickly and will only be offered for a limited time C) the development period for a product is long and that the R&D needed and the design activities are costly D) a service that will be offered once this year and then eliminated as a result of a proposed sale of a division Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
6) Which of the following best describes customer life-cycle costs? A) costs incurred by the selling company to satisfy the customer B) costs to the customers for buying and using a product C) same as the selling life-cycle prices D) replacement costs of using a product or service Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
7) Expo Manufacturing Inc., is in the process of evaluating a new product using the following information: ∙ A new transformer has three production runs each year, each with $14,000 in setup costs. ∙ The new transformer incurred $50,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing the transformers are $55,000 per run of 5100 transformers each. ∙ Indirect manufacturing costs charged to each run are $55,000. ∙ Destination charges for each transformer average $4.00. ∙ Customer service expenses average $0.20 per transformer. ∙ The transformers are selling for $40 the first year and will increase by $2 each year thereafter. ∙ Sales units equal production units each year. What are estimated life-cycle revenues? A) $612,000 B) $1,254,600 C) $1,897,200 D) $1,927,800 Answer: D Explanation: D) First year (5100 × 3 runs × $40) $612,000 Second year (5100 × 3 × $42) 642,600 Third year (5100 × 3 × $44) 673,200 Total $1,927,800 Diff: 2 Objective: 6 AACSB: Application of knowledge
8) Expo Manufacturing Inc., is in the process of evaluating a new product using the following information:
966 richard@qwconsultancy.com
∙ A new transformer has three production runs each year, each with $15,000 in setup costs. ∙ The new transformer incurred $45,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing the transformers are $55,000 per run of 5000 transformers each. ∙ Indirect manufacturing costs charged to each run are $45,000. ∙ Destination charges for each transformer average $2.00. ∙ Customer service expenses average $0.40 per transformer. ∙ The transformers are selling for $20 the first year and will increase by $4 each year thereafter. ∙ Sales units equal production units each year. What is the estimated life-cycle operating income for the first year? A) (126,000) B) 1,146,000 C) 1,596,000 D) 126,000 Answer: A Explanation: A) Sales (5000 units × 3 runs × $20) $300,000 Development costs $45,000 Setup costs (3 × $15,000) 45,000 Direct manufacturing costs (3 × $55,000) 165,000 Indirect manufacturing costs (3 × $45,000) 135,000 Destination charges ($2.00 × 15,000) 30,000 Customer service ($0.40 × 15,000) 6000 426,000 Estimated life-cycle operating income for the first year
($126,000)
Diff: 3 Objective: 6 AACSB: Application of knowledge
967 richard@qwconsultancy.com
9) Expo Manufacturing Inc., is in the process of evaluating a new product using the following information: ∙ A new transformer has three production runs each year, each with $15,000 in setup costs. ∙ The new transformer incurred $50,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing the transformers are $40,000 per run of 5700 transformers each. ∙ Indirect manufacturing costs charged to each run are $115,000. ∙ Destination charges for each transformer average $2.00. ∙ Customer service expenses average $0.70 per transformer. ∙ The transformers are selling for $35 the first year and will increase by $2 each year thereafter. ∙ Sales units equal production units each year. What is the estimated life-cycle operating income for the first three years? A) $556,170 B) $2,221,170 C) $179,590 D) $2,196,970 Answer: C Explanation: C) Year 1 Year 2 Year 3 Totals Life-cycle revenue Year 1 ((5700 × 3) × $35) $598,500 Year 2 ((5700 × 3) × ($35 + $2)) $632,700 Year 3 ((5700 × 3) × ($35 + $2 + $2)) $666,900 Total $1,898,100 Life-cycle costs: Development 50,000 Setup ($3 × $15,000) 45,000 Direct manufacturing costs (3 × $40,000) 120,000 Indirect manufacturing (3 × $115,000) 345,000 Destination charges ($2.00 × 3 × 5700) 34,200 Customer service ($0.70 × 5700 × 3) 11,970
50,000 45,000 120,000 345,000 34,200 11,970
45,000 120,000 345,000 34,200 11,970
135,000 360,000 1,035,000 102,600 35,910
Total costs
$606,170 $556,170 $556,170
1,718,510
Life-cycle operating income
$179,590
Diff: 3 Objective: 6 AACSB: Application of knowledge
968 richard@qwconsultancy.com
10) Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the business consulting division. ∙ Estate Planning, a new service, incurred $150,000 in development costs and employee training. ∙ The direct costs of providing this service, which is all labor, averages $31 per hour. ∙ Other costs for this service are estimated at $440,000 per year. ∙ The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting. ∙ Customer service expenses average $99 per client, with each job lasting an average of 450 hours. The current staff expects to bill 54,000 hours for each of the two years the program is in effect. Billing averages $46 per hour. What are estimated life-cycle revenues? A) $2,484,000 B) $208,120 C) $4,968,000 D) $416,240 Answer: C Explanation: C) First year (54,000 × $46) $2,484,000 Second year (54,000 × $46) 2,484,000 Total $4,968,000 Diff: 1 Objective: 6 AACSB: Application of knowledge
969 richard@qwconsultancy.com
11) Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the business consulting division. ∙ Estate Planning, a new service, incurred $180,000 in development costs and employee training. ∙ The direct costs of providing this service, which is all labor, averages $30 per hour. ∙ Other costs for this service are estimated at $450,000 per year. ∙ The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting. ∙ Customer service expenses average $104 per client, with each job lasting an average of 500 hours. The current staff expects to bill 50,000 hours for each of the two years the program is in effect. Billing averages $46 per hour. What is estimated life-cycle operating income for the first year? A) $339,600 B) $149,200 C) $159,600 D) $319,200 Answer: C Explanation: C) Revenue (50,000 × $46) 2,300,000 Development cost 180,000 Direct costs (50,000 × $30) 1,500,000 Indirect costs 450,000 Customer service ($104 × (50,000./500)) 10,400 2,140,400 Operating income / loss $159,600 Diff: 3 Objective: 6 AACSB: Application of knowledge
970 richard@qwconsultancy.com
12) Jamal, Kareem, Rashid and Associates are in the process of evaluating its new client services for the business consulting division. ∙ Estate Planning, a new service, incurred $190,000 in development costs and employee training. ∙ The direct costs of providing this service, which is all labor, averages $29 per hour. ∙ Other costs for this service are estimated at $410,000 per year. ∙ The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting. ∙ Customer service expenses average $104 per client, with each job lasting an average of 450 hours. The current staff expects to bill 67,500 hours for each of the two years the program is in effect. Billing averages $49 per hour. What is the estimated life-cycle operating income for the first two years? A) $6,615,000 B) $1,658,800 C) $924,400 D) $734,400 Answer: B Explanation: A) Year 1 Year 2 Totals Revenue (67,500 × $49) 3,307,500 3,307,500 6,615,000 Development cost 190,000 190,000 Direct costs (67,500 × $29) 1,957,500 1,957,500 3,915,000 Indirect costs 410,000 410,000 820,000 Customer service ($104 × (67,500/450)) 15,600 15,600 31,200 Life-cycle operating income 1,658,800 Diff: 3 Objective: 6 AACSB: Application of knowledge
971 richard@qwconsultancy.com
13) Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division. ∙ Server Planning, a new service, incurred $330,000 in development costs. ∙ The direct costs of providing the service, which is all labor, averages $40 per hour. ∙ Other costs for this service are estimated at $340,000 per year. ∙ The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non-viable. ∙ Customer service expenses average $350 per client, with each job lasting an average of 40 hours. The current staff expects to bill 15,000 hours for each of the two years the program is in effect. Billing averages $100 per hour. What are the estimated life-cycle revenues? A) $3,000,000 B) $3,340,000 C) $3,670,000 D) $1,500,000 Answer: A Explanation: A) First year (15,000 × $100) $1,500,000 Second year (15,000 × $100) 1,500,000 Total $3,000,000 Diff: 1 Objective: 6 AACSB: Analytical thinking
972 richard@qwconsultancy.com
14) Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division. ∙ Server Planning, a new service, incurred $280,000 in development costs. ∙ The direct costs of providing the service, which is all labor, averages $70 per hour. ∙ Other costs for this service are estimated at $350,000 per year. ∙ The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non-viable. ∙ Customer service expenses average $350 per client, with each job lasting an average of 20 hours. The current staff expects to bill 7,900 hours for each of the two years the program is in effect. Billing averages $100 per hour. What is the estimated life-cycle operating income for the first year? A) -$251,250 B) -$782,500 C) -$531,250 D) $531,250 Answer: C Explanation: C) Revenue (7,900 hours × $100) $790,000 Development costs $280,000 Direct costs (7,900 × 70) 553,000 Indirect costs 350,000 Customer service ($350 × (7,900/20) clients) 138,250 1,321,250 Operating income (loss) $(531,250) Diff: 3 Objective: 6 AACSB: Analytical thinking
973 richard@qwconsultancy.com
15) Knowledge Transfer Associates is in the process of evaluating its new client services for the business systems consulting division. • Server Planning, a new service, incurred $260,000 in development costs. • The direct costs of providing the service, which is all labor, averages $60 per hour. • Other costs for this service are estimated at $340,000 per year. • The current program for server planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non-viable. • Customer service expenses average $150 per client, with each job lasting an average of 40 hours. The current staff expects to bill 16,000 hours for each of the two years the program is in effect. Billing averages $100 per hour. What is the estimated life-cycle operating income for both years combined? A) $960,000 B) $(220,000) C) $(20,000) D) $1,620,000 Answer: B Explanation: B) Year 1 Year 2 Totals Life-cycle revenue (22,800 × $100) $2,280,000 $2,280,000 $4,560,000 Life-cycle costs: Development 270,000 270,000 Direct costs (22,800 × $40) 912,000 912,000 1,824,000 Indirect costs 310,000 310,000 620,000 Customer service ($300 × (22,800/60) 114,000 114,000 228,000 Total costs Life-cycle operating income
$1,606,000
$1,336,000
$2,942,000 $1,618,000
Diff: 3 Objective: 6 AACSB: Application of knowledge
16) A life-cycle budget is usually prepared to budget for costs and production for a period of one year. Answer: FALSE Explanation: Life cycle budgeting is prepared for the product life cycle, from initial R&D on a product to when customer service and support is no longer offered for that product. It can span several years. Diff: 2 Objective: 6 AACSB: Analytical thinking
17) Customer life-cycle costs focus on the total costs incurred by a customer to acquire, use, maintain, and dispose of a product or service. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
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18) Customer life-cycle costs, because they are only budgeted items, do not influence the prices a company can charge for its products. Answer: FALSE Explanation: Customer life-cycle costs influence the prices a company can charge for its products. Diff: 2 Objective: 6 AACSB: Analytical thinking
19) Managing environmental costs is an example of life-cycle costing and value engineering. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
20) Life-cycle budgeting estimates the costs and revenues attributed to a product from its initial R&D through production of a prototype product. Answer: FALSE Explanation: Life-cycle budgeting estimates the costs and revenues attributed to a product from its initial R&D through its final customer service and support. Diff: 2 Objective: 6 AACSB: Analytical thinking
21) Environmental costs that are incurred over several years of the product's life cycle are often locked in at the product- and process-design stage. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
22) The product life cycle spans the time from when a product is produced and first offered to customers when customer service and support is no longer offered for that product. Answer: FALSE Explanation: The product life cycle spans the time from initial R&D on a product to when customer service and support is no longer offered for that product. Diff: 2 Objective: 6 AACSB: Analytical thinking
975 richard@qwconsultancy.com
23) Franklin Company is in the process of evaluating a new part using the following information. ∙ Part SLC2002 has one production run each month, each with $18,000 in setup costs. ∙ Part SLC2002 incurred $40,000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing Part SLC2002 are $56,000 per run of 24,000 parts each. ∙ Indirect manufacturing costs charged to each run are $88,000. ∙ Destination charges for each run average $15,000. ∙ Part SLC2002 is selling for $14.00 in the United States and $25 in all other countries. Sales are one-third domestic and two-thirds exported. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating income for the first year? Answer: a. Domestic ($14 × 12 months × 24,000 × 3 yrs. × 1/3) $ 4,032,000 Export ($25 × 12 months × 24,000 × 3 yrs. × 2/3) 14,400,000
b.
Estimated life-cycle revenues
$18,432,000
Sales Domestic ($14.00 × 12 months × 24,000 × 1/3) Export ($25 × 12 months × 24,000 × 2/3)
$1,344,000 4,800,000
Total Sales
6,144,000
Costs: Development costs Setup costs (12 × $18,000) Direct manufacturing costs (12 × $56,000) Indirect manufacturing costs (12 × $88,000) Destination costs (12 × $15,000)
$ 40,000 216,000 672,000 1,056,000 180,000
Estimated life-cycle operating income, first year Diff: 3 Objective: 6 AACSB: Analytical thinking
976 richard@qwconsultancy.com
2,164,000 $3,980,000
24) Harry and Sally are starting a new business venture and are in the process of evaluating their product lines. Information for one new product, hand-made lamps, is as follows: ∙ Every six months a new lamp pattern will be put into production. Each new pattern will require $8,000 in setup costs. ∙ The lamp product line incurred $40,000 in development costs and is expected to be produced over the next six years. ∙ Direct costs of producing the lamps average $144 each. Each lamp requires 12 labor-hours and 2 machine-hours. ∙ Indirect manufacturing costs are estimated at $168,000 per year. ∙ Customer service expenses average $16 per lamp. ∙ Current sales are expected to be 2,000 units of each lamp pattern. Each lamp sells for $300. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating income for the first year? Answer: a. Estimated life-cycle revenues: (2,000 × 2 patterns per year × $300 per lamp) $ 1,200,000 × 6 years $7,200,000 b. Annual revenue (2,000 × $300 × 2) Setup costs ($8,000 × 2) $16,000 Development costs (2,000 × $144 × 2) 40,000 Direct manufacturing costs 576,000 Indirect manufacturing cost 168,000 Customer service costs ($16 × 2,000 lamps × 2) 64,000 Estimated life-cycle operating income for the first year Diff: 2 Objective: 6 AACSB: Application of knowledge
977 richard@qwconsultancy.com
$1,200,000
864,000 $ 336,000
25) Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows: ∙ Sixteen times each year, a new card design will be put into production. Each new design will require $700 in setup costs. ∙ The parchment grade card product line incurred $75,000 in development costs and is expected to be produced over the next four years. ∙ Direct costs of producing the designs average $0.50 each. ∙ Indirect manufacturing costs are estimated at $50,000 per year. ∙ Customer service expenses average $0.10 per card. ∙ Current sales are expected to be 2,500 units of each card design. Each card sells for $4.00. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating income for the first year? c. What is the estimated life-cycle operating income per year for the years after the first year? d. What is the total estimated life-cycle operating income? Answer: a. Estimated life-cycle revenues: (2,500 × 16 designs per year × $4.00 per card sold) $160,000 × 4 years $640,000 b.
Annual revenues (2,500 × $4.00 × 16)
$160,000
Development costs Setup costs ($700 × 16) Direct manufacturing costs (2,500 × $0.50 × 16) Indirect manufacturing costs Customer service costs ($0.10 × 2,500 cards × 16)
c.
$ 75,000 11,200 20,000 50,000 4,000
160,200
Estimated life-cycle operating income (loss) for the first year
$(20,200)
Annual revenues (2,500 × $4.00 × 16)
$160,000
Setup costs ($700 × 16) Direct manufacturing costs (2,500 × $0.50 × 16) Indirect manufacturing costs Customer service costs ($0.10 × 2,500 cards × 16)
$ 11,200 20,000 50,000 4,000
Estimated life-cycle operating income (loss) for the first year d. Estimated life-cycle operating income for all four years (3 × $74,800 - $20,200) Diff: 2 Objective: 6 AACSB: Analytical thinking
978 richard@qwconsultancy.com
85,200 $74,800 $204,200
26) Ski Valet provides materials that let people teach themselves how to snow ski. It has six different skill-level programs. Each one includes visual and audio learning aids along with a workbook that can be submitted to the company for grading and evaluation purposes, if the person so desires. The accounting system of Ski Valet is very traditional in its reporting functions with the calendar year being the company's fiscal year. It includes an abundance of information that can be used for various reporting purposes. The company has found that any new idea soon runs its course with an effective life of about three years. Therefore, the company is always in the development stage of some new program. Program development requires experts in the area to provide the know-how of the item being developed and a development team that puts together the video, audio, and workbook materials. The actual costs of reproducing the packages are relatively inexpensive when compared to the development costs. Required: How might product life-cycle budgeting aid the company in improving its overall operations? Answer: Because the product life cycle for Ski Valet extends over several traditional accounting periods, it is critical for the company to consider a planning concept that evaluates each one of its products during its entire life cycle. Procedures that highlight an entire life cycle can include items for overall profitability, and which products might be repeated in a few years. With a large portion of their expenses in the development area, life-cycle budgeting can assist in predicting the sales needs for the entire life of a product. It is probably more important to evaluate company performance on a product basis rather than year to year. Life-cycle budgeting would allow the company to compare products to each other rather than just comparing one year to the next. Diff: 2 Objective: 6 AACSB: Analytical thinking
979 richard@qwconsultancy.com
Objective 14.7 1) Predatory pricing: A) is ethical; even though it may devalue the product in the minds of consumers, it saves the consumer money B) is illegal as it sets prices low to drive out competition C) sets prices high so as to earn abnormal profits for the seller/producer D) is ethical since its main purpose is to help the ultimate consumer acquire the product or enjoy the service Answer: B Diff: 2 Objective: 7 AACSB: Ethical understanding and reasoning
2) Which of the following is the best description of price discrimination? A) setting different prices for different products B) charging different prices for quantity amounts C) using variable costing for some products and full costing for other products when setting prices D) charging different prices to different customers or clients for the same products or services Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
3) Roberto Inc., operates a chain of luxury hotels in the Asia-Pacific region. It charges $150 for one night stay. However when 90% of the rooms are occupied, Roberto charges a premium of 20% on room tariff for the remaining rooms. What pricing method has Roberto Inc. adopted? A) customer-preference pricing B) seasonal-load pricing C) peak-load pricing D) capacity pricing Answer: C Diff: 3 Objective: 7 AACSB: Analytical thinking
4) Which of the following choices is the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service? A) price discrimination B) peak-load pricing C) demand-based pricing D) customer preference pricing Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
980 richard@qwconsultancy.com
5) When demand for a product is very elastic and prices are increased, demand will: A) remain the same, and operating profits will increase B) remain the same, and operating profits may either increase or decrease C) decrease, and operating profits will decrease D) decrease, and operating profits may either increase or decrease Answer: D Diff: 3 Objective: 7 AACSB: Analytical thinking
6) Which of the following is an example of price discrimination? A) Larry's offers a 30% discount to buyers making repeat purchases within 30 days. B) Enrique Corp sells different kind of goods at different prices. C) Chang sells his wares at different prices based on the market conditions. D) Nathan sells his ice-creams for a discount during winter season. Answer: A Diff: 3 Objective: 7 AACSB: Application of knowledge
7) Troy City Inc., manufactures a product and is considering raising the price by $20 a unit for the coming year. With a $20 price increase, demand is expected to fall by 2500 units.
Demand Selling price
Currently 21,000 units $170
Variable costs per unit
Projected 18,500 units $190 $110
$110
Would you recommend the $20 price increase? A) No, because demand decreased. B) No, because the contribution margin decreases. C) Yes, because inventory turnover increases. D) Yes, because operating income increases. Answer: D Explanation: D) Old operating income = $1,260,000 (21,000 × ($170 - $110)). New operating income = $1,480,000 (18,500 × ($190 – $110). Net increase in operating profits = $220,000 ($1,480,000 – $1,260,000). Diff: 2 Objective: 7 AACSB: Application of knowledge
981 richard@qwconsultancy.com
8) Toy City Inc., manufactures a product and is considering raising the price by $40 a unit for the coming year. With a $40 price increase, demand is expected to fall by 2800 units.
Demand Selling price Variable costs per unit
Currently 21,000 units $170 $110
Projected 18,500 units $190 $110
Bright Inc., has a capacity to produce 28,800 units. Due to an increase in the electricity costs, there is a sudden spike in demand by 2800 units. If the company adopts peak-load pricing policy and charges a premium of 20% over the current sales price, what is the total contribution on the sale of additional units? A) $257,600 B) $280,000 C) $537,600 D) $526,400 Answer: A Explanation: A) Expected selling price = $160 + ($160 × 20%) = $192 Total contribution from sale of additional units = 2800 × ($192 – $100) = $257,600 Diff: 3 Objective: 7 AACSB: Application of knowledge
9) Velim Electronics manufactures electric shavers and is considering decreasing the price by $3 a unit for the coming year. With a $3 price decrease, the unit demand is expected to increase by 25%, and a high volume materials discount is expected to decrease the variable costs per unit by $2 per unit.
Demand Selling price Variable costs per unit
Currently 50,000 units $60 $52
Projected 62,500 units $190 $50
Would you recommend the $3 price decrease? A) Yes, because demand decreases. B) No, because the selling price decreases. C) Yes, because operating income increases. D) No, because contribution margin per unit increases. Answer: C Explanation: C) Old operating income = $400,000 (50,000 × ($60 - $52)). New operating income = $437,500 (62,500 × ($57 – $50). Net increase in operating profits = $37,500 ($437,500 – $400,000). Diff: 2 Objective: 7 AACSB: Application of knowledge
982 richard@qwconsultancy.com
10) Einstein Motors, has a capacity to produce 38,000 electric cars. Due to a temporary subsidy announced, there is a sudden increase in demand. Einstein decides to adopt peak-load pricing and charge a premium of 30% over its normal selling price of $4000. It has already accepted orders for 29,000 units at normal selling price. What is the total contribution to the company on sale of additional 9000 units if the variable cost per unit is $2000? A) $36,000,000 B) $28,800,000 C) $18,000,000 D) $10,800,000 Answer: B Explanation: B) Expected selling price = $4000 + ($4000 × 30%) = $5200 Total contribution from sale of additional units = 9000 × ($5200 – $2000) = $28,800,000 Diff: 3 Objective: 7 AACSB: Application of knowledge
983 richard@qwconsultancy.com
11) The Maize Eagles are evaluating ticket prices for its basketball games. Studies show that Friday and Saturday night games average more than twice the number of fans compared to other days. The following information pertains to the stadium's normal operations per season: Average fans per game (all games) Average fans per Friday and Saturday night games Number of home games per season Stadium capacity Variable operating costs per operating hour Marketing costs per season for basketball Customer-service costs per season for basketball
3,000 fans 4,000 fans 20 games 4,000 seats $500 $139,950 $25,000
The stadium is open for 4 operating hours on each day a game is played. All employees work by the hour except for the administrators. A maximum of one game is played per day and each fan has only one ticket per game. The stadium authority wants to charge more for games on Friday and Saturday. What is the minimum price that should be charged for peak attendance nights? A) $2.56 B) $0.66 C) $3.42 D) $68.31 Answer: C Explanation: C) Variable operating costs (20 × 4 × $500) $40,000 Marketing $139,950 Customer service 25,000 Total $204,950 Attendance = 20 × 3,000 = 60,000 fans Minimum price is $204,950/60,000 = $3.42 Diff: 3 Objective: 7 AACSB: Application of knowledge
984 richard@qwconsultancy.com
12) Hitz Video Rental is evaluating rental prices. Historical data show that Friday and Saturday have twice the rentals of other days of the week. The following information pertains to the store's normal operations per week: Average rentals per day on Friday and Saturday Average rentals per day on Sunday through Thursday Store hours per day Total units available for rent
1,500 600 8 11,000
Variable operating costs per hour Marketing costs per week Customer service costs per week
$50 $2,500 $300
The store manager wants to charge more for rentals on Friday and Saturday. What is the minimum price that should be charged during peak rental days? A) $0.54 B) $0.47 C) $0.52 D) $0.93 Answer: D Explanation: D) Variable operating costs ($50 × 8 × 7) $2,800 Marketing 2,500 Customer service 300 Total $5,600 Average rental cost per customer $5,600 / [(2 × 1,500) + (5 × 600)] = $0.93 Diff: 3 Objective: 7 AACSB: Application of knowledge
13) Which of the following scenarios is an example of predatory pricing? A) Ceramic Corp sells its products below average total costs during off-peak seasons. B) Almeida flowers has arrived at an informal agreement with other sellers in the area to charge a very high selling price. C) Anton Inc., sells its products for $25 in the U.S, however it can sell the same product for double the price in its home country. D) Duyen Inc., is launching a new product and has decided to sell its product below its average variable costs until it drives competitors out of market. Answer: D Diff: 3 Objective: 7 AACSB: Application of knowledge
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14) Predatory pricing is a type of price discrimination that: A) allows prices to be cut to the level of variable costs B) deliberately sets prices very low, sometimes even below costs, to minimize competition C) is required when a company declares bankruptcy so that it can sell its remaining goods quickly D) is used in the food industry for perishable goods Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
15) To minimize the chances of violating pricing laws, a company should: A) keep detailed records of variable costs for all value-chain business functions B) use a variable cost-plus markup method of pricing C) underprice products on a consistent basis, rather than sporadically D) use dumping only when a product is at the end of its life cycle Answer: A Diff: 3 Objective: 7 AACSB: Analytical thinking
16) Crimpson Corp., a California-based company is selling its products for $21. Its average variable costs is $23 and the average selling price of its competitors is $26. This is an example of: A) dumping B) predatory pricing C) collusive pricing D) suicidal pricing Answer: B Diff: 3 Objective: 7 AACSB: Application of knowledge
17) When the price of a product does not change as a result of changes in demand, the price insensitivity to demand is called demand inelasticity. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
18) Price discrimination is the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service. Answer: FALSE Explanation: Peak-load pricing is the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service. Diff: 1 Objective: 7 AACSB: Analytical thinking
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19) Peak-load pricing is the practice of charging a lower price for the same product or service when the demand for it approaches the physical limit of the capacity to produce that product or service. Answer: FALSE Explanation: Peak-load pricing is the practice of charging a higher price for the same product or service when the demand for it approaches the physical limit of the capacity to produce that product or service. Diff: 1 Objective: 7 AACSB: Analytical thinking
20) The difference in prices between countries can vary beyond the cost of delivering the product to each country, solely because of changes in exchange rates. Answer: FALSE Explanation: Price differences also arise because of differences in the purchasing power of consumers in different countries and government restrictions that may limit the prices that companies can charge. Diff: 2 Objective: 7 AACSB: Analytical thinking
21) To prove predatory pricing, one of conditions established by the U.S. Supreme Court is that the company should be charging a price below 60% of its total costs. Answer: FALSE Explanation: To prove predatory pricing, one of conditions established by the U.S. Supreme Court is that the company should be charging a price below an appropriate measure of costs. The Supreme Court has not specified the "appropriate measure of costs." Diff: 2 Objective: 7 AACSB: Analytical thinking
22) Faraway Corporation is located in Providence, RI and manufactures a product that costs $100 and charges McLeod Company, a Massachusetts based retailer, $300 but charges a customer located in China $310 as it costs more to ship the product oversees. This is an example of illegal price discrimination under the U.S. Robinson-Patman Act of 1936. Answer: FALSE Explanation: Price discrimination under the act is legal of differences in price can be justified by cost. Diff: 2 Objective: 7 AACSB: Analytical thinking
23) Predatory pricing occurs when companies in an industry conspire in their pricing and production decisions to achieve a price above the competitive price and so restrain trade. Answer: FALSE Explanation: Collusive pricing occurs when companies in an industry conspire in their pricing and production decisions to achieve a price above the competitive price and so restrain trade. Diff: 2 Objective: 7 AACSB: Analytical thinking
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24) Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a substantially reduced price. Answer: FALSE Explanation: Price dumping occurs when a non-U.S. company sells a product in the United States at a price below the market value where it is produced and this action threatens to injure an industry in the United States. Diff: 1 Objective: 7 AACSB: Analytical thinking
25) A company is said to be involved in predatory pricing even when it is compelled to sell its products are a price below the average variable cost because of pricing of the competitor. Answer: FALSE Explanation: Such pricing is competitive response and is not predatory pricing as the company is unlikely to be able to charge a monopoly price later and recoup its losses. Diff: 2 Objective: 7 AACSB: Analytical thinking
26) An Indian company selling a product in the United States at a price below the market value of the product in India is an example of collusive pricing. Answer: FALSE Explanation: An Indian company selling a product in the United States at a price below the market value of the product in India is an example of dumping. Diff: 2 Objective: 7 AACSB: Analytical thinking
27) To comply with antitrust laws, a company must not engage in predatory pricing, dumping, or collusive pricing which lessen competition, put another company at a competitive disadvantage, or harm consumers. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
28) When is a company said to be engaged in predatory pricing? What are the primary conditions to be satisfied to prove predatory pricing? Answer: A company is said to be engaged in predatory pricing when it deliberately prices products below its costs in an effort to drive competitors out of the market and restrict supply and then raises prices rather than enlarge demand. The U.S. Supreme Court has established the following conditions to prove that predatory pricing has occurred: 1) The predator company charges a price below an appropriate measure of its costs. 2) The predator company has a reasonable prospect of recovering in the future, through larger market share or higher prices, the money it lost by pricing below cost. Diff: 2 Objective: 7 AACSB: Analytical thinking
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29) What factors may influence the level of markups? Answer: Factors affecting the level of markups include the strength of demand, the elasticity of demand, and the intensity of competition. In addition, strategic reasons also may influence the level of markups. For instance, a firm may either choose a low markup to penetrate the market and win market share from established products of its competitors, or employ a high markup if it employs a skimming strategy for a market segment in which some customers are willing to pay higher prices for the privilege of owning the product. Diff: 2 Objective: 7 AACSB: Analytical thinking
30) A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices be adjusted during peak periods? During slow times? Why? Answer: During peak periods the hotel can justify increased prices because of full capacity conditions, whereas in slower periods when there is excess capacity, the hotel may want to lower prices to fill the excess capacity. Diff: 2 Objective: 7 AACSB: Analytical thinking
31) Clark Manufacturing offers two product lines, IN2 and EL5. The demand of the IN2 product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits? Answer: For the inelastic product line, when prices are increased demand will stay approximately the same and profits would be expected to increase. For the elastic product line, the increased price will result in decreased demand (i.e., lower sales volume). Whether a profit or a loss results from this change will depend on the amount of decreased demand and the amount of the increased contribution margin due to the increase in price. Diff: 2 Objective: 7 AACSB: Analytical thinking
32) What advice would you give a company to avoid the appearance of predatory pricing? Answer: Useful advice for a company to avoid the appearance of predatory pricing would be (1) Collect data and keep detailed records of variable costs for all value chain functions; and (2) Review all proposed prices below variable cost in advance, with a presumption that claims of predatory intent would occur. Diff: 2 Objective: 7 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 15 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis Objective 15.1 1) Which of the following customer related costs are NOT economically feasible to trace but are related to a customer? A) the additional cost of selling one more unit to a new customer who has never done business with the firm before B) the direct material costs of a product that a customer has purchased
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C) the allocation of the cost of travel, lodgings, and meals that result from visiting customers at their locations D) the shipping costs that result from shipping a package by Fed Ex to a customer when the technology allows a direct match of that cost to the direct material and direct labor costs of the product Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Which of the following is a reason to gather data, associate revenues with each customer and develop a system of allocating costs to each customer? A) GAAP requirements for external reporting including 10K disclosures B) to assure that highly profitable customers get the appropriate level of care and attention C) ABC systems cannot be implemented without customer-profitability reporting D) to assure that more resources are committed to loss-making customers in an attempt to retain all customers Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Segmenting customers as a result of customer profitability analysis would be done by which of the following groupings? A) geography such as state or by zip code B) operating income C) gross margin D) total direct costs Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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4) Which of the following classifications would the cost of visiting customers would most likely fit into? A) customer output unit-level cost B) customer batch-level cost C) customer-sustaining cost D) corporate-sustaining cost Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
5) Which of the following classifications would costs incurred to handle each unit sold fit into? A) customer output unit-level cost B) customer batch-level cost C) customer-sustaining cost D) corporate-sustaining cost Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
6) Which of the following classifications would be the most appropriate for the cost of the manager of a retail distribution channel? A) customer-sustaining cost B) distribution-channel cost C) customer batch-level cost D) corporate-sustaining cost Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
7) Which of the following classifications would be the most relevant for the costs incurred to process orders? A) customer output unit-level cost B) customer batch-level cost C) customer-sustaining cost D) corporate-sustaining cost Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
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8) A division of a major furniture maker specializes in custom bedroom sets; manufactured to the specific needs of the customer and tracks the warehouse storage, shipping and packing and other distribution costs of each order it fulfills. Which of the following cost classifications would those costs fall into: A) customer-sustaining costs B) customer batch-level costs C) distribution-channel costs D) division-sustaining costs Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
9) A division of a major publisher specializes in publishing and selling study guides for college students through distribution channels such as major bookstore chains, independent bookstores, and ecommerce sites. Sales representatives activities include visits to bookstores that carry the products and setup of eye catching in-store displays. Which of the following cost classifications would those activities fall into: A) customer-sustaining costs B) customer batch-level costs C) distribution-channel costs D) division-sustaining costs Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
10) To improve customer profitability, companies should track which of the following? A) only the final invoice price of a sale B) the volume of the products purchased by each customer C) the location of each customer D) the customer profile Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
11) Customers making large contributions to the profitability of the company should: A) be treated the same as other customers because all customers are important B) receive a higher level of attention from the company than less profitable customers C) be charged higher prices for the same products than less profitable customers D) not be offered the volume-based price discounts offered to less profitable customers Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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12) To reduce distribution-channel costs, a company could: A) improve the efficiency of the ordering process B) make fewer customer visits C) eliminate distribution to retailers and only service wholesalers D) reduce product-handling costs Answer: C Diff: 3 Objective: 1 AACSB: Analytical thinking
13) Price discounts are most influenced by: A) the volume of product purchased B) the prime cost of production C) the operational budget D) the contribution -margin per unit Answer: A Diff: 3 Objective: 1 AACSB: Analytical thinking
14) Managers use a customer-profitability analysis report to ensure that: A) unpaid invoices are categorized according to age by due date B) costs related to customers are segmented into different cost pools on the basis of different types of cost drivers or cost-allocation bases C) customers making large contributions to the operating income of a company receive a high level of attention from the company D) cost allocation of indirect cost is in place Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
15) Which of the following illustrates a purpose for allocating costs to cost objects? A) to provide information for cost-control and pricing decisions B) to provide information to customers C) to determine marginal cost D) to measure capital expenditure Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
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16) How is value-engineering relevant to a well done customer profitability analysis, especially when an ABC system is utilized to calculate customer profits (or losses)? A) ABC will satisfy GAAP and provide input into value-engineering decisions. B) ABC offers the opportunity to analyze the costs of activities assigned to each customer and to determine if improvements can be made to optimize profits. C) Customer profitability analysis will reveal that the cost drivers of less profitable customers are the problem and that value-engineering is the solution. D) Only value-added activities will be shown in the cost analysis and thus all other costs will be eliminated via value-engineering. Answer: B Diff: 3 Objective: 1 AACSB: Analytical thinking
17) Which purpose of cost allocation is used to encourage sales representatives to push high-margin products or services? A) to provide information for economic decisions B) to motivate managers and other employees C) to justify costs or compute reimbursement D) to measure income and assets for reporting to external parties Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
18) Which of the following classifications of costs in the customer-cost hierarchy would be most appropriate for the costs of activities to sell each unit to a customer? A) customer-sustaining costs B) division-sustaining costs C) customer output unit-level costs D) distribution-channel costs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
19) ________ categorizes costs related to customers into different cost pools on the basis of either different classes of cost drivers or different degrees of difficulty in determining the cause-and-effect (or benefits-received) relationships. A) Customer-profitability analysis B) Customer revenues C) Customer cost hierarchy D) Price discounting Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
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20) Which of the following could be interpreted by customers as an unethical practice? A) discount pricing via an e-commerce site based on customer data collected via cookies B) discount pricing based on volume purchasing available to all customers C) discount pricing from effects of a selling companies sales person incentive/performance plan D) poor negotiation skills of a sales representative Answer: A Explanation: A) If the cookies collect data without the knowledge and consent of the customer, the practice could be considered unethical and possibly illegal. Diff: 2 Objective: 1 AACSB: Ethical understanding and reasoning
21) To analyze customer profitability, corporate-sustaining costs should be allocated to customers. Answer: FALSE Explanation: The allocation of corporate-sustaining costs serves no purpose in assessing customer profitability, decision making, performance evaluation, or motivation. Diff: 2 Objective: 1 AACSB: Analytical thinking
22) Costs of activities related to a group of units sold to a customer is termed as customer batch-level costs. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
23) A price discount is the reduction in selling price below list selling price to encourage customers to purchase more quantities. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
24) Tracking price discounts by customer and by salesperson helps improve customer profitability. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
25) Customer-profitability analysis is the reporting and assessment of revenues earned from customers and the costs incurred to earn those revenues. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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26) Costs of displays at customer sites is an example of customer batch-level costs. Answer: FALSE Explanation: Costs of displays at customer sites is an example of customer-sustaining costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
27) Customer-sustaining costs is the costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
28) All customers are equally important to a company and should receive equal levels of attention. Answer: FALSE Explanation: Customers should receive a level of attention from the company that matches their contribution to the company's profitability. Diff: 2 Objective: 1 AACSB: Analytical thinking
29) Price discounts must be uniform among all customers. Answer: FALSE Explanation: Price discounts will depend on the size of the purchase and the importance of the customer. Diff: 2 Objective: 1 AACSB: Analytical thinking
30) There are two elements that influence customer profitability - revenues and costs. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
31) Companies that only record the invoice price can usually track the magnitude of price discounting. Answer: FALSE Explanation: To track discounting, the discount must be recorded. Diff: 2 Objective: 1 AACSB: Analytical thinking
32) A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different cost drivers. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
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33) An activity-based costing system may focus on customers rather than products. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
34) A customer cost hierarchy may include customer-sustaining costs. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
35) A customer cost hierarchy may include distribution-channel costs. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
36) Corporate-sustaining costs are costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer. Answer: FALSE Explanation: Customer-sustaining costs are costs of activities to support individual customers, regardless of the number of units or batches of product delivered to the customer. Diff: 2 Objective: 1 AACSB: Analytical thinking
37) In general, distribution-channel costs are more easily influenced by customer actions than customer batch-level costs. Answer: FALSE Explanation: In general, customer batch-level costs are more easily influenced by customer actions than distribution-channel costs. Diff: 3 Objective: 1 AACSB: Analytical thinking
38) If one of five distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely be reduced by 20%. Answer: FALSE Explanation: If one of five distribution channels is discontinued, corporate-sustaining costs such as general administration costs will most likely not be affected. Diff: 3 Objective: 1 AACSB: Analytical thinking
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39) Colise Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:
Marveline Burnett J Jackson Roger Jones Paul Saas Becky Stephan
Customer Revenues Customer Costs $360 $270 240 366 96 90 90 132 420 264
Required: a. Compute the operating income for each of the five customers. b. What options should Colise Services consider in light of the customer-profitability results? c. What problems might Colise Services encounter in accurately estimating the operating costs of each customer? Answer: a. Customer Revenues Customer Costs Operating income Marveline Burnett $360 $270 $ 90 J Jackson 240 366 (126) Roger Jones 96 90 6 Paul Saas 90 132 (42) Becky Stephan 420 264 156 b.
1. Pay increased attention to the profitable customers Stephan and Burnett. 2. Seek ways of reducing costs and increasing revenues for the loss accounts of J Jackson and Paul Saas. Work with the customers so their behavior reduces overall costs. Reduce costs with better scheduling. Maybe a different fee schedule needs to be implemented depending on the age of the house, the distance to the home, if the repair is preventive or an emergency, etc. Determine whether the operating income pattern will probably continue or not and why. 3. As a last resort, the company may want to discontinue the Jackson account if the customer does not agree to a fee increase and the operating loss pattern is expected to continue. c.
Problems in accurately estimating operating costs of each customer include: 1. The basic underlying records may not be accurate. 2. Some repair personnel may be efficient and more experienced, others may be less experienced and slower, and still others may "chit-chat" more with the clients than others. 3. Costs that are allocated to more than one customer may be distorting operating income. Diff: 2 Objective: 1 AACSB: Application of knowledge
40) How can a company's revenues and costs differ across customers? Answer: Revenues differ because of differences in the quantity purchased and price discounts. Costs differ because different customers place different demands on a company's resources in terms of processing sales orders, making deliveries, and customer support. Diff: 3 Objective: 1 AACSB: Analytical thinking
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41) Explain the importance of customer-profitability analysis. Answer: Customer-profitability analysis is the reporting and assessment of revenues earned from customers and the costs incurred to earn those revenues. An analysis of customer differences in revenues and costs reveals why differences exist in the operating income earned from different customers. Managers use this information to ensure that customers making large contributions to the operating income of a company receive a high level of attention from the company and that loss-making customers do not use more resources than the revenues they provide. Diff: 3 Objective: 1 AACSB: Analytical thinking
42) Consider revenues from three of Megafy's 10 wholesale customers in 2020:
Units sold List selling price Price discount Invoice price Revenues
Customer A 20,000
Customer B 15,000
Customer C 3,000
$500 $50 $450 $9,000,000
$500 $30 $470 $7,050,000
$500 $100 $400 $1,200,000
What conclusions can be drawn from the above data? What steps can the manager of the company take? Answer: The company managers may decide to strictly enforce its volume-based price discounting policy. The company may also require its salespeople to obtain approval for giving large discounts to customers who do not normally qualify for them. In addition, the company could track future sales to customers who have received sizable price discounts on the basis of their "high growth potential." For example, managers should track future sales to Customer C to see if the $100-per-computer discount translates into higher future sales. Diff: 3 Objective: 1 AACSB: Application of knowledge
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Objective 15.2 1) A financial analyst for Simon Manufacturing prepared the following report:
Customers A B C D E F G H I J
CustomerLevel Operating Income $5,083.00 $4,464.00 $3,113.00 $1,147.50 $984.80 $844.80 $336.60 $252.00 ($168.00) ($676.00)
Customer Revenue $26,250 $30,000 $15,000 $7,300 $5,100 $4,400 $1,800 $4,500 $2,400 $2,600
What is the cumulative customer-level operating income as a percentage of customer level operating income for the top 4 most profitable (operating income) customers? A) 17.6% B) 89.8% C) 85.1% D) 79.1% Answer: B Explanation: B) The cumulative customer-level operating income for the first four customers is $13,807.50 while the total customer level operating income is $15,381.70. $13,807.50/$15,381.70 = 89.8%. Diff: 3 Objective: 2 AACSB: Analytical thinking
2) Dropping an unprofitable customer will: A) eliminate long-run costs assigned to that customer B) eliminate most short-run costs assigned to that customer C) decrease long-run profitability D) increase the potential to cross-sell other products that are more desirable Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
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3) A financial analyst for Simon Manufacturing prepared the following report:
Customers A B C D E F G H I J
CustomerLevel Operating Income $5,447.00 $4,905.00 $3,248.00 $1,110.50 $984.80 $844.80 $336.60 $252.00 ($168.00) ($676.00)
Customer Revenue $26,250 $30,000 $15,000 $7,300 $5,100 $4,400 $1,800 $4,500 $2,400 $2,600
Which of the following conclusions can be drawn from the report? A) All profitable customers achieve customer level operating income in excess of 20% B) Customer B has the second highest operating income margin. C) The cumulative customer-level operating income of the top eight customers represents about 105.2% of operating income. D) All customers provide positive contribution towards profitability. Answer: C Explanation: C) The cumulative operating income for the top eight customers is $17,128.70 and with the operating income of $16,284.70, the cumulative customer-level operating income as a percentage of operating income is about 105.2% ($17,128.70/$16,284.70). Diff: 3 Objective: 2 AACSB: Analytical thinking
4) Which of the following is true about discontinuing an unprofitable customer? A) will eliminate all corporate costs assigned to and may result in losing more revenues relative to costs saved B) will eliminate all costs assigned to and may result in gaining more revenues relative to costs saved C) will not eliminate all costs assigned to and may result in losing more revenues relative to costs saved D) will not eliminate all corporate costs assigned to and may result in gaining more revenues relative to costs saved Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
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5) Discontinuing an unprofitable customer should be solely done on the basis of profitability. Answer: FALSE Explanation: There may be strategic reasons to retain unprofitable customers and managers must use caution when allocating fixed costs to unprofitable customers. In addition., some customers might be dropped, not because of profits but because they might be congruent with the company's strategic plans or fall outside a company's target market or require unsustainable high levels of service. Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Managers who utilize customer profitability charts should drop customers that generate a negative customer operating income, since dropping an unprofitable customer will automatically cause overall income to increase. Answer: FALSE Explanation: Managers who utilize customer profitability charts should not drop customers that generate a negative customer operating income, because dropping an unprofitable customer may not cause overall income to increase. Diff: 2 Objective: 2 AACSB: Analytical thinking
7) It is possible that the smallest customer in terms of revenue is the most profitable customer. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
8) With the use of a bar chart, the number of "unprofitable" customers and the magnitude of their losses are apparent. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
9) The chart used to express customer profitability is called the whale curve because it is backward-bending at the point where customers start to become unprofitable and thus resembles a humpback. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
10) Bar charts and a whale curve are some of the common ways of displaying the results of customer-profitability analysis. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
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11) Why would a manager perform customer-profitability analysis? Answer: Customer profitability analysis highlights how individual customers contribute to profitability. It helps managers determine whether customers who are contributing significantly to profits are receiving a comparable level of attention from the organization. Diff: 2 Objective: 2 AACSB: Analytical thinking
12) What actions might be taken with an unprofitable customer? Answer: An unprofitable customer might be dropped as a customer, might be charged more for some of the resources of the company that it is using in excess of other customers, or he/she might be counseled on how to use less resources and be restored to profitability in the future. Diff: 2 Objective: 2 AACSB: Analytical thinking
13) A statement attributed to Microsoft explains knowing which customers to keep happy (satisfied) is critical to success because "not all revenue dollars are endowed equally in profitability". Briefly explain what that means. Answer: The most profitable customers contribute a significant proportion of the total customer-level operating income of companies. In fact, it is common for a small number of customers to contribute a high percentage of operating income. It is very important to be able to accurately identify the most profitable customers. The most profitable customers deserve the highest service and priority. Companies keep their best customers happy in a number of ways, including special service and upgrade privileges as a way of retaining those customers. Diff: 2 Objective: 2 AACSB: Analytical thinking
Objective 15.3 1) Allocation of corporate-sustaining costs is useful for which of the following? A) evaluating the performance of salespersons with individual customer accounts B) motivating distribution-channel management C) focusing on the cause-and-effect relationships with the cost-allocation bases D) motivating division managers to examine how corporate costs are planned and controlled Answer: D Diff: 3 Objective: 3 AACSB: Analytical thinking
2) Salary of top management and general-administration costs is an example of which of the following? A) customer output unit-level costs B) customer batch-level costs C) distribution-channel costs D) corporate-sustaining costs Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
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3) Which of the following is an example of division-sustaining costs? A) research and development cost B) corporate administration costs C) corporate brand advertising D) shipment costs Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
4) For companies in which full allocation is not followed, which of the following is true of corporate sustaining costs? A) allocated to divisions using cause-and-effect relationship B) allocated to customers using cause-and-effect relationship C) added to aggregate operating incomes of the divisions D) subtracted as a lump-sum amount after aggregating operating incomes of the divisions Answer: D Diff: 3 Objective: 3 AACSB: Analytical thinking
5) If deciding whether to eliminate a distribution channel, allocating corporate-sustaining costs to distribution channels: A) helps define cost reduction possibilities B) gives the misleading impression of potential cost savings C) identifies administrative inefficiencies D) evaluates the effectiveness of sales personnel Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
6) When corporate-sustaining costs are fully allocated to distribution channels, then the sum of the operating income from each distribution-channel is: A) greater than company-wide operating income B) equal to company-wide operating income C) equal to customer-level operating income D) greater than customer-level operating income Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
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7) A company has two distribution channels: wholesale and business sales. Which of the following costs would be allocated as distribution-channel-level costs when analyzing the profitability of customer distribution channels? A) sales order costs B) customer visit costs C) salary of the wholesale distribution channel manager D) corporate administration costs Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
8) Which of the following is a corporate-sustaining cost? A) design costs B) corporate brand advertising C) shipment costs D) research and development costs Answer: B Diff: 3 Objective: 3 AACSB: Analytical thinking
9) Some companies allocate only those corporate costs, division costs, or channel costs to customers that are widely perceived as: A) causally influencing customer actions B) contributing to the overall profitability of the company C) necessary because of a multi-product sales mix D) necessary to comply with laws and regulations Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
10) There is a direct cause-and effect relationship between division-sustaining costs and customer or sales manager's actions. Answer: FALSE Explanation: There is no direct cause-and effect relationship between division-sustaining costs and customer or sales manager's actions. Diff: 2 Objective: 3 AACSB: Analytical thinking
11) Using a hierarchical approach to assigning costs to customers and distribution channels dovetails with the different levels at which managers make decisions and evaluate performance. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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12) Why do managers prepare cost-hierarchy-based operating incomes statements? Answer: Cost-hierarchy-based operating income statements allocate only those costs that will be affected by actions at a particular hierarchical level. For example, costs such as sales-order costs and shipment costs are allocated to customers because customer actions can affect these costs, but costs of managing the wholesale channel are not allocated to customers because changes in customer behavior will have no effect on these costs. Cost-hierarchy-based income statements align well with the management accounting questions of when and what costs to allocate and an example of the concept: "different costs for different purposes". Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 15.4 1) When the purpose of cost allocation is to provide information for economic decisions or to motivate managers and employees, which of the following would be the best criteria? A) the cause-and-effect and the ability-to bear criteria B) the cause-and-effect and the benefits-received criteria C) the benefits-received and the fairness criteria D) the fairness and the ability-to-bear criteria Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
2) To guide cost allocation decisions, the cause-and-effect criterion: A) is used less frequently than the other criteria B) is the primary criterion used in activity-based costing C) considers fairness as a matter of judgment rather than an operational criterion D) advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
3) To guide cost allocation decisions, the benefits-received criterion: A) generally uses the cost driver as the cost allocation base B) advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it C) is the primarily used criterion in activity-based costing D) may use an allocation base of division revenues to allocate advertising costs Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
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4) What might explain why some managers advocate fully allocating all costs, including corporate costs to distribution channels and to customers? A) all costs are incurred to support sales of products to customers B) division managers can influence and control corporate costs C) distribution channel managers can control corporate costs D) all costs need to be considered to conduct adequate variance analysis Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
5) Which of the following is true of corporate-sustaining costs? A) are common to all individual customers B) have a clear cause-and-effect relationship with several cost-allocation bases C) should be allocated for decisions regarding reducing customer costs D) evaluates the effectiveness of sales personnel Answer: A Diff: 3 Objective: 4 AACSB: Analytical thinking
6) A customer cost hierarchy categorizes costs related to customers into different cost pools on the basis of different: A) contribution-margin ratios of products B) distribution-channel costs C) levels of cause-and-effect relationships D) division-sustaining costs Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
7) To guide cost allocation decisions, the fairness or equity criterion: A) considers reasonableness as a matter of judgment rather than an operational criterion B) allocates cost among the beneficiaries in proportion to the benefits each receives C) is used more frequently than any other criteria D) is the primary criterion used in activity-based costing Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
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8) To guide cost allocation decisions, the ability to bear criterion: A) is the primary criterion used in activity-based costing B) allocates cost among the beneficiaries in proportion to the benefits each receives C) results in subsidizing products that are not profitable D) is used more frequently than any other criteria Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
9) Which of the following criteria has the presumption that the more-profitable divisions have a greater ability to absorb corporate administration costs? A) the fairness or equity criterion B) the ability to bear criterion C) the cause-and-effect criterion D) the benefits-received criterion Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
10) The primary criterion of cost allocation used in activity-based cost accounting is: A) the fairness or equity criterion B) the ability to bear criterion C) the cause-and-effect criterion D) the benefits-received criterion Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
11) Which of the following would be considered a problematic method because it could be highly subjective and happen because of a manager's persuasiveness? A) the fairness or equity criterion B) the ability to bear criterion C) the cause-and-effect criterion D) the benefits-received criterion Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
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12) Which cost-allocation criterion is most likely to subsidize poor performers at the expense of the best performers? A) the fairness or equity criterion B) the benefits-received criterion C) the ability to bear criterion D) the cause-and-effect criterion Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
13) Which of the following is a challenge to using cost-benefit criteria for allocating costs? A) the costs of designing and implementing complex cost allocations are not readily apparent B) the benefits of making better-informed pricing decisions are difficult to measure C) cost systems are being simplified and fewer multiple cost-allocation bases are being used D) the costs of collecting and processing information keep spiraling upward Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
14) Today, companies are simplifying their cost systems and moving toward less-detailed and less-complex cost allocation bases. Answer: FALSE Explanation: Companies are moving toward more-detailed and more-complex cost allocations because today technology can capture these costs in a relatively inexpensive manner. Diff: 2 Objective: 4 AACSB: Analytical thinking
15) Using the fairness criterion, the costs are allocated among the beneficiaries in proportion to the benefits each receives. Answer: FALSE Explanation: Using the benefits received criterion, the costs are allocated among the beneficiaries in proportion to the benefits each receives. Diff: 2 Objective: 4 AACSB: Analytical thinking
16) Under the cause and effect criterion, reasonableness is a matter of judgment rather than an operational criterion. Answer: FALSE Explanation: Under the fairness or equity criterion, reasonableness is a matter of judgment rather than an operational criterion. Diff: 2 Objective: 4 AACSB: Analytical thinking
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17) When using the cause-and-effect criterion, cost drivers are selected as the cost allocation bases. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
18) The ability-to-bear criterion is considered superior when the purpose of cost allocation is motivation. Answer: FALSE Explanation: The cause-and-effect or benefits-received criteria is considered superior when the purpose of cost allocation is motivation. Diff: 2 Objective: 4 AACSB: Analytical thinking
19) The benefits of implementing a more-complex cost allocation system are relatively easy to quantify for application of the cost-benefit approach. Answer: FALSE Explanation: The benefits of implementing a more-complex cost allocation system are difficult to measure. Diff: 2 Objective: 4 AACSB: Analytical thinking
20) Briefly describe the four criteria used to guide cost-allocation decisions. Answer: 1. Cause and effect - managers identify the variables that cause resources to be consumed. 2. Benefits received - managers identify the beneficiaries of the outputs of the cost object. 3. Fairness or equity - establishing a selling price that is deemed fair by contracting parties. 4. Ability to bear - advocates allocating costs in proportion to the cost object's ability to bear costs allocated to it. Diff: 1 Objective: 4 AACSB: Analytical thinking
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Objective 15.5 1) A company sets up cost pools for indirect cost allocation. Management sees clear cause-and-effect relationships between the incurrence of costs and the chosen the cost-allocation base. What other common relationships or basis with a cost allocation base might management utilize to allocate costs? A) R&D expenses B) benefits -received C) capital investment in a related process D) gross profit proportions Answer: B Diff: 3 Objective: 5 AACSB: Application of knowledge
2) While allocating corporate costs to divisions: A) only fixed costs should be allocated B) no homogeneous cost pools should be constructed C) all the costs in the cost pool should not have the same or a similar cause-and-effect or benefits-received relationship with the cost-allocation base D) allocate both variable and fixed costs to divisions and then to customers Answer: D Diff: 3 Objective: 5 AACSB: Analytical thinking
3) Dartmouth Building Products Inc. provides the following information. Corporate advertising costs = $890,000 Division A – $4,800,000 Division B – $19,200,000 Number of ads run relevant on Division A products 800 Number of ads run relevant to Division B products 2,400 Assume that customers with higher revenues benefited more from corporate advertising costs than customers with lower revenues. What is the allocated corporate costs for Division A? A) $667,500 B) $222,500 C) $178,000 D) $890,000 Answer: C Explanation: C) Allocated corporate cost for Division A = $4,800,000 / ($4,800,000 + $19,200,000) × $890,000 = $178,000 Diff: 2 Objective: 5 AACSB: Application of knowledge
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4) Dartmouth Building Products Inc. provides the following information. Corporate advertising costs = $830,000 Division A – $4,900,000 Division B – $11,433,333.3 Number of ads run on Division A products 300 Number of ads run on Division B products 900 Assume that customers with higher revenues benefited more from corporate advertising costs than customers with lower revenues. What is the allocated corporate costs for Division B? A) $622,500 B) $355,714 C) $581,000 D) $249,000 Answer: C Explanation: C) Allocated corporate cost for Division B = $11,433,333.3 / ($4,900,000 + $11,433,333.3) × $830,000 = $581,000 Diff: 2 Objective: 5 AACSB: Application of knowledge
5) NOT allocating some corporate costs to divisions and products results in which of the following? A) an increase in overall corporate profitability B) the sum of individual product profitability being less than overall company profitability C) the sum of individual product profitability being greater than overall company profitability D) a decrease in overall corporate profitability Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
6) When the cost pools are homogeneous which of the following will be true? A) the number of needed cost pools will be more B) the costs in the cost pool have a similar cause-and-effect or benefits-received relationship with the cost-allocation base C) managers should not allocate both variable costs and costs that are fixed in the short-run D) there will be a greater variety of cause-and-effect, benefits-received, or fair-and-equitable relationship with the cost-allocation base Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
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7) When individual activities within a cost pool have a similar relationship with the cost driver, which of the following could be said about the cost pool? A) the costs accumulated in the cost pool are not used for customer-profitability analysis B) there is a need for need multiple cost drivers to allocate costs from the pool to customers C) the cost pool is considered a homogeneous cost pool D) the cost pool is considered contains only direct variable costs Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
8) Homogeneous cost pool leads to which of the following? A) more accurate costs of a given cost object B) more resources being assigned to that cost object C) the need for more cost drivers D) the need for different cost allocation bases to allocate the costs Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
9) In cost allocation, R&D costs are used to: A) provide information for economic decisions B) report to external parties when using generally accepted accounting principles C) calculate costs of a government contract D) calculate prime cost of a product Answer: A Diff: 3 Objective: 5 AACSB: Analytical thinking
10) To allocate corporate costs to divisions, the ideal situation would be for the allocation base to: A) be an output unit-level base B) have the best cause-and-effect relationship with the costs C) combine administrative costs and human resource management costs D) allocate the fixed costs only Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
11) Corporate administrative costs allocated to a division cost pool are most likely to be: A) output unit-level costs B) facility-sustaining costs C) product-sustaining costs D) batch-level costs Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
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12) The Conity Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $17,000,000 bond issuance, the Electric Mixer Division used $9,400,000 and the Electric Lamp Division used $7,600,000 for expansion. Interest costs on the bond totaled $975,000 for the year. What amount of interest costs should be allocated to the Electric Mixer Division? (Round any intermediary calculations two decimal places and your final answer to the nearest dollar.) A) $627,841 B) $536,250 C) $7,600,000 D) $9,400,000 Answer: B Explanation: B) Costs allocated to the Electric Mixer Division = ($9,400,000 / 17,000,000) × $975,000 = $536,250 Diff: 2 Objective: 5 AACSB: Application of knowledge
13) The Conity Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $17,000,000 bond issuance, the Electric Mixer Division used $9,300,000 and the Electric Lamp Division used $7,700,000 for expansion. Interest costs on the bond totaled $1,000,000 for the year. What amount of interest costs should be allocated to the Electric Lamp Division? (Round any intermediary calculations two decimal places and your final answer to the nearest dollar.) A) $450,000 B) $547,059 C) $646,388 D) $7,700,000 Answer: A Explanation: A) Costs allocated to the Electric Lamp Division = $7,700,000 / $17,000,000 × $1,000,000 = $450,000 Diff: 2 Objective: 5 AACSB: Application of knowledge
14) The Conity Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $14,000,000 bond issuance, the Electric Mixer Division used $9,300,000 and the Electric Lamp Division used $4,700,000 for expansion. Interest costs on the bond totaled $1,000,000 for the year. The above interest costs would be considered a(n): A) output unit-level cost B) facility-sustaining cost C) product-sustaining cost D) batch-level cost Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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15) Which of the following is true about the process of making cost allocations? A) the costs of designing and implementing a cost allocation system are less visible than the benefits of such a system B) a cost benefit-analysis cannot be performance on cost allocation systems because the benefits are difficult to estimate C) the costs of cost allocation systems is mostly the cost of collection D) as the cost of collecting and processing cost allocation information decreases, it becomes more economically feasible to provide more detailed cost allocations Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
16) Corporate brand advertising and general administration costs are examples of corporate costs. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
17) Allocating all corporate costs motivates division managers to examine how corporate costs are planned and controlled. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
18) Companies that want to calculate the full cost of products must allocate all corporate costs to divisions. Answer: TRUE Diff: 3 Objective: 5 AACSB: Analytical thinking
19) When there is a lesser degree of homogeneity, fewer cost pools are required to accurately explain the use of company resources. Answer: FALSE Explanation: The greater the degree of homogeneity, the fewer the cost pools required to accurately explain the use of company resources. Diff: 2 Objective: 5 AACSB: Analytical thinking
20) If a cost pool is homogeneous, the cost allocations using that pool will be the same as they would be if costs of each individual activity in that pool were allocated separately. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
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21) Costs in a homogeneous cost pools have the same or a similar cause-and-effect or benefits-received relationship with the cost-allocation base. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
22) An individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object. Answer: TRUE Diff: 3 Objective: 5 AACSB: Analytical thinking
23) Advances in information-gathering technology make it more likely that multiple cost-pool systems will pass the cost-benefit test. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
24) Once a cost pool has been established, it should NOT need to be revisited or revised. Answer: FALSE Explanation: Once a cost pool has been established, it is often necessary to revisit it or revise it. Diff: 2 Objective: 5 AACSB: Analytical thinking
25) Most companies do not allocate corporate costs to divisions because they are uncontrollable by the division managers. Answer: FALSE Explanation: Just the opposite is true. Many companies do not allocate any corporate costs to divisions because they are not controllable by the division managers. Diff: 2 Objective: 5 AACSB: Analytical thinking
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26) Should a company allocate its corporate costs to divisions? Answer: Some companies allocate all corporate costs to divisions because corporate costs are incurred to support division activities. Allocating all corporate costs motivates division managers to examine how corporate costs are planned and controlled. Also, companies that want to calculate the full cost of products in order to make some economic decision must allocate corporate costs to indirect-cost pools of divisions. Some companies do not allocate corporate costs to divisions because these costs are not controllable by division managers. Particularly if performance evaluations are based on these allocations, a company will often not choose to allocate certain corporate costs that are not perceived as being controllable by division management. Other companies allocate only those corporate costs, such as corporate human resources, that are widely perceived as either causally related to division activities or provide explicit benefits to divisions. Diff: 2 Objective: 5 AACSB: Analytical thinking
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27) For each cost pool listed select an appropriate allocation base from the list below. An allocation base may be used only once. Assume a manufacturing company. Allocation bases for which the information system can provide data: 1. 2. 3. 4. 5. 6. 7. 8.
Number of employees per department Employee wages and salaries per department Number of sales orders Hours of operation of each production department Machine hours by department Operations costs of each department Hours of computer use per month per department Number of units sold
Cost pools: ________ a. Vice President of Finance's office expenses ________ b. Computer operations used in conjunction with manufacturing ________ c. Personnel Department ________ d. Sales-order costs ________ e. Energy costs Answer: a. Vice President of Finance's office expenses Operations costs of each department b. Computer operations used in conjunction with manufacturing Hours of computer use per month per department c. Personnel Department Number of employees per department d. Sales-order costs Number of sales orders e. Energy costs Hours of operation of each production department Diff: 2 Objective: 5 AACSB: Analytical thinking
1018 richard@qwconsultancy.com
Objective 15.6 1) The sales-quantity variance can be decomposed into: A) sales-mix variance and sales-volume variance B) static-budget variance and flexible-budget variance C) flexible-budget variance and sales-volume variance D) market-share variance and market-size variance Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
2) Flexible budget contribution margin is equal to: A) actual contribution margin per unit times actual units sold of each product B) actual contribution margin per unit times budgeted units sold of each product C) budgeted contribution margin per unit times budgeted units sold of each product D) budgeted contribution margin per unit times actual units sold of each product Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
3) Sales-mix variance = $250,000 (F), sales-volume variance = $510,000 (U), flexible-budget variance = $200,000 (F), market-size variance = $34,000 (U), calculate the sales-quantity variance. A) $760,000 (U) B) $794,000 (U) C) $226,000 (U) D) $260,000 (U) Answer: A Explanation: A) Sales-quantity variance = $510,000 (U) - $250,000 (F) = $260,000 (U) Diff: 3 Objective: 6 AACSB: Application of knowledge
4) Market-share variance = $390,000 (U); Market-size variance = $250,000 (F); Sales-mix variance = $660,000 (F); calculate the sales-quantity variance. A) $390,000 (F) B) $640,000 (F) C) $20,000 (F) D) $140,000 (U) Answer: D Explanation: D) Sales-quantity variance = $390,000 (U) + $250,000 (F) = $140,000 (U) Diff: 2 Objective: 6 AACSB: Application of knowledge
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5) Sales-mix variance = $310,000 (F), sales-quantity variance = $200,000 (F), flexible-budget variance = $140,000 (F), market-size variance = $90,000 (U), calculate the sales-volume variance. A) $740,000 (F) B) $540,000 (F) C) $600,000 (F) D) $510,000 (F) Answer: D Explanation: D) Sales-volume variance = $310,000 (F) + $200,000 (F) = $510,000 (F) Diff: 3 Objective: 6 AACSB: Application of knowledge
6) Flexible-budget variance = $240,000 (F); sales-volume variance = $350,000 (U); sales-mix variance = $310,000 (F); calculate the static-budget variance. A) $110,000 (U) B) $310,000 (U) C) $310,000 (F) D) $280,000 (F) Answer: A Explanation: A) Static-budget variance = $240,000 (F) + $350,000 (U) = $110,000 (U) Diff: 3 Objective: 6 AACSB: Application of knowledge
7) The sales-volume variance is subdivided into: A) sales-mix variance and static-budget variance B) sales-mix variance and sales-quantity variance C) flexible-budget variance and fixed-budget variance D) market-share variance and static-budget variance Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
8) The sales-mix variance is calculated by: A) deducting budgeted contribution margin based on actual units at budgeted mix from budgeted contribution margin based on actual units sold at the actual mix B) deducting budgeted contribution margin based on budgeted units at actual mix from budgeted contribution margin based on actual units sold at the budgeted mix C) deducting budgeted contribution margin based on actual units at actual mix from budgeted contribution margin based on budgeted units sold at the budgeted mix D) deducting budgeted contribution margin based on actual units at actual mix from budgeted contribution margin based on actual units sold at the actual mix Answer: A Diff: 3 Objective: 6 AACSB: Analytical thinking
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9) The static-budget variance is the difference between: A) an actual result and the corresponding budgeted amount in the static budget B) the budget amount in the static budget and the amount in the flexible budget C) an actual result and the flexible budget amount D) the static budget amount and the sales-volume variance Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
10) More insight into the static-budget variance can be gained by subdividing it into: A) the sales-mix variance and the sales-quantity variance B) the market-share variance and the market-size variance C) the flexible-budget variance and the sales-volume variance D) the flexible-budget variance and the sales-mix variance Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
11) The static-budget variance will be favorable, when: A) budgeted unit sales are more than actual unit sales B) the actual contribution margin is less than the static-budget contribution margin C) the actual sales mix shifts toward the less profitable units D) the flexible-budget and the sales-volume variance are favorable Answer: D Diff: 3 Objective: 6 AACSB: Analytical thinking
12) More insight into the sales-volume variance can be gained by subdividing it into: A) the sales-mix variance and the sales-quantity variance B) the market-share variance and the sales-mix variance C) the flexible-budget variance and the market-size variance D) the flexible-budget variance and the sales-mix variance Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
13) The budgeted contribution margin per composite unit for the budgeted sales mix can be computed by dividing the: A) total budgeted contribution margin by the actual total units B) total budgeted contribution margin by the total budgeted units C) actual total contribution margin by the total actual total units D) actual total contribution margin by the total budgeted units Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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14) The difference between budgeted contribution margin per composite unit for the actual mix and the budgeted contribution margin per composite unit for the budgeted mix is the: A) material-mix variance B) flexible-budget variance C) sales-mix variance D) sales-volume variance Answer: C Diff: 3 Objective: 6 AACSB: Analytical thinking
15) The sales-mix variance will be unfavorable when which of the following occurs? A) the actual sales mix shifts toward the less profitable units B) the contribution margin per composite unit for the actual mix is greater than the budgeted mix C) the actual unit sales are less than the budgeted unit sales D) the actual contribution margin is less than the static-budget contribution margin Answer: A Diff: 3 Objective: 6 AACSB: Analytical thinking
16) The sales-mix variance will be favorable when: A) the actual contribution margin is greater than the static-budget contribution margin B) actual unit sales are more than budgeted unit sales C) the actual sales mix shifts toward the less profitable units D) the budgeted contribution margin for actual sales mix is greater than for the budgeted mix Answer: D Diff: 3 Objective: 6 AACSB: Analytical thinking
17) An unfavorable sales-mix variance would most likely be caused by which of the following? A) a new competitor providing better service in the high-margin product sector B) a competitor having distribution problems with high-margin products C) the company offering low-margin products at a higher price D) the company experiencing quality-control problems that get negative media coverage of low-margin products Answer: A Diff: 3 Objective: 6 AACSB: Analytical thinking
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18) A shift towards a higher proportion of sales of products with a lower contribution margin per unit will most likely result in a(n): A) unfavorable sales-mix variance B) unfavorable sales-quantity variance C) favorable sales-mix variance D) favorable sales-quantity variance Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
19) The sales-quantity variance will be favorable when which of the following occurs? A) sales-volume variance and flexible-budget variance are favorable B) actual units of all products sold exceed budgeted units of all products sold C) the actual sales mix shifts towards the more profitable units D) static-budget variance and flexible-budget variance are favorable Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
20) The sales-quantity variance will be unfavorable when which of the following occurs? A) the composite unit for the actual mix is less than for the budgeted mix B) the actual unit sales are less than the budgeted unit sales C) the actual contribution margin per unit is less than the static-budget contribution margin D) the actual sales mix shifts toward the less profitable units Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
21) The sales-volume variance is the difference between: A) a sales-mix variance and the corresponding sales-quantity variance B) a flexible-budget amount and the corresponding static-budget amount C) a market-share variance and the corresponding market-size variance D) a sales-mix variance and the corresponding market size variance Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
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22) Which of the following is the formula for the sales-quantity variance? A) deducting budgeted contribution margin based on actual units at actual mix from budgeted contribution margin based on actual units sold at the actual mix B) deducting budgeted contribution margin based on actual units at actual mix from budgeted contribution margin based on actual units sold at the budgeted mix C) deducting budgeted contribution margin based on budgeted units at actual mix from budgeted contribution margin based on actual units sold at the budgeted mix D) deducting budgeted contribution margin based on budgeted units at budgeted mix from budgeted contribution margin based on actual units sold at the budgeted mix Answer: D Diff: 3 Objective: 6 AACSB: Analytical thinking
23) The sales-quantity variance results from a difference between: A) the actual sales mix and the budgeted sales mix B) the actual quantity of units sold and the budgeted quantity of unit sales in the static budget C) actual contribution margin and the budgeted contribution margin D) actual market size in units and the budgeted market size in units Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
24) Capity Tea Products has an exclusive contract with British Distributors. Calamine and Capity are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of March: Actual Calamine Capity Sales in pounds 3,820 lbs. 3,960 lbs. Price per pound $3.00 $3.30 Variable cost per pound 1.10 2.00 Contribution margin $1.90 $1.30
Budget Calamine Capity 4,400 lbs. 3,300 lbs $2.00 $3.00 1.00 1.50 $1.00 $1.50
Budgeted and actual fixed corporate-sustaining costs are $1,850 and $2,300, respectively. What is the actual contribution margin for the month? A) $14,256 B) $10,142 C) $9,558 D) $12,406 Answer: D Explanation: D) Actual contribution margin for the month = (3,820 × $1.90) + (3,960 × $1.30) = $12,406 Diff: 2 Objective: 6 AACSB: Application of knowledge
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25) Capity Tea Products has an exclusive contract with British Distributors. Calamine and Capity are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of March: Actual Calamine Capity Sales in pounds 3,840 lbs. 3,980 lbs. Price per pound $3.00 $3.00 Variable cost per pound 1.10 2.20 Contribution margin $1.90 $0.80
Budget Calamine Capity 4,400 lbs. 3,300 lbs $2.00 $3.00 1.00 1.50 $1.00 $1.50
Budgeted and actual fixed corporate-sustaining costs are $1,850 and $2,300, respectively. What is the contribution margin for the flexible budget? A) $10,480 B) $9,810 C) $9,596 D) $12,330 Answer: B Explanation: B) Contribution margin for the flexible budget = (3,840 × $1) + (3,980 × $1.50) = $9,810 Diff: 2 Objective: 6 AACSB: Application of knowledge
26) Capity Tea Products has an exclusive contract with British Distributors. Calamine and Capity are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of March: Actual Calamine Capity Sales in pounds 3,800 lbs. 3,990 lbs. Price per pound $2.80 $2.80 Variable cost per pound 1.00 2.00 Contribution margin $1.80 $0.80
Budget Calamine Capity 4,500 lbs. 3,500 lbs $2.00 $3.00 1.00 1.50 $1.00 $1.50
Budgeted and actual fixed corporate-sustaining costs are $1,850 and $2,300, respectively. For the contribution margin, what is the total static-budget variance? A) $6,840 favorable B) $282 unfavorable C) $35 favorable D) $282 favorable Answer: D Explanation: D) Total static-budget variance = [(4,500 × $1.00) + (3,500 × $1.50)] - [(3,800 × $1.80) + (3,990 × $0.80)] = $9,750 - $10,032 = $282 favorable Diff: 3 Objective: 6 AACSB: Application of knowledge
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27) Capity Tea Products has an exclusive contract with British Distributors. Calamine and Capity are two brands of teas that are imported and sold to retail outlets. The following information is provided for the month of March: Actual Calamine Capity Sales in pounds 3,740 lbs. 3,960 lbs. Price per pound $2.80 $2.80 Variable cost per pound 1.00 2.00 Contribution margin $1.80 $0.80
Budget Calamine Capity 4,400 lbs. 3,500 lbs $2.00 $3.00 1.00 1.50 $1.00 $1.50
Budgeted and actual fixed corporate-sustaining costs are $1,850 and $2,300, respectively. For the contribution margin, what is the total flexible-budget variance? A) $30 favorable B) $220 favorable C) $250 favorable D) $250 unfavorable Answer: B Explanation: B) Actual contribution margin for the month = ((3,740 × $1.80) + (3,960 × $0.80) = $9,900 Contribution margin for the flexible budget = (3,740 × $1.00) + (3,960 × $1.50) = $9,680 Total flexible-budget variance = $9,900 - $9,680 = $220 favorable Diff: 3 Objective: 6 AACSB: Application of knowledge
28) Archoid's Flowering Plants provides the following information for the month of May:
Sales in units Contribution margin per unit
Tulips 5,000 $12
Actual Geraniums 4,100 $19
Budget Tulips Geraniums 4,950 3,300 $11 $23
What is the budgeted contribution margin per composite unit for the actual mix? (Round any intermediary calculations two decimal places.) A) $15.80 B) $17.60 C) $19.00 D) $16.40 Answer: D Explanation: D) Budgeted contribution margin per composite unit for the actual mix = [$11 × (5,000 / (5,000 + 4,100))] + [$23 × (4,100) / (5,000 + 4,100))] = $16.40 Diff: 3 Objective: 6 AACSB: Application of knowledge
1026 richard@qwconsultancy.com
29) Archoid's Flowering Plants provides the following information for the month of May:
Sales in units Contribution margin per unit
Tulips 4,600 $13
Actual Geraniums 4,400 $19
Budget Tulips Geraniums 4,950 3,300 $10 $22
What is the budgeted contribution margin per composite unit for the budgeted mix? (Round any intermediary calculations two decimal places.) A) $16.12 B) $14.80 C) $19.00 D) $15.88 Answer: B Explanation: B) Budgeted contribution margin per composite unit for the budgeted mix = [$10 × (4,950) / (4,950 + 3,300))] + [$22 × (3,300 / (4,950 + 3300))] = $14.80 Diff: 3 Objective: 6 AACSB: Application of knowledge
30) Archoid's Flowering Plants provides the following information for the month of May:
Sales in units Contribution margin per unit
Tulips 4,420 $15
Actual Geraniums 4,200 $19
Budget Tulips Geraniums 4,950 3,300 $10 $22
For May, the company will report a(n): (Round any intermediary calculations two decimal places.) A) favorable sales-mix variance B) unfavorable sales-mix variance C) favorable market-share variance D) unfavorable market-share variance Answer: A Explanation: A) Budgeted contribution margin per composite unit for the actual mix = [$10 × (4,420 / (4,420 + 4,200))] + [$22 × (4,200 / (4,420 + 4,200))] = $15.88 Budgeted contribution margin per composite unit for the budgeted mix = [$10 × (4,950) / (4,950 + 3,300))] + [$22 × (3,300 / (4,950 + 3300))] = $14.80 Diff: 3 Objective: 6 AACSB: Analytical thinking
1027 richard@qwconsultancy.com
31) Woodruff Flowering Plants provides the following information for the month of May: Actual Fuchsia Dogwood Sales in units 21,000 4,500 Contribution margin per unit $23 $19
Budget Fuchsia Dogwood 18,000 3,100 $22 $17
What is the budgeted contribution margin per composite unit for the actual mix? (Round any intermediary calculations two decimal places.) A) $21.77 B) $21.92 C) $21.00 D) $21.10 Answer: D Explanation: D) Budgeted contribution margin per composite unit for the actual mix = [$22 × (21,000) / (21,000 + 4,500))] + [$17 × (4,500 / (21,000 + 4,500))] = $21.10 Diff: 3 Objective: 6 AACSB: Application of knowledge
32) Woodruff Flowering Plants provides the following information for the month of May: Actual Fuchsia Dogwood Sales in units 18,000 4,700 Contribution margin per unit $21 $18
Budget Fuchsia Dogwood 18,000 3,300 $22 $17
What is the budgeted contribution margin per composite unit for the budgeted mix? (Round any intermediary calculations two decimal places.) A) $20.17 B) $22.27 C) $20.96 D) $21.25 Answer: D Explanation: D) Budgeted contribution margin per composite unit for the budgeted mix = [$22 × (18,000 / (18,000 + 3,300))] + [$17 × (3,300 / (18,000 + 3,300))] = $21.25 Diff: 3 Objective: 6 AACSB: Application of knowledge
1028 richard@qwconsultancy.com
33) Woodruff Flowering Plants provides the following information for the month of May: Actual Fuchsia Dogwood Sales in units 19,000 4,500 Contribution margin per unit $23 $18
Budget Fuchsia Dogwood 19,000 3,000 $22 $16
For May, Woodruff will report a(n): A) favorable sales-mix variance B) unfavorable sales-mix variance C) favorable market-share variance D) unfavorable market-share variance Answer: B Explanation: B) Budgeted contribution margin per composite unit for the actual mix = [$22 × (19,000) / (19,000 + 4,500))] + [$16 × (4,500 / (19,000 + 4,500))] = $4,500 Budgeted contribution margin per composite unit for the budgeted mix = [$22 × (19,000 / (19,000 + 3,000))] + [$16 × (3,000 / (19,000 + 3,000))] = $21.18 Diff: 3 Objective: 6 AACSB: Application of knowledge
34) The Corata Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:
Budgeted sales in units Budgeted selling price Budgeted contribution margin per unit Actual sales in units Actual selling price
Standard 2,700 $600 $400 3,200 $650
Super 900 $1,700 $1,050 1,500 $1,680
What is the budgeted sales-mix percentage for the Standard and the Super vacuum cleaners, respectively? A) 0.75 and 0.25 B) 0.68 and 0.32 C) 0.25 and 0.75 D) 0.32 and 0.68 Answer: A Explanation: A) Budgeted sales-mix percentage for the Standard = 2,700 / (2,700 + 900) = 0.75 Budgeted sales-mix percentage for the Super = 900 / (2,700 + 900) = 0.25 Diff: 1 Objective: 6 AACSB: Application of knowledge
1029 richard@qwconsultancy.com
35) The Corata Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:
Budgeted sales in units Budgeted selling price Budgeted contribution margin per unit Actual sales in units Actual selling price
Standard 2,700 $600 $420 2,800 $650
Super 600 $1,700 $1,060 1,200 $1,680
What is the total sales-volume variance in terms of the contribution margin? A) $678,000 unfavorable B) $594,000 favorable C) $636,000 unfavorable D) $678,000 favorable Answer: D Explanation: D) Standard = (2,800 - 2,700) × $420 = $42,000 F Super = (1,200 - 600) × $1,060 = 636,000 F $678,000 F Diff: 3 Objective: 6 AACSB: Application of knowledge
1030 richard@qwconsultancy.com
36) The Corata Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:
Budgeted sales in units Budgeted selling price Budgeted contribution margin per unit Actual sales in units Actual selling price
Standard 2,400 $600 $400 3,000 $650
Super 700 $1,700 $1,070 1,300 $1,680
What is the total sales-quantity variance in terms of the contribution margin? (Round intermediary calculations to two decimal places.) A) $369,600 favorable B) $295,320 favorable C) $664,920 favorable D) $74,280 favorable Answer: C Explanation: C) Sales mix calculations: Standard = 2,400 / (2,400 + 700) = 0.77 Super = 700 / (2,400 + 700) = 0.23 Sales quantity variance: Standard = (4,300 - 3,100) × 0.77 × $400 = $369,600 F Super = (4,300 - 3,100) × 0.23 × $1,070 =295,320 F $664,920 F Diff: 3 Objective: 6 AACSB: Application of knowledge
1031 richard@qwconsultancy.com
37) The Corata Appliance Manufacturing Corporation manufactures two vacuum cleaners, the Standard and the Super. The following information was gathered about the two products:
Budgeted sales in units Budgeted selling price Budgeted contribution margin per unit Actual sales in units Actual selling price
Standard 2,700 $600 $700 3,000 $650
Super 900 $1,700 $1,050 1,200 $1,680
What is the total sales-mix variance in terms of the contribution margin? (Round intermediary calculations to two decimal places.) A) $117,600 favorable B) $58,800 favorable C) $294,000 favorable D) $176,400 favorable Answer: B Explanation: B) Sales mix calculations: Budgeted Standard = 2,700 / (2,700 + 900) = 0.75 Budgeted Super = 900 / (2,700 + 900) = 0.25 Actual Standard = 3,000 / (3,000 + 1,200) = 0.71 Actual Super = 1,200 / (3,000 + 1,200) = 0.29 Sales mix variance: Standard = 4,200 × (0.71 - 0.75) × $700 = $117,600 U Super = 4,200 × (0.29 - 0.25) × $1,050 = $176,400 F $58,800 F Diff: 3 Objective: 6 AACSB: Application of knowledge
1032 richard@qwconsultancy.com
38) The Fortise Corporation manufactures two types of vacuum cleaners, the Victor for commercial building use and the House-Mate for residences. Budgeted and actual operating data for the year 2020 were as follows: Static Budget Number sold Contribution margin
Victor 6,000 $1,580,000
House-Mate 27,000 $3,150,000
Total 33,000 $4,730,000
Actual Results Number sold Contribution margin
Victor 5,200 $1,400,000
House-Mate 35,000 $4,130,000
Total 40,200 $5,530,000
What is the contribution margin for the flexible budget? (Round intermediary calculations to the nearest dollar.) A) $1,367,600 B) $4,095,000 C) $4,737,000 D) $5,462,600 Answer: D Explanation: D) Budgeted contribution margin per unit: Victor = $1,580,000 / 6,000 = $263 House-Mate = $3,150,000 / 27,000 = $117 Flexible-budget contribution margin: $263 × 5,200 = $1,367,600 35,000 × $117 = 4,095,000 $5,462,600 Diff: 3 Objective: 6 AACSB: Application of knowledge
1033 richard@qwconsultancy.com
39) The Fortise Corporation manufactures two types of vacuum cleaners, the Victor for commercial building use and the House-Mate for residences. Budgeted and actual operating data for the year 2020 were as follows: Static Budget Number sold Contribution margin
Victor 6,000 $1,570,000
House-Mate 24,000 $3,130,000
Total 30,000 $4,700,000
Actual Results Number sold Contribution margin
Victor 5,000 $1,540,000
House-Mate 35,000 $4,170,000
Total 40,000 $5,710,000
What is the total static-budget variance in terms of the contribution margin? A) $1,070,000 favorable B) $1,010,000 favorable C) $1,010,000 unfavorable D) $1,070,000 unfavorable Answer: B Explanation: B) Total static-budget variance in terms of the contribution margin = $4,700,000 - $5,710,000 = $1,010,000 favorable Diff: 3 Objective: 6 AACSB: Application of knowledge
1034 richard@qwconsultancy.com
40) The Fortise Corporation manufactures two types of vacuum cleaners, the Victor for commercial building use and the House-Mate for residences. Budgeted and actual operating data for the year 2020 were as follows: Static Budget Number sold Contribution margin
Victor 6,200 $1,590,000
House-Mate 26,000 $3,150,000
Total 32,200 $4,740,000
Actual Results Number sold Contribution margin
Victor 5,400 $1,400,000
House-Mate 39,000 $4,130,000
Total 44,400 $5,530,000
What is the total flexible-budget variance in terms of the contribution margin? (Round intermediary calculations to the nearest dollar.) A) $571,400 favorable B) $1,382,400 favorable C) $571,400 unfavorable D) $4,719,000 unfavorable Answer: C Explanation: C) Budgeted contribution margin per unit: Victor = $1,590,000 / 6,200 = $256 House-Mate = $3,150,000 / 26,000 = $121 Flexible-budget contribution margin: $256 × 5,400 = $1,382,400 39,000 × $121 = 4,719,000 $6,101,400 Total flexible-budget variance in terms of the contribution margin = $6,101,400 - $5,530,000 = $571,400 unfavorable Diff: 3 Objective: 6 AACSB: Application of knowledge
1035 richard@qwconsultancy.com
41) The Fortise Corporation manufactures two types of vacuum cleaners, the Victor for commercial building use and the House-Mate for residences. Budgeted and actual operating data for the year 2020 were as follows: Static Budget Number sold Contribution margin
Victor 6,000 $1,560,000
House-Mate 24,000 $3,120,000
Total 30,000 $4,680,000
Actual Results Number sold Contribution margin
Victor 5,100 $1,400,000
House-Mate 35,000 $4,130,000
Total 40,100 $5,530,000
What is the total sales-volume variance in terms of the contribution margin? A) $1,196,000 favorable B) $1,326,000 favorable C) $4,550,000 unfavorable D) $1,196,000 unfavorable Answer: A Explanation: A) Budgeted contribution margin per unit: Victor = $1,560,000 / 6,000 = $260 House-Mate = $3,120,000 / 24,000 = $130 Flexible-budget contribution margin: 5,100 × $260 = $1,326,000 35,000 × $130 = 4,550,000 $5,876,000 Total sales-volume variance in terms of the contribution margin = $5,876,000 - $4,680,000 = $1,196,000 favorable Diff: 3 Objective: 6 AACSB: Application of knowledge
1036 richard@qwconsultancy.com
42) The Fortise Corporation manufactures two types of vacuum cleaners, the Victor for commercial building use and the House-Mate for residences. Budgeted and actual operating data for the year 2020 were as follows: Static Budget Number sold Contribution margin
Victor 6,000 $1,560,000
House-Mate 24,000 $3,120,000
Total 30,000 $4,680,000
Actual Results Number sold Contribution margin
Victor 5,500 $1,400,000
House-Mate 38,000 $4,130,000
Total 43,500 $5,530,000
What is the total sales-quantity variance in terms of the contribution margin? (Round any intermediary calculations two decimal places.) A) $2,106,000 unfavorable B) $702,000 favorable C) $1,404,000 unfavorable D) $2,106,000 favorable Answer: D Explanation: D) Budgeted sales-mix percentage: Victor = 6,000 / 30,000 = 0.20 House-Mate = 24,000 / 30,000 = 0.80 Actual sales-mix percentage: Victor = 5,500 / 43,500 = 0.13 House-Mate = 38,000 / 43,500 = 0.87 Sales-quantity variance
Victor House-Mate Total
Actual units of all Budgeted Budgeted Sales-quantity products sold sales-mix % CM per unit variance Budgeted units of all products sold (43,500 - 30,000) × 0.20 × $260 = $702,000 F (43,500 - 30,000) × 0.80 × $130 = $1,404,000 F $2,106,000 F
Diff: 3 Objective: 6 AACSB: Application of knowledge
1037 richard@qwconsultancy.com
43) The Fortise Corporation manufactures two types of vacuum cleaners, the Victor for commercial building use and the House-Mate for residences. Budgeted and actual operating data for the year 2020 were as follows: Static Budget Number sold Contribution margin
Victor 6,000 $1,560,000
House-Mate 24,000 $3,120,000
Total 30,000 $4,680,000
Actual Results Number sold Contribution margin
Victor 5,100 $1,400,000
House-Mate 35,000 $4,130,000
Total 40,100 $5,530,000
What is the total sales-mix variance in terms of the contribution margin? (Round any intermediary calculations two decimal places.) A) $729,820 unfavorable B) $456,820 unfavorable C) $273,000 favorable D) $1,002,820 favorable Answer: B Explanation: B) Sales mix calculations: Budgeted Victor = 6,000 / 30,000 = 0.20 Budgeted House-mate = 24,000 / 30,000 = 0.80 Actual Victor = 5,100 / 40,100 = 0.13 Actual House-mate = 35,000 / 40,100 = 0.87 Sales mix variance: Sales-mix Actual units of Actual sales-mix % Budgeted variance all products - Budgeted CM per unit sold sales-mix% Victor 40,100 × (0.13 - 0.20) × $260 House-Mate 30,000 × (0.87 - 0.80) × $130 Total
Sales-mix variance = $729,820 U = $273,000 F $456,820 U
Diff: 3 Objective: 6 AACSB: Application of knowledge
44) The static-budget variance is the difference between an actual result and the corresponding budgeted amount in the static budget. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
1038 richard@qwconsultancy.com
45) The flexible-budget variance is the difference between an actual result and the flexible-budget amount based on the level of output actually achieved in the budget period. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
46) Managers can gain more insight about the static-budget variance by subdividing it into the flexible-budget variance and the sales-volume variance. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
47) The market-share variance is the difference in budgeted contribution margin for actual market size in units caused solely by actual market share being different from budgeted market share. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
48) Additional insight can be gained by dividing the sales-volume variance into the sales-mix variance and the sales-quantity variance. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
49) A favorable sales-mix variance arises when the actual sales-mix percentage exceeds the budgeted sales-mix percentage. Answer: TRUE Diff: 3 Objective: 6 AACSB: Analytical thinking
50) A composite unit is a hypothetical unit with weights based on the mix of individual units. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
51) The market-share variance is the difference in actual contribution margin for actual market size in units caused solely by actual market share being different from budgeted market share. Answer: FALSE Explanation: The market-share variance is the difference in budgeted contribution margin for actual market size in units caused solely by actual market share being different from budgeted market share. Diff: 2 Objective: 6 AACSB: Analytical thinking
1039 richard@qwconsultancy.com
52) The sales-mix variance can be explained in terms of the budgeted contribution margin per composite unit of the sales mix. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
53) The sales-quantity variance occurs in a multi-product company from a change in the sales mix. Answer: FALSE Explanation: It occurs from a change in volume of sales, independent of any change in the sales-mix. Diff: 3 Objective: 6 AACSB: Analytical thinking
54) The sales-mix variance is the difference between budgeted contribution margin for the actual sales mix and the budgeted contribution margin for the budgeted sales mix. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
55) The sales quantity variance is the difference between budgeted contribution margin based on actual units sold of all products at the budgeted mix, and contribution margin in the flexible budget. Answer: FALSE Explanation: The sales quantity variance is the difference between budgeted contribution margin based on actual units sold of all products at the budgeted mix, and contribution margin in the static budget. Diff: 2 Objective: 6 AACSB: Analytical thinking
1040 richard@qwconsultancy.com
56) Blue States Coffee, Inc., sells two types of coffee, Colombian and Blue Mountain. The monthly budget for U.S. coffee sales is based on a combination of last year's performance, a forecast of industry sales, and the company's expected share of the U.S. market. The following information is provided for March:
Sales in pounds
Actual Colombian Blue Mountain 15,000 lbs. 17,000 lbs.
Budget Colombian Blue Mountain 13,500 lbs. 18,000 lbs
Price per pound Variable cost per pound
$13.00 5.00
$16.00 9.00
$13.00 6.50
$16.00 9.00
Contribution margin
$8.00
$7.00
$6.50
$7.00
Budgeted and actual fixed corporate-sustaining costs are $60,000 and $72,000, respectively. Required: a. Calculate the actual contribution margin for the month. b. Calculate the contribution margin for the static budget. c. Calculate the contribution margin for the flexible budget. d. Determine the total static-budget variance, the total flexible-budget variance, and the total sales-volume variance in terms of the contribution margin. Answer: a. Actual contribution margin: 15,000 × $8.00 = $ 120,000 17,000 × $7.00 = 119,000 $239,000 b.
Static-budget contribution margin:
13,500 × $6.50 = $ 87,750 18,000 × $7.00 = 126,000 $213,750
c.
Flexible-budget contribution margin: 15,000 × $6.50 = $ 97,500 17,000 × $7.00 = 119,000 $216,500
d. Static-budget variance = $213,750 - $239,000 = $25,250 favorable Flexible-budget variance = $216,500 - $239,000 = $22,500 favorable Sales-volume variance = $213,750 - $216,500 = $2,750 favorable Diff: 3 Objective: 6 AACSB: Application of knowledge
1041 richard@qwconsultancy.com
57) Superior Electronics manufactures TVs and DVDRs. During April, the following activities occurred: TVs 19,404 $40 22,000 $45
Budgeted units sold Budgeted contribution margin per unit Actual units sold Actual contribution margin per unit
DVDRs 72,996 $75 80,000 $76
Required: Compute the following variances in terms of the contribution margin. a. Determine the total sales-mix variance. b. Determine the total sales-quantity variance. c. Determine the total sales-volume variance. Answer: a. TVs [(110,000 × 0.20) × $40] = $880,000 [(110,000 × 0.21) × $40] = 924,000 $ 44,000 unfavorable DVDRs [(110,000 × 0.80) × $75 (110,000 × 0.79) × $75]
= =
$6,600,000 6,517,500 $ 82,500 favorable
Total sales-mix variance = $44,000 unfavorable + $82,500 favorable = $38,500 favorable. b.
TVs {[(110,000 - 94,000) × 0.21] × $40] DVDRs {[(110,000 - 94,000) × 0.79] × $75] Total sales-quantity variance
= =
$134,400 favorable 948,000 favorable $1,082,400 favorable
c.
Total sales-volume variance = $38,500 favorable + $1,082,400 favorable = $1,229,140 favorable
Diff: 3 Objective: 6 AACSB: Application of knowledge
1042 richard@qwconsultancy.com
58) The Octova Corporation manufactures two types of vacuum cleaners: the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 2020 are as follows: Static Budget Number sold Contribution margin
ZENITH 20,000 $4,800,000
House-Helper 80,000 $15,600,000
Total 100,000 $20,400,000
Actual Results Number sold Contribution margin
ZENITH 21,500 $6,665,000
House-Helper 60,000 $13,200,000
Total 81,500 $19,865,000
Required: a. Calculate the contribution margin for the flexible budget. b. Determine the total static-budget variance, the total flexible-budget variance, and the total sales-volume variance in terms of the contribution margin. Answer: Budgeted contribution margin per unit: ZENITH = $4,600,000/20,000 = $240 House-Helper = $15,600,000/80,000 = $195 a.
Flexible-budget contribution margin: 21,500 × $240 = $ 5,160,000 60,000 × $195 = 11,700,000 $16,860,000
b.
Static-budget variance = $20,400,000 - $19,865,000= $535,000 favorable Flexible-budget variance = $16,860,000 - $19,865,000= $3,005,000 favorable Sales-volume variance = $20,400,000 - $16,860,000 =$3,540,000 unfavorable
Diff: 3 Objective: 6 AACSB: Application of knowledge
1043 richard@qwconsultancy.com
59) The Octova Corporation manufactures two types of vacuum cleaners: the ZENITH for commercial building use and the House-Helper for residences. Budgeted and actual operating data for the year 2020 are as follows: Static Budget Number sold Contribution margin
Zenith 20,000 $4,600,000
House-Helper 80,000 $15,200,000
Total 100,000 $19,800,000
Actual Results Number sold Contribution margin
Zenith 21,500 $6,665,000
House-Helper 64,500 $14,190,000
Total 86,000 $20,855,000
Required: Compute the sales-mix variance and the sales-quantity variance by type of vacuum cleaner, and in total. (in terms of the contribution margin) Answer: Budgeted sales-mix percentage: Zenith = 20,000/100,000 = 20% House-Helper = 80,000/100,000 = 80% Actual sales-mix percentage: Zenith = 21,500/86,000 = 30%
House-Helper = 64,500/86,000 = 70%
Budgeted contribution margin per unit: Zenith = $4,600,000/20,000 = $230 House-Helper = $15,200,000/80,000 = $190 Sales-mix variance
Actual units of Actual all products sales-mix % sold Budgeted sales-mix % Zenith 86,000 × (0.3 - 0.2) × House-Helper 86,000 × (0.7 - 0.8) × Total
Budgeted CM per unit
Sales-mix variance
$230 $190
= $989,000 F = $817,000 U $ 172,000 F
Sales-quantity Actual units of all Budgeted Budgeted Sales-quantity variance products sold sales-mix % CM per unit variance Budgeted units of all products sold Zenith (86,000 - 100,000) × 0.2 × $230 = $644,000 U House-Helper (86,000 - 100,000) × 0.8 × $190 = $2,128,000 U Total $2,772,000 U Diff: 3 Objective: 6 AACSB: Application of knowledge
1044 richard@qwconsultancy.com
60) The Chair Company manufactures two modular types of chairs: one for the residential market, and the other for the office market. Budgeted and actual operating data for the year 2020 are: Static Budget Number of chairs sold Contribution margin
Residential 260,000 $26,000,000
Office 140,000 $11,200,000
Total 400,000 $37,200,000
Actual Results Number of chairs sold Contribution margin
Residential 248,400 $22,356,000
Office 165,600 $13,248,000
Total 414,000 $35,604,000
Required: Compute the following variances in terms of contribution margin: a. Compute the total static-budget variance, the total flexible-budget variance, and the total sales-volume variance. b. Compute the sale-mix variance and the sales-quantity variance by type of chair, and in total.
1045 richard@qwconsultancy.com
Answer: a. Budgeted contribution margin per unit: Residential = $26,000,000/260,000 = $100 Office = $11,200,000/140,000 = $80 Flexible-budget contribution margin: Residential 248,400 × $100 = $24,840,000 Office 165,600 × $80 = $13,248,000 $38,088,000 Static-budget variance is $1,596,000 unfavorable = $37,200,000 - $35,604,000 Sales-volume variance is $888,000 favorable = $37,200,000 - $38,088,000 Flexible-budget variance is $2,484,000 unfavorable = $38,088,000 - $35,604,000 b. Actual sales-mix percentage: Residential = 248,400/414,000 = 60% Office = 165,600/414,000 = 40% Budgeted sales-mix percentage: Residential = 260,000/400,000 = 65% Office = 140,000/400,000 = 35% Sales-mix variance
Residential Office Total
Actual units of Actual all products sales-mix % sold Budgeted sales-mix % 414,000 × (0.6 - 0.65) × 414,000 × (0.4 - 0.35) ×
Budgeted CM per unit
Sales-mix variance
$100 $80
= $2,070,000 U = $1,656,000 F $ 414,000 U
Sales-quantity Actual units of all Budgeted Budgeted Sales-quantity variance products sold sales-mix % CM per unit variance Budgeted units of all products sold Residential (414,000 - 400,000) × 0.65 × $100 = $ 910,000 F Office (414,000 - 400,000) × 0.35 × $80 = $ 392,000 F Total $1,302,000 F Diff: 3 Objective: 6 AACSB: Application of knowledge
61) What are the two components of the sales-volume variance? Answer: The two components of sales-volume variance are (a) the difference between actual sales mix and budgeted sales mix (the sales-mix variance) and (b) the difference between actual unit sales and budgeted unit sales (the sales-quantity variance). Diff: 2 Objective: 6 AACSB: Analytical thinking
1046 richard@qwconsultancy.com
62) What are the two components of the sales-quantity variance? Answer: The two components of the sales-quantity variance are (a) the difference between the actual market share and the budgeted market share (the market-share variance) and (b) the difference between the actual market size in units and the budgeted market size in units (the market-size variance). Diff: 3 Objective: 6 AACSB: Analytical thinking
63) Explain what is meant by the sales volume variance and describe the relationship between the sales-volume variance and (1) the sales mix variance and (2) the sales quantity variance and (3) Market share variance and the market size variance. Answer: The sales volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount. A greater understanding of what has caused the sales volume variance can be achieved by calculating and interpreting the sales-mix variance and the sales-quantity variance — which is a breaking down (drill down) of the sales volume variance. Future understanding can be gained by calculating two more sales related variances: market share variance and market size variance; two variance that explain the sales quantity variance. Therefore, a sales volume variance can be explained by the impact of changes in the sales mix, deviations from plan on quantity sold, missing the target on market share and/or unanticipated changes or improper estimates of the size of a market. Diff: 3 Objective: 6 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 16 Allocation of Support-Department Costs, Common Costs, and Revenues Objective 16.1 1) The method that allocates costs in each cost pool using the same rate per unit is known as the: A) incremental cost-allocation method B) reciprocal cost-allocation method C) single-rate cost allocation method D) dual-rate cost-allocation method Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
2) The dual-rate cost-allocation method classifies costs in each cost pool into a: A) budgeted-cost pool and an actual-cost pool B) variable-cost pool and a fixed-cost pool C) direct-cost pool and an indirect-cost pool D) direct-cost pool and a reciprocal-cost pool Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Which of the following departments would NOT be considered a service or support department? A) assembly
1047 richard@qwconsultancy.com
B) information systems C) shipping D) plant maintenance Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
4) Which of the following would be distinguishing features or attributes of a support (service) department of a manufacturer? A) directly adding value to the finish product to be purchased by customers B) directly adding value to service contracts to be purchased by customers C) assisting the production area with services such as maintenance and janitorial work D) assisting potential customers who need to utilize the service agreement Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
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5) The ________ would be consistent with the main functions/activities of an operational area of a manufacturer. A) installation of information technology B) materials management in a warehouse C) factory activities D) plant maintenance Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
6) When using the dual-rate method, the fixed cost allocation is based on: A) actual rate B) budgeted usage C) incremental cost allocation D) prime cost allocation Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
7) Consider the following information attributed to the material management department Budgeted usage of materials-handling labor-hours 3,500 Budgeted cost pools: Fixed costs $164,500 Variable costs $126,000 (3,500 hours × $36 per hour) The company uses the single-rate method to allocate support costs to the Machining and Assembly Departments. Assuming that the actual hours tracked in the Machining and Assembly department are 400 for the month, what would be the allocation rate and how much cost would be allocated to the Machining and Assembly Department for the operations of the month? (Round final answers to the nearest dollar.) A) $83 an hour for a total of $33,200 B) $36 an hour for a total of $33,200 C) $36 an hour for a total of $14,400 D) $726 an hour for a total of $83 Answer: A Explanation: A) Fixed costs per hour: $164,500 / 3,500 = $47 per hour Allocation rate: $36 + $47 = $83 per hour Cost allocated to department: $83 per hour × 400 hours = $33,200 Diff: 2 Objective: 1 AACSB: Analytical thinking
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8) Which of the following is a disadvantage of single-rate method? A) It is very costly to implement. B) It may lead operating department managers to make sub-optimal decisions that are in their own best interest. C) It does not signal to department managers how variable costs and fixed costs behave differently. D) It requires managers to distinguish variable costs from fixed costs, which is often a challenging task. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
9) Which of the following is an advantage of a dual-rate method? A) It is the most widely used method in practice. B) It is less costly to implement. C) It avoids the expensive analysis for categorizing costs as either fixed or variable. D) It allocates fixed cost as per the budgeted usage that helps in short and long-run planning. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
10) Which of the following is a disadvantage of a dual-rate method? A) It allocates fixed costs on the basis of budgeted long-run usage, which may tempt some managers to underestimate their planned usage. B) It may lead operating department managers to make sub-optimal decisions that are in their own best interest. C) It allocates fixed and variable-cost pool using the same cost-allocation base, which will mislead managers in making decisions. D) It does not guide department managers to make decisions that benefit both the organization as a whole and each department. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
11) Which of the following is an advantage of using practical capacity to allocate costs? A) is that it allows a downward supply spiral to develop B) is that it focuses management's attention on managing unused capacity C) is that budgets are much easier to develop D) is that it results in departments bearing a lower percentage of fixed costs Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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12) Which of the following would be considered the biggest advantage of using practical capacity to allocate costs? A) focuses the user's division with the costs of overused capacity B) never causes over or under-allocated overhead C) burdens the user divisions with the costs of unused capacity D) focuses management's attention on unused capacity Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
13) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 400,000 to 600,000 copies: Fixed costs per year Variable costs Budgeted long-run usage in copies per year: Marketing Department Operations Department
$64,000 7 cents (0.07) 90,000 310,000
per copy copies copies
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 120,000 copies and by the Operations Department was 380,000 copies. If a single-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department? (Round any intermediary calculations to the nearest cent.) A) $20,700 B) $6,300 C) $14,400 D) $17,820 Answer: A Explanation: A) 400,000 total copies budgeted × $0.07 = $28,000 of variable cost + $64,000 of fixed cost = $92,000. Total budged cost of $92,000/400,000 total copies is a single allocation rate of 0.23 per copy. If the marketing department plans on making 120,000 copies, the allocated budgeted amount for copies would be 90,000 × $0.23 = $20,700. [(90,000 / (90,000 + 310,000)) × $64,000] + (90,000 × $0.07) = $20,700 Diff: 2 Objective: 1 AACSB: Application of knowledge
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14) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 400,000 to 600,000 copies: Fixed costs per year Variable costs Budgeted long-run usage in copies per year: Marketing Department Operations Department
$64,000 6 cents (0.06) 90,000 310,000
per copy copies copies
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 120,000 copies and by the Operations Department was 380,000 copies. If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. (Do not round interim calculations and round the final calculation to the nearest dollar.) A) $16,920 B) $19,800 C) $26,400 D) $7,200 Answer: C Explanation: C) [(90,000) / (90,000 + 310,000)) × $64,000] + (90,000 × $0.06) = $19,800 $19,800 / 90,000 copies = $0.22 per copy × 120,000 = $26,400 Diff: 3 Objective: 1 AACSB: Application of knowledge
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15) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 400,000 to 600,000 copies: Fixed costs per year Variable costs Budgeted long-run usage in copies per year: Marketing Department Operations Department
$70,000 2 cents (0.02) 120,000 480,000
per copy copies copies
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 150,000 copies and by the Operations Department was 410,000 copies. If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department? A) $65,600 B) $64,200 C) $60,850 D) $59,450 Answer: A Explanation: A) [(480,000) / (120,000 + 480,000)) × $70,000] + (480,000 × $0.02) = $65,600 Diff: 2 Objective: 1 AACSB: Application of knowledge
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16) The Charmatz Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 400,000 to 600,000 copies: Fixed costs per year Variable costs Budgeted long-run usage in copies per year: Marketing Department Operations Department
$60,000 3 cents (0.03) 120,000 380,000
per copy copies copies
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 90,000 copies and by the Operations Department was 360,000 copies. If a dual-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Operations Department? Assume budgeted usage is used to allocate fixed copying costs and actual usage is used to allocate variable copying costs. A) $59,400 B) $130,800 C) $57,000 D) $56,400 Answer: D Explanation: D) [(380,000) / (120,000 + 380,000)) × $60,000] + (360,000 × $0.03) = $56,400 Diff: 3 Objective: 1 AACSB: Application of knowledge
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17) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 150,000 to 250,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department
$8,600,000 $73
per technician hour
80,000 120,000
technician hours technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 100,000 technician hours. If a single-rate cost-allocation method is used, what is the allocation rate per hour used? (Round the final answer to the nearest dollar.) A) $126.75 B) $116.00 C) $145.00 D) $101.40 Answer: B Explanation: B) Allocation rate per hour = ($8,600,000 + (200,000 hours × $73))/ 200,000 hours = $116.00/ per hour used Diff: 2 Objective: 1 AACSB: Application of knowledge
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18) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 100,000 to 200,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department
$7,200,000 $65
per technician hour
90,000 110,000
technician hours technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 70,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Large Plane Department? A) $9,090,000 B) $7,910,000 C) $7,070,000 D) $10,170,000 Answer: A Explanation: A) The fixed cost allocation rate is $36.00 ($7,200,000 / (90,000 + 110,000) while the variable rate is $65. Budgeted materials laboratory costs for Large Plane Department = ($36.00 + $65) × 90,000 = $9,090,000 Diff: 2 Objective: 1 AACSB: Application of knowledge
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19) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 150,000 to 250,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department
$9,000,000 $67
per technician hour
100,000 60,000
technician hours technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 90,000 technician hours and by the Small Plane Department was 110,000 technician hours. If a single-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume actual usage is used to allocate laboratory costs. A) $11,200,000 B) $12,325,000 C) $10,080,000 D) $11,092,500 Answer: D Explanation: D) ($9,000,000 + (160,000 hours × $67))/ 160,000 hours = $123.25 / per hour used 90,000 = $11,092,500 Diff: 3 Objective: 1 AACSB: Application of knowledge
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20) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 100,000 to 200,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department
$8,400,000 $66
per technician hour
80,000 120,000
technician hours technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Large Plane Department? Assume budgeted usage is used to allocate fixed materials laboratory costs and actual usage is used to allocate variable materials laboratory costs. A) $7,800,000 B) $7,320,000 C) $6,480,000 D) $8,640,000 Answer: B Explanation: B) Budgeted materials laboratory costs for Large Plane Department = [(80,000 / 200,000) × $8,400,000] + (60,000 × $66) = $7,320,000 Diff: 3 Objective: 1 AACSB: Application of knowledge
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21) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 100,000 to 200,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department
$7,800,000 $66
per technician hour
80,000 120,000
technician hours technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be budgeted for the Small Plane Department? A) $14,605,714 B) $9,737,143 C) $8,400,000 D) $12,600,000 Answer: D Explanation: D) Budgeted materials laboratory costs for Small Plane Department = [(120,000 / 200,000) × $7,800,000] + (120,000 × $66) = $12,600,000 Diff: 2 Objective: 1 AACSB: Application of knowledge
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22) The Speedjet Aircraft Corporation has a central materials laboratory. The laboratory has only two users, the Large Plane Department and the Small Plane Department. The following data apply to the coming budget year: Budgeted costs of operating the materials laboratory for 100,000 to 200,000 technician hours per year: Fixed costs per year Variable costs Budgeted long-run usage in hours per year: Large Plane Department Small Plane Department
$9,000,000 $66
per technician hour
80,000 120,000
technician hours technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 60,000 technician hours and by the Small Plane Department was 80,000 technician hours. If a dual-rate cost-allocation method is used, what amount of materials laboratory costs will be allocated to the Small Plane Department? Assume budgeted usage is used to allocate fixed materials laboratory costs and actual usage is used to allocate variable materials laboratory costs. A) $8,880,000 B) $10,680,000 C) $11,520,000 D) $13,320,000 Answer: B Explanation: B) Budgeted materials laboratory costs for Small Plane Department = [(120,000 / 200,000) × $9,000,000] + (80,000 × $66) = $10,680,000 Diff: 3 Objective: 1 AACSB: Application of knowledge
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23) Illumination Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Budgeted costs of operating the plant for 2,000 to 3,000 hours: Fixed operating costs per year $500,000 Variable operating costs $900 per hour Budgeted long-run usage per year: Flashlight Division 2,000 hours Night Light Division 1,000 hours Practical capacity 4,000 hours Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was 800 hours. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Flashlight Division? A) $2,050,000 B) $1,537,500 C) $1,987,500 D) $1,600,000 Answer: A Explanation: A) Flashlight Division cost = [(2,000 / 4,000) × $500,000] + (2,000 × $900) = $2,050,000 Diff: 2 Objective: 1 AACSB: Application of knowledge
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24) Illumination Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Budgeted costs of operating the plant for 2,000 to 3,000 hours: Fixed operating costs per year $500,000 Variable operating costs $750 per hour Budgeted long-run usage per year: Flashlight Division 2,000 hours Night Light Division 1,000 hours Practical capacity 4,000 hours Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was 800 hours. If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Flashlight Division? Assume actual usage is used to allocate operating costs. A) $1,750,000 B) $1,625,000 C) $1,031,250 D) $1,312,500 Answer: D Explanation: D) Flashlight Division cost = [(2,000 / 4,000) × $500,000] + (2,000 × $750) = $1,750,000 ($1,750,000 / 2,000) × 1,500 = $1,312,500 Diff: 3 Objective: 1 AACSB: Application of knowledge
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25) Illumination Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Budgeted costs of operating the plant for 2,000 to 3,000 hours: Fixed operating costs per year $480,000 Variable operating costs $650 per hour Budgeted long-run usage per year: Flashlight Division 1,500 hours Night Light Division 600 hours Practical capacity 3,000 hours Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Flashlight Division was 1,400 hours and by the Night Light Division was 700 hours. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Night Light Division? A) $695,000 B) $502,000 C) $486,000 D) $567,000 Answer: C Explanation: C) Night Light Division cost = [(600 / 3,000) × $480,000] + (600 × $650) = $486,000 Diff: 2 Objective: 1 AACSB: Application of knowledge
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26) Illumination Corp operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Budgeted costs of operating the plant for 2,000 to 3,000 hours: Fixed operating costs per year $500,000 Variable operating costs $800 per hour Budgeted long-run usage per year: Flashlight Division 2,000 hours Night Light Division 1,000 hours Practical capacity 4,000 hours Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Flashlight Division was 1,500 hours and by the Night Light Division was 800 hours. If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs. A) $925,000 B) $765,000 C) $900,000 D) $740,000 Answer: B Explanation: B) Night Light Division cost = [(1,000 / 4,000) × $500,000] + (800 × $800) = $765,000 Diff: 3 Objective: 1 AACSB: Application of knowledge
27) Costs incurred in the support departments must be allocated ultimately to the operating departments for planning and control purposes but not to the final cost object. Answer: FALSE Explanation: Costs incurred in the support departments must be allocated ultimately to the operating departments and eventually to the final cost object. Diff: 2 Objective: 1 AACSB: Analytical thinking
28) The single-rate method makes a distinction between fixed and variable costs by allocating using a single rate for fixed costs and another single rate for variable costs. Answer: FALSE Explanation: The single-rate method makes no distinction between fixed and variable costs. It allocates costs in each cost pool to cost objects using the same rate per unit of a single allocation base. Diff: 1 Objective: 1 AACSB: Application of knowledge
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29) The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool. Answer: FALSE Explanation: The dual cost-allocation method classifies costs into two pools, a variable cost pool and a fixed cost pool. Diff: 1 Objective: 1 AACSB: Analytical thinking
30) The single cost-allocation method makes no distinction between fixed and variable costs. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
31) The single-rate method transforms the direct costs per hour into indirect costs to users of that facility. Answer: FALSE Explanation: The single-rate method transforms the fixed costs per hour into variable costs to users of that facility. Diff: 3 Objective: 1 AACSB: Analytical thinking
32) The dual-rate cost-allocation method provides better information for decision making than the single-rate method as it differentiates between fixed and variable costs and its allocation. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
33) An advantage of the single-rate method is that it is the most accurate method of cost-allocation. Answer: FALSE Explanation: The single-rate method is the easiest cost allocation method, but it is the least accurate cost-allocation choice. Diff: 1 Objective: 1 AACSB: Analytical thinking
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34) The fixed costs of operating the maintenance facility of General Hospital are $4,500,000 annually. Variable costs are incurred at the rate of $30 per maintenance-hour. The facility averages 40,000 maintenance-hours a year. Budgeted and actual hours per user for 2020 are as follows:
Building and grounds Operating and emergency Patient care Administration Total
Budgeted hours 10,000 8,000 21,000 1,000 40,000
Actual hours 12,000 8,000 22,000 1,200 43,200
Assume that budgeted maintenance-hours are used to calculate the allocation rates. Required: a. If a single-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department? b. If a single-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? c. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be budgeted for each department? d. If a dual-rate cost-allocation method is used, what amount of maintenance cost will be allocated to each department based on actual usage? Based on budgeted usage for fixed operating costs and actual usage for variable operating costs?
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Answer: a. Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000 Single rate = $5,700,000 / 40,000 mh = $142.50 per maintenance-hour Single-rate budgeted amounts: Building and grounds $142.50 × 10,000 = $1,425,000 Operating and emergency $142.50 × 8,000 = $1,140,000 Patient care $142.50 × 21,000 = $2,992,500 Administration $142.50 × 1,000 = $ 142,500 b.
Total costs + $4,500,000 + ($30 × 40,000) = $5,700,000 Single rate = $5,700,000 / 40,000 mh = $142.50 per maintenance-hour Single-rate allocated amounts: Building and grounds $142.50 × 12,000 = $1,710,000 Operating and emergency $142.50 × 8,000 = $1,140,000 Patient care $142.50 × 22,000 = $3,135,000 Administration $142.50 × 1,200 = $ 171,000
c.
Dual-rate budgeted amounts: Building and grounds: Fixed ($4,500,000 × 10/40) Variable ($30 × 10,000) Total
$1,125,000 300,000 $1,425,000
Operating and emergency: Fixed ($4,500,000 × 8/40) Variable ($30 × 8,000) Total
$ 900,000 240,000 $1,140,000
Patient care: Fixed ($4,500,000 × 21/40) Variable ($30 × 21,000) Total
$2,362,500 630,000 $2,992,500
Administration: Fixed ($4,500,000 × 1/40) Variable ($30 × 1,000) Total
$112,500 30,000 $142,500
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d. Dual-rate allocated amounts: Building and grounds: Fixed ($4,500,000 × 10/40) Variable ($30 × 12,000) Total
$1,125,000 360,000 $1,485,000
Operating and emergency: Fixed ($4,500,000 × 8/40) Variable ($30 × 8,000) Total
$ 900,000 240,000 $1,140,000
Patient care: Fixed ($4,500,000 × 21/40) Variable ($30 × 22,000) Total
$2,362,500 660,000 $3,022,500
Administration: Fixed ($4,500,000 × 1/40) Variable ($30 × 1,200) Total
$112,500 36,000 $148,500
Diff: 3 Objective: 1 AACSB: Application of knowledge
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35) The Alex Miller Corporation operates one central plant that has two divisions, the Flashlight Division and the Night Light Division. The following data apply to the coming budget year: Budgeted costs of the operating the plant for 10,000 to 20,000 hours: Fixed operating costs per year Variable operating costs Practical capacity Budgeted long-run usage per year: Lamp Division 800 hours × 12 months = Flashlight Division 450 hours × 12 months =
$280,000 $10 per hour 20,000 hours per year 9,600 hours per year 5,400 hours per year
Assume that practical capacity is used to calculate the allocation rates. Further assume that actual usage of the Lamp Division was 700 hours and the Flashlight Division was 400 hours for the month of June. Required: a. If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? b. For the month of June, if a single-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume actual usage is used to allocate operating costs. c. If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Lamp Division each month? For the Flashlight Division each month? d. For the month of June, if a dual-rate cost-allocation method is used, what amount of cost will be allocated to the Lamp Division? To the Flashlight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.
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Answer: a. Fixed costs $280,000 / 20,000 practical capacity hours = $14 / hour Single-rate cost-allocation = $14 + $10 = $24 per hour Lamp Division 800 × $24 / hour = $19,200 per month Flashlight Division 450 × $24 / hour = $10,800 per month b.
Lamp Division Flashlight Division
700 × $24 / hour = 400 × $24 / hour =
$16,800 per month $9,600 per month
c.
Fixed costs $280,000 / 20,000 practical capacity hours = $14 / hour Budgeted costs — Lamp Division (800 × $14/hour) + (800 × $10/hour) = $19,200 per month Budgeted costs — Flashlight Division (450 × $14/hour) + (450 × $10/hour) = $10,800 per month
d. Allocated costs for June — Lamp Division (800 × $14 / hour) + (700 × $10/hour) = Allocated costs for June — Flashlight Division (450 × $14 / hour) + (400 × $10/hour) =
$18,200 per month $10,300 per month
Diff: 3 Objective: 1 AACSB: Application of knowledge
36) The Pitt Corporation has been outsourcing data processing in the belief that such outsourcing would reduce costs and increase corporate profitability. In spite of this, there has been no meaningful increase in corporate profitability. Previously, Pitt used a single-rate method to allocate data processing costs. A per unit cost for data processing was computed and compared to the price of the outside supplier. The price of the outside supplier was lower and thus, the outside bid was accepted. Required: Formulate a possible reason why Pitt's profitability has not shown improvement in terms of the cost allocation method used. Answer: The single-rate cost allocation method groups fixed and variable costs together within each cost pool. The deficiency of this comparison is that the fixed costs included in the cost pool will continue to incur apart from the price paid to the supplier. Therefore, Pitt may be spending more funds in total than if the work was still performed in-house. Diff: 3 Objective: 1 AACSB: Application of knowledge
1070 richard@qwconsultancy.com
37) What is an operating department and how is it different from a support department? Give examples of each. Answer: An operating department, also called a production department, directly adds value to a product or service. Examples are manufacturing departments where products are made. A support department, also called a service department, provides the services that assist other internal departments (operating departments and other support departments) in a company. Examples of support departments are information systems, production control, materials management, and plant maintenance. Diff: 2 Objective: 1 AACSB: Application of knowledge
38) Van Meter Fig Company has substantial fluctuations in its production costs because of the seasonality of figs. Would you recommend an actual or budgeted allocation base? Why? Would you recommend calculating monthly, seasonal, or annual allocation rates? Why? Answer: The company should use a long-term budget amount for the allocation base. Neither an actual amount nor a budgeted monthly amount will provide the company with reliable allocation amounts because of the variability in the supply of figs. With long-term budgeted usage, the user departments will know their allocated costs in advance and should help them in their planning. Diff: 3 Objective: 1 AACSB: Application of knowledge
Objective 16.2 1) When budgeted cost-allocations rates are used: A) user departments are not informed about the charges until the end of the period which makes decision making during the period difficult B) user departments can determine the amount of service to request and if allowed, can determine whether to use an internal or external resource C) user divisions pay for costs that exceed budgeted amounts D) user divisions pay for inefficiencies of the supplier department Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
2) When actual cost-allocations rates are used, which of the following would be true? A) user divisions pay for costs that exceed budgeted amounts B) managers of the supplier division are motivated to improve efficiency C) user divisions are unaware of the allocated amounts until the end of the budget period D) managers know with certainty the rates to be used in that budget period Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
1071 richard@qwconsultancy.com
3) Under the dual-rate cost-allocation method, when fixed costs are allocated based on actual usage then: A) user-division managers are motivated to make accurate long-run usage forecasts B) user-division managers can better plan for the short-run and for the long-run C) the costs of unused capacity are highlighted D) variations in one division's usage affect another division's allocation Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
4) The costs of unused capacity are highlighted when: A) actual usage based allocations are used B) budgeted usage allocations are used C) practical capacity-based allocations are used D) the dual-rate cost-allocation method allocates fixed costs based on actual usage Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
5) To discourage unnecessary use of a support department, management might: A) allocate user department costs based upon support department usage B) allocate support department costs based upon user department usage C) allocate a fixed amount of support department costs to each and every department D) allocate a fixed amount of user department costs to each and every department Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Single-rate and dual rate methods used in allocating service department costs: A) both assign variable costs on the basis of budgeted rates and actual usage B) ignore the causal link between variable cost and usage C) both assign variable costs on the basis of actual rates D) assign variable costs on the basis of budgeted rates and budgeted usage Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
7) Allocating variable costs on the basis of budgeted usage would provide the user departments with no incentive to control their consumption of support services. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
1072 richard@qwconsultancy.com
8) When actual cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency. Answer: FALSE Explanation: When budgeted cost-allocation rates are used, managers of the supplier division are motivated to improve efficiency. Diff: 1 Objective: 2 AACSB: Analytical thinking
9) When budgeted cost-allocation rates are used, variations in actual usage by one division affect the costs allocated to other divisions. Answer: FALSE Explanation: When actual cost-allocations rates are used, variations in actual usage by one division affect the costs allocated to other divisions. Diff: 2 Objective: 2 AACSB: Analytical thinking
10) Because the variable costs are directly and causally linked to usage, charging them as a function of the actual usage is appropriate. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
11) When budgeted fixed costs are allocated based on actual usage, user departments will not know their fixed-cost allocations until the end of the budget period. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
12) The use of actual rates to allocate support department costs to user departments is the most common approach because of its high level of accuracy. Answer: FALSE Explanation: Using actual rates is much less common as it imposes uncertainty on the user departments during the operating cycle as the allocation cannot be done until the end of the period. Allocations made with budgeted rates allow managers to know how their budgets are impacted as operations are being carried out. Diff: 1 Objective: 2 AACSB: Analytical thinking
1073 richard@qwconsultancy.com
13) Foodiez Inn is a fast-food restaurant that sells burgers and hot dogs in a 1980s environment. The fixed operating costs of the company are $10,000 per month. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to either the burgers or the hot dogs. The following information is provided for the operations of the company:
Sales for January Sales for February
Burgers 4,000 6,500
Hot Dogs 2,700 2,800
Required: a. What amount of fixed operating costs is assigned to the burgers and hot dogs when actual sales are used as the allocation base for January? For February? b. Hot dog sales for January and February remained constant. Did the amount of fixed operating costs allocated to hot dogs also remain constant for January and February? Explain why or why not. Comment on any other observations. Answer: a. January sales: Burgers ($10,000 × 4,000) / (4,000 + 2,700) = $5,970 Hot dogs ($10,000 × 2,700) / (4,000 + 2,700) = $4,030 February sales: Burgers ($10,000 × 6,500) / (6,500 + 2,800) = $6,989 Hot dogs ($10,000 × 2,800 / (6,500 + 2,800) = $3,011 b. Even though hot dog sales remained constant for both months, the allocation of fixed operating costs decreased by more than $1,000. The reason is that fixed overhead costs are allocated based on actual sales. The dollar amount is fixed, and since burger sales increased, more of the fixed costs were allocated to the burgers. Another observation is that burger sales increased by more than 50% from January to February, while the fixed operating costs assigned to burgers increased by only 17.34%. Diff: 3 Objective: 2 AACSB: Application of knowledge
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14) Marvelous Motors is a small motor supply outlet that sells motors to companies that make various small motorized appliances. The fixed operating costs of the company are $300,000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75,000) or by using an annual forecast budget to allocate the costs. The following information is provided for the operations of the company: Forecast Sales for First Quarter 5,000 Sales for Second Quarter 8,000 Sales for Third Quarter 8,000 Sales for Fourth Quarter 3,000
Actual 4,850 7,900 8,125 3,125
Required: a. What amount of fixed operating costs are assigned to each motor by quarter when actual sales are used as the allocation base and $75,000 is allocated? b. How much fixed cost is recovered each quarter under requirement a.? c. What amount of fixed operating costs are assigned to each motor by quarter when forecast sales are used as the allocation base and the rate is calculated annually as part of the budgetary process? d. How much fixed cost is recovered each quarter under requirement c.? e. Which method seems more appropriate in this case? Explain. Answer: a. Rate per unit using Actual Sales by Quarter: Q1 $75,000 / 4,850 = $15.46 per motor Q2 $75,000 / 7,900 = $ 9.49 per motor Q3 $75,000 / 8,125 = $ 9.23 per motor Q4 $75,000 / 3,125 = $24.00 per motor b.
$75,000 cost is recovered each quarter => $300,000 cost recovered over the year.
c.
Quarterly Cost Recovery using Annual Forecast of Sales: Forecast Sales for the year = 5,000 + 8,000 + 8,000 + 3,000= 24,000 Rate per motor = $300,000 / 24,000 = $12.50 per motor
d. Quarterly Cost Recovery using Annual Forecast of Sales as the allocation basis: Q1 4,850 × $12.50 = $ 60,625 Q2 7,900 × $12.50 = $ 98,750 Q3 8,125 × $12.50 = $101,563 Q4 3,125 × $12.50 = $ 39,062 => $300,000 cost recovered over the year e.
The budgeted rate based on an annualized forecast of sales is more appropriate to use. The fluctuations in sales was predictable and using actual quantities per quarter to calculate the cost recovery rates would distort the objective of assigning appropriate costs to the units. There would be uncertainty in interpretation of why one quarter has a very high rate per unit and another quarter has a very low rate per unit if the actual quarters fixed costs were spread to the actual units sold each quarter. Diff: 3 Objective: 2 AACSB: Application of knowledge
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15) Jonathan has managed a downtown store in a major metropolitan city for several years. The firm has ten stores in varying locations. In the past, senior management noticed Jonathan's work and he has received very good annual evaluations for his management of the store. This year his store has generated steady growth in sales, but earnings have been deteriorating. After examining the monthly performance report generated by the company budgeting department, he noticed that increasing fixed costs is causing the decrease in earnings. Administrative corporate costs, primarily fixed costs, are allocated to individual stores each month based on actual sales for that month. Two of these stores are currently growing at a rapid pace, while four other stores are having operating difficulties. Required: From the information presented, what do you think is the cause of Jonathan's reported decrease in earnings? How can this be corrected? Answer: The variations in reporting are probably caused by the growth fluctuations of the other branches. When fixed costs are involved in an allocation process based on actual usage, one unit receiving the allocation can have changes even when it doesn't change itself. This is caused by the other stores causing changes in the allocation base, thereby causing everyone to receive different allocation amounts, even those who don't have changes in their base. Because Jonathan's sales have been increasing, his allocation of corporate fixed costs has also increased. To correct the problem, the corporation should change to using budgeted performance as the allocation base and use a denominator level that reflects expected performance over the long run. An allocation base other than sales may also want to be considered. Diff: 3 Objective: 2 AACSB: Application of knowledge
16) Why do organizations use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user departments and divisions? Explain. Answer: The method of using actual rates based on costs realized during the period imposes a level of uncertainty on the user departments. When allocations are made using budgeted rates, managers of departments to which costs are allocated know with certainty the rates to be used in that budgetary period. Users can determine the amount of service to request. Budgeted rates also help motivate the manager of the support department to improve efficiency. The supplier department bears the risk of unfavorable variances and is aware of factors which may be causing negative variances. In cases where the support department's costs are out of control of the support department manager, the uncontrollable factors can be identified and the supplier department can either be relieved of responsibility for those specific factors or there can be a risk sharing agreement negotiated between the support department and the user departments. Diff: 3 Objective: 2 AACSB: Application of knowledge
1076 richard@qwconsultancy.com
17) Describe the conflict of interest that is created when fixed costs are allocated to user departments at a rate $10 per unit that is higher than a variable cost for the same service offered by an outside vendor at $4 per unit. Answer: Since the internal fixed cost allocation seems like a variable cost (allocated on a per unit basis) and the same service can be utilized by outsourcing with a savings of $4 per unit, it would seem that the manager's decision to outsource makes sense however, because the cost allocation is a fixed cost, company-wide savings will not be realized and in fact, the total "service" cost (internal resources + outsourced resources) will be higher. Therefore, the manager's decision to outsource may make his or her budget look b better but the decision to outsource is in conflict with the interest of the company (to maximize income.) Diff: 3 Objective: 2 AACSB: Ethical understanding and reasoning
Objective 16.3 1) Special cost-allocation problems arise when: A) support department costs exceed budgetary estimates B) practical capacity is used as the allocation base C) support departments provide reciprocal services to each other and operating departments D) the same cost-allocation base is used among various support departments Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
2) Which of the following describes reciprocal support? A) the accounting department provides services to production B) molding provides services to production and accounting provides services to both molding and production C) assembling department provides services to three other departments D) the materials management department provides support to all departments including the production control department which also provides services to the materials management department Answer: D Diff: 2 Objective: 3 AACSB: Application of knowledge
3) Which of the following describes the direct allocation method's allocation of support-department costs? A) it allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments B) it allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments C) it allocates each support-department's costs to operating departments only D) it requires managers to rank the support departments after predicting the usage of multiple support departments Answer: C Diff: 1 Objective: 3 AACSB: Analytical thinking
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4) The method that allocates each department's budgeted costs to operating departments only is called: A) direct method B) step-down method C) reciprocal method D) sequential method Answer: A Diff: 1 Objective: 3 AACSB: Analytical thinking
5) Under which allocation method are one-way reciprocal support services recognized? A) direct method B) artificial cost method C) reciprocal method D) step-down method Answer: D Diff: 1 Objective: 3 AACSB: Analytical thinking
6) Which of the following statements is true about the step-down method? A) it partially recognizes the services provided among support departments B) it does not recognize the total services that support departments provide to each other C) it is conceptually the most precise method D) it results in allocating only the support costs used by operating departments Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
7) When using the direct allocation method, a cost accountant would: A) not allocate support department costs to other support departments B) use information about reciprocal services provided among support departments and therefore could generate inaccurate estimates of the cost of operating departments C) allocate complete reciprocated costs D) allocate support department costs to other support departments Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
1078 richard@qwconsultancy.com
8) The reciprocal allocation method: A) is the most widely used because of its simplicity B) requires the ranking of support departments in the order that the allocation is to proceed C) fully incorporates interdepartmental relationships into the support-department cost allocations D) allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
9) Which of the following statements is false with regards to departmental cost allocations? A) amounts allocated to departments will most likely differ depending on the cost allocation method used B) the total amount allocated among departments will differ in total depending on the cost allocation method used C) the reciprocal method is usually the most conceptually precise method because it considers mutual services provided among all support departments D) the step-down and direct methods are simple for managers to compute and understand relative to the reciprocal method Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
10) Managers of supplier departments: A) view the budgeted rates positively if unfavorable cost variances occur due to price decreases outside of their control B) view the budgeted rates negatively if favorable cost variances occur due to price decreases outside of their control C) view the budgeted rates negatively if unfavorable cost variances occur due to price increases outside of their control D) view the budgeted rates negatively if unfavorable cost variances occur due to price decreases outside of their control Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
1079 richard@qwconsultancy.com
11) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $330,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $170,000 are allocated based on the number of employees. The costs of operating departments A and B are $200,000 and $300,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
Budgeted costs Budgeted maintenance-hours Number of employees
Support Departments Maintenance Personnel Department Department $330,000 $170,000 NA 890 75
NA
Production Departments A
B
$200,000 $300,000 1,220 630 220
660
Using the direct method, what amount of Maintenance Department costs will be allocated to Department B? (Do not round any intermediary calculations.) A) $102,162 B) $112,378 C) $75,876 D) $170,270 Answer: B Explanation: B) Maintenance Department costs allocated to Department B = 630 / (630 + 1,220) × $330,000 = $112,378 Diff: 2 Objective: 3 AACSB: Application of knowledge
1080 richard@qwconsultancy.com
12) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $370,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $120,000 are allocated based on the number of employees. The costs of operating departments A and B are $196,000 and $294,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
Budgeted costs Budgeted maintenance-hours Number of employees
Support Departments Maintenance Personnel Department Department $370,000 $120,000 NA 870 90
NA
Production Departments A
B
$196,000 $294,000 1,260 670 280
680
Using the direct method, what amount of Personnel Department costs will be allocated to Department B? (Do not round any intermediary calculations.) A) $32,000 B) $35,000 C) $77,714 D) $85,000 Answer: D Explanation: D) Personnel Department costs allocated to Department B = 680 / (280 + 680) × $120,000 = $85,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
1081 richard@qwconsultancy.com
13) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $320,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $120,000 are allocated based on the number of employees. The costs of operating departments A and B are $176,000 and $264,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
Budgeted costs Budgeted maintenance-hours Number of employees
Support Departments Maintenance Personnel Department Department $320,000 $120,000 NA 900 100
NA
Production Departments A
B
$176,000 $264,000 1,200 690 240
600
Using the step-down method, what amount of Maintenance Department cost will be allocated to Department B if the service department with the highest percentage of interdepartmental support service is allocated first? (Do not round any intermediary calculations.) A) $27,527 B) $79,140 C) $29,677 D) $51,613 Answer: B Explanation: B) Maintenance provides the greatest amount of service to support departments, so it is allocated first. Dept B: 690 / (900 + 1,200 + 690) × $320,000 = $79,140 Diff: 3 Objective: 3 AACSB: Application of knowledge
1082 richard@qwconsultancy.com
14) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $370,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $150,000 are allocated based on the number of employees. The costs of operating departments A and B are $208,000 and $312,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
Budgeted costs Budgeted maintenance-hours Number of employees
Support Departments Maintenance Personnel Department Department $370,000 $150,000 NA 810 50
NA
Production Departments A
B
$208,000 $312,000 1,280 660 200
610
Using the direct method, what amount of Maintenance Department costs will be allocated to Department A? (Do not round any intermediary calculations.) A) $172,218 B) $343,093 C) $137,237 D) $244,124 Answer: D Explanation: D) Maintenance Department costs allocated to Department A = 1,280 / (660 + 1,280) × $370,000 = $244,124 Diff: 2 Objective: 3 AACSB: Application of knowledge
1083 richard@qwconsultancy.com
15) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $330,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $140,000 are allocated based on the number of employees. The costs of operating departments A and B are $188,000 and $282,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
Budgeted costs Budgeted maintenance-hours Number of employees
Support Departments Maintenance Personnel Department Department $330,000 $140,000 NA 850 75
NA
Production Departments A
B
$188,000 $282,000 1,300 650 270
660
Using the direct method, what amount of Personnel Department costs will be allocated to Department A? (Do not round any intermediary calculations.) A) $40,645 B) $37,612 C) $54,581 D) $99,355 Answer: A Explanation: A) Personnel Department costs allocated to Department A = 270 / (270 + 660) × $140,000 = $40,645 Diff: 2 Objective: 3 AACSB: Application of knowledge
1084 richard@qwconsultancy.com
16) Hanung Corp has two service departments, Maintenance and Personnel. Maintenance Department costs of $390,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $110,000 are allocated based on the number of employees. The costs of operating departments A and B are $200,000 and $300,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
Budgeted costs Budgeted maintenance-hours Number of employees
Support Departments Maintenance Personnel Department Department $390,000 $110,000 NA 800 55
NA
Production Departments A
B
$200,000 $300,000 1,290 600 250
620
Using the step-down method, what amount of Maintenance Department cost will be allocated to Department A if the service department with the highest percentage of interdepartmental support service is allocated first? (Do not round any intermediary calculations.) A) $266,190 B) $136,508 C) $52,751 D) $187,026 Answer: D Explanation: D) Maintenance provides the greatest amount of service to support departments, so it is allocated first. Dept A: 1,290 / (800 + 1,290 + 600) × $390,000 = $187,026 Diff: 3 Objective: 3 AACSB: Application of knowledge
1085 richard@qwconsultancy.com
17) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $360,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $100,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $115,000 and $138,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:
Budgeted costs Budgeted warehouse-hours Number of computer hours
Support Departments Warehouse Data Center Department Department $360,000 $100,000 NA 510 250 NA
Production Departments Music
Books
$115,000 $138,000 1,050 1,530 810 1,030
Using the direct method, what amount of Warehouse Department costs will be allocated to Department Books? (Do not round any intermediary calculations.) A) $146,512 B) $213,488 C) $138,000 D) $178,252 Answer: B Explanation: B) Warehouse Department costs allocated to Department Books = 1,530 / (1,050 + 1,530) × $360,000 = $213,488 D) Diff: 2 Objective: 3 AACSB: Application of knowledge
1086 richard@qwconsultancy.com
18) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $380,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $160,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $135,000 and $162,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:
Budgeted costs Budgeted warehouse-hours Number of computer hours
Support Departments Warehouse Data Center Department Department $380,000 $160,000 NA 560 260 NA
Production Departments Music
Books
$135,000 $162,000 1,090 1,600 870 1,040
Using the direct method, what amount of Data Center Department costs will be allocated to Department Music? (Do not round any intermediary calculations.) A) $160,000 B) $72,880 C) $87,120 D) $64,147 Answer: B Explanation: B) Data Center Department costs allocated to Department Music = 870 / (870 + 1,040) × $160,000 = $72,880 Diff: 2 Objective: 3 AACSB: Application of knowledge
1087 richard@qwconsultancy.com
19) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $400,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $200,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $150,000 and $180,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:
Budgeted costs Budgeted warehouse-hours Number of computer hours
Support Departments Warehouse Data Center Department Department $400,000 $200,000 NA 520 220 NA
Production Departments Music
Books
$150,000 $180,000 1,070 1,580 890 1,100
Using the step-down method, what amount of Data Center Department cost will be allocated to the Warehouse Department if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up) A) $65,409 B) $200,000 C) $19,910 D) $0 Answer: D Explanation: D) Warehouse provided to Data Center: 520 / (520 + 1,070 + 1,580) = 0.164 Data Center provided to Warehouse: 220 / (220 + 890 + 1,100) = 0.100 Warehouse provides the greatest amount of service to support departments, so it is allocated first. Therefore, there will be no cost from the Data Center allocated to the Warehouse department. Diff: 3 Objective: 3 AACSB: Application of knowledge
1088 richard@qwconsultancy.com
20) Consider this information: Support Departments Human Information Resources Systems Budgeted costs incurred before any interdependent cost allocations Support work supplied by human resources department (number of full-time equivalent employees) Support work supplied by information systems department. Budgeted processing time (hours)
$80,000
Operating Departments Corporate Sales Consumer Sales
$320,000
$900,000
$480,000
30
60
70
2,000
1,800
400
The ranking of support departments based on percentage of their services provided to other support departments would result in which of the following? A) Support costs should be allocated to consumer sales as it would be ranked number 1 because the full-time equivalent employees dedicated to that function is the largest percentage. B) Support work supplied by IS is ranked at number 1 at 10% C) Support work supplied by human resources department is ranked number 1 at 20% D) Support costs should be allocated to consumer sales as it would be ranked number 1 because the information system hours dedicated to that function is the largest percentage. Answer: C Explanation: C) Support work supplied by human resources department represents 19% and support work supplied by information systems department. 10% Diff: 3 Objective: 3 AACSB: Application of knowledge
1089 richard@qwconsultancy.com
21) Consider this information below while assuming that ranking based on percentage of services rendered to other support departments. Support Departments Operating Departments Human Information Corporate Sales Consumer Sales Resources Systems Budgeted costs incurred before any interdependent cost allocations $80,000 $320,000 $900,000 $480,000 Support work supplied by human resources department (number of full-time equivalent employees) 30 60 70 Support work supplied by information systems department. Budgeted processing time (hours) 400 2,000 1,800 The amount of HR support allocated to IS is about: A) $15,000 B) $30,500 C) $320,000 D) $400,000 Answer: A Explanation: A) Support work supplied by human resources department represents 19% and support work supplied by information systems department. 10%. Therefore, 19% of $80,000 = $15,000. Diff: 3 Objective: 3 AACSB: Application of knowledge
1090 richard@qwconsultancy.com
22) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $310,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $200,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $127,500 and $153,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:
Budgeted costs Budgeted warehouse-hours Number of computer hours
Support Departments Warehouse Data Center Department Department $310,000 $200,000 NA 600 290 NA
Production Departments Music
Books
$127,500 $153,000 1,020 1,510 850 1,040
Using the step-down method, what amount of Warehouse Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Do not round any intermediary calculations.) A) $65,176 B) $101,022 C) $124,980 D) $41,550 Answer: B Explanation: B) Warehouse provided to Data Center: 600 / (600 + 1,020 + 1,510) = 0.192 Data Center provided to Warehouse: 290 / (290 + 850 + 1,040) = 0.133 Warehouse provides the greatest amount of service to support departments, so it is allocated first. Dept Music: 1,020 / (600 + 1,020 + 1,510) × $310,000 = $101,022 Diff: 3 Objective: 3 AACSB: Application of knowledge
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23) Goldfarb's Book and Music Store has two service departments, Warehouse and Data Center. Warehouse Department costs of $400,000 are allocated on the basis of budgeted warehouse-hours. Data Center Department costs of $180,000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $145,000 and $174,000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows:
Budgeted costs Budgeted warehouse-hours Number of computer hours
Support Departments Warehouse Data Center Department Department $400,000 $180,000 NA 540 260 NA
Production Departments Music
Books
$145,000 $174,000 1,010 1,590 860 1,050
Using the step-down method, what amount of Data Center Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round intermediary calculations to three decimal places.) A) $136,775 B) $81,047 C) $111,960 D) $98,953 Answer: C Explanation: C) Warehouse provided to Data Center: 540 / (540 + 1,010 + 1,590) = 0.172 Data Center provided to Warehouse: 260 / (260 + 860 + 1,050) = 0.120 Warehouse provides the greatest amount of service to support departments, so it is allocated first. Data Center gets costs from Warehouse = 0.172 × ($400,000) = $68,800 Data Center total costs are now = $180,000 + $68,800 = $248,800 Allocation of Data Center to Music = (860 / (860 + 1,050)) × $248,800 = $111,960 Diff: 3 Objective: 3 AACSB: Application of knowledge
1092 richard@qwconsultancy.com
24) Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Plant Maintenance PM (Support Dept) Data Processing DP (Support Dept) Machining M (Operating Dept) Capping C (Operating Dept)
$330,000 $80,000 $230,000 $105,000
Services furnished: By Plant Maintenance (budgeted labor-hours): to Data Processing to Machining to Capping By Data Processing (budgeted computer time): to Plant Maintenance to Machining to Capping
3,500 5,000 8,700 1,000 3,900 550
Which of the following linear equations represents the complete reciprocated cost of the Data Processing Department? A) DP = $80,000 + (1,000 / 5,450) PM B) DP = $80,000 + (3,500/ 17,200) PM C) DP = $80,000 × (1,000 / 5,450) + $330,000 × (3,500 / 17,200) D) DP = $330,000 + (1,000 / 17,200) DP Answer: B Diff: 3 Objective: 3 AACSB: Application of knowledge
1093 richard@qwconsultancy.com
25) Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Plant Maintenance PM (Support Dept) Data Processing DP (Support Dept) Machining M (Operating Dept) Capping C (Operating Dept)
$370,000 $85,000 $230,000 $140,000
Services furnished: By Plant Maintenance (budgeted labor-hours): to Data Processing to Machining to Capping By Data Processing (budgeted computer time): to Plant Maintenance to Machining to Capping
3,000 5,000 8,900 800 3,800 750
What is the complete reciprocated cost of the Plant Maintenance Department? (Do not round any intermediary calculations.) A) $397,618 B) $393,146 C) $455,000 D) $395,589 Answer: B Explanation: B) DP = $85,000 + (3,000 / 16,900) PM PM = $370,000 + (800 / 5,350) DP PM = $370,000 + (800 / 5,350) × [$85,000 + (3,000 / 16,900) PM] PM = $370,000 + $12,710 + (0.026,544) PM 0.973,456 PM = $382,710 PM = $393,146 Diff: 3 Objective: 3 AACSB: Application of knowledge
1094 richard@qwconsultancy.com
26) Alfred, owner of Hi-Tech Fiberglass Fabricators, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Plant Maintenance PM (Support Dept) Data Processing DP (Support Dept) Machining M (Operating Dept) Capping C (Operating Dept)
$330,000 $90,000 $200,000 $110,000
Services furnished: By Plant Maintenance (budgeted labor-hours): to Data Processing to Machining to Capping By Data Processing (budgeted computer time): to Plant Maintenance to Machining to Capping
3,300 5,900 8,600 600 3,750 750
What is the complete reciprocated cost of the Data Processing Department? (Do not round any intermediary calculations.) A) $240,000 B) $106,685 C) $130,963 D) $154,551 Answer: D Explanation: D) DP = $90,000 + (3,300 / 17,800) PM PM = $330,000 + (600 / 5,100) DP PM = $330,000 + (600 / 5,100) × [$90,000 + (3,300 / 17,800) PM] PM = $330,000 + $10,588 + (0.021,811) PM 0.978,189 PM = $340,588 PM = $348,182 PM = $348,182 ; DP = $90,000 + (3,300 / 17,800) PM DP = $90,000 + (3,300 / 17,800) $348,182 = $154,551 Diff: 3 Objective: 3 AACSB: Application of knowledge
1095 richard@qwconsultancy.com
27) Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Maintenance M (Support Dept) Personnel P (Support Dept) Weaving W (Weaving Dept) Colorizing C (Colorizing Dept)
$330,000 $200,000 $660,000 $440,000
Services furnished: By Maintenance (budgeted labor-hours): to Personnel to Weaving to Colorizing By Personnel (Number of employees serviced): Plant Maintenance Weaving Colorizing
1,100 7,600 5,000 9 39 25
Which of the following linear equations represents the complete reciprocated cost of the Personnel Department? A) P = $330,000 - $200,000 (1,100 / 13,700) M B) P = (1,100 / 13,700) M C) P = $200,000 + (1,100 / 13,700) M D) P = $200,000 Answer: C Diff: 3 Objective: 3 AACSB: Application of knowledge
1096 richard@qwconsultancy.com
28) Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Maintenance M (Support Dept) Personnel P (Support Dept) Weaving W (Weaving Dept) Colorizing C (Colorizing Dept)
$380,000 $150,000 $610,000 $360,000
Services furnished: By Maintenance (budgeted labor-hours): to Personnel to Weaving to Colorizing By Personnel (Number of employees serviced): Plant Maintenance Weaving Colorizing
2,000 7,500 4,700 6 35 28
What is the complete reciprocated cost of the Maintenance Department? (Do not round any intermediary calculations.) A) $397,916 B) $393,043 C) $380,000 D) $0 Answer: A Explanation: A) P = $150,000 + (2,000 / 14,200) M M = $380,000 + (6 / 69) P M = $380,000 + (6 / 69) × [$150,000 + (2,000 / 14,200) M] M = $380,000 + $13,043 + (0.012,247) M 0.987,753 M = $393,043 M = $397,916 Diff: 3 Objective: 3 AACSB: Application of knowledge
1097 richard@qwconsultancy.com
29) Hugo, owner of Automated Fabric, Inc., is interested in using the reciprocal allocation method. The following data from operations were collected for analysis: Budgeted manufacturing overhead costs: Maintenance M (Support Dept) Personnel P (Support Dept) Weaving W (Weaving Dept) Colorizing C (Colorizing Dept)
$320,000 $190,000 $680,000 $360,000
Services furnished: By Maintenance (budgeted labor-hours): to Personnel to Weaving to Colorizing By Personnel (Number of employees serviced): Plant Maintenance Weaving Colorizing
1,600 7,200 4,700 11 38 28
What is the complete reciprocated cost of the Personnel Department? (Do not round any intermediary calculations.) A) $130,000 B) $231,851 C) $190,000 D) $240,446 Answer: B Explanation: B) P = $190,000 + (1,600 / 13,500) M M = $320,000 + (11 / 77) P M = $320,000 + (11 / 77) × [$190,000 + (1,600 / 13,500) M] M = $320,000 + $27,143 + (0.016,931) M 0.983,069 M = $347,143 M = $353,122 P = $190,000 + (1,600 / 13,500) M P = $190,000 + (1,600 / 13,500) ($353,122) P = $231,851 Diff: 3 Objective: 3 AACSB: Application of knowledge
1098 richard@qwconsultancy.com
30) Which of the following is one of the methods of allocating support department costs to operating departments that partially recognizes mutual service provided among all support departments? A) dual-cost allocation method B) direct method C) sequential allocation method D) single-rate cost allocation method Answer: C Explanation: A) Diff: 1 Objective: 3 AACSB: Analytical thinking
31) One version of the reciprocal method of cost allocation uses a sequence that begins with allocating the costs of the support department that renders the lowest amount of services to support departments and ends with the allocation of costs of the department that renders the highest dollar amount of services to other support departments. Answer: FALSE Explanation: One version of the reciprocal method of cost allocation uses a sequence that begins with allocating the costs of the support department that renders the highest amount of services to support departments and ends with the allocation of costs of the department that renders the lowest dollar amount of services to other support departments. Diff: 1 Objective: 3 AACSB: Application of knowledge
32) The cost-allocation method that allocates each support-department's costs to operating departments only is the direct method. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
33) Two or more support departments whose costs are being allocated can also provide support to each other and as well as to operating departments. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
34) Some companies prefer not to allocate production or plant administration costs to jobs, products or customers because these costs are fixed and independent of the level of activity. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
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35) Both direct and the step-down method can provide relevant information for outsourcing decisions. Answer: FALSE Explanation: Neither direct nor the step-down method can provide relevant information for outsourcing decisions. Diff: 2 Objective: 3 AACSB: Application of knowledge
36) Knowing the complete reciprocated costs of a support department is an important factor when deciding whether or not to outsource services that support services. Answer: TRUE Diff: 2 Objective: 3 AACSB: Application of knowledge
37) Complete reciprocated costs is the support department's own costs plus any interdepartmental cost allocations. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
38) The direct allocation method provides key information for outsourcing decisions regarding support services. Answer: FALSE Explanation: Complete reciprocal costs of a support department provide key information for outsourcing decisions regarding support services. The direct allocation method does not provide this information. Diff: 2 Objective: 3 AACSB: Analytical thinking
39) An alternative way to implement the reciprocal method is to formula and use linear equations. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
40) The direct method is conceptually the most precise method because it considers the mutual services provided among all support departments. Answer: FALSE Explanation: The reciprocal method is conceptually the most precise method because it considers the mutual services provided among all support departments. Diff: 2 Objective: 3 AACSB: Analytical thinking
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41) The step-down method allocates support department costs to only operating departments in a sequential manner. Answer: FALSE Explanation: The step-down method allocates support department costs to other support departments and operating departments in a sequential manner. Diff: 2 Objective: 3 AACSB: Analytical thinking
42) Under the step-down method, once a support department's costs have been allocated, all subsequent support-department costs are allocated back to it. Answer: FALSE Explanation: Under the step-down method, once a support department's costs have been allocated, no subsequent support-department costs are allocated back to it. Diff: 2 Objective: 3 AACSB: Analytical thinking
43) The direct and step-down methods of support department cost allocations are theoretically more precise than the reciprocal method. Answer: FALSE Explanation: The direct and step-down methods have the advantage of simplicity but the reciprocal method is theoretically the most precise. Diff: 2 Objective: 3 AACSB: Analytical thinking
1101 richard@qwconsultancy.com
44) Tryst University offers only high-tech graduate-level programs. Tryst has two principal operating departments, Engineering and Social Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $450,000, while the Enrollment Services budget is $900,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:
Budget F&T Maintenance $450,000 (in hours) Enrollment Service $900,000 (in credit hrs)
Services Provided: (Annually) Social F&T Engineering Sciences Maintenance
Enrollment Service
3,000
6,000
Zero
1,000
25,000
35,000
2,000
Zero
Required: Use the direct method to allocate support costs to each of the two principal operating departments, Engineering and Social Sciences. Prepare a schedule showing the support costs allocated to each department. Answer: Engineering Social Sciences F&T Maintenance $450,000 × 3/9 = $150,000 $450,000 × 6/9 = $300,000 Enrollment Service $900,000 × 25/60 = $375,000 $900,000 × 35/60 = $525,000 Total $525,000 $825,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
1102 richard@qwconsultancy.com
45) Marshall University offers only high-tech graduate-level programs. Marshall has two principal operating departments, Commerce and Social Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $500,000, while the Enrollment Services budget is $900,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:
Budget F&T Maintenance $500,000 (in hours) Enrollment Service $900,000 (in credit hrs)
Services Provided: (Annually) Social F&T Commerce Sciences Maintenance
Enrollment Service
3,000
6,000
Zero
5,000
25,000
35,000
2,000
Zero
Required: Prepare a schedule which allocates service department costs using the step-down method with the sequence of allocation based on the highest-percentage support concept. Compute the total amount of support costs allocated to each of the two principal operating departments, Commerce and Social Sciences. Answer: F&T Maintenance provided to enrollment services = 5,000/14,000 Enrollment services provided to maintenance = 2,000/62,000 F&T Maintenance provides the greatest amount of service to support departments, so it is allocated first. F&T Maintenance $500,000 to Enrollment Services = $500,000 × 5/14 = $178,571 to Commerce = $500,000 × 3/14= $107,143 to Social Sciences = $500,000 × 6/14 = $214,286 Enrollment Service costs of $900,000 + $178,571 = $1,078,571 are allocated to Commerce and Social Sciences to Commerce = $1,078,571 × 25/60 = $449,405 to Social Sciences = $1,078,572 × 35/60 = $629,167 F&T Maintenance $500,000 ($500,000) $0 Totals
Enrollment Service $900,000 $178,571 ($1,078,571) $0
Commerce
Social Sciences
$107,143 $449,405 $556,548
$214,286 $629,167 $843,452
Diff: 3 Objective: 3 AACSB: Application of knowledge
1103 richard@qwconsultancy.com
46) Gotham University offers only high-tech graduate-level programs. Gotham has two principal operating departments, Engineering and Computer Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department:
Budget Engineering $3,500,000 Computer $1,400,000 Sciences F&T Maintenance $350,000 (in hours) Enrollment Service $950,000 (in credit hrs)
Services Provided: (Annually) Computer F&T Engineering Sciences Maintenance
Enrollment Service
2,000
1,000
Zero
5,000
24,000
36,000
2,000
Zero
Required: a. Set up algebraic equations in linear equation form for each activity. b. Determine total costs for each department by solving the equations from part (a) using the reciprocal method. (Engineering= Eng; Computer Sciences = CS; Facility and Technical Maintenance = FTM; Enrollment Service = ES)
1104 richard@qwconsultancy.com
Answer: a. Eng = $1,400,000 + 2/8 (FTM) + 24/62 (ES) CS = $3,500,000 + 1/8 (FTM)+ 36/62 (ES) FTM = $350,000 + 2/62 (ES) ES = $950,000 + 5/8 (FTM) b.
Enrollment Service = $950,000 + 0.625 (FTM) ES = $950,000 + .625 (350,000 + 2/62 ES) ES = $950,000 + $218,750 + .02 ES 0.98 ES = $1,168,750 ES = $1,192,602 FTM = $350,000 + 2/62 ($1,192,602) = $388,471 Engineering = $1,400,000 + 2/8 ($388,471) + 24/62 ($1,192,602) $1,400,000 + 97,118 + 461,652 = $1,958,770 CS = $3,500,000 + 1/8 ($388,471) + 36/62 ($1,192,602) = $3,500,000 + $48,559 + $692,479 = $4,241,038
Diff: 3 Objective: 3 AACSB: Application of knowledge
1105 richard@qwconsultancy.com
47) Craylon Corp has two service departments, S1 and S2, and two production departments, P1 and P2. The data for April were as follows:
Activity S1 S2 P1 P2
Costs $100,000 $80,000 Fixed Costs $400,000 $500,000
Services provided to: S2 P1 P2 20% 40% 50% 10% 55% 25% S1
Required: a. Set up algebraic equations in linear form for each activity. b. Determine total costs for each department by solving the equations from part (a) using the reciprocal method. Answer: a. S1 = $100,000 + 0.10 (S2) S2 = $80,000 + 0.20 (S1) P1 =$400,000 + 0.40 (S1) + 0.55 (S2) P2 = $500,000 + 0.50 (S1) + 0.25 (S2) b.
S1 = $100,000 + 0.10 ($80,000 + 0.20 (S1)) S1 = $100,000 + $8,000 + 0.02 (S1) 0.98 (S1) = $108,000 = $110,204 S2 = $80,000 + (0.20 × $110,204) = 102,041 P1 = $400,000 + (0.40 × $110,204) + (0.55 × $102,041) = $500,205 P2 = 500,000 +(0.50 × $110,204) + (0.25 × $102,041) = $580,612
Diff: 3 Objective: 3 AACSB: Application of knowledge
1106 richard@qwconsultancy.com
48) Describe methods which may be used to allocate support costs within organizations containing multiple support departments. Discuss advantages and disadvantages of the various methods. Answer: Three methods which are used to allocate costs of support departments are; the direct method, the step-down method, and the reciprocal method. The direct method allocates support department costs only to the operating departments. An advantage of this approach is simplicity. A disadvantage of the approach is that it does not take into account the extent to which some support departments use the services of other support departments. The resultant permutation of costs will not be distributed to the operating departments accurately because they will not have recognized the mutual services provided among all support departments. The step-down method allocates support department costs to other support departments in a sequential manner that partially recognizes the mutual services provided among all support departments. The method usually ranks the support departments in order of the highest percentage of its total services to other support departments. This provides more accuracy than the direct method with a minimum added level of complexity in the process. The reciprocal method allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments. The method is complicated in that it either requires an iterative series of allocations or a linear programming solution to determine the final amounts to be allocated between the support departments which use each other's services. It provides the highest level of accuracy but is complex to implement. Diff: 2 Objective: 3 AACSB: Analytical thinking
1107 richard@qwconsultancy.com
Objective 16.4 1) Corny Solutions processes various corn related food items. One of its facilities located in Iowa, performs some initial processing of corn on the cob once it arrives from the corn fields. The corn from that facility will be further processed elsewhere into corn for popping and corn meal. The costs incurred at the Iowa plant would be considered: A) combined costs B) distinct costs C) fixed costs D) common costs Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
2) Which of the following would be the case under the stand-alone method of allocating common costs? A) the individual users of a cost object are ranked in the order of users least responsible for the common cost and then uses this ranking to allocate cost among those users B) disputes can arise over who is the primary user C) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs D) the individual users of a cost object are ranked in the order of users most responsible for the common cost and then uses this ranking to allocate cost among those users Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
3) Under the incremental method of allocating common costs: A) the parties are interested in being viewed as primary users B) each party bears a proportionate share of the total costs in relation to their individual stand-alone costs C) the first-incremental user bears a higher proportion of the cost in comparison with the primary user D) the primary user bears the maximum of the total cost Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
4) Emerald Corp currently uses a manufacturing facility costing $410,000 per year; 93% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 7% of the facility and increase the overall costs of maintaining the space by 5%. If the stand-alone method were used, what amount of cost would be allocated to the start-up business? A) $28,126 B) $28,700 C) $26,691 D) $30,135 Answer: D Explanation: D) Amount allocated = $410,000 × 1.05 × 0.07 = $30,135 Diff: 2 Objective: 4 AACSB: Application of knowledge
1108 richard@qwconsultancy.com
5) Emerald Corp currently uses a manufacturing facility costing $450,000 per year; 89% of the facility's capacity is currently being used. A start-up business has proposed a plan that would utilize the other 11% of the facility and increase the overall costs of maintaining the space by 10%. If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $44,055 B) $45,000 C) $54,450 D) $49,005 Answer: B Explanation: A) B) Amount allocated = $450,000 × 10% = $45,000 Diff: 2 Objective: 4 AACSB: Application of knowledge
6) Harbor Corp currently leases a corporate suite in an office building for a cost of $340,000 a year. Only 88% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 12% of the suite and increase the overall costs of maintaining the space by $25,995. If the stand-alone method were used, what amount of cost would be allocated to the start-up business? (Round the final answer to the nearest dollar.) A) $63,676 B) $40,800 C) $43,919 D) $37,681 Answer: C Explanation: C) Amount allocated = $365,995 × 0.12 = $43,919 Diff: 2 Objective: 4 AACSB: Application of knowledge
7) Harbor Corp currently leases a corporate suite in an office building for a cost of $390,000 a year. Only 85% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 15% of the suite and increase the overall costs of maintaining the space by $23,366. If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $23,366 B) $413,366 C) $62,005 D) $78,361 Answer: A Explanation: A) Amount allocated = $23,366, the increased cost of maintaining the space Diff: 2 Objective: 4 AACSB: Application of knowledge
1109 richard@qwconsultancy.com
8) Annual total travel expenses to visit two clients (A and B) are $110,000. Stand-alone weights for cost allocation were determined to be 50% for A and 50% for B however that was based on initial cost estimates and travel arrangements that were later changed to combine trips and make some savings ($30,000) possible. If management uses the incremental Shapely value method, what would be the cost allocation? A) A = $55,000, B = $55,000 B) A = $40,000, B = $40,000 C) A = $55,000, B = $25,000 D) A = $80,000, B = $30,000 Answer: B Explanation: B) A = ($55,000 stand-alone allocation (primary) + $25,000 stand-alone allocation (secondary)/2 + B = ($55,000 stand-alone (primary) + $25,000 stand-alone (secondary))/2 =$40,000 + $40,000 = $80,000. Diff: 2 Objective: 4 AACSB: Application of knowledge
9) The stand-alone method of allocating determines the weights for cost allocation by considering each user of the cost as a separate entity. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
10) Under the incremental method, the first incremental user receives the largest allocation of the common costs. Answer: FALSE Explanation: The primary user usually receives the largest allocation of the common costs. Diff: 2 Objective: 4 AACSB: Analytical thinking
11) If the incremental users are newly formed companies or subunits, the incremental method may decrease their chances for short-run survival by assigning them a high allocation of the common costs. Answer: FALSE Explanation: If the incremental users are newly formed companies or subunits, such as a new product line or a new sales territory, the incremental method may enhance their chances for short-run survival by assigning them a low allocation of the common costs. Diff: 2 Objective: 4 AACSB: Application of knowledge
12) Allocating common costs can best be achieved by using the stand-alone cost-allocation method. Answer: FALSE Explanation: Allocating common costs is very challenging and can generate disputes. Whenever feasible, the rules for the allocation of common costs should be agreed on in advance. Diff: 1 Objective: 4 AACSB: Analytical thinking
13) The Shapley value method of allocating common costs only considers each party as a primary party
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and ignores incremental parties. Answer: FALSE Explanation: The Shapley value method considers each part as the primary party first and then the incremental party. Diff: 2 Objective: 4 AACSB: Analytical thinking
14) The incremental cost-allocation method ranks the individual users of the cost object in the order of users most responsible for the common cost and uses this ranking to allocate cost among those users. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
15) The stand-alone cost allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users. Answer: FALSE Explanation: The incremental cost-allocation method ranks the individual users of a cost object in order of users most responsible for a common cost and then uses these rankings to allocate the costs among the users. Diff: 1 Objective: 4 AACSB: Analytical thinking
16) The Shapley value method of allocating common costs considers each party as first the primary party and then the incremental party and computes an average allocation. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
1111 richard@qwconsultancy.com
17) The Maintenance Department has been servicing Gizmo Production for four years. Beginning next year, the company is adding a Scrap-Processing Department to recycle the materials from Gizmo Production. As a result, maintenance costs are expected to increase from $460,000 per year to $525,000 per year. The Scrap-Processing Department will use 25% of the maintenance efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year. b. Using the incremental cost-allocation method, identify the amount of maintenance cost that will be allocated to Gizmo Production and the Scrap-Processing Department next year. Answer: a. Gizmo Production = $525,000 × 0.75 = $393,750 Scrap-Processing Department = $525,000 × 0.25 = $131,250 b.
Gizmo Production would receive $460,000. Scrap-Processing Department would receive $65,000, the incremental amount
Diff: 3 Objective: 4 AACSB: Application of knowledge
18) Buildz Corp has been servicing the Production Casting Department for five years. Beginning next year, the company is adding a Production Molding Department to compliment the materials produced by the Production Casting Department. As a result, data center costs are expected to increase from $800,000 per year to $1,000,000 per year. The Production Molding Department will use 20% of the data center efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year. b. Using the incremental cost-allocation method, identify the amount of data center cost that will be allocated to Production Casting and the Production Molding Department next year. Answer: a. Production Casting Department = $1,000,000 × 0.80 = $800,000 Production Molding = $1,000,000 × 0.20 = $200,000 b.
Production Casting Department would receive $800,000. Production Molding Department would receive $200,000, the incremental amount.
Diff: 2 Objective: 4 AACSB: Application of knowledge
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19) What is a "common cost"? What are two methods that a manager can use to allocate common costs to two or more users? Answer: A common cost is a cost of operating a facility, activity, or like cost object that is shared by two or more users. Common costs arise because each user obtains a lower cost by sharing than the separate cost that would result if each user operated independently. Two ways to allocate common costs would be the stand-alone method and the incremental method. The stand-alone method uses information pertaining to each user of the cost object to determine the cost allocation weights. The incremental method ranks individual users of the cost object and allocates common costs first to the primary user, and then to the other incremental users. Diff: 2 Objective: 4 AACSB: Analytical thinking
Objective 16.5 1) Which of the following would be an explicit agreement of reimbursement on a contract? A) contractor will produce a bill at the end of the contract without having disclose costs B) contractor will seek payment for contract without having to submit a bid or disclose a mark-up C) contractor agrees with customer before the project begins, on a set price D) Contractor will bill the customer based on what the contractor perceives to be the going rate Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
2) Contract disputes regarding cost allocation can be reduced by defining which of the following? A) the material items allowed for production B) the terms used, such as what constitutes direct labor C) permissible tax deductions D) minimum profit level the company should earn Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
3) Cost-plus contracts negotiated with suppliers of the government usually involves: A) a price that allows the contractor to break-even B) a price that covers the contract's cost plus other noncash benefits C) the supplier's cost to perform the contact (provide the product or service) plus a fee D) a price that covers the contractor's direct costs plus an amount to cover overhead costs Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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4) Which of the following is an example of an allowable cost considered by U.S. government contract? A) supervision costs B) costs of lobbying activities C) costs of alcoholic beverages D) costs of vacation for executives Answer: A Diff: 1 Objective: 5 AACSB: Application of knowledge
5) In certain high-cost defense contracts involving new weapons and equipment, contracts are rarely subject to competitive bidding because: A) the government taxes the defense companies at a higher level than that of other public sector companies B) there is an implicit agreement among defense contractors to "share contracts" C) all defense contractors have essentially the same cost structure D) no contractor is willing to assume all the risk of receiving a fixed price for the contract Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Contracts with the U.S. Government must comply with the accounting standards of the: A) IRS B) CASB C) FASB D) SEC Answer: B Diff: 1 Objective: 5 AACSB: Application of knowledge
7) Cost Accounting Standards Board has exclusive authority to: A) make and implement cost accounting standards and interpretations B) approve all government contracts between private parties and the federal government C) specify that contractors doing business with the government are paid a set price D) require that a government contract be paid based on an analysis of actual contract cost date Answer: A Diff: 1 Objective: 5 AACSB: Application of knowledge
8) All contracts with U.S. government agencies must comply with the cost accounting standards issued by the SEC. Answer: FALSE Explanation: All contracts with U.S. government agencies must comply with the cost accounting standards issued by the Cost Accounting Standards Board (CASB). Diff: 1 Objective: 5 AACSB: Analytical thinking
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9) The FASB (Financial Accounting Standards Board) provides cost accounting guidance (standards) for U.S. government contractors who do business with the federal government. Answer: FALSE Explanation: The CASB (Cost Accounting Standards Board) provides the cost accounting standards for contracts between private contractors and the federal government. Diff: 1 Objective: 5 AACSB: Analytical thinking
10) In costs-plus-fixed-fee contracts the allocation of a specific cost may be difficult to defend on the basis of any cause-and-effect reasoning. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
11) If the government wants to contract a very large scale project with significant uncertainty about what the final cost will be; often a cost-plus contract is awarded to attract qualified contractors who may otherwise not be willing to accept the risks inherent in a guaranteed bid price. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
12) The issue of "allowable costs" is applicable in government cost-plus contracts. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
13) An allowable cost is a cost that the contract parties agree to include in the costs to be reimbursed in a government contract. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
14) John Peters is drafting the provisions of a cost-plus contract and is concerned with ironing out any possible misunderstandings during the life of the contract. What advice can you provide to reduce contract disputes over reimbursement amounts based on costs? Answer: Disputes can be reduced by making the cost-allocation rules as explicit as possible and in writing. These rules should include details such as the allowable cost items, the acceptable cost-allocation bases, and how differences between budgeted and actual costs are to be accounted for. Diff: 2 Objective: 5 AACSB: Analytical thinking
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15) There is uncertainty in defense contracts about the final cost to produce a new weapon or equipment. Explain. Answer: Such contracts are rarely subject to competitive bidding because no contractor is willing to assume all the risk of receiving a fixed price for the contract and subsequently incurring high costs to fulfill it. To address this issue, a government typically assumes a major share of the risk of the potentially high costs of completing the contract. Rather than relying on selling prices as ordinarily set by suppliers in the marketplace, the government negotiates contracts on the basis of costs plus a fixed fee. Diff: 2 Objective: 5 AACSB: Analytical thinking
Objective 16.6 1) Revenue allocation is used when: A) revenues cannot be estimated but can be traced to specific cost objects B) revenues are related to a particular revenue object but cannot be traced to it in an economically feasible way C) revenues are not related to a particular object but can be traced to that object in an economically feasible way D) revenue optimization is the goal Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
2) Which of the following is an example of a revenue object? A) suppliers B) products C) labor D) duration to complete a given task Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
3) Which of the following is an example of a bundled product? A) a checking account B) A complete mechanics tool kit C) an accounting textbook with an access code to a homework/study system D) Microsoft Excel Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
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4) Which of the following is NOT one of the methods used to allocate the revenues of a bundled product? A) direct revenue method B) stand-alone selling prices method C) stand-alone physical units method D) incremental revenue method Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
5) Which of the following best describes the stand-alone revenue-allocation method? A) uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual products B) ranks individual products in a bundle according to criteria determined by management C) ranks individual products in a bundle according to costs allocated to the products D) survey customers about the importance of each of the individual products in their purchase decision Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
6) The best method to determining weights for the stand-alone revenue-allocation method is: A) selling prices revenue-allocation method because the weights explicitly consider the prices customers are willing to pay for the individual products B) unit cost revenue-allocation method because it can be used on all occasions C) the direct revenue-allocation method since selling prices or unit costs are difficult to calculate for individual products D) physical-units revenue-allocation method because the physical units explicitly value the prices customers are willing to pay for the individual products Answer: A Diff: 3 Objective: 6 AACSB: Analytical thinking
7) Which of the following methods ranks individual products in a bundle for revenue allocation? A) stand-alone revenue-allocation method B) incremental revenue-allocation method C) unit-cost weighting method D) physical-unit weighting method Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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8) If management wants to choose a method of revenue allocation that best captures the "benefits received" by customers then they would use ________ to allocate revenue to products in a bundle. A) stand-alone revenue -allocation based on unit costs B) stand-alone revenue-allocation based on selling prices C) stand-alone revenue-allocation based on physical units D) stand-alone revenue-allocation based on unit costs Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
9) To give more weight to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using: A) selling prices B) unit costs C) physical units D) stand-alone product revenues Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
10) Craylon Corp sells two products X and Y. X sells for $250 and Y sells for $145. Both X and Y sell for $345 as a bundle. What is the revenue allocated to product Y, if product X is termed as the primary product in the bundle? A) $95 B) $105 C) $73 D) $173 Answer: A Explanation: A) Revenue allocated to Y = $345 - $250 = $95 Diff: 2 Objective: 6 AACSB: Application of knowledge
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11) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows: Stand-Alone Selling Price
Cost
Reading Fun
$23
$3.90
Math Fun Analysis
$36 $52
$4.20 $5.35
Package 1. Reading Fun & Math Fun 2. Reading Fun & Analysis 3. All three
Packaged Price $49 $61 $87
Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? (Do not round any intermediary calculations.) A) $19.10 B) $29.90 C) $26.00 D) $23.00 Answer: A Explanation: A) [$23 / ($23 + $36)] × $49 = $19.10 Diff: 2 Objective: 6 AACSB: Application of knowledge
12) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows: Stand-Alone Selling Price
Cost
Reading Fun
$24
$3.60
Math Fun Analysis
$32 $50
$4.05 $5.00
Package 1. Reading Fun & Math Fun 2. Reading Fun & Analysis 3. All three
Packaged Price $46 $60 $82
Using the incremental method for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? Assume Reading Fun is the primary product, followed by Math Fun, and then Analysis. (Do not round any intermediary calculations.) A) $19.71 B) $26.29 C) $22.00 D) $24.00 Answer: D Explanation: D) $24.00 since Reading Fun is the primary product. Diff: 2 Objective: 6 AACSB: Application of knowledge
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13) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows: Stand-Alone Selling Price
Cost
Reading Fun
$20
$3.85
Math Fun Analysis
$34 $52
$4.25 $5.10
Package 1. Reading Fun & Math Fun 2. Reading Fun & Analysis 3. All three
Packaged Price $44 $58 $82
Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Math Fun in the package that contains all three products? (Do not round any intermediary calculations.) A) $17.40 B) $34.00 C) $26.30 D) $32.42 Answer: C Explanation: C) [$34 / ($20 + $34 + $52)] × $82 = $26.30 Diff: 2 Objective: 6 AACSB: Application of knowledge
1120 richard@qwconsultancy.com
14) Buzz's Educational Software Outlet sells two or more of the video games as a single package. Managers are keenly interested in individual product-profitability figures. Information pertaining to three bundled products and the stand-alone prices is as follows: Stand-Alone Selling Price
Cost
Reading Fun
$22
$3.80
Math Fun Analysis
$33 $52
$4.00 $5.15
Package 1. Reading Fun & Math Fun 2. Reading Fun & Analysis 3. All three
Packaged Price $45 $60 $83
Using the incremental method, what amount of revenue will be allocated to Math Fun in the package that contains all three products? Assume Reading Fun is the primary product, followed by Math Fun, and then Analysis. (Do not round any intermediary calculations.) A) $17.47 B) $33.00 C) $25.60 D) $32.22 Answer: B Explanation: B) $83 - $22 primary product = $61 revenues remaining to be allocated to other products; $33 since there are revenues remaining to cover the selling price of Reading Fun, the first incremental product. Diff: 2 Objective: 6 AACSB: Application of knowledge
15) Electro Corp sells a refrigerator and a freezer as a single package for $1,050. Other data are in the chart below.
Selling price Manufacturing cost per unit Stand-alone product revenues
Refrigerator $850 $670 $1,280,000
Full-size Freezer Packaged Price $400 $1,050 $210 $860,000
Using the stand-alone method with selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator? (Do not round any intermediary calculations.) A) $525.00 B) $336.00 C) $714.00 D) $850.00 Answer: C Explanation: C) Amount allocated to Refrigerator = $850 / ($850 + $400) × $1,050 = $714.00 Diff: 2 Objective: 6 AACSB: Application of knowledge
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16) Electro Corp sells a refrigerator and a freezer as a single package for $1,020. Other data are in the chart below.
Selling price Manufacturing cost per unit Stand-alone product revenues
Refrigerator $810 $660 $1,300,000
Full-size Freezer Packaged Price $410 $1,020 $290 $870,000
Using the stand-alone method with stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the refrigerator? (Do not round any intermediary calculations.) A) $485.25 B) $611.06 C) $408.94 D) $510.00 Answer: B Explanation: B) Amount allocated to Refrigerator = $1,300,000 / ($1,300,000 + $870,000) × $1,020 = $611.06 Diff: 2 Objective: 6 AACSB: Application of knowledge
17) Electro Corp sells a refrigerator and a freezer as a single package for $1,140. Other data are in the chart below.
Selling price Manufacturing cost per unit Stand-alone product revenues
Refrigerator $900 $600 $1,350,000
Full-size Freezer Packaged Price $440 $1,140 $220 $910,000
Using the stand-alone method with manufacturing cost per unit as the weight for revenue allocation, what amount will be allocated to the refrigerator? (Do not round any intermediary calculations.) A) $305.85 B) $570.00 C) $658.54 D) $834.15 Answer: D Explanation: D) Amount allocated to Refrigerator = $600 / ($600 + $220) × $1,140 = $834.15 Diff: 2 Objective: 6 AACSB: Application of knowledge
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18) Electro Corp sells a refrigerator and a freezer as a single package for $1,000. Other data are in the chart below.
Selling price Manufacturing cost per unit Stand-alone product revenues
Refrigerator $900 $650 $1,230,000
Full-size Freezer Packaged Price $490 $1,190 $270 $920,000
Using the stand-alone method with physical units as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $595 B) $250 C) $650 D) $900 Answer: A Explanation: A) Amount allocated to Refrigerator = (1/2) × $1,190 = $595 Diff: 2 Objective: 6 AACSB: Application of knowledge
19) A company sells a software suite that includes a word processor and spreadsheet applications. The suite sells for $290 and the items are also available separately for $175 (spreadsheet) and $145 (word processor). The spreadsheet app is by far the best seller of the standalone product sales. Using the incremental-revenue allocation method and assuming that the spreadsheet is the primary product, how much of the $290 revenue from the bundled product sale would be allocated to the spreadsheet and to the word processing products? A) $175 of revenue for the spreadsheet and $115 for the word processor B) $175 of revenue for the spreadsheet and $0 for the word processor C) $160 of revenue for the spreadsheet and $130 for the word processor D) $290 of revenue for the spreadsheet and $0 for the word processor Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
20) The Shapley value method: A) is used only for common cost allocations and is not applied to revenue allocations B) uses the average standalone revenue of each product in a bundle to allocate revenue among the products C) helps mitigate the problem of each product manager claiming that their product is the primary one in the bundle D) treats all products in the bundle as first-incremental products only Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
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21) Revenue allocation is required to determine the profitability of individual items within a bundled product. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
22) The stand-alone method uses the product in the bundle with the most sale and then uses this ranking to allocate bundled revenues to individual products. Answer: FALSE Explanation: The incremental-revenue allocation method uses the product in the bundle with the most sale and then uses this ranking to allocate bundled revenues to individual products. Diff: 2 Objective: 6 AACSB: Analytical thinking
23) Revenue allocation based on the number of physical units is only appropriate when individual products in the bundle are of equal value. Answer: FALSE Explanation: The value of the products do not need to be of equal value. After the revenue allocation is calculated, the revenue allocation will then be equal for each product in the bundle. Diff: 2 Objective: 6 AACSB: Analytical thinking
24) The selling prices method under stand-alone revenue-allocation method is best because the weights explicitly consider the prices customers are willing to pay for the individual products. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
25) When allocating the revenues between a bundled product offering, management judgement can be used in issuing revenue-allocation weights. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
26) The rankings of products for the purposes of allocating revenues can be based on stand-alone unit sales or managerial intuition. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
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27) The price of a bundled product is typically more than the sum of the prices of the individual products sold separately. Answer: FALSE Explanation: The price of a bundled product is typically less than the sum of the prices of the individual products sold separately. Diff: 2 Objective: 6 AACSB: Analytical thinking
28) Give examples of bundled products for each of the following industries: a. Resort hotel b. Bank c. Restaurant d. Computer store e. Super markets f. Personal care products manufacturer Answer: a. Hotel room plus meals, free drinks, use of athletic facilities, morning newspaper b. Checking account, safe deposit box, wire transfers, certified checks, travelers checks c. Fixed-price meal includes a beverage, appetizer, entree, and dessert d. Computer, keyboard, monitor, printer, software, 1-year contract for the repair and maintenance of the computer e. Vegetables, fruits, electronic goods etc. f. Shaving gel, razors, and after shave cream Diff: 2 Objective: 6 AACSB: Application of knowledge
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29) Max's Movie Store encounters revenue-allocation decisions with its bundled product sales. Here, two or more of the movie videos are sold as a single package. Managers at Max's are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:
New Releases Older Releases Classics
Stand-Alone Selling Price, $15 $10 $8
Cost
Package
Packaged Price
$2.00 $1.50 $1.25
New & Older New & Classics All three
$20 $17 $25
Required: a. With selling prices as the weights, allocate the $25 packaged price of "All Three" to the three videos using the stand-alone revenue-allocation method. b. Allocate the $25 packaged price of "All Three" to the three types of videos using the incremental revenue-allocation method. Assume New Releases is the primary product, followed by Older Releases, and then Classics. Answer: a. New $15 + Older $10 + Classics $8 = $33.00 New $15 / $33 × $25 Old $10 / $33 × $25 Classics $8 / $33 × $25 Total
= $11.36 = $ 7.58 = $ 6.06 $25.00
b. Product
Revenue Allocated
New Releases Older Releases Classics Total revenue allocated
$15 $10 $0 $25
Revenue Remaining To Be Allocated $25 -15 = $10 $25 - $15 - $10 = $0 none
Diff: 3 Objective: 6 AACSB: Application of knowledge
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30) Software For You encounters revenue-allocation decisions with its bundled product sales. Here, two or more units of the software are sold as a single package. Managers at Software For You are keenly interested in individual product-profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:
Word Processing (WP) Spreadsheet (SS) Accounting Software (AS)
Stand-Alone Selling Price,
Cost
Package
Packaged Price
$125
$18
WP & SS
$220
$150
$20
WP & AS
$280
$225
$25
All three
$380
Required: a. Using the stand-alone revenue-allocation method, allocate the $380 packaged price of "All Three" to the three software products 1. with selling prices as the weights. 2. with individual product costs as the weights. 3. based on physical units. b. Allocate the $380 packaged price of "All Three" to the three software products using the incremental revenue-allocation method. Assume Word Processing is the primary product, followed by Spreadsheet, and then Accounting Software.
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Answer: a1. WP $125 + SS $150 + AS $225 = $500 WP $125 / $500 × $380 SS $150 / $500 × $380 AS $225 / $500 × $380 Total
= $ 95 = $114 = $171 $380
a2. WP $18 + SS $20 + AS $25 = $63 WP $18 / $63 × $380 SS $20 / $63 × $380 AS $25 / $63 × $380 Total
= $108.57 = $120.64 = $150.79 $380.00
a3. 1 / (1 + 1 + 1) × $380 = $126.67 per software package b. Product
Revenue Allocated
WP SS AS Total revenue allocated
$125 $150 $105 $380
Revenue Remaining To Be Allocated $380 -125 = $255 $380 - $125 - $150 = $105 none
Diff: 3 Objective: 6 AACSB: Application of knowledge
31) Describe and discuss the two methods of allocating revenues of a bundled package to the individual products in that package. Describe any special problems associated with the method. Answer: Method 1. The stand-alone revenue-allocation method allocates bundled revenues using product-specific information on the bundle of products as the weights to allocate the bundled revenues to the individual products. When allocating bundled revenues, the proportion of revenues is allocated on four alternative bases: (1) individual product unit selling prices, (2) individual product unit costs, (3) physical units, or (4) stand-alone product revenues. It is preferable to allocate common revenues based on unit revenues, since this best reflects customers' willingness to pay for the different products. However, if the products are never sold separately, unit-selling prices are unavailable, so revenues are allocated based on unit costs (which should be available in the firm's accounting records), or simply by the number of physical units that comprise the bundle. Method 2. The incremental revenue-allocation method ranks the individual products in the bundled product according to criteria determined by management. This ranking is then used to allocate the bundled revenues to individual products. One problem is how to determine the ranking. Individual product managers want to ranked first so that as much of the revenue as possible is allocated to their product. This can result in disputes between managers. Diff: 2 Objective: 6 AACSB: Analytical thinking
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32) Explain three approaches to determining weights for the stand-alone revenue-allocation. Which method do managers prefer? Answer: Three approaches to determining weights for the stand-alone revenue-allocation are (1) the selling prices method (2) unit costs method, and (3) physical-units method. The selling prices method is best because the weights explicitly consider the prices customers are willing to pay for the individual products. Weighting approaches that use revenue information better capture "benefits received" by customers than unit costs or physical units. The physical-units revenue-allocation method is used when managers cannot use any of the other methods (such as when selling prices are unstable or unit costs are difficult to calculate for individual products). Diff: 3 Objective: 6 AACSB: Application of knowledge
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 17 Cost Allocation: Joint Products and Byproducts Objective 17.1 1) What is the name of a cost of production process that yields multiple products simultaneously? A) byproduct B) joint C) main D) separable Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
2) When a joint production process yields two products with high total sales values relative to the total sales values of other products, those products are called: A) byproducts B) joint products C) split off products D) bundled products Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Which of the following statements best define split off point in joint costing? A) It is the point at which managers decide to discontinue one or more of the products. B) It is the point at which the managers decide to outsource some of its production processes. C) It is the juncture in a joint production process when two or more products become separately identifiable. D) It is the juncture at which decisions determining joint costs of various products to be produced are taken. Answer: C Diff: 2
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Objective: 1 AACSB: Analytical thinking
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4) Which of the following statements is true of joint production process and its components? A) Distribution costs incurred beyond the split-off point assignable to each of the specific products identified at the split-off point are considered as joint costs. B) Decisions relating to the sale or further processing of each identifiable product can be made independently of decisions about the other products beyond the split-off point. C) When a joint production process yields two or more products with low total sales values relative to the total sales values of other products, those products are called joint products. D) The primary purpose of joint costing is to allocate the separable costs to the individual products that are eventually sold. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
5) The challenge of a production facility that is producing several products from one main process is how to allocate the joint costs that are incurred: A) before the split-off point B) after the split-off point C) at the split-off point D) at the end of production Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
6) Which of the following statements is true of joint costing? A) The costs of a production process that yields multiple products simultaneously are called joint costs. B) Distribution costs incurred beyond the split-off point that are assignable to each of the specific products identified at the split-off point are considered as joint costs. C) The primary purpose of joint costing is to allocate the separable costs to the individual products that are eventually sold. D) Joint costing is less useful for companies which manufacture multiple products simultaneously from the same production process. Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
7) When a single manufacturing process yields two products, one of which has a relatively high sales value compared to the other, the two products are respectively known as: A) joint products and byproducts B) joint products and scrap C) main products and byproducts D) main products and joint products Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
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8) Which of the following statements best define joint products? A) When one product has a high total sales value compared with the total sales value of other products of the process, that product is called a joint product. B) Product of a joint production process that have the same sales value compared with the total sales value of the byproducts is called a joint product. C) When one product has a low total sales value compared with the total sales value of other products of the process, that product is called a joint product. D) When a joint production process yields two or more products with high total sales values relative to the total sales values of other products, those products are called joint products. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
9) A company produces three products from a joint production process:: A, B, and C. As a percentage of total sales value, a represents 50%, B 49.5%, and C .5%. Product C could be considered a: A) primary product B) main product C) byproduct D) waste product Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
10) Which of the following factors would guide you in classifying a product as a main product or byproduct? A) number of units per processing period B) weight or volume of outputs per period C) percentage of total sales value D) joint costs incurred up to the split-off point Answer: C Diff: 2 Objective: 1 AACSB: Application of knowledge
11) In joint costing, which of the following changes may lead to a change in product classification? A) main product sales price increases due to a new application B) byproduct sales price decreases due to a new government regulation C) main product becomes technologically obsolete and its market value falls significantly D) byproduct losses value due to a competing products Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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12) Timber logs are processed into standard lumber used in home construction and wood chips that will be sold to landscapers. How would these products be classified? A) primary products B) main products C) joint products D) a primary product and a byproduct Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
13) Which of the following statements is true of main products and byproducts? A) A byproduct will never become a main product. B) A main product will never become a byproduct. C) Product classifications may change over time. D) Product classifications remains constant over time. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
14) Outputs with a negative sales value because of disposal costs have which of the following impact on costs? A) added to cost of goods sold B) added to joint production costs and allocated to joint or main products C) added to joint production costs and allocated to byproducts and scrap D) subtracted from product revenue Answer: B Diff: 3 Objective: 1 AACSB: Analytical thinking
15) Joint costs are incurred beyond the split-off point and are assignable to individual products. Answer: FALSE Explanation: Joint costs are incurred prior to the split-off point. Diff: 1 Objective: 1 AACSB: Analytical thinking
16) Joint costing allocates the joint costs to the individual products that are eventually sold. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
17) Separable costs include manufacturing costs only. Answer: FALSE Explanation: Separable costs include manufacturing, marketing, distribution, and other costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
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18) Separable costs can include manufacturing, marketing, distribution, and other costs incurred beyond the split off point. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
19) Outputs of a joint production process cannot reduce revenue. Answer: FALSE Explanation: Some outputs of a joint production process have "negative" revenue when their disposal costs (such as the costs of handling nonsalable toxic substances that require special disposal procedures) are considered. These disposal costs should be added to the joint production costs that are allocated to joint or main products. Diff: 2 Objective: 1 AACSB: Analytical thinking
20) Joint costs are the costs of processing that are incurred after the split-off point. Answer: FALSE Explanation: Joint costs are the costs that are incurred prior to reaching the split-off point. Diff: 1 Objective: 1 AACSB: Analytical thinking
21) Joint costs are the costs of a production process that yields multiple products simultaneously. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
22) The juncture in a joint production process when two products become separable is the byproduct point. Answer: FALSE Explanation: The juncture in a joint production process when two products become separable is the split-off point. Diff: 1 Objective: 1 AACSB: Analytical thinking
23) Before the split-off point, decisions relating to the sale or further processing of each identifiable product cannot be made independently of decisions about the other products. Answer: TRUE Diff: 2 Objective: 1 AACSB: Application of knowledge
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24) When a joint production process yields one product with a high total sales value compared to the total sales value of the other products of the process, that product is called a joint product. Answer: FALSE Explanation: That product would be called a main product. Diff: 1 Objective: 1 AACSB: Analytical thinking
25) All products yielded from joint product processing have some positive value to the firm. Answer: FALSE Explanation: Not all products yielded from joint product processing have some positive value to the firm. Diff: 1 Objective: 1 AACSB: Analytical thinking
26) If the value of a byproduct drops significantly, its cost could also be viewed as a joint product cost. Answer: FALSE Explanation: If the value of a byproduct drops significantly, it will remain as a byproduct only. Diff: 2 Objective: 1 AACSB: Application of knowledge
27) In each of the following industries, identify possible joint (or severable) products at the split-off point. a. Coal b. Petroleum c. Dairy d. Lamb e. Lumber f. Cocoa Beans g. Christmas Trees h. Salt i. Cowhide Answer: a. Coke, Gas, Benzole, Tar, Ammonia b. Crude Oil, Gas, Raw LPG c. Milk, Butter, Cheese, Ice Cream, Skim Milk d. Lamb Cuts, Tripe, Hides, Bones, Fat e. Board, Newsprint, Shavings, Chips, etc. f. Cocoa Butter, Cocoa Powder, Cocoa Shells g. Christmas Trees, Wreaths, Decorations h. Hydrogen, Chlorine, Caustic Soda i. Leather, Suede, Chew Toys Diff: 3 Objective: 1 AACSB: Analytical thinking
1135 richard@qwconsultancy.com
28) Define the terms main product, joint product, and byproduct. Give at least one example of each type of product. Answer: Main product - When one product has a high total sales value compared with the total sales value of other products of the process. Ex. timber processed into lumber Joint product - When a joint production process yields two or more products with high total sales value compared with the total sales value of other products. Ex. crude oil processed into gasoline and kerosene Byproduct - Products of a joint production process that have low total sales value compared with the total sales value of the main product or joint products. Ex. wood chips created when timber processed into lumber Diff: 2 Objective: 1 AACSB: Analytical thinking
29) Silver Company uses one raw material, silver ore, for all of its products. It spends considerable time getting the silver from the ore before it starts the actual processing of the finished products, rings, lockets, etc. Traditionally, the company made one product at a time and charged the product with all costs of production, from ore to final inspection. However, in recent months, the cost accounting reports have been somewhat disturbing to management. It seems that some of the finished products are costing more than they should, even to the point of approaching their retail value. It has been noted by the accounting manager that this problem began when the company started buying ore from different parts of the world, some of which require difficult extraction methods. Required: Can you explain how the company might change its accounting system to reflect the reporting problems better? Are there other problems with the purchasing area? Answer: It appears that the company needs to start assigning all extraction costs to a joint-cost category. It is unfair that the finished products receive a high cost simply because a certain batch of ore was very expensive to run through the extraction process when the next finished products were produced from silver that was easy to extract. If all extraction costs are considered joint, then each finished product would share in the average cost of extraction, rather than being charged with the cost of a specific batch. This should result in costs that are more reflective of the product's actual cost. Additional problems may be with the purchasing department. The accounting department may help highlight the problem but it does not pinpoint the actual problem. Maybe the company should buy refined silver or else hire experts in the minerals area as part of the purchasing team. Diff: 2 Objective: 1 AACSB: Application of knowledge
1136 richard@qwconsultancy.com
30) What are joint costs, separable costs, and a split-off point? Answer: Joint costs are the costs of a single production process that yield multiple products simultaneously. Separable costs are all costs incurred beyond the split-off point that are assignable to each of the specific products identified at the split-off point. The split-off point is the juncture in a joint production process when the products become separately identifiable. An example is the point at which coal becomes coke, natural gas, and other products. Diff: 2 Objective: 1 AACSB: Analytical thinking
31) Discuss in brief how easy it is for companies to classify products as main products, joint products, and byproducts. Answer: Distinctions among main products, joint products, and byproducts are not so clear cut in practice. Companies use different thresholds for determining whether the relative sales value of a product is high enough for it to be considered a joint product. Moreover, the classification of products can change over time, especially for products whose selling prices change frequently. Diff: 2 Objective: 1 AACSB: Analytical thinking
32) Explain the difference between a joint product and a byproduct. Can a byproduct ever become a joint product? Also, can a joint product ever become a byproduct? Answer: The differentiating factor between a joint product and a byproduct is the sales value at the split-off point. Joint products have high total sales value at the split-off point. A byproduct has a low total sales value at the split-off point. Products can change from byproducts to joint products when their total sales values increase significantly. Also, products can change from joint products to by products when their total sales values decrease significantly. Diff: 2 Objective: 1 AACSB: Analytical thinking
1137 richard@qwconsultancy.com
Objective 17.2 1) Which of the following would NOT be a GAAP or managerial accounting reason for allocating joint costs? A) to calculate cost of goods sold B) to analyze the profitability of various products C) for reimbursement of costs under a federal contract D) to avoid generating "negative" revenue when disposal costs are considered Answer: D Diff: 2 Objective: 2 AACSB: Application of knowledge
2) Which of the following would explain why a company might need to follow very stringent rules that specify the way in which joint costs are assigned to products? A) to satisfy a federal contract reimbursement stipulations B) so that cost of goods sold is accurate for income tax purposes C) to satisfy FASB D) to increase market share Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
3) One of the reasons to allocate joint costs to individual products is to have costs reimbursed under a federal cost = plus contract. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
4) Allocating joint costs to individual products can be helpful for litigation settlement purposes in which the costs of joint products or services are key inputs. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
1138 richard@qwconsultancy.com
5) List three reasons why we allocate joint costs to individual products or services. Give an example of when the particular cost allocation reason would come into use. Answer: a. For inventory costing, and cost of goods sold computations for financial accounting purposes. Example: Cost of goods sold and ending inventory valuation is necessary for reports to shareholders and for the inland revenue service. b.
For internal costing and cost of goods sold computations for internal reporting purposes. Example: These computations are necessary for division profitability analysis.
c.
Reimbursement under contracts. Example: A firm produces multiple products or services-and uses the same resources and facilities to produce the products or services. But not all the firm's products are under the contract. The firm must allocate the cost of these shared facilities or resources to reflect the portion used by the product under the contract. d. Insurance settlement computations. Example: Where a business with multiple products or services claim losses under an insurance policy and wants to calculate the loss. The insurance company and the insured must agree on the value of the loss. e. Rate regulation. When companies are subject to rate regulation, the allocation of joint costs can be a significant factor in determining the regulated rates. Example: Crude oil and natural gas are produced out of a common well. Diff: 2 Objective: 2 AACSB: Analytical thinking
6) What are the reasons for allocating joint costs to individual products or services? Answer: The joint costs should be allocated to individual products or services to compute inventoriable costs and the cost of goods sold for external reporting purposes. Absorption costing is required for income tax reporting which necessitates the allocation of joint manufacturing or processing costs to products. The costs should be allocated to also allow for computing cost of goods sold and inventoriable costs for internal reporting purposes of computing division profits and to evaluate the performance of division managers. The costs will be reimbursed under contracts using a cost plus system, often found in government contracts which calls for allocation of joint costs. Another reason for the cost allocation is to allow for proper valuation and settlement in insurance claims for damages. Also, where joint products are regulated, proper costing is essential. Allocating joint costs can support litigation where the joint product is a key input. Diff: 2 Objective: 2 AACSB: Analytical thinking
1139 richard@qwconsultancy.com
7) Other than for the purposes of external reporting, why would joint costs need to be allocated to individual products or services? Answer: Joint costs are allocated to individual products for a number of reasons other than for external reporting purposes. For example, determination of inventoriable costs and cost of goods sold is done for internal reporting purposes such as division profitability analysis. Cost reimbursement is another reason to allocate joint costs. When a company has cost-reimbursement contracts as with a government agency, joint cost principles would be used to prepare a cost analysis as stipulated in the government contract for pricing purposes such as cost plus a fixed fee. Insurance-settlement computations for damage claims made on the basis of cost information of jointly produced products is also sometimes required and in the case of lawsuits costs of joint products might be key inputs into a case/discovery activities for litigation. Diff: 2 Objective: 2 AACSB: Analytical thinking
8) Briefly explain why joint cost allocations methods may not be acceptable for decision making purposes. Answer: Joint-cost allocation should not be used for decision-making or performance-evaluation purposes, as the allocations lack any cause-and-effect relationship. Diff: 2 Objective: 2 AACSB: Analytical thinking
Objective 17.3 1) Which of the following statements is true of the methods for allocating joint costs? A) Constant gross-margin percentage method results in same joint production cost per unit for all products. B) Estimated net realizable value method results in same gross margin percentage for all products. C) Present value allocation method is the least preferred method due to its complex calculations. D) Sales value at split-off method uses the sales value of the entire production of the accounting period to allocate costs. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
2) The sales price at the point of sale, reduced by the cost to complete after split-off is equal to: A) total estimated product costs B) joint costs C) sales price less a normal profit margin at point of sale D) net realizable value at split-off Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
1140 richard@qwconsultancy.com
3) An example of allocating joint costs using physical measures is allocating joint costs based on the: A) sales value at split-off point B) volume of the products produced C) constant gross-margin percentage D) net realizable value Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
4) Which of the following is a market-based approach to allocating joint costs? A) sales units B) units of production C) physical measures D) net realizable value Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
5) How does the sales value at split-off method allocate joint costs? A) allocates joint costs to joint products on the basis of the relative total sales value at the split-off point B) allocates joint costs to joint products on the basis of a comparable physical measure at the split-off point C) allocates joint costs to joint products on the basis of relative NRV D) allocates joint costs to joint products in a way that each product has an identical gross-margin percentage Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
6) Which of the following statements is true of the methods for allocating joint costs? A) The net realizable value method uses the sales value of the units sold during the accounting period to allocate joint costs. B) The sales value at split-off method always results in the same gross-margin percentage for all products. C) The sales value at split-off method allocates joint costs to each product in proportion to the sales value of total production. D) The net realizable value method results in the same joint production cost per unit for all products. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
1141 richard@qwconsultancy.com
7) How does the physical-measure method allocate joint costs? A) allocates joint costs to joint products in a way that each product has an identical gross-margin percentage B) allocates joint costs to joint products on the basis of a comparable physical measure at the split-off point C) allocates joint costs to joint products on the basis of the relative sales value at the split-off point D) allocates joint costs to joint products on the basis of relative NRV Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
8) How does the net realizable value method allocate joint costs? A) allocates joint costs to joint products on the basis of a comparable physical measure at the split-off point B) allocates joint costs to joint products on the basis of the relative sales value at the split-off point C) allocates joint costs to joint products in a way that each product has an identical gross-margin percentage D) allocates joint costs to joint products on the basis of relative NRV Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
9) Which of the following formulas would calculate the net realizable value of a product? A) sales value at the split-off point less cost to produce up to the split-off point B) sales value × constant gross-margin C) final sales value minus cost of goods sold D) final sales value minus separable costs Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
10) Which of the following best describes how the constant gross-margin percentage NRV method allocates joint costs? A) a gross margin is calculated and for each product and then the gross margin is deducted along with separable costs from the final sales value of a product to derive the joint cost allocation for a product B) an overall gross margin is calculated and for each product and then the gross margin is deducted along with separable costs from the final sales value of all the products produced in the joint processing and the allocations are then made based on physical volume measures C) an overall gross margin is calculated and for each product the gross margin is deducted along with separable costs from the final sales value of a product to derive the joint cost allocation for the product D) a gross margin is calculated and for each product and then gross margin is deducted along from the final sales value of a product to derive the joint cost allocation for a product. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
1142 richard@qwconsultancy.com
11) Bismite Corporation purchases trees from Cheney lumber and processes them up to the split-off point where two products (paper and pencil casings) are obtained. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of October: Trees processed: Production: Sales:
280 trees paper pencil casings paper pencil casings
160,000 sheets 160,000 147,000 at $0.10 per page 158,500 at $0.13 per casing
The cost of purchasing 280 trees and processing them up to the split-off point to yield 160,000 sheets of paper and 160,000 pencil casings is $13,000. Bismite's accounting department reported no beginning inventory. What is the total sales value at the split-off point for paper? A) $20,605 B) $14,700 C) $16,000 D) $20,800 Answer: C Explanation: C) Sales value of paper = 160,000 sheets × $0.10 = $16,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
1143 richard@qwconsultancy.com
12) Bismite Corporation purchases trees from Cheney lumber and processes them up to the split-off point where two products (paper and pencil casings) emerge from the process. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of October: Trees processed: Production: Sales:
300 trees paper pencil casings paper pencil casings
200,000 sheets 200,000 195,000 at $0.10 per page 195,500 at $0.16 per casing
The cost of purchasing 300 trees and processing them up to the split-off point to yield 200,000 sheets of paper and 200,000 pencil casings is $12,500. Bismite's accounting department reported no beginning inventory. What is the total sales value at the split-off point of the pencil casings? A) $20,000 B) $32,000 C) $31,280 D) $19,500 Answer: B Explanation: B) Sales value of pencils = 200,000 casings × $0.16 = $32,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
1144 richard@qwconsultancy.com
13) Bismite Corporation purchases trees from Cheney lumber and processes them up to the split-off point where two products (paper and pencil casings) emerge from the process. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of October: Trees processed: Production: Sales:
320 trees paper pencil casings paper pencil casings
180,000 sheets 180,000 169,000 at $0.10 per page 177,500 at $0.13 per casing
The cost of purchasing 320 trees and processing them up to the split-off point to yield 180,000 sheets of paper and 180,000 pencil casings is $13,000. Bismite's accounting department reported no beginning inventory. What are the paper's and the pencil's approximate weighted cost proportions using the sales value at split-off method, respectively? A) 50.00% and 50.00% B) 42.28% and 57.72% C) 48.77% and 51.23% D) 43.48% and 56.52% Answer: D Explanation: D) Paper: 180,000 sheets × $0.10 = $18,000 Pencils: 180,000 casings × $0.13 = $23,400 Weighted cost proportions - Paper: $18,000 / ($18,000 + $23,400) = 43.48% Weighted cost proportions - Pencil: $23,400 / ($18,000 + $23,400) = 56.52% Diff: 3 Objective: 3 AACSB: Application of knowledge
1145 richard@qwconsultancy.com
14) Bismite Corporation purchases trees from Cheney lumber and processes them up to the split-off point where two products (paper and pencil casings) emerge from the process. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of October: Trees processed: Production: Sales:
310 trees paper pencil casings paper pencil casings
200,000 sheets 200,000 193,000 at $0.10 per page 197,000 at $0.14 per casing
The cost of purchasing 310 trees and processing them up to the split-off point to yield 200,000 sheets of paper and 200,000 pencil casings is $13,500. Bismite's accounting department reported no beginning inventory. If the sales value at split-off method is used, what are the approximate joint costs assigned to ending inventory for paper? (Round intermediary percentages to the nearest hundredth.) A) $196.89 B) $84.38 C) $275.61 D) $204.03 Answer: A Explanation: A) Paper: 200,000 sheets × $0.10 = $20,000 Pencils: 200,000 casings × $0.14 = $28,000 Weighted cost proportions - Paper: $20,000 / ($20,000 + $28,000) = 41.67% Ending inventory = 200,000 - 193,000 = 7,000 sheets Joint costs assigned to ending inventory for paper = 41.67% × $13,500 × (7,000 / 200,000) = $196.89 Diff: 3 Objective: 3 AACSB: Application of knowledge
1146 richard@qwconsultancy.com
15) Bismite Corporation purchases trees from Cheney lumber and processes them up to the split-off point where two products (paper and pencil casings) emerge from the process. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of October: Trees processed: Production: Sales:
320 trees paper pencil casings paper pencil casings
200,000 sheets 200,000 187,000 at $0.10 per page 196,500 at $0.13 per casing
The cost of purchasing 320 trees and processing them up to the split-off point to yield 200,000 sheets of paper and 200,000 pencil casings is $15,500. Bismite's accounting department reported no beginning inventory. If the sales value at split-off method is used, what is the approximate production cost for each pencil casing? (Round intermediary percentages to the nearest hundredth.) A) $0.036 B) $0.047 C) $0.034 D) $0.044 Answer: D Explanation: D) Paper: 200,000 sheets × $0.10 = $20,000 Pencils: 200,000 casings × $0.13 = $26,000 Production cost for each pencil casing = [($26,000 / ($20,000 + $26,000) × $15,500)] / 200,000 = $0.044 Diff: 3 Objective: 3 AACSB: Application of knowledge
1147 richard@qwconsultancy.com
16) Bismite Corporation purchases trees from Cheney lumber and processes them up to the split-off point where two products (paper and pencil casings) emerge. The products are then sold to an independent company that markets and distributes them to retail outlets. The following information was collected for the month of October: Trees processed: Production: Sales:
280 trees paper pencil casings paper pencil casings
190,000 sheets 190,000 177,000 at $0.20 per page 188,000 at $0.26 per casing
The cost of purchasing 280 trees and processing them up to the split-off point to yield 190,000 sheets of paper and 190,000 pencil casings is $14,500. Bismite's accounting department reported no beginning inventory. If the sales value at split-off method is used, what is the approximate production cost for each paper sheet? (Round intermediary percentages to the nearest hundredth.) A) $0.036 B) $0.046 C) $0.033 D) $0.043 Answer: C Explanation: C) Paper: 190,000 sheets × $$0.20 = $38,000 Pencils: 190,000 casings × $0.26 = $49,400 Production cost of each paper sheet = [($38,000 / ($38,000 + $49,400) × $14,500)] / 190,000 = $0.033,2 (round to $0.033) Diff: 3 Objective: 3 AACSB: Application of knowledge
1148 richard@qwconsultancy.com
17) The Berkel Corporation manufactures Widgets, Gizmos, and Turnbols from a joint process. June production is 9,000 widgets; 12,500 gizmos; and 14,500 turnbols. Respective per unit selling prices at split-off are $100, $60, and $20. Joint costs up to the split-off point are $190,000. If joint costs are allocated based upon the sales value at split-off, what amount of joint costs will be allocated to the widgets? (Do not round any intermediary calculations.) A) $18,608 B) $88,144 C) $28,402 D) $73,454 Answer: B Explanation: B) Widgets: $100 × 9,000 = $900,000 Gizmos: $60 × 12,500 = $750,000 Turnbols: $20 × 14,500 = $290,000 Total = $1,940,000 Joint costs allocated to the Widgets = $900,000 / $1,940,000 × $190,000 = $88,144 Diff: 3 Objective: 3 AACSB: Application of knowledge
18) The Berkel Corporation manufactures Widgets, Gizmos, and Turnbols from a joint process. June production is 7,000 widgets; 10,000 gizmos; and 11,500 turnbols. Respective per unit selling prices at split-off are $115, $85, and $50. Joint costs up to the split-off point are $188,000. What amount of joint costs will be allocated to the Turnbols? (Do not round any intermediary calculations.) A) $48,475 B) $15,849 C) $71,659 D) $67,865 Answer: A Explanation: A) Widgets: $115 × 7,000 = $805,000 Gizmos: $85 × 10,000= $850,000 Turnbols: $50 × 11,500 = $575,000 Total = $2,230,000 Joint costs allocated to the Turnbols = $575,000 / $2,230,000 × $188,000 = $48,475 Diff: 3 Objective: 3 AACSB: Application of knowledge
1149 richard@qwconsultancy.com
19) The Berkel Corporation manufactures Widgets, Gizmos, and Turnbols from a joint process. June production is 7,000 widgets; 10,500 gizmos; and 12,500 turnbols. Respective per unit selling prices at split-off are $95, $65, and $30. Joint costs up to the split-off point are $188,000. What amount of joint costs will be allocated to the Gizmos? (Do not round any intermediary calculations.) A) $40,929 B) $20,519 C) $74,491 D) $72,581 Answer: C Explanation: C) Widgets: $95 × 7,000 = $665,000 Gizmos: $65 × 10,500 = $682,500 Turnbols: $30 × 12,500 = $375,000 Total = $1,722,500 Joint costs allocated to the Gizmos = $682,500 / $1,722,500 × $188,000 = $74,491 Diff: 3 Objective: 3 AACSB: Application of knowledge
20) Which of the following reasons explain why a physical-measure to allocate joint costs is less preferred than the sales value at split-off point? A) a physical measure such as volume is difficult to estimate than sales value B) physical volume usually has little relationship to the revenue producing power of products C) a physical measure usually results in less costs being allocated to the product that weighs the most D) customers will easily understand that the products are overpriced Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
1150 richard@qwconsultancy.com
21) The Alfarm Corporation processes raw milk up to the split-off point where two products, cream and liquid skim, are produced and sold. There was no beginning inventory. The following material was collected for the month of February: Direct materials processed: Production: Sales:
Cream Liquid skim Cream Liquid skim
820,000 gallons (797,500 gallons of good product) 443,500 gallons 354,000 gallons 424,500 at $1.90 per gallon 345,000 at $1.80 per gallon
The cost of purchasing 820,000 gallons of direct materials and processing it up to the split-off point to yield a total of 797,500 gallons of good product was $1,060,000. What are the physical-volume proportions to allocate joint costs for cream and liquid skim, respectively? A) 54.09% and 45.91% B) 55.61% and 44.39% C) 50.00% and 50.00% D) 53.23% and 46.77% Answer: B Explanation: B) Cream: 443,500 / 797,500 = 55.61% Liquid skim: 354,000 / 797,500 = 44.39% Diff: 3 Objective: 3 AACSB: Application of knowledge
1151 richard@qwconsultancy.com
22) The Alfarm Corporation processes raw milk up to the split-off point where two products, cream and liquid skim, are produced and sold. There was no beginning inventory. The following material was collected for the month of February: Direct materials processed: Production: Sales:
Cream Liquid skim Cream Liquid skim
850,000 gallons (828,500 gallons of good product) 443,000 gallons 385,500 gallons 425,000 at $2.00 per gallon 375,500 at $1.80 per gallon
The cost of purchasing 850,000 gallons of direct materials and processing it up to the split-off point to yield a total of 828,500 gallons of good product was $1,190,000. When using a physical-volume measure, what is the approximate amount of joint costs that will be allocated to cream and liquid skim? (Round intermediary percentages to the nearest hundredth.) A) $636,293 and $553,707 B) $595,000 and $595,000 C) $631,793 and $558,207 D) $620,200 and $569,800 Answer: A Explanation: A) Cream: 443,000 / 828,500 = 53.47% Liquid skim: 385,500 / 828,500 = 46.53% Joint costs allocated to Cream = $1,190,000 × 53.47% = $636,293 Joint costs allocated to Liquid skim = $1,190,000 × 46.53% = $553,707 Diff: 3 Objective: 3 AACSB: Application of knowledge
1152 richard@qwconsultancy.com
23) The Alfarm Corporation processes raw milk up to the split-off point where two products, cream and liquid skim, are produced and sold. There was no beginning inventory. The following material was collected for the month of February: Direct materials processed: Production: Sales:
Cream Liquid skim Cream Liquid skim
810,000 gallons (787,500 gallons of good product) 443,500 gallons 344,000 gallons 425,500 at $1.80 per gallon 332,000 at $1.65 per gallon
The cost of purchasing 810,000 gallons of direct materials and processing it up to the split-off point to yield a total of 787,500 gallons of good product was $1,010,000. When using the physical-volume method, what is Cream's approximate production cost per gallon? (Round intermediary percentages to the nearest hundredth.) A) $1.14 B) $1.25 C) $1.28 D) $1.34 Answer: C Explanation: C) Cream: 443,500 / 787,500 = 56.32% Joint costs allocated to Cream = $1,010,000 × 56.32% = $568,832 Production cost per gallon for Cream = $568,832 / 443,500 = $1.28 Diff: 3 Objective: 3 AACSB: Application of knowledge
1153 richard@qwconsultancy.com
24) The Alfarm Corporation processes raw milk up to the split-off point where two products, cream and liquid skim, are produced and sold. There was no beginning inventory. The following material was collected for the month of February: Direct materials processed: Production: Sales:
Cream Liquid skim Cream Liquid skim
840,000 gallons (817,500 gallons of good product) 442,500 gallons 375,000 gallons 424,500 at $2.50 per gallon 366,000 at $2.30 per gallon
The cost of purchasing 840,000 gallons of direct materials and processing it up to the split-off point to yield a total of 817,500 gallons of good product was $1,020,000. Which of the following statements about Alfarm's joint production costs is true? A) The gross-margin percentage per gallon of Cream and Liquid skim are equal because joint costs are allocated based on the number of gallons. B) The gross-margin percentage per gallon of Cream is higher than gross margin percentage per gallon of Liquid skim because of Cream's higher production volume. C) The joint production cost per gallon of Cream and Liquid skim are equal because joint costs are allocated based on the number of gallons. D) The joint production cost per gallon of Cream is higher than joint production cost per gallon of Liquid skim because of Cream's higher production volume. Answer: C Diff: 3 Objective: 3 AACSB: Application of knowledge
1154 richard@qwconsultancy.com
25) Netzone Company is in semiconductor industry and fabrication of silicon-wafer chips splits off two types of memory chips, Standard and Premium. The following information was collected for last quarter of the calendar year: Direct materials processed: Production: Sales:
Standard Premium Standard Premium
200 kgs (Both standard and premium chips weigh 20 grams each) 10,000 chips 6,600 chips 9,500 at $190 per chip 6,100 at $260 per chip
The cost of purchasing 200 kgs of direct materials and processing it up to the split-off point to yield a total of 16,600 chips of good products was $2,050,000. Beginning inventories totaled 100 chips for Standard and 80 chips for Premium. Ending inventory amounts reflected 100 chips of Standard and 80 chips of Premium. October costs per unit were the same as November. What are the physical-volume proportions for products Standard and Premium, respectively? A) 60.90% and 39.10% B) 64.10% and 35.90% C) 60.24% and 39.76% D) 50.00% and 50.00% Answer: C Explanation: C) Standard: 10,000 / (10,000 + 6,600) = 60.24% Premium: 6,600 / (10,000 + 6,600) = 39.76% Diff: 3 Objective: 3 AACSB: Application of knowledge
1155 richard@qwconsultancy.com
26) Netzone Company is in semiconductor industry and fabrication of silicon-wafer chips splits off two types of memory chips, Standard and Premium. The following information was collected for last quarter of the calendar year: Direct materials processed: Production: Sales:
Standard Premium Standard Premium
400 kgs (Both standard and premium chips weigh 10 grams each) 16,000 chips 6,700 chips 15,500 at $170 per chip 6,200 at $250 per chip
The cost of purchasing 400 kgs of direct materials and processing it up to the split-off point to yield a total of 22,700 chips of good products was $2,010,000. Beginning inventories totaled 120 chips for Standard and 80 chips for Premium. Ending inventory amounts reflected 120 chips of Standard and 80 chips of Premium. October costs per unit were the same as November. When using a physical-volume measure, what is the approximate amount of joint costs that will be allocated Standard chips? (Round intermediary percentages to the nearest hundredth.) A) $1,482,028 B) $1,435,714 C) $1,005,000 D) $1,416,648 Answer: D Explanation: D) Standard: 16,000 / (16,000 + 6,700) = 70.48% Joint costs allocated to Standard chips = $2,010,000 × 70.48% = $1,416,648 Diff: 3 Objective: 3 AACSB: Application of knowledge
1156 richard@qwconsultancy.com
27) Netzone Company is in semiconductor industry and fabrication of silicon-wafer chips splits off two types of memory chips, Standard and Premium. The following information was collected for last quarter of the calendar year: Direct materials processed: Production: Sales:
Standard Premium Standard Premium
200 kgs (Both standard and premium chips weigh 20 grams each) 19,000 chips 7,100 chips 18,400 at $110 per chip 6,800 at $190 per chip
The cost of purchasing 200 kgs of direct materials and processing it up to the split-off point to yield a total of 26,100 chips of good products was $1,950,000. Beginning inventories totaled 140 chips for Standard and 60 chips for Premium. Ending inventory amounts reflected 140 chips of Standard and 60 chips of Premium. October costs per unit were the same as November. When using a physical-volume measure, what is the approximate amount of joint costs that will be allocated Premium chips? (Round intermediary percentages to the nearest hundredth.) A) $530,400 B) $526,190 C) $975,000 D) $479,762 Answer: A Explanation: A) Premium: 7,100 / (19,000 + 7,100) = 27.20% Joint costs allocated to Premium chips = $1,950,000 × 27.20% = $530,400 Diff: 3 Objective: 3 AACSB: Application of knowledge
1157 richard@qwconsultancy.com
28) The Green Company processes unprocessed goat milk up to the split-off point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October: Direct materials processed: Production: Sales:
Condensed goat milk Skim goat milk Condensed goat milk Skim goat milk
103,000 gallons (after shrinkage) 46,000 gallons 57,000 gallons $4.50 per gallon $3.75 per gallon
The costs of purchasing the of unprocessed goat milk and processing it up to the split-off point to yield a total of 103,000 gallons of saleable product was $188,480. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 45,500 gallons (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $5 per usable gallon. Xyla can be sold for $21 per gallon. Skim goat milk can be processed further to yield 55,700 gallons of skim goat milk ice cream, for an additional processing cost per usable gallon of $5. The product can be sold for $10 per gallon. There are no beginning and ending inventory balances. What is the estimated net realizable value of Xyla at the split-off point? A) $278,500 B) $285,000 C) $728,000 D) $736,000 Answer: C Explanation: C) Xyla Sales 45,500 × $21 = $955,500 Less: cost 45,500 × $5 = $227,500 Est. NR Value $728,000 Diff: 3 Objective: 3 AACSB: Application of knowledge
1158 richard@qwconsultancy.com
29) The Green Company processes unprocessed goat milk up to the split-off point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October: Direct materials processed: Production: Sales:
Condensed goat milk Skim goat milk Condensed goat milk Skim goat milk
101,000 gallons (after shrinkage) 44,000 gallons 57,000 gallons $3.50 per gallon $2.50 per gallon
The costs of purchasing the of unprocessed goat milk and processing it up to the split-off point to yield a total of 101,000 gallons of saleable product was $185,480. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 43,500 gallons (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $5 per usable gallon. Xyla can be sold for $21 per gallon. Skim goat milk can be processed further to yield 55,700 gallons of skim goat milk ice cream, for an additional processing cost per usable gallon of $5. The product can be sold for $10 per gallon. There are no beginning and ending inventory balances. What is the estimated net realizable value of the skim goat milk ice cream at the split-off point? A) $278,500 B) $285,000 C) $696,000 D) $704,000 Answer: A Explanation: A) Ice Cream Sales 55,700 × $10 = $557,000 Less: cost 55,700 × $5 = $278,500 Est. NR Value $278,500 Diff: 3 Objective: 3 AACSB: Application of knowledge
1159 richard@qwconsultancy.com
30) The Green Company processes unprocessed goat milk up to the split-off point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October: Direct materials processed: Production: Sales:
99,500 gallons (after shrinkage) 43,500 gallons 56,000 gallons $4.75 per gallon $4.00 per gallon
Condensed goat milk Skim goat milk Condensed goat milk Skim goat milk
The costs of purchasing the of unprocessed goat milk and processing it up to the split-off point to yield a total of 99,500 gallons of saleable product was $184,480. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 43,000 gallons (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $7 per usable gallon. Xyla can be sold for $25 per gallon. Skim goat milk can be processed further to yield 54,700 gallons of skim goat milk ice cream, for an additional processing cost per usable gallon of $7. The product can be sold for $13 per gallon. There are no beginning and ending inventory balances. Using estimated net realizable value, what amount of the joint costs would be allocated Xyla and the skim goat milk ice cream? (Round intermediary percentage calculations to the nearest hundredth.) A) $774,000 and $328,200 B) $129,542 and $54,938 C) $92,240 and $92,240 D) $88,518 and $95,962 Answer: B Explanation: B) Xyla Ice Cream Sales 43,000 × $25 = $1,075,000 54,700 × $13 = $711,100 Less: cost 43,000 × $7 = $301,000 54,700 × $7 = $382,900 Est. NR Value $774,000 $328,200 Weighting 70.22% 29.78% Joint costs $184,480 × 70.22% = $184,480 × 29.78%= allocated $129,542 $54,938 Diff: 3 Objective: 3 AACSB: Application of knowledge
1160 richard@qwconsultancy.com
31) The Green Company processes unprocessed goat milk up to the split-off point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October: Direct materials processed: Production: Sales:
Condensed goat milk Skim goat milk Condensed goat milk Skim goat milk
102,500 gallons (after shrinkage) 45,000 gallons 57,500 gallons $3.50 per gallon $3.00 per gallon
The costs of purchasing the of unprocessed goat milk and processing it up to the split-off point to yield a total of 102,500 gallons of saleable product was $190,480. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 44,500 gallons (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $6 per usable gallon. Xyla can be sold for $20 per gallon. Skim goat milk can be processed further to yield 56,200 gallons of skim goat milk ice cream, for an additional processing cost per usable gallon of $6. The product can be sold for $11 per gallon. There are no beginning and ending inventory balances. Using the sales value at split-off method, what is the gross-margin percentage for condensed goat milk at the split-off point? (Round intermediary percentages to the nearest hundredth.) A) 47.73% B) 50.00% C) 42.28% D) 52.27% Answer: C Explanation: C) Condensed Goat Milk Skim Goat Milk Revenues 45,000 × $3.50 = $157,500 57,500 × $3.00 = $172,500 $157,500 / $330,000 = $172,500 / $330,000= Percentage 0.477,3 0.522,7 Joint costs
$190,480 × .0.477,3 = $90,911
$190,480 × .0.522,7 = $99,569
$66,589
$72,931
$66,589 / $157,500 = 0.422,8
$72,931 / $172,500 = 0.422,8
Gross margin GM percentage
Diff: 3 Objective: 3 AACSB: Application of knowledge
1161 richard@qwconsultancy.com
32) The Green Company processes unprocessed goat milk up to the split-off point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October: Direct materials processed: Production: Sales:
Condensed goat milk Skim goat milk Condensed goat milk Skim goat milk
100,000 gallons (after shrinkage) 43,500 gallons 56,500 gallons $4.00 per gallon $3.00 per gallon
The costs of purchasing the of unprocessed goat milk and processing it up to the split-off point to yield a total of 100,000 gallons of saleable product was $187,480. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 43,000 gallons (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $7 per usable gallon. Xyla can be sold for $21 per gallon. Skim goat milk can be processed further to yield 55,200 gallons of skim goat milk ice cream, for an additional processing cost per usable gallon of $7. The product can be sold for $15 per gallon. There are no beginning and ending inventory balances. Using the sales value at split-off method, what is the gross-margin percentage for skim goat milk at the split-off point? (Round intermediary percentages to the nearest hundredth.) A) 50.66% B) 50.00% C) 45.42% D) 49.34% Answer: C Explanation: C) Skim goat milk sales = $169,500 (56,500 × $3.00). Total sales $343,500. $169,500/$343,500 × $187,480 = $92,512. Gross-margin percentage = ($169,500 - $92,512)/$169,500 = 0.454,2 = 45.42% Diff: 3 Objective: 3 AACSB: Application of knowledge
1162 richard@qwconsultancy.com
33) The Green Company processes unprocessed goat milk up to the split-off point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October: Direct materials processed: Production: Sales:
Condensed goat milk Skim goat milk Condensed goat milk Skim goat milk
102,500 gallons (after shrinkage) 45,000 gallons 57,500 gallons $3.50 per gallon $3.00 per gallon
The costs of purchasing the of unprocessed goat milk and processing it up to the split-off point to yield a total of 102,500 gallons of saleable product was $184,480. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 44,500 gallons (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $5 per usable gallon. Xyla can be sold for $19 per gallon. Skim goat milk can be processed further to yield 56,200 gallons of skim goat milk ice cream, for an additional processing cost per usable gallon of $5. The product can be sold for $13 per gallon. There are no beginning and ending inventory balances. How much (if any) extra income would Green earn if it produced and sold all of the Xyla from the condensed goat milk? Allocate joint processing costs based upon relative sales value on the split-off. (Extra income means income in excess of what Green would have earned from selling condensed goat milk. Do not round intermediary percentages.) A) $534,953 B) $277,100 C) $465,500 D) $353,167
1163 richard@qwconsultancy.com
Answer: C Explanation: C) Condensed Goat Milk Skim Goat Milk Revenues 45,000 × $3.50 = $157,500 57,500 × $3.00 = $172,500 $157,500 / $330,000 = $172,500 / $330,000= Percentage 0.477,3 0.522,7 Joint costs Gross margin
$184,480 × .0.477,3 = $88,047
$184,480 × .0.522,7 = $96,433
$69,453
$76,067
GM percentage $69,453 / $157,500 = 0.441 $76,067 / $172,500 = 0.441 Xyla Revenue 44,500 × $19 = $845,500 Joint cost (88,047) Process costs ($5 × $44,500) = (222,500) Revenue (net) 534,953 Gross margin (69,453) Difference $465,500
Ice Cream 56,200 × $13 = $730,600 (96,433) ($5 × 56,200) = (281,000) 353,167 (76,067) $277,100
Diff: 3 Objective: 3 AACSB: Application of knowledge
1164 richard@qwconsultancy.com
34) The Green Company processes unprocessed goat milk up to the split-off point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October: Direct materials processed: Production: Sales:
Condensed goat milk Skim goat milk Condensed goat milk Skim goat milk
101,500 gallons (after shrinkage) 43,000 gallons 58,500 gallons $4.50 per gallon $3.50 per gallon
The costs of purchasing the of unprocessed goat milk and processing it up to the split-off point to yield a total of 101,500 gallons of saleable product was $184,480. There were no inventory balances of either product. Condensed goat milk may be processed further to yield 42,500 gallons (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $4 per usable gallon. Xyla can be sold for $20 per gallon. Skim goat milk can be processed further to yield 57,200 gallons of skim goat milk ice cream, for an additional processing cost per usable gallon of $4. The product can be sold for $10 per gallon. There are no beginning and ending inventory balances. How much (if any) extra income would Green earn if it produced and sold skim milk ice cream from goats rather than skim goat milk? Allocate joint processing costs based upon the relative sales value at the split-off point. Do not round intermediary percentages.) A) $138,450 B) $590,366 C) $486,500 D) $248,354
1165 richard@qwconsultancy.com
Answer: A Explanation: A) Revenues Percentage
Joint costs
Condensed Goat Milk Skim Goat Milk 43,000 × $4.50 = $193,500 58,500 × $3.50 = $204,750 $193,500 / $398,250 = $204,750 / $398,250= 0.485,9 0.514,1 $184,480 × .0.485,9 = $89,634
$184,480 × .0.514,1 = $94,846
$103,866
$109,904
$103,866 / $193,500 = 0.536,8
$109,904 / $204,750 = 0.536,8
Gross margin GM percentage
Revenue Joint cost Process costs Revenue (net) Gross margin Difference
Xyla 42,500 × $20 = $850,000 (89,634) ($4 × $42,500) = (170,000) 590,366 (103,866) $486,500
Ice Cream 57,200 × $10 = $572,000 (94,846) ($4 × 57,200) = (228,800) 248,354 (109,904) $138,450
Diff: 3 Objective: 3 AACSB: Application of knowledge
1166 richard@qwconsultancy.com
35) Chem Manufacturing Company processes direct materials up to the split-off point where two products (X and Y) are obtained and sold. The following information was collected for the month of November: Direct materials processed: Production:
X Y
10,400 gallons (10,400 gallons yield 9,800 gallons of good product and 600 gallons of shrinkage) 5,000 gallons 4,800 gallons
Sales:
X Y
4,750at $350 per gallon 4,550at $100 per gallon
The cost of purchasing 10,400 gallons of direct materials and processing it up to the split-off point to yield a total of 9,800 gallons of good products was $1,125,000. The beginning inventories totaled 30 gallons for X and 350 gallons for Y. Ending inventory amounts reflected 535 gallons of Product X and 400 gallons of Product Y. October costs per unit were the same as November. Using the physical-volume method, what is Product X's approximate gross-margin percentage? (Round all intermediary calculations two decimal places.) A) 67% B) 51% C) 205% D) 72% Answer: A Explanation: A) Sales (4,750 × $350) $1,662,500 Cost of Goods Sold [(4,750) × $573,975 */ 5,000] 545,276 Gross Margin $1,117,224 * 5,000/(5,000 + 4,800) = 0.510,2 × $1,125,000 = $573,975 Gross-margin percentage $1,117,224 / $1,662,500 = 0.67 rounded Diff: 3 Objective: 3 AACSB: Application of knowledge
1167 richard@qwconsultancy.com
36) Beverage Drink Company processes direct materials up to the split-off point where two products, A and B, are obtained. The following information was collected for the month of July: Direct materials processed: Production:
Sales:
A B
3,000 liters (with 15% shrinkage) 500 liters 2,050 liters
A B
$30.00 per liter $25.00 per liter
The cost of purchasing 3,000 liters of direct materials and processing it up to the split-off point to yield a total of 2,550 liters of good products was $7,000. There were no inventory balances of A and B. Product A may be processed further to yield 375 liters of Product Z5 for an additional processing cost of $200. Product Z5 is sold for $45 per liter. There was no beginning inventory and ending inventory was 125 liters. Product B may be processed further to yield 1,900 liters of Product W3 for an additional processing cost of $280. Product W3 is sold for $50 per liter. There was no beginning inventory and ending inventory was 25 liters. If Product Z5 and Product W3 are produced, what are the expected sales values of production, respectively? A) $95,000 and $16,875 B) $15,000 and $51,250 C) $18,750 and $85,500 D) $16,875 and $95,000 Answer: D Explanation: D) Z5 = 375 liters × $45 = $16,875 W3 = 1,900 liters × $50 = $95,000 Diff: 3 Objective: 3 AACSB: Application of knowledge
1168 richard@qwconsultancy.com
37) Cola Drink Company processes direct materials up to the split-off point where two products, A and B, are obtained. The following information was collected for the month of July: Direct materials processed: Production:
Sales:
A B
3,500 liters (with 20% shrinkage) 2,100 liters 700 liters
A B
$15.00 per liter $10.00 per liter
The cost of purchasing 3,500 liters of direct materials and processing it up to the split-off point to yield a total of 2,800 liters of good products was $4,500. There were no inventory balances of A and B. Product A may be processed further to yield 2,000 liters of Product Z5 for an additional processing cost of $190. Product Z5 is sold for $70.00 per liter. There was no beginning inventory and ending inventory was 125 liters. Product B may be processed further to yield 575 liters of Product W3 for an additional processing cost of $325. Product W3 is sold for $75 per liter. There was no beginning inventory and ending inventory was 25 liters. What is Product Z5's estimated net realizable value at the split-off point? A) $42,935 B) $31,310 C) $139,810 D) $140,000 Answer: C Explanation: C) 2,000 × $70 = $140,000; $140,000 - $190 = $139,810 Diff: 3 Objective: 3 AACSB: Application of knowledge
38) Which of the following is true of the physical-measure approach of allocating joint costs? A) Costs cannot be allocated if the measurement basis for each product are different. B) Physical measures usually result in less costs being allocated to the product that weighs the most. C) The physical measure reflects a product's ability to generate revenues. D) Obtaining comparable physical measures for all products is always straightforward. Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
1169 richard@qwconsultancy.com
39) The Kenton Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 27,500 gallons (after shrinkage) Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
13,000 14,500 12,500 14,000 $3.50 $8.50
Separable costs in total: Butter Cream Condensed Milk
$12,500 $34,900
Sales: Sales Price:
gallons gallons gallons gallons per gallon per gallon
The cost of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 27,500 gallons of saleable product was $49,000. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. What is the constant gross-margin percent for Kenton? A) 71.9% B) 40.8% C) 42.9% D) 70.9% Answer: C Explanation: C) Total Total final sales value (13,000 × $3.50) + (14,500 × $8.50) $168,750 Total production costs ($49,000 + $12,500 + $34,900) 96,400 Gross margin $72,350 Gross margin % 42.9% Diff: 2 Objective: 3 AACSB: Application of knowledge
1170 richard@qwconsultancy.com
40) The Kenton Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 22,500 gallons (after shrinkage) Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
10,500 12,000 10,000 11,500 $6.00 $7.50
Separable costs in total: Butter Cream Condensed Milk
$14,000 $34,900
Sales: Sales Price:
gallons gallons gallons gallons per gallon per gallon
The cost of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 22,500 gallons of saleable product was $53,000. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. What is the allocated joint costs of Condensed Milk? (Round intermediary percentages to the nearest hundredth.) A) $25,040 B) $27,958 C) $14,000 D) $34,900 Answer: A Explanation: A) Gross margin percentage calculation: ($153,000 - $53,000 - $34,900 - $14,000) / $153,000 = 33.40%
Final sales value Gross margin @ 33.40% Total production costs Separable costs Joint costs allocated
Butter Condensed Cream Milk Total $63,000 $90,000 $153,000 21,042 30,060 51,100 41,958 59,940 101,898 14,000 34,900 48,900 $27,958 $25,040 $52,998
Diff: 3 Objective: 3 AACSB: Application of knowledge
1171 richard@qwconsultancy.com
41) The Kenton Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 23,500 gallons (after shrinkage) Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
12,500 11,000 12,000 10,500 $5.00 $8.50
Separable costs in total: Butter Cream Condensed Milk
$12,500 $35,600
Sales: Sales Price:
gallons gallons gallons gallons per gallon per gallon
The cost of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 23,500 gallons of saleable product was $47,000. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. What is the allocated joint costs of Butter Cream? (Round intermediary percentages to the nearest hundredth.) A) $21,398 B) $12,500 C) $35,600 D) $25,600 Answer: D Explanation: D) Gross margin percentage calculation: ($156,000 - $47,000 - $35,600 - $12,500) / $156,000 = 39.04%
Final sales value Gross margin @ 39.04% Total production costs Separable costs Joint costs allocated
Butter Condensed Cream Milk Total $62,500 $93,500 $156,000 24,400 36,502 60,900 38,100 56,998 95,098 12,500 35,600 48,100 $25,600 $21,398 $46,998
Diff: 3 Objective: 3 AACSB: Application of knowledge
1172 richard@qwconsultancy.com
42) The Kenton Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 25,500 gallons (after shrinkage) Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
11,000 14,500 10,500 14,000 $3.50 $10.00
Separable costs in total: Butter Cream Condensed Milk
$13,500 $36,000
Sales: Sales Price:
gallons gallons gallons gallons per gallon per gallon
The cost of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 25,500 gallons of saleable product was $49,000. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. Which of the following statements is true of Kenton's joint cost allocations? A) The gross margin is same for both products because constant gross margin percentage NRV method ignores profits earned before the split-off point. B) One product can receive negative joint costs allocations to bring the other unprofitable product to the overall average gross margin. C) Kenton has chosen the easiest method for allocating its joint costs of production. D) The gross profit percent of condensed milk is lower than the gross profit of butter cream. Answer: B Diff: 3 Objective: 3 AACSB: Application of knowledge
43) Which of the methods of allocating joint costs usually is considered the simplest to implement? A) estimated net realizable value B) constant gross-margin percentage NRV C) sales value at split-off D) physical measures Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
44) Which of the following statements is true of the methods for allocating joint costs? A) Under the cause-and-effect criterion, the physical-measure method is highly desirable. B) Byproducts are never excluded from the denominator used in the physical-measure method. C) The NRV method is never used when the selling prices of joint products vary frequently. D) The sales value at split-off method follows the benefits-received criterion of cost allocation. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
1173 richard@qwconsultancy.com
45) The Brital Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: Production:
28,500 gallons
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
12,500 16,000 12,000 15,500 $5.00 $9.00
Separable costs in total: Butter Cream Condensed Milk
$13,500 $34,100
Sales: Sales:
gallons gallons gallons gallons per gallon per gallon
The costs of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 28,500 gallons of saleable product was $48,000. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. What is the constant gross margin percent for Brital? A) 77% B) 52% C) 54% D) 60% Answer: C Explanation: C) Total Total final sales value (12,500 × $5.00) + (16,000 × $9.00) $206,500 Total production costs ($48,000 + $13,500 + $34,100) 95,600 Gross margin $110,900 Gross margin % 54 Diff: 2 Objective: 3 AACSB: Application of knowledge
1174 richard@qwconsultancy.com
46) The Brital Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 30,000 gallons Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
13,000 17,000 12,500 16,500 $2.00 $5.50
Separable costs in total: Butter Cream Condensed Milk
$15,500 $34,900
Sales: Sales:
gallons gallons gallons gallons per gallon per gallon
The costs of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 30,000 gallons of saleable product was $57,150. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. What is the allocated joint costs of Butter Cream? A) $34,900 B) $15,500 C) $49,250 D) $7,900 Answer: D Explanation: D) Butter Condensed Cream Milk Total Final sales value $26,000 $93,500 $119,500 Gross margin @ 10% 2,600 9,350 11,950 Total production costs 23,400 84,150 107,550 Separable costs 15,500 34,900 50,400 Joint costs allocated $7,900 $49,250 $57,150 Diff: 3 Objective: 3 AACSB: Application of knowledge
1175 richard@qwconsultancy.com
47) The Brital Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 33,500 gallons Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
13,500 20,000 13,000 19,500 $4.50 $6.00
Separable costs in total: Butter Cream Condensed Milk
$15,000 $33,900
Sales: Sales:
gallons gallons gallons gallons per gallon per gallon
The costs of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 33,500 gallons of saleable product was $77,625. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. What is the allocated joint costs of Condensed Milk? A) $50,100 B) $15,000 C) $33,900 D) $27,525 Answer: A Explanation: A) Butter Condensed Cream Milk Total Final sales value $60,750 $120,000 $180,750 Gross margin @ 30% 18,225 36,000 54,225 Total production costs 42,525 84,000 126,525 Separable costs 15,000 33,900 48,900 Joint costs allocated $27,525 $50,100 $77,625 Diff: 3 Objective: 3 AACSB: Application of knowledge
1176 richard@qwconsultancy.com
48) The Brital Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 30,500 gallons Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
13,500 17,000 13,000 16,500 $1.50 $6.50
Separable costs in total: Butter Cream Condensed Milk
$13,500 $34,700
Sales: Sales:
gallons gallons gallons gallons per gallon per gallon
The costs of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 30,500 gallons of saleable product was $50,000. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. Which of the following statements is true of Brital? A) The gross profit percent of condensed milk is lower than the gross profit of butter cream. B) The gross margin is same for both products because constant gross margin percentage NRV method ignores profits earned before the split-off point. C) The gross profit of condensed milk is lower than the gross profit of butter cream. D) The gross margin is allocated to the joint products in order to determine the joint-cost allocations. Answer: D Diff: 3 Objective: 3 AACSB: Application of knowledge
1177 richard@qwconsultancy.com
49) The Brital Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 33,000 gallons Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
14,000 19,000 13,500 18,500 $4.00 $10.00
Separable costs in total: Butter Cream Condensed Milk
$17,000 $34,200
Sales: Sales:
gallons gallons gallons gallons per gallon per gallon
The costs of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 33,000 gallons of saleable product was $167,700. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. If separable costs of Butter Cream was $19,500 and constant gross margin was 10%, what would have been the allocated joint costs of Condensed Milk? A) $30,900 B) $48,900 C) $136,800 D) $131,800 Answer: C Explanation: C) Butter Condensed Cream Milk Total Final sales value $56,000 $190,000 $246,000 Gross margin @ 10% 5,600 19,000 24,600 Total production costs 50,400 171,000 221,400 Separable costs 19,500 34,200 53,700 Joint costs allocated $30,900 $136,800 $167,700 Diff: 3 Objective: 3 AACSB: Application of knowledge
1178 richard@qwconsultancy.com
50) The Brital Company processes unprocessed milk to produce two products, Butter Cream and Condensed Milk. The following information was collected for the month of June: Direct Materials processed: 29,000 gallons Production:
Butter Cream Condensed Milk Butter Cream Condensed Milk Butter Cream Condensed Milk
13,500 15,500 13,000 15,000 $4.00 $8.00
Separable costs in total: Butter Cream Condensed Milk
$14,500 $35,800
Sales: Sales:
gallons gallons gallons gallons per gallon per gallon
The costs of purchasing the of unprocessed milk and processing it up to the split-off point to yield a total of 29,000 gallons of saleable product was $89,600. The company uses constant gross-margin percentage NRV method to allocate the joint costs of production. If separable costs of Butter Cream was $17,000 and constant gross margin was 20%, what would have been the total allocated joint costs of production? A) $89,600 B) $35,800 C) $63,400 D) $142,400 Answer: A Explanation: A) Butter Condensed Cream Milk Total Final sales value $54,000 $124,000 $178,000 Gross margin @ 20% 10,800 24,800 35,600 Total production costs 43,200 99,200 142,400 Separable costs 17,000 35,800 52,800 Joint costs allocated $26,200 $63,400 $89,600 Diff: 3 Objective: 3 AACSB: Application of knowledge
1179 richard@qwconsultancy.com
51) The G-Lab Company produced three joint products at a joint cost of $140,000. Two of these products were processed further. Production and sales were:
Product A B C
Weight 200,000 lbs. 300,000 lbs. 400,000 lbs.
Sales
Additional Processing Costs 245,000 200,000 30,000 0 175,000 100,000
If joint costs are allocated based on relative weight of the outputs and all products are main products, how much of the joint costs would be allocated to product A? (Do not round intermediary calculations. Round final answer to the nearest cent.) A) $62,222.22 B) $76,222.22 C) $31,111.11 D) $93,333.33 Answer: C Explanation: C) [200,000/(200,000 + 300,000 + 400,000)] × $140,000 = $31,111.11. Diff: 3 Objective: 3 AACSB: Application of knowledge
52) Which of the following is false regarding net realizable value (NRV)? A) it is better to use a product's market value at the split-off point than its estimated NRV B) the estimated NRV at the split-off point is calculated by taking the sales value after further processing and deducting additional processing costs C) NRV is the estimated selling price after processing the product beyond the split-off point. D) the constant NRV method uses an identical gross-margin percentage for each product to allocate joint costs Answer: C Diff: 2 Objective: 3 AACSB: Application of knowledge
53) The constant gross-margin percentage NRV method of joint cost allocation: A) involves allocating costs in such a way that maintaining the same gross margin percentage for each product that was obtained in prior years B) computes gross margin before allocating the costs to the products C) is the same as the estimated NRV method D) is the same as the sales-value at split-off method Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
1180 richard@qwconsultancy.com
54) Which of the following methods of allocating joint costs are market-based approaches is not a market-based approach? A) sales-value at splitoff method B) physical-measure method C) net realizable value (NRV) method D) constant gross-margin percentage NRV method Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
55) In joint costing, the constant gross-margin percentage NRV method is an example of allocating costs using physical measures. Answer: FALSE Explanation: In joint costing, the constant gross-margin percentage NRV method is an example of allocating costs using market based data. Diff: 1 Objective: 3 AACSB: Analytical thinking
56) In joint costing, using physical measures at split-off to allocate costs enables the accountant to obtain individual product costs and gross margins. Answer: FALSE Explanation: In joint costing, using sales value at split-off to allocate costs enables the accountant to obtain individual product costs and gross margins. Diff: 2 Objective: 3 AACSB: Analytical thinking
57) An advantage of the physical-measure method is that obtaining physical measures for all products is an easy task. Answer: FALSE Explanation: For some products such as gas, obtaining physical measures is difficult. Diff: 1 Objective: 3 AACSB: Analytical thinking
58) In joint costing, the sales value at split-off method allocates joint costs entirely to joint products sold during the accounting period on the basis of the relative total sales value at the split-off point. Answer: FALSE Explanation: The sales value at split-off method allocates joint costs to joint products produced during the accounting period on the basis of the relative total sales value at the split-off point. Diff: 2 Objective: 3 AACSB: Analytical thinking
1181 richard@qwconsultancy.com
59) In joint costing, the sales value at split-off method is typically used in preference to the NRV method only when net realizable value for one or more products at split-off do not exist. Answer: FALSE Explanation: The sales value at split-off method is the more preferred method. The NRV method is typically used in preference to the sales value at split-off method only when selling prices for one or more products at split-off do not exist. Diff: 2 Objective: 3 AACSB: Analytical thinking
60) The net realizable value (NRV) method allocates joint costs to joint products produced during the accounting period on the basis of their relative NRV—final sales value plus separable costs. Answer: FALSE Explanation: The net realizable value (NRV) method allocates joint costs to joint products produced during the accounting period on the basis of their relative NRV—final sales value minus separable costs. Diff: 2 Objective: 3 AACSB: Analytical thinking
61) In joint costing, the physical measures are generally used for products or services that are processed and, after split-off, additional value is added to the product and a selling price can be determined. Answer: FALSE Explanation: The net realizable value method is generally used for products or services that are processed and, after split-off, additional value is added to the product and a selling price can be determined. Diff: 2 Objective: 2 AACSB: Analytical thinking
62) The net realizable value (NRV) method allocates joint costs to joint products produced during the accounting period in such a way that each individual product achieves an identical gross-margin percentage. Answer: FALSE Explanation: The constant gross-margin percentage NRV method allocates joint costs to joint products produced during the accounting period in such a way that each individual product achieves an identical gross-margin percentage. Diff: 2 Objective: 3 AACSB: Analytical thinking
63) The constant gross-margin percentage method differs from market-based joint-cost allocation method (sales value at split-off and estimated net realizable value) since no account is taken of profits earned before or after the split-off point when allocating joint costs. Answer: FALSE Explanation: The constant gross-margin percentage method takes account of the profits earned before or after the split-off when allocating joint costs. Diff: 2 Objective: 3 AACSB: Analytical thinking
1182 richard@qwconsultancy.com
64) In joint costing, outputs with no sales value are always excluded when costs are allocated using physical measures. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
65) The only allowable method of joint cost allocation is net realizable value which is specified by FASB. Answer: FALSE Explanation: The FASB does not specify a single allowable method of joint cost allocation. Diff: 1 Objective: 3 AACSB: Analytical thinking
66) The constant gross-margin percentage NRV method is the only method of allocating joint costs under which products may receive negative allocations. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
67) The sales value at split-off method of joint cost allocation involves computation of the relative amounts of the sales value of the amount of each joint product sold during the period. Answer: FALSE Explanation: The sales value at split-off method allocates joint costs to joint products produced during the accounting period on the basis of the relative total sales value at the split-off point (not when the product is sold). Diff: 2 Objective: 3 AACSB: Analytical thinking
68) The constant gross-margin percentage NRV method allocates joint costs to joint products in such a way that the gross margin on each joint product is the same as it was in the previous year. Answer: FALSE Explanation: The constant gross-margin percentage NRV method allocates joint costs to joint products in such a way that the overall gross margin percentage is identical for the individual products. Diff: 2 Objective: 3 AACSB: Analytical thinking
69) The constant gross-margin percentage NRV method is the only method whereby products can receive negative allocations. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
1183 richard@qwconsultancy.com
70) Under the benefits-received criterion, the physical-measure method is much less desirable than the sales value at split-off method. Why? Answer: Under the benefits-received criterion, the physical-measure method is much less desirable than the sales value at split-off method because the physical measure of the individual products may have no relationship to their respective revenue-generating abilities. Consider a gold mine that extracts ore containing gold, silver, and lead. Using a common physical measure (tons) would result in almost all costs being allocated to lead, the product that weighs the most but has the lowest revenue-generating power. This method of cost allocation is inconsistent with the main reason the mining company is incurring mining costs—to earn revenues from gold and silver, not lead. When a company uses the physical-measure method in a product-line income statement, products that have a high sales value per ton, like gold and silver, would show a large "profit" and products that have a low sales value per ton, like lead, would show sizable losses. Diff: 2 Objective: 3 AACSB: Analytical thinking
71) For each of the following methods of allocating joint costs, give a positive or a negative aspect of selecting each one to allocate joint costs. a. sales value at split-off b. estimated net realizable value method c. the constant gross margin method d. a physical measure such as volume Answer: a. Positive: Costs are allocated to products in proportion to their potential revenues. This is a fairly simple method to implement. Negative: We use the sales value of the entire production of the accounting period. b.
Positive: It can be used when the market prices of the products are not known or available. Negative: It can be very complex in operations with multiple products and multiple split-off points.
c. Positive: Account is taken of the profits earned either before or after the split-off point when allocating the joint costs. Negative: The assumption is made that all have the same ratio of cost to sales value. This is likely not true. d. Positive: It is fairly simple to use. Negative: It has no relationship to the revenue-producing power of individual products. Diff: 2 Objective: 3 AACSB: Analytical thinking
1184 richard@qwconsultancy.com
72) Berkel Company processes sugar cane into three products. During May, the joint costs of processing were $600,000. Production and sales value information for the month were as follows: Product
Units Produced
Sugar Sugar Syrup Fructose Syrup
15,000 10,000 5,000
Sales Value at Split-off Point $200,000 175,000 125,000
Separable costs $60,000 192,000 96,000
Required: Determine the amount of joint cost allocated to each product if the sales value at split-off method is used. Answer: Product Units Sales Value Percent Joint Cost Allocated Sugar 15,000 $200,000 40% × $600,000 $240,000 Sugar Syrup 10,000 175,000 35% × 600,000 210,000 Fructose Syrup 5,000 125,000 25% × 600,000 150,000 Total $500,000 100% $600,000 Diff: 2 Objective: 3 AACSB: Application of knowledge
73) Calamata Corporation processes a single material into three separate products A, B, and C. During September, the joint costs of processing were $300,000. Production and sales value information for the month were as follows: Product
Units Produced A B C
10,000 15,000 12,500
Final Sales Value per Unit $25 30 24
Separable Costs $125,000 250,000 125,000
Required: Determine the amount of joint cost allocated to each product if the constant gross-margin percentage NRV method is used. Answer: The gross margin percentage is 20% ($1,000,000 - $800,000)/$1,000,000
Product A B C Total
Total Final Sales Less Gross Production Less Separable Joint Costs Value Margin Costs Costs Allocated $ 250,000 $50,000 $ 200,000 $ 125,000 $ 75,000 450,000 90,000 360,000 250,000 110,000 300,000 60,000 240,000 125,000 115,000 1,000,000 200,000 800,000 $ 500,000 300,000
Diff: 2 Objective: 3 AACSB: Application of knowledge
1185 richard@qwconsultancy.com
74) Oregon Lumber processes timber into four products. During January, the joint costs of processing were $280,000. There was no inventory at the beginning of the month. Production and sales value information for the month is as follows:
Product 2 × 4's 2 × 6's 4 × 4's Slabs
Board feet 6,000,000 3,000,000 2,000,000 1,000,000
Sales Value at Split-off Point $0.30 per board foot 0.40 per board foot 0.45 per board foot 0.10 per board foot
Ending Inventory 500,000 bdft. 250,000 bdft. 100,000 bdft. 50,000 bdft.
Required: Determine the value of ending inventory if the sales value at split-off method is used for product costing. Round to 3 decimal places when necessary. Answer: Product Board feet Sales Value Percent Joint Cost Allocated 2 × 4's 6,000,000 $1,800,000 45.0 × $280,000 $126,000 2 × 6's 3,000,000 1,200,000 30.0 × 280,000 84,000 4 × 4's 2,000,000 900,000 22.5 × 280,000 63,000 Slabs 1,000,000 100,000 2.5 × 280,000 7,000 Totals Product 2 × 4's 2 × 6's 4 × 4's Slabs
$4,000,000
100.0%
Fraction of Production in Allocated Inventory 500,000/6,000,000 × $126,000 = 250,000/3,000,000 × 84,000 = 100,000/2,000,000 × 63,000 = 50,000/1,000,000 × 7,000 =
$280,000 Inventory value $10,500 7,000 3,150 350
Total
$21,000
Diff: 3 Objective: 3 AACSB: Application of knowledge
1186 richard@qwconsultancy.com
75) Zenon Chemical, Inc., processes pine rosin into three products: turpentine, paint thinner, and spot remover. During May, the joint costs of processing were $240,000. Production and sales value information for the month is as follows: Product
Units Produced
Turpentine Paint thinner Spot remover
15,000 liters 15,000 liters 7,500 liters
Sales Value at Split-off Point $120,000 100,000 50,000
Required: Determine the amount of joint cost allocated to each product if the physical-measure method is used. Answer: Product Units Produced Percentage Joint Costs Allocated Turpentine 15,000 liters 40 % $720,000 = $288,000 Paint thinner 15,000 liters 40 % 720,000 = 288,000 Spot remover 7,500 liters 20 % 720,000 = 144,000 Totals
37,500
100
Diff: 2 Objective: 3 AACSB: Application of knowledge
1187 richard@qwconsultancy.com
$720,000
76) Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During the summer of 2020, the joint costs of processing the tomatoes were $420,000. There was no beginning or ending inventories for the summer. Production and sales value information for the summer is as follows: Product Catsup Juice Canned
Cases 100,000 150,000 200,000
Sales Value at Separable Costs Selling Price Split-off Point $6 per case $3.00 per case $28 per case 8 per case 5.00 per case 25 per case 5 per case 2.50 per case 10 per case
Required: Determine the amount allocated to each product if the estimated net realizable value method is used, and compute the cost per case for each product. Answer: Expected Sales Separable Net Realizable Product Percentage Value Costs Value Catsup $2,800,000 $300,000 $2,500,000 35.71 Juice 3,750,000 750,000 3,000,000 42.86 Canned 2,000,000 500,000 1,500,000 21.43 Totals
$7,000,000
Product Percentage Joint Costs Allocated Catsup Juice Canned
35.71% × 42.86% × 21.43% ×
Catsup cost per case Juice cost per case Canned cost per case
$420,000 = 420,000 = 420,000 =
$149,982 + 180,012 + 90,006 +
100.00
Separable Product Costs Costs $300,000 = $449,982 750,000 = 930,012 500,000 = 590,006
= $449,982/100,000 = $4.50 = $930,012/150,000 = $6.20 = $590,006/200,000 = $2.95
Diff: 3 Objective: 3 AACSB: Application of knowledge
1188 richard@qwconsultancy.com
77) Pilgrim Corporation processes frozen turkeys. The company has not been pleased with its profit margin per product because it appears that the high value items have too few costs assigned to them, while the low value items have too many costs assigned to them. The processing results in several products, the primary one of which is frozen small turkeys. Other products include frozen parts such as wings and legs, byproducts such as skin and bones, and unused scrap items. Required: What may be the cost assignment problem if a key consideration is the value of the products being sold? Answer: First, the company needs to consider whether the byproducts are being treated as products, rather than byproducts. For the most part, byproducts should not be assigned costs. The revenue from the byproducts should be used as either minor sale categories or else as offsets to processing costs. A second consideration is the method used to assign the costs. It is possible that some physical measure (weight) is being used, in which case the parts items and the byproducts may weigh as much as the primary product. It may be necessary to evaluate the various methods of allocation and select the one which management feels is best for decision making. Diff: 2 Objective: 3 AACSB: Application of knowledge
78) Wharf Fisheries processes many of its seafood items to the demands of its largest customers, most of which are large retail distributors. To keep the accounting system simple, it has always assigned cost by the weight of the finished product. However, with increased competition, it has had to watch its prices closely and, in recent years, several items have incurred zero profit margins. After several weeks of investigation, your consulting firm has found that, while weight is important in processing of seafood, numerous items have very distinct processing steps and some items are processed through more steps than others. Required: Based on the findings of your consulting firm, what changes might you recommend to the company in the way of cost allocation among its products? Answer: Recommendations might include, among others, some of the following: a. Categorize the fishing expeditions as joint costs, especially if multiple items are caught. b. Categorize all processing activities where multiple items are processed as joint costs. c. For those processes that are unique to only one product or a set of products, use separable cost categories. d. Choose something other than weight for allocating joint costs. Select one of the value methods of assigning the costs. e. Carefully separate main products from byproducts in the costing system. f. Do not allocate the joint costs for internal decisions. Diff: 2 Objective: 3 AACSB: Application of knowledge
1189 richard@qwconsultancy.com
79) Paragon University operates an extensive and an expensive registration, testing, and counseling center, through which all students are required to pass through when they enter the university. The registration effort's costs (for the most part) are almost impossible to allocate based upon which students require time, effort, etc. The cost of this center is approximately 15% of the total costs of Paragon. This department engages in no other activities than the registration of students. Paragon is interested in determining the profitability of the three technical departments it operates. Paragon has the perception that some departments are more profitable than others, and it would like to determine an appropriate method of allocating the costs of this registration center. Required: Recommend to Paragon University a method (or methods) of allocating the costs of registration to the three departments. Answer: The joint costs of the registration effort could be allocated based on physical volume or the sales (tuition) dollars of each department. Volume. Allocating on volume would be based not upon physical measures, but upon the number of credit hours each of the three departments offer each semester. If the ratio of credit hours for the three departments were 25%, 45%, and 30% then the costs would be allocated based upon these ratios. Sales Dollars. It is possible that some departments charge more per credit hour than others. In this case it might be appropriate to allocate the costs based upon the total tuition revenues of each department. Diff: 2 Objective: 3 AACSB: Application of knowledge
1190 richard@qwconsultancy.com
Objective 17.4 1) Which of the following is NOT true of the joint allocation methods? A) the sales value at the split-off method is the best measure of benefits received B) when selling prices of all products at the split-off are unavailable, the NRV method is the best alternative C) the constant gross-margin percentage NRV method treats the joint products as though they comprise a single product D) when selling prices are at the split-off point are available but further processing is necessary, the NRV method is the preferred allocation method Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
2) When the selling prices of all products at the split-off point are unavailable, the ________ is the best alternative for allocating joint costs. A) sales value at split-off method B) NRV method C) physical measures method D) constant gross-margin percentage method Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
3) When management believes that there is a direct link between the joint costs incurred and the value of products before further processing takes place, the ________ is the best alternative to allocating joint costs. A) sales value at split-off method B) NRV method C) physical measures method D) constant gross-margin percentage method Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
4) The sales value at splitoff method is the preferred method when selling-price data exist at splitoff because: A) this is seen as the best measure of benefits received as a result of joint processing B) it anticipates subsequent management decisions C) it requires easily obtainable information about any processing occurring after the splitoff point D) it is more precise than methods involving NRV calculations Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
1191 richard@qwconsultancy.com
5) Which of the following statements is true of the methods for allocating joint costs? A) The sales value at split-off method lacks a common basis for allocating joint costs to products. B) The complexity of the sales value at split-off method increases when managers make frequent changes to the sequence of post-split-off processing decisions. C) The NRV method assumes that none of the markup is attributable to the separable costs. D) The NRV method treats the joint products as though they comprise a single product. Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
6) The drawback of the constant gross-margin percentage NRV method in joint costing is that it: A) recognizes that profits are derived from the costs incurred after split-off B) assumes the profit margin to be identical across all products C) attempts to approximate the sales values at split-off by subtracting from final selling prices the separable costs incurred after the split-off point D) ignores the separable costs of further processing Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
7) In joint costing, which method assumes that all the markup is attributable to the joint process costs? A) sales value at split-off method B) NRV method C) constant gross-margin percentage method D) physical measures method Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
8) When the selling prices at the split-off are unavailable, the NRV method is the best alternative. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
9) The net realizable value (NRV) method makes the assumption that products will be processed beyond the splitoff point. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
1192 richard@qwconsultancy.com
10) Physical measures such as weight or volume are the best indicators of the benefits received for allocating joint costs. Answer: FALSE Explanation: Sales value is a better indicator of the benefits received than the physical measures. Diff: 2 Objective: 4 AACSB: Analytical thinking
11) In joint costing, the constant gross-margin percentage method recognizes that the profit margin is not just attributable to the joint process but is also derived from the costs incurred after split-off. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
12) The constant gross-margin percentage NRV method makes the simplifying assumption of treating the joint products as though they comprise a single product. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
13) List the reasons that the sales value at split-off method of joint cost allocation should be used. Answer: 1. Measurement of the value of the joint products at split-off - Sales value at split-off is the best measure of the benefits received as a result of joint processing. 2. No anticipation of subsequent management decisions - This method does not require information on processing steps after split-off. 3. Availability of a common basis to allocate joint costs to products - Revenue is the common basis to allocate costs. 4. Simplicity - It is the simplest method compared to the NRV and constant gross-margin percentage NRV methods. Diff: 2 Objective: 4 AACSB: Analytical thinking
14) Explain why some companies choose not to allocate joint costs to products. Answer: Some companies choose not to allocate joint costs to products due to the complexity of their production or extraction processes and the difficulty of gathering a sufficient amount of data to allocate the costs correctly. Rather than allocating joint costs, some firms simply subtract them directly from total revenues in the management accounts. Diff: 2 Objective: 4 AACSB: Analytical thinking
1193 richard@qwconsultancy.com
15) What are the four methods of allocating joint costs to individual products? Which of these methods is preferred, and what are two advantages of this method? Answer: The four methods of allocating joint costs to individual products are: the sales-value at split-off method, estimated net-realizable value (NRV) method, the constant gross margin percentage NRV, and physical measures methods. Of these methods, the sales-value at split-off method is preferred when market prices are available, because it is consistent with the benefits-received criterion, it does not depend or anticipate further managerial decisions on further processing, and it is relatively simple. Diff: 2 Objective: 4 AACSB: Analytical thinking
16) Explain why some companies carry their inventories at NRV minus an estimated operating income margin instead of the NRV itself. Answer: Some companies carry their inventories at NRV minus an estimated operating income margin instead of the NRV itself. This is because accountants do not ordinarily record inventories at NRV because this practice recognizes the income on each product at the time the production is completed but before it is sold. When any end-of-period inventories are sold in the next period, the cost of goods sold then equals this carrying value. Diff: 2 Objective: 4 AACSB: Application of knowledge
Objective 17.5 1) When a product is the result of a joint process, the decision to process the product past the split-off point further should be influenced by which of the following measures? A) the product's proportion of the total costs B) the portion of the joint costs allocated to the individual products C) the extra revenue earned past the split-off point D) the incremental operating income earned past the split-off point Answer: D Diff: 1 Objective: 5 AACSB: Analytical thinking
2) A company manufactures three products, A, B, and C from a single raw material input. Product C can be sold at the split-off point for total revenues of $50,000 or it can be processed further at a total cost of $11,000 and then sold for $68,000. Product C: A) should be sold at the split-off point, rather than processed further B) would increase the company's overall net income by $18,000 if processed further and then sold C) would increase the company's overall net income by $68,000 if processed further and then sold D) would increase the company's overall net income by $7,000 if processed further and then sold Answer: D Explanation: D) The increase in operating income would be $7,000 by further processing: $68,000 $11,000 = $57,000 less the revenues at the split-off point of $50,000 = $7,000. Diff: 2 Objective: 5 AACSB: Analytical thinking
1194 richard@qwconsultancy.com
3) Which of the following statements is true of sell-or-process-further decisions in joint costing? A) Joint costs incurred before the split-off point are relevant in deciding whether to process the product further. B) All separable costs in joint-cost allocations are incremental costs. C) Separable costs incurred before the split-off point are irrelevant in deciding whether to process the product further. D) Costs that differ between the alternatives of selling products or processing further are relevant. Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
4) Joint costs are: A) not required to be allocated to inventory costs per GAAP B) irrelevant to decision making as to whether to process further C) have no impact on the contribution margin of a product D) relevant to whether to process further beyond the split-off point Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
5) Which of the following factors would NOT be one of the reasons why the sales value at the split-off would be used to allocate joint costs? A) the sales value method is a good measure of benefits received B) it helps determine manager compensation and performance evaluation C) it is a method that is independent of further processing decisions D) it provides a common allocation basis Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Separable costs that do not differ between alternatives are irrelevant for decision making. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
7) Joint processing costs are relevant in deciding whether to process the product further. Answer: FALSE Explanation: Joint processing costs are irrelevant in deciding whether to process the product further. Diff: 1 Objective: 5 AACSB: Analytical thinking
1195 richard@qwconsultancy.com
8) All separable costs in joint-cost allocations are always incremental costs. Answer: FALSE Explanation: Some of the separable costs may be fixed and therefore not incremental. Diff: 2 Objective: 5 AACSB: Analytical thinking
9) There can be conflicts between cost concepts used for decision-making purposes and cost concepts used for performance evaluation however, market-based methods of joint cost allocation tend to reduce these conflicts. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
10) New York Liberty Corporation makes miniature statues of the Empire State Building from cast iron. Sales total 50,000 units a year. The statues are finished either rough or polished, with an average demand of 60% rough and 40% polished. Iron ingots, the direct material, costs $5 per pound. Processing costs are $300 to convert 30 pounds into 60 statues. Rough statues are sold for $17 each, and polished statues can be sold for $19 or engraved for an additional cost of $5. Polished statues can then be sold for $32. Required: Determine whether New York Liberty Company should sell the engraved statutes. Why? Answer: New York Liberty should engrave the statutes because they increase profits by $7 per statute. Polished Sales Cost of Sales: Materials ($5 × 30)/60 Conversion $300/60 Operating Income
Rough $17.00 $2.50 5.00
7.50 $9.50
Sales, polished and engraved Costs: Materials Conversion Additional Processing Operating Income Advantage in favor of selling the engraved statutes
$19.00 $3.00 5.00
7.50 $11.50 $32.00
$2.50 5.00 5.00
12.50 $19.50 $8.00
Diff: 3 Objective: 5 AACSB: Application of knowledge
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11) What revenue or expense amounts are necessary to make a sell-or-process-further decision and why? What items are irrelevant to the decision and why? Answer: The revenues and expenses that occur after split-off are the necessary items to make a sell-or-process-further decision. If incremental revenues are higher than incremental costs, processing further is the correct decision. Expenses that occur before the split-off point, called joint processing costs, are irrelevant to the decision. These expenses have occurred and have no effect on the decision to sell-or-process-further. Diff: 2 Objective: 5 AACSB: Analytical thinking
12) Firms should be wary of using the full cost of a joint product as the basis for making pricing decisions. Why? Answer: Firms should be wary of using the full cost of a joint product (that is, the cost after joint costs are allocated) as the basis for making pricing decisions because in many situations, there is no direct cause-and-effect relationship that identifies the resources demanded by each joint product that can then be used as a basis for pricing. In fact, the use of the sales value at split-off or the net realizable value method to allocate joint costs results in a reverse effect: The selling prices of joint products drive joint-cost allocations, rather than cost allocations serving as the basis for the pricing of joint products. Diff: 2 Objective: 5 AACSB: Analytical thinking
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Objective 17.6 1) Which method of accounting recognizes byproducts in the financial statements at the time their production is completed? A) gross margin method B) sales method C) production method D) market value method Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
2) Torid Company processes 18,225 gallons of direct materials to produce two products, Product X and Product Y. Product X sells for $10 per gallon and Product Y, the main product, sells for $160 per gallon. The following information is for December:
Product X: Product Y:
Production 6,100 9,975
Sales 6,000 10,080
Beginning Inventory 0 125
Ending Inventory 100 20
The manufacturing costs totaled $35,000. Under production method, Product X NRV would be offset against the costs of Product Y by how much? A) $60,000 B) $61,000 C) $16,000 D) $1,000 Answer: B Explanation: B) 6,100 gallons × $10 = $61,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
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3) Torid Company processes 18,800 gallons of direct materials to produce two products, Product X and Product Y. Product X sells for $9 per gallon and Product Y, the main product, sells for $170 per gallon. The following information is for December:
Product X: Product Y:
Production 6,175 10,475
Sales 6,000 10,485
Beginning Inventory 0 50
Ending Inventory 175 40
The manufacturing costs totaled $27,000. How much is the ending inventory for the byproduct if byproducts are recognized in the general ledger at the point of sale? A) $0 B) $1,575 C) $6,800 D) $29,750 Answer: A Explanation: A) Byproducts are not recognized until they are sold. Therefore, the ending inventory is always $0. Diff: 2 Objective: 6 AACSB: Application of knowledge
4) Torid Company processes 17,950 gallons of direct materials to produce two products, Product X and Product Y. Product X sells for $9 per gallon and Product Y, the main product, sells for $170 per gallon. The following information is for December:
Product X: Product Y:
Production 5,525 10,275
Sales 5,400 10,315
Beginning Inventory 0 50
The manufacturing costs totaled $34,000. The production method will report Product X in the balance sheet at: A) $0 B) $1,700 C) $1,125 D) $21,250 Answer: C Explanation: C) 125 gallons × $9 = $1,125 Diff: 3 Objective: 6 AACSB: Application of knowledge
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Ending Inventory 125 10
5) Torid Company processes 18,250 gallons of direct materials to produce two products, Product X and Product Y. Product X sells for $6 per gallon and Product Y, the main product, sells for $160 per gallon. The following information is for December:
Product X: Product Y:
Production 5,725 10,375
Sales 5,600 10,385
Beginning Inventory 0 50
Ending Inventory 125 40
The manufacturing costs totaled $34,000. If the byproduct inventory is recorded at NRV less profit margin of 20%, the balance sheet will report ________ of byproduct inventory. A) $750 B) $0 C) $6,400 D) $600 Answer: D Explanation: D) $750 × 80% = $600 Diff: 3 Objective: 6 AACSB: Application of knowledge
6) Which if the following is a negative consequence of recording byproducts in the accounting records when the sale occurs? A) the revenue from the byproducts is usually fairly large and the accounting records will be distorted B) earnings cannot be timed under this method C) managers can be tempted to stockpile byproducts D) it involves complex calculations compared to the production method Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
7) Which of the following statements is true of the production method of accounting for byproducts? A) It makes no journal entries until the byproduct is sold. B) It is the preferred method because of the matching principle. C) It records revenues of the byproduct in the income statement as revenue. D) It adds revenues of the byproduct to the cost of goods sold in the income statement. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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8) Which of the following statements is true of the sales method of accounting for byproducts? A) It makes journal entries when the byproducts are produced. B) It is the preferred method because of the matching principle. C) It allows a firm to manage its reported earnings by timing the sale of byproducts. D) This method recognizes the byproduct inventory in the accounting period in which it is produced. Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
9) Which of the following journal entries can happen only under the production method of recording byproducts? A) Work in Process Finished Goods - Byproduct Accounts Payable B) Cash or Accounts Receivable Revenues - Main product C) Byproduct Inventory Finished Goods - Main product Work in Process D) Cash or Accounts Receivable Revenues - Byproduct Answer: C Diff: 3 Objective: 6 AACSB: Application of knowledge
10) The production method of accounting for byproducts: A) recognizes revenues from the sale of the byproducts when they are sold B) recognizes the NRV of the byproduct as an offset against costs of the main product C) recognizes the sales value of the byproduct at the time of sale as "other revenue" D) deducts the sales value of the byproduct from cost of goods sold at the time of sale Answer: B Diff: 2 Objective: 6 AACSB: Application of knowledge
11) Byproducts are recognized in the general ledger either at the time production is completed or at the time of sale. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
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12) The sales method for recognizing byproducts is conceptually correct because it is consistent with the matching principle. Answer: FALSE Explanation: The production method for recognizing byproducts is conceptually correct because it is consistent with the matching principle. Diff: 2 Objective: 6 AACSB: Analytical thinking
13) The sales method of accounting for byproducts allows companies to manage its reported earnings by the timing of the sale of byproducts. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
14) The production method for recognizing byproducts reduces the cost of manufacturing the main or joint products in the income statement. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
15) The production method for recognizing byproducts is simpler and is often used in practice, primarily because the dollar amounts of byproducts are immaterial. Answer: FALSE Explanation: The sales method is simpler and is often used in practice, primarily because the dollar amounts of byproducts are immaterial. Diff: 1 Objective: 6 AACSB: Analytical thinking
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16) Woody City Manufacturing mills lumber for companies who manufacture furniture. The main product is finished lumber with a byproduct of wood shavings. The byproduct is sold to plywood manufacturers. For July, the manufacturing process incurred $412,000 in total costs. Eighty thousand board feet of lumber were produced and sold along with 7,000 pounds of shavings. The finished lumber sold for $6.00 per board foot and the shavings sold for $0.60 a pound. There were no beginning or ending inventories. Required: Prepare an income statement showing the byproduct (1) as a cost reduction during production, and (2) as a revenue item when sold. Answer: Cost reduction when Revenue when sold produced Sales: Lumber $480,000 $480,000 Shavings 4,200 Total Sales: $480,000 484,200 Cost of Goods Sold: Total manufacturing costs $332,000 $332,000 Byproduct 4,200 0 Total COGS 327,800 332,000 Gross Margin $152,200 $152,200 Diff: 2 Objective: 6 AACSB: Application of knowledge
17) Distinguish between the two principal methods of accounting for byproducts, the production byproduct method and the sale byproduct method. Briefly discuss the relative merits (or lack thereof) of each. Answer: a. Production byproduct method. This method recognizes byproducts in the financial statements at the time their production is completed. The estimated net realizable value from the byproduct produced is offset against the costs of the main (or joint) products, and it is reported in the balance sheet as inventory. Accounting entries are made and the byproducts are reported in the balance sheet at their selling price. b.
Sale byproduct method. This method delays recognition of the byproducts until the time of their sale. Revenues could be recorded in one accounting period, while the expense in an earlier period. Companies may find it necessary to keep an inventory of the byproduct processing costs in a separate account until the byproducts are sold. This practice can be rationalized on the grounds that the dollar amounts of byproducts are immaterial. But managers can use this method to manage reported earnings by timing when they sell byproducts. Diff: 2 Objective: 6 AACSB: Analytical thinking
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18) What are the two methods to account for byproducts. Which is the more appropriate method to use and why? Answer: The two methods are the production method and the sales method. The production method recognizes byproducts in the financial statements at the time production is completed. The sales method delays recognition of byproducts until the time of sale. The production method is the appropriate method to use because it is consistent with the matching principle. If the sales method were used, the byproduct cost recognition could be delayed for several periods until the inventory is sold. Diff: 2 Objective: 6 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 18 Process Costing Objective 18.1 1) Which of the following is the costing system used for mass produced like or similar units of products? A) inventory-costing systems B) job-costing systems C) process-costing systems D) weighted-average costing systems Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Which of the following companies is most likely to use process costing? A) Crimpson Color, a company selling customized garments for niche customers B) Effel & Associates, a consulting firm providing various audit and related services C) Dental Bright Inc., a company manufacturing and selling toothpaste on a large scale D) Grimpy Corp., a company manufacturing furniture for customers as per their requirements Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Process costing would most likely be used to assign costs to products produced by which of these companies? A) Jones Flour Mill B) Riley Automobile Dealer C) Big Time Yacht Corporation D) Sullivan and Murphy Law Firm LLC Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
4) Which of the following statements is true? A) In a job-costing system, average production cost is calculated for all units produced. B) In a process-costing system, each unit uses approximately the same amount of resources.
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C) In a job-costing system, overheads are allocated to all units equally. D) In a process-costing system, individual jobs use different quantities of production resources. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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5) Which of the following most accurately describes the contrast between process and job costing? A) in process costing, they include all the factors of production but job costing includes only materials and labor B) job costing includes materials, labor and overhead while process costing only considers conversion costs C) the main difference is the extent of averaging used to compute the unit costs D) job costing measures the variable cost of identical jobs while process costing measures the cost of identical products using average units costs of materials and conversion costs, some of which are fixed costs Answer: C Diff: 3 Objective: 1 AACSB: Analytical thinking
6) Which if the following are not conversion costs? A) the cost of direct laborers who assemble the parts of an automobile B) the cost of tires on an automobile C) the cost of depreciation on an automobile assembly plant D) the cost of electricity to run the tools in the automobile assembly plant Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Which of the following statements best describes conversion costs? A) Conversion costs are all manufacturing and nonmanufacturing costs. B) Conversion costs are all manufacturing costs other than direct materials costs. C) Conversion costs are all nonmanufacturing costs including marketing costs. D) Conversion costs are all nonmanufacturing costs other than fixed selling and distribution costs. Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Process-costing systems separate costs into cost categories according to: A) when costs are introduced into the process B) cost behavior (fixed versus variable) C) the specific job being worked on D) customer being served Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
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9) Job-costing systems separate costs into cost categories according to when costs are introduced into the process of manufacture. Answer: FALSE Explanation: Process-costing systems separate costs into cost categories according to when costs are introduced into the process of manufacture. Diff: 2 Objective: 1 AACSB: Analytical thinking
10) The principal difference between process costing and job costing is that in job costing an averaging process is used to compute the unit costs of products or services. Answer: FALSE Explanation: The averaging process is used to calculate unit costs in process costing. Diff: 2 Objective: 1 AACSB: Analytical thinking
11) The main difference between process costing and job costing is the extent of averaging used to compute unit costs. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
12) In a process-costing system, each unit uses varying amounts of resources. Answer: FALSE Explanation: In a process-costing system, each unit uses approximately the same amount of resources. Diff: 1 Objective: 1 AACSB: Analytical thinking
13) If manufacturing labor costs are added to the process at a different time compared to other conversion costs, an additional cost category—direct manufacturing labor costs—would be needed to assign these costs to products. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
14) Estimating the degree of completion for the calculation of equivalent units is usually easier for conversion costs than it is for direct materials. Answer: FALSE Explanation: Estimating the degree of completion is easier for the calculation of direct materials since direct materials can be measured more easily than conversion costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
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15) If two different direct materials—such as the circuit board and microphone—are added to the process at different times, a company will need two different direct-materials categories to assign direct materials cost. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
16) Conversion costs include direct materials and direct labor but excludes all other manufacturing and non-manufacturing costs. Answer: FALSE Explanation: Conversion costs are all manufacturing costs other than direct material costs, including manufacturing labor, energy, plant depreciation, and so on. Diff: 2 Objective: 1 AACSB: Analytical thinking
17) Job-costing and process-costing are mutually exclusive, hence a hybrid costing system that combines elements of both job and process costing cannot be used. Answer: FALSE Explanation: Job-costing and process-costing are not mutually exclusive. Many companies use a hybrid costing system combining elements of both job and process costing. Diff: 3 Objective: 1 AACSB: Analytical thinking
18) There are basically two distinct methods of calculating product costs. Required: Compare and contrast the two methods. Answer: In job costing the job or product is a distinctly identifiable product or service. Each job requires (or can require) vastly different amounts of input. Job costing is usually associated with products that are unique or heterogeneous. Thus, each job requires different amounts of input, and they can require vastly different amount of costs to finish. Job-costed products tend to be high cost per unit. Thus the costs of each (unique) job are important for planning, pricing, and profitability. In process costing, the jobs or products are similar (or homogeneous). Each job usually requires the same inputs, and results in approximately the same costs per unit. The cost of a product or service is obtained by assigning total costs to many identical or similar units. We assume each unit receives the same amount of direct material costs, direct manufacturing labor costs, and indirect manufacturing costs. Unit costs are then computed by dividing total costs by the number of units. The principal difference between process costing and job costing is the extent of averaging used to compute unit costs. As noted above in job costing, individual jobs use different quantities of production resources; whereas in process costing, we assume that each job uses approximately the same amount of resources. Diff: 2 Objective: 1 AACSB: Analytical thinking
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19) Why do we need to accumulate and calculate unit costs in process costing (and also job costing)? Answer: We need to accumulate unit costs to: 1. Budget (planning) 2. Price 3. Account for the costs 1. Budgeting — To operate a successful business, we should prepare budgets, review the results, and make decisions as to how well our business is doing. Our business has formulated plans for the future. The resources we need for the future (materials, conversion costs, facilities, etc.) will depend on our estimate of the resources we need to accomplish these goals. An important part of these estimates is the unit costs of the products we plan to produce. These unit costs will tell us how many dollars we must acquire to accomplish our plans. 2. Price — In order to be a profitable business, we must sell our product at a price in excess of what it costs us to produce the product. Essential for the pricing decision is the cost per unit. We will also learn whether we can sell a product at a profit. 3. Accounting — During the course of the accounting period, we will be accumulating costs. At the end of the accounting period, we must allocate this pool of costs between the units that were transferred out and the goods in ending inventory. Unit costs are essential for this purpose. Diff: 1 Objective: 1 AACSB: Analytical thinking
20) The president of the Gulf Coast Refining Corporation wants to know why his golfing partner, who is the chief financial officer of a large construction company, calculates his costs by the job, but his own corporation calculates costs by large units rather than by individual barrel of oil. Answer: Oil refineries use process costing to calculate their costs per barrel of oil. Each barrel of oil is essentially the same. Thus, costs are accumulated for all the oil processed during a given time period, and the total costs are divided by the barrels of oil produced. An average cost is calculated. Since the costs to actually produce the oil are essentially the same, accuracy is not lost by this process. The construction company calculates costs by each job, since each job can require substantially different amounts of the various inputs. Thus, the cost of each job could be radically different from the other jobs. Diff: 1 Objective: 1 AACSB: Analytical thinking
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21) Describe the differences between process costing and job costing. Discuss some typical products which would be more likely to use process costing as compared to some which would be more likely to use job costing. Answer: When products are unique, job costing is a more appropriate method to use in collecting costs and making decisions regarding price levels,. In a job-costing system, individual jobs require differing levels of resources. Each job is treated separately and the resources used to complete the job have to be calculated separately. Construction jobs are most likely to use job costing because of their unique specifications. In a process-costing system, the units produced as output are very similar to one another. As a result, the means by which the raw material is converted to a finished product is common among all of the products. This allows the conversion costs to be summed up and divided by the total number of units for an accurate conversion cost on a unit by unit basis. Some typical types of products which are likely to use process costing are oil refineries, ice cream, various food preparation industries, etc. This is because the raw material is processed in a similar manner for all of the units produced. Diff: 1 Objective: 1 AACSB: Analytical thinking
22) Briefly explain this statement: "Job costing and process costing are the ends of a continuum." Answer: two systems are described as the ends of a continuum. Most operations have characteristics of both job-costing and process-costing systems and management must make a determination about which type of system to use. Diff: 1 Objective: 1 AACSB: Analytical thinking
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Objective 18.2 1) In a process-costing system average unit costs are calculated: A) by dividing total costs in a given accounting period by total units produced in that period B) by multiplying total costs in a given accounting period by total units produced in that period C) by dividing total costs in a given accounting period by units started in that period D) by multiplying total costs in a given accounting period by units started in that period Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
2) Vital Industries manufactured 2,600 units of its product Huge in the month of April. It incurred a total cost of $130,000 during the month. Out of this $130,000, $46,000 comprised of direct materials used in the product and the rest was incurred because of the conversion cost involved in the process. Ryan had no opening or closing inventory. What will be the total cost per unit of the product, assuming conversion costs contained $10,400 of indirect labor? A) $50 B) $45 C) $35 D) $32 Answer: A Explanation: A) Total cost per unit = $130,000 / 2,600 = $50 Diff: 3 Objective: 2 AACSB: Application of knowledge
3) Serile Pharma places 840 units in production during the month of January. All 840 units are completed during the month. It had no opening inventory. Direct material costs added during January was $106,000 and conversion costs added during January was $11,600. What is the total cost per unit of the product produced during January? A) $140 B) $10 C) $80 D) $126 Answer: A Explanation: A) Total cost per unit = [($106,000 + $11,600) / 840] = $140 Diff: 3 Objective: 2 AACSB: Application of knowledge
4) When a company has no opening or ending inventory during the month, the cost per unit is calculated by dividing the total costs incurred in the period by the total units produced during the period. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
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5) Often the need for separate equivalent unit calculations for materials and for conversion cost is due to the fact that material is typically added throughout the production process while conversion costs are added at the beginning of the process. Answer: FALSE Explanation: Just the opposite is typically the case. Materials are often added early in the conversion process. Therefore, separate equivalent unit calculations are done for materials and for conversion cost due to the fact that material is typically introduced at the beginning of the process with conversion costs added throughout the process. Diff: 2 Objective: 2 AACSB: Analytical thinking
Objective 18.3 1) The purpose of the equivalent-unit computation is to: A) convert completed units into the amount of partially completed output units that could be made with that quantity of input B) use a common metric to estimate the amount of work done on units in a period C) predict the future production capabilities of the organization D) satisfy the GAAP requirements which requires all partially completed goods to be reported as equivalent-units Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
2) Which of the following is true regarding estimates of completion of units in a process costing system? A) estimating the degree of completion with regards to conversion costs is more of a science than an art B) estimating the degree of completion with regards to conversion costs is usually easier and more accurate than estimating the degree of completion with regards to direct materials C) estimating the degree of completion with regards to direct materials is usually easier and more accurate than estimating the degree of completion with regards to conversion costs D) when estimating degree of completion, the degree of completion with regards to conversion costs is usually a portion similar to the degree of completion with regards to direct materials Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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3) When a Bakery transfers goods from the Mixing Department to the Baking Department, the accounting entry would be: A) Debit: Work in Process — Mixing Department Credit: Work in Process — Baking Department B) Debit: Work in Process — Baking Department Credit: Accounts Payable C) Debt: Work in Process — Baking Department Credit: Work in Process — Mixing Department D) Debt: Work in Process — Mixing Department Credit: Accounts Payable Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
4) Charlie Chairs Inc., manufactures plastic moldings for car seats. Its costing system utilizes two cost categories, direct materials and conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Department A for February 2020 are: Work in process, beginning inventory, 45% converted Units started during February Work in process, ending inventory
310 units 820 units 300 units
Costs for Department A for February 2020 are: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during February Conversion costs added during February
$155,000 $204,000 $604,000 $434,000
What is the unit cost per equivalent unit of beginning inventory in Department A? (Round the final answer to the nearest whole dollar.) A) $500 B) $962 C) $2,200 D) $1,962 Answer: D Explanation: D) Direct materials per unit ($155,000/ 310 units) $500 Conversion costs per unit ($204,000 / 310 × 0.45) units) 1,462 Total costs per unit $1,962 Diff: 2 Objective: 3 AACSB: Application of knowledge
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5) Charlie Chairs Inc., manufactures plastic moldings for car seats. Its costing system utilizes two cost categories, direct materials and conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Department A for February 2020 are: Work in process, beginning inventory, 40% converted Units started during February Work in process, ending inventory
320 units 900 units 120 units
Costs for Department A for February 2020 are: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during February Conversion costs added during February
$160,000 $203,000 $601,000 $427,000
How many units were completed and transferred out of Department A during February? A) 440 units B) 900 units C) 1,100 units D) 1,220 units Answer: C Explanation: C) Number of units completed and transferred out = 320 units + 900 units - 120 units = 1,100 units Diff: 2 Objective: 3 AACSB: Application of knowledge
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6) Dessa Cabinetry, Inc., manufactures standard sized modular cabinet units for kitchens and other applications within the home. Its costing system utilizes two cost categories, direct materials and conversion costs. Each product must pass through the rough cut department and the finish department. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Finishing Department for March 2020 are: Work in process, beginning inventory, 30% converted Units started during February Work in process, ending inventory Costs for Finishing Department for March 2020 are: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during February Conversion costs added during February
880 units 1,900 units 550 units
$198,000 $204,000 $421,000 $140,000
What is the unit cost per equivalent unit of the beginning inventory in the Finishing Department? (Round the final answer to the nearest whole dollar.) A) $225 B) $360 C) $773 D) $998 Answer: D Explanation: D) Direct materials per unit ($198,000/ 880 units) $225 Conversion costs per unit ($204,000 / 880 × 0.3) units) 773 Total costs per unit $998 Diff: 2 Objective: 3 AACSB: Application of knowledge
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7) Dessa Cabinetry, Inc., manufactures standard sized modular cabinet units for kitchens and other applications within the home. Its costing system utilizes two cost categories, direct materials and conversion costs. Each product must pass through the rough cut department and the finish department. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Finishing Department for March 2020 are: Work in process, beginning inventory, 25% converted Units started during February Work in process, ending inventory Costs for Finishing Department for March 2020 are: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during February Conversion costs added during February
1,020 units 1,200 units 600 units
$204,000 $200,000 $421,000 $140,000
How many units were completed and transferred out of the Finishing Department during March? A) 1,020 units B) 1,200 units C) 1,620 units D) 2,100 units Answer: C Explanation: C) Number of units completed and transferred out = 1,020 units + 1,200 units - 600 units = 1,620 units Diff: 2 Objective: 3 AACSB: Application of knowledge
8) Which of the following entries is used to record direct materials purchased and used in production during a month in the Assembly department, before transferring the goods to Testing department? A) Debit: Work in Process—Assembly Credit: Wages Payable Control B) Debit: Accounts Payable Control Credit: Work in Process—Assembly C) Debit: Work in Process—Assembly Credit: Accounts Payable Control D) Debit: Accounts Payable Control Credit: Cash Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
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9) Stefan Ceramics is in the business of selling ceramic vases. It has two departments – molding and finishing. Molding department purchases tungsten carbide and produces ceramic vases out of it. Ceramic Vases are then transferred to finishing department, which designs it as per the requirement of the customers. During the month of July, molding department purchased 720 kgs of tungsten carbide at $280 per kg. It started manufacture of 4,200 vases and completed and transferred 3,200 vases during the month. It has 1,000 vases in the process at the end of the month. It incurred direct labor charges of $1,700 and other manufacturing costs of $1,200, which included electricity costs of $500. Stefan had no inventory of tungsten carbide at the end of the month. It also had no beginning inventory of vases. The ending inventory was 55% complete in respect of conversion costs. Which of the following journal entry would record the tungsten carbide purchased and used in production during July? A) Work in Process—Molding $2,200 Accounts Payable Control $2,200 B) Work in Process—Molding $201,600 Accounts Payable Control $201,600 C) Accounts Payable Control $2,200 Work in Process—Molding $2,200 D) Accounts Payable Control $201,600 Work in Process—Molding $201,600 Answer: B Explanation: B) 720 kg × $280 = $201,600 Diff: 2 Objective: 3 AACSB: Application of knowledge
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10) Stefan Ceramics is in the business of selling ceramic vases. It has two departments – molding and finishing. Molding department purchases tungsten carbide and produces ceramic vases out of it. Ceramic Vases are then transferred to finishing department, which designs it as per the requirement of the customers. During the month of July, molding department purchased 650 kgs of tungsten carbide at $210 per kg. It started manufacture of 3,500 vases and completed and transferred 3,200 vases during the month. It has 300 vases in the process at the end of the month. It incurred direct labor charges of $1,000 and other manufacturing costs of $600, which included electricity costs of $900. Stefan had no inventory of tungsten carbide at the end of the month. It also had no beginning inventory of vases. The ending inventory was 55% complete in respect of conversion costs. Which of the following journal entries would be correct to record direct labor for July? A) Work in Process—Molding Accounts Payable Control B) Work in Process—Molding Overhead Control C) Work in Process—Molding Wages Payable Control D) Work in Process—Molding Work in Process—Finishing Answer: C
$136,500 $136,500 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
Diff: 2 Objective: 3 AACSB: Application of knowledge
11) Stefan Ceramics is in the business of selling ceramic vases. It has two departments – molding and finishing. Molding department purchases tungsten carbide and produces ceramic vases out of it. Ceramic Vases are then transferred to finishing department, which designs it as per the requirement of the customers. During the month of July, molding department purchased 500 kgs of tungsten carbide at $60 per kg. It started manufacture of 4,000 vases and completed and transferred 3,600 vases during the month. It has 400 vases in the process at the end of the month. It incurred direct labor charges of $1,400 and other manufacturing costs of $900, which included electricity costs of $700. Stefan had no inventory of tungsten carbide at the end of the month. It also had no beginning inventory of vases. The ending inventory was 55% complete in respect of conversion costs. What is the total conversion costs for the month of July? A) $3,000 B) $2,300 C) $1,600 D) $1,400 Answer: B Explanation: B) Total conversion cost = $1,400 + $900 = $2,300 Diff: 2 Objective: 3 AACSB: Application of knowledge
1218 richard@qwconsultancy.com
12) Stefan Ceramics is in the business of selling ceramic vases. It has two departments – molding and finishing. Molding department purchases tungsten carbide and produces ceramic vases out of it. Ceramic Vases are then transferred to finishing department, which designs it as per the requirement of the customers. During the month of July, molding department purchased 500 kgs of tungsten carbide at $60 per kg. It started manufacture of 4,000 vases and completed and transferred 3,700 vases during the month. It has 300 vases in the process at the end of the month. It incurred direct labor charges of $1,400 and other manufacturing costs of $800, which included electricity costs of $400. Stefan had no inventory of tungsten carbide at the end of the month. It also had no beginning inventory of vases. The ending inventory was 45% complete in respect of conversion costs. What is the cost of tungsten carbide that will be assigned to vases finished and transferred to the finishing department for the month of July? A) $30,000 B) $30,350 C) $4,500 D) $27,750 Answer: D Explanation: D) Tungsten carbide cost per unit = [(500 × 60) / 4,000] = $7.5 per unit Cost of Tungsten carbide that will be assigned to vases finished and transferred to the finishing department = $7.5 × 3,700 units = $27,750 Diff: 3 Objective: 3 AACSB: Application of knowledge
13) Which of the following statements is true of conversion costs? A) Estimating the degree of completion is usually easier for direct material costs than for conversion costs. B) The calculation of equivalent units is relatively easy for the textile industry. C) The conversion cost needed for a completed unit and the conversion cost in a partially completed unit can be measured accurately. D) If conversion costs are added evenly during the assembly we can conclude that there are more than one indirect-cost category. Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
14) Underestimating the degree of completion of ending work in process leads to increase in operating income. Answer: FALSE Explanation: Overestimating the degree of completion of ending work in process decreases the costs assigned to goods transferred out and eventually to cost of goods sold and increases operating income. Diff: 2 Objective: 3 AACSB: Analytical thinking
1219 richard@qwconsultancy.com
15) The last step in a process-costing system is to compute cost per equivalent unit. Answer: FALSE Explanation: The last step in a process-costing system is to assign total costs to units completed and to units in ending work in process. Diff: 2 Objective: 3 AACSB: Analytical thinking
16) Equivalent units is a derived measure of output calculated by converting the quantity of inputs into the amount of completed output that could be produced with that quantity of input. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
17) When there are beginning inventories, it is assumed that the percentage of completion of the unfinished units is 100%. Answer: FALSE Explanation: When there are beginning or ending work-in-process inventories, estimates must be made about the percentage of completion of the unfinished units. Diff: 2 Objective: 3 AACSB: Analytical thinking
18) The accuracy of the completion estimate of conversion costs depends on the care, skill, and experience of the estimator and also the nature of the conversion process. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
19) The accuracy of the percentage of completion estimate of conversion costs depends on formulas used by cost accountants. Answer: FALSE Explanation: The accuracy of the completion estimate of conversion costs depends on the care, skill, and experience of the estimator and also the nature of the conversion process. Diff: 2 Objective: 3 AACSB: Analytical thinking
20) In a process-costing system, there is always a separate Work-in-Process account for each different process. or department in the process. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
1220 richard@qwconsultancy.com
21) A production cost worksheet is used to summarize total costs to account for, compute cost per equivalent unit, and assign total costs to units completed and to units in ending work-in-process. Answer: TRUE Explanation: A production cost worksheet is used to summarize total costs to account for, compute cost per equivalent unit, and assign total costs to units completed and to units in ending work-in-process. Diff: 2 Objective: 3 AACSB: Analytical thinking
22) When calculating the equivalent units, we should only focus on dollar amounts of inventory. Answer: FALSE Explanation: When calculating the equivalent units, we should disregard dollar amounts and focus should be on quantities. Diff: 2 Objective: 3 AACSB: Analytical thinking
23) The accounting entry to record the conversion cost of the Assembly Department is: Work in Process-Assembly Department Accounts Payable Control Answer: FALSE Explanation: The correct accounting entry is: Work in Process—Assembly Department Various accounts such as Wages Payable Control and Accumulated Depreciation Diff: 2 Objective: 3 AACSB: Analytical thinking
1221 richard@qwconsultancy.com
24) Big Bernard Corporation was recently formed to produce a semiconductor chip that forms an essential part of the personal computer manufactured by a major corporation. The direct materials are added at the start of the production process while conversion costs are added uniformly throughout the production process. June is Big Bernard's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totaled $950,000, while conversion costs equaled $4,625,000. Accounting records indicate that 475,000 chips were started in June and 425,000 chips were completed. Ending inventory was 50% complete as to conversion costs. Required: a. What is the total manufacturing cost per chip for June? b. Allocate the total costs between the completed chips and the chips in ending inventory. Answer: a. Direct Materials Conversion Costs Total Cost to account for $950,000 $4,625,000 $5,575,000 Divided by equiv. units 475,000 450,000 Cost per equivalent units $2.00 $10.28 $12.28 Equivalent unit for conversion costs = 425,000 completed + (50,000 × 0.5 completed) = 425,000 + 25,000 = 450,000 b.
Completed units = $12.28 × 425,000 = $5,219,000 Ending work in process = Direct materials = 50,000 × $2.00 = Conversion costs = 25,000 × $10.28 = Total ending work in process
Diff: 2 Objective: 3 AACSB: Application of knowledge
1222 richard@qwconsultancy.com
$ 100,000 257,000 $357,000
25) The Esther Valve Corporation was recently formed to produce a brass valve that forms an essential part of a compressor manufactured by a major corporation. The direct materials are added at the start of the production process while conversion costs are added uniformly throughout the production process. September is Parson's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totaled $2,800,000, while conversion costs equaled $3,600,000. Accounting records indicate that 1,600,000 valves were started in September and 1,400,000 valves were completed. Ending inventory was 20% complete as to conversion costs. Required: a. What is the total manufacturing cost per valve for September? b. Allocate the total costs between the completed valves and the valves in ending inventory. Answer: a. Direct Materials Conversion Costs Total Cost to account for $2,800,000 $3,600,000 $6,400,000 Divided by equiv. units 1,600,000 1,440,000 Cost per equivalent units $1.75 $2.50 $4.25 Equivalent unit for conversion costs = 1,400,000 completed + (200,000 × 0.2 completed) = 1,400,000 + 40,000 = 1,440,000 b.
Completed units = $4.25 × 1,400,000 =
$5,950,000
Ending work in process = Direct materials = 200,000 × $1.75 = Conversion costs =40,000 × $2.50 = Total ending work in process Diff: 2 Objective: 3 AACSB: Application of knowledge
1223 richard@qwconsultancy.com
$ 350,000 100,000 $450,000
26) Sodius Chemical Inc. placed 220,000 liters of direct materials into the mixing process. At the end of the month, 5,000 liters were still in process, 30% converted as to labor and factory overhead. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly during the process. Sodius uses weighted-average costing. Required: a. Determine the equivalent units in process for direct materials and conversion costs, assuming there was no beginning inventory. b. Determine the equivalent units in process for direct materials and conversion costs, assuming that 12,000 liters of chemicals were 40% complete prior to the addition of the 220,000 liters. Answer: a. Direct materials: Beginning inventory 0 liters Units started 220,000 liters Equivalent units 220,000 liters Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 liters 220,000 liters 220,000 liters 215,000 liters 5,000 liters
Units transferred out Ending inventory, 30% complete Equivalent units b.
215,000 liters 1,500 liters 216,500 liters
Direct materials: Completed and transferred out (215,000 + 12,000) Ending inventory, 100% complete Equivalent units
227,000 liters 5,000 liters 232,000 liters
Conversion costs: Completed and transferred out Ending inventory, 30% complete Equivalent units
227,000 liters 1,500 liters 228,500 liters
Diff: 2 Objective: 3 AACSB: Application of knowledge
1224 richard@qwconsultancy.com
27) Bright Colors Company placed 315,000 gallons of direct materials into the mixing process. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly during the process. Bright Colors uses weighted-average costing. The initial forecast for the end of the month was to have 75,000 gallons still in process, 15% converted as to labor and factory overhead. Required: a. Determine the total equivalent units (in process and transferred out) for direct materials and for conversion costs, assuming there was no beginning inventory. b. With the installation of a new paint processing filtration device, the forecast for the end of the month was to have 50,000 gallons still in process, 70% converted as to labor and factory overhead. In this event, determine the equivalent units (in process and transferred out) for direct materials and for conversion costs, assuming there was no beginning inventory. Answer: a. Direct materials: Beginning inventory 0 gallons Units started 315,000 gallons Equivalent units 315,000 gallons Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 gallons 315,000 gallons 315,000 gallons 240,000 gallons 75,000 gallons
Units transferred out Ending inventory, 15% complete Equivalent units b.
240,000 gallons 11,250 gallons 251,250 gallons
Direct materials: Beginning inventory Units started Equivalent units
0 gallons 315,000 gallons 315,000 gallons
Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 gallons 315,000 gallons 315,000 gallons 265,000 gallons 50,000 gallons
Units transferred out Ending inventory, 70% complete Equivalent units
265,000 gallons 35,000 gallons 300,000 gallons
Diff: 2 Objective: 3 AACSB: Analytical thinking
1225 richard@qwconsultancy.com
28) Jordana Woolens is a manufacturer of wool cloth. The information for March is as follows: Beginning work in process Units started Units completed
10,000 units 20,000 units 25,000 units
Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labor during month Factory overhead
$ 6,000 $ 2,600 $30,000 $12,000 $ 5,000
Beginning work in process was half converted as to labor and overhead. Direct materials are added at the beginning of the process. All conversion costs are incurred evenly throughout the process. Ending work in process was 60% complete. Required: Prepare a production cost worksheet using the weighted-average method. Include any necessary supporting schedules. Answer: PRODUCTION COST WORKSHEET Flow of production Physical Units Direct Materials Work in process, beginning 10,000 Started during period 20,000 To account for 30,000 Units completed Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
25,000 5,000 30,000
25,000 5,000 30,000
Conversion
25,000 3,000 28,000
Totals Direct Materials Conversion $ 8,600 $ 6,000 $ 2,600 47,000 30,000 17,000 $55,600 $36,000 $19,600 30,000 28,000 $ 1.90 $ 1.20 $ 0.70
Assignment of costs Costs transferred out (25,000 × $1.90) Work in process, ending Direct materials (5,000 × $1.20) Conversion (5,000 × $0.70 × 0.60) Costs accounted for
$47,500 6,000 2,100 $55,600
Diff: 3 Objective: 3 AACSB: Analytical thinking
1226 richard@qwconsultancy.com
29) List and describe the five steps in process costing. Answer: Step 1 involves summarizing the physical flow of the units of output. Step 2 involves determining the number output expressed in terms of equivalent units. This means determining how many complete units would have been done with the materials, time, and effort expended had units been done one at a time. The third step involves computing the cost per equivalent unit — determining how much a whole unit cost for each item this period. In the fourth step, the costs that need to be assigned to the units are summarized. The fifth step involves assigning the costs to the completed units and the units still remaining in work in process. Diff: 2 Objective: 3 AACSB: Analytical thinking
30) Marv and Vicki own and operate a vegetable canning plant. In recent years, their business has grown tremendously and, at any point in time, they may have 30 to 35 different vegetables being processed. Also, during the peak summer months there are several thousand bushels of vegetables in some stage of processing at any one time. With the company's growth during the past few years, the owners decided to employ an accountant to provide cost estimations on each vegetable category and prepare monthly financial statements. Although the accountant is doing exactly as instructed, Marv and Vicki are confused about the monthly operating costs. Although they process an average of 50,000 canned units a month, the monthly production report fluctuates wildly. Required: Explain how the production report can fluctuate wildly if they process a constant amount of vegetables each month. Answer: It appears that the accountant may not be using equivalent units of production but he or she is only including completed units when preparing the monthly reports. Particularly with large summer inventories, the number and value associated costs with ending work in process could cause wide fluctuations between months if the equivalent unit concept is ignored. The accountant should start using equivalent units to determine the costs to assign to finished goods and ending work in process each month. Diff: 2 Objective: 3 AACSB: Analytical thinking
1227 richard@qwconsultancy.com
Objective 18.4 1) The weighted-average process-costing method calculates the equivalent units by: A) considering only the work done during the current period B) the units started during the current period minus the units in ending inventory C) the units started during the current period plus the units in ending inventory D) the equivalent units completed during the current period plus the equivalent units in ending inventory Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
2) Assembly department of Zahra Technologies had 200 units as work in process at the beginning of the month. These units were 50% complete. It has 300 units which are 30% complete at the end of the month. During the month, it completed and transferred 600 units. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Zahra uses weighted-average process-costing method. What is the number of equivalent units of work done during the month with regards to direct materials? A) 700 units B) 1,100 units C) 900 units D) 600 units Answer: C Explanation: C) Equivalent units for direct material = 600 units + 300 units = 900 units Diff: 2 Objective: 4 AACSB: Application of knowledge
3) Assembly department of Zahra Technologies had 100 units as work in process at the beginning of the month. These units were 60% complete. It has 300 units which are 35% complete at the end of the month. During the month, it completed and transferred 500 units. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Zahra uses weighted-average process-costing method. Calculate the total equivalent units in ending inventory for assignment of conversion costs? A) 100 units B) 105 units C) 195 units D) 300 units Answer: B Explanation: B) Equivalent units in ending inventory = 300 units × 35% = 105 units Diff: 2 Objective: 4 AACSB: Application of knowledge
1228 richard@qwconsultancy.com
4) Assembly department of Zahra Technologies had 100 units as work in process at the beginning of the month. These units were 60% complete. It has 300 units which are 25% complete at the end of the month. During the month, it completed and transferred 600 units. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Zahra uses weighted-average process-costing method. What is the total equivalent units in ending inventory for assignment of direct materials cost? A) 100 units B) 75 units C) 225 units D) 300 units Answer: D Explanation: D) As direct materials are added at the beginning of production, equivalent units = 300 units Diff: 2 Objective: 4 AACSB: Application of knowledge
5) In the computation of the cost per equivalent unit, the weighted-average method of process costing considers all the costs: A) entering work in process from the units in beginning inventory plus the costs for the work completed during the current accounting period B) that have entered work in process from the units started or transferred in during the current accounting period C) that have entered work in process during the current accounting period from the units started or transferred in minus the costs associated with ending inventory D) that have entered work in process during the current accounting period from the units started or transferred in plus the costs associated with ending inventory Answer: A Diff: 3 Objective: 4 AACSB: Analytical thinking
6) Which of the following is NOT true of the weighted-average process-costing method? A) the method calculates the cost per equivalent unit of all work done to date regardless of the accounting period in which the work was done B) the costs in work in process (beginning work in process) when the period starts are not considered when calculating the weighted-average cost per equivalent unit C) the weighted-average cost is the total of all costs entering the Work in Process account divided by the total equivalent units in ending work-in-process inventory D) the costs to account for are equal to the beginning work in process plus the costs added to work in process during the same period Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
1229 richard@qwconsultancy.com
7) Under the weighted-average method, how would you calculate the cost per equivalent units with regards to conversion costs? A) conversion costs for work done in the current period/units completed and transferred out in the current period B) (total conversion costs in beginning work in process)/(units completed and transferred out during the period + equivalent units in ending inventory) C) (total conversion costs in beginning work in process + conversion cost for work done in the current period)/(units completed and transferred out during the period + equivalent units in ending inventory) D) (total direct labor costs in beginning work in process + conversion cost for work done in the current period)/(units completed and transferred out during the period + equivalent units in ending inventory) Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
1230 richard@qwconsultancy.com
8) Timekeeper Inc. manufactures clocks on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Timekeeper Inc. uses weighted-average costing. Data for the Assembly Department for June 2020 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (55% complete)
300 units
Units started in June Work in process, ending inventory: Direct materials (100% complete) Conversion costs (75% complete)
950 units 220 units
Costs for June 2020: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$93,000 $139,500 $602,000 $400,000
What are the equivalent units for direct materials and conversion costs, respectively, for June? (Round final answers to the nearest unit.) A) 1,250 units; 953 units B) 1,250 units; 1,195 units C) 1,170 units; 1,170 units D) 1,098 units; 979 units Answer: B Explanation: B) Direct materials Conversion costs Completed and transferred out (300 + 950 - 220) 1,030.0 1,030.0 Work in process, ending 220.0 165.0 Total equivalent units 1,250 1,195 Diff: 2 Objective: 4 AACSB: Application of knowledge
1231 richard@qwconsultancy.com
9) Timekeeper Inc. manufactures clocks on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Timekeeper Inc. uses weighted-average costing. Data for the Assembly Department for June 2020 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (55% complete)
300 units
Units started in June Work in process, ending inventory: Direct materials (100% complete) Conversion costs (75% complete)
1,010 units 220 units
Costs for June 2020: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$93,500 $140,000 $600,500 $402,000
What is the total amount debited to the Work-in-Process account during the month of June? A) $233,500 B) $1,002,500 C) $1,142,500 D) $1,236,000 Answer: B Explanation: B) The total amount debited to the Work-in-Process account during the month of June = $600,500 + $402,000 = $1,002,500 Diff: 1 Objective: 4 AACSB: Application of knowledge
1232 richard@qwconsultancy.com
10) Timekeeper Inc. manufactures clocks on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Timekeeper Inc. uses weighted-average costing. Data for the Assembly Department for June 2020 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (60% complete)
300 units
Units started in June Work in process, ending inventory: Direct materials (100% complete) Conversion costs (70% complete)
1,000 units 150 units
Costs for June 2020: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$93,500 $139,000 $601,500 $402,500
What is the direct materials cost per equivalent unit during June? A) $776.54 B) $523.04 C) $534.62 D) $462.69 Answer: C Explanation: C) Direct materials Conversion costs Completed and transferred out (300 + 1,000 - 150) 1,150.0 1,150.0 Work in process, ending 150.0 105.0 Total equivalent units 1,300.0 1,255.0
Total cost of direct materials = $93,500 + $601,500 = $695,000 Direct material cost per equivalent unit = $695,000 / 1,300.0 units = $534.62 Diff: 3 Objective: 4 AACSB: Application of knowledge
1233 richard@qwconsultancy.com
11) Timekeeper Inc. manufactures clocks on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Timekeeper Inc. uses weighted-average costing. Data for the Assembly Department for June 2020 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (60% complete)
340 units
Units started in June Work in process, ending inventory: Direct materials (100% complete) Conversion costs (75% complete)
1,030 units 150 units
Costs for June 2020: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$92,500 $139,000 $601,500 $401,500
What is the conversion cost per equivalent unit in June? A) $521.80 B) $920.94 C) $405.63 D) $382.71 Answer: C Explanation: C) Direct materials Conversion costs Completed and transferred out (340 + 1,030 - 150) 1,220 1,220 Work in process, ending 150 112.5 Total equivalent units 1,370.0 1,332.5
The total conversion cost = $139,000 + $401,500 = $540,500 Conversion cost per equivalent unit = $540,500 / 1,332.5 = $405.63 Diff: 3 Objective: 4 AACSB: Application of knowledge
1234 richard@qwconsultancy.com
12) Timekeeper Inc. manufactures clocks on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Timekeeper Inc. uses weighted-average costing. Data for the Assembly Department for June 2020 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (60% complete)
380 units
Units started in June Work in process, ending inventory: Direct materials (100% complete) Conversion costs (75% complete)
960 units 210 units
Costs for June 2020: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$92,500 $136,500 $604,000 $402,500
What amount of direct materials costs is assigned to the ending Work-in-Process account for June? (Round intermediary calculations to the nearest whole dollar.) A) $109,200 B) $79,492 C) $116,115 D) $64,957 Answer: A Explanation: A) Direct materials Conversion costs Completed and transferred out (380 + 960 - 210) 1,130 1,130 Work in process, ending 210 157.5 Total equivalent units 1,340.0 1,287.5 Direct material cost per equivalent unit = [($604,000 + $92,500) / 1,340.0] = $520. Equivalent units in ending inventory = 210 units Direct materials cost to be assigned to ending Work-in-Process account = $520 × 210 = $109,200 Diff: 3 Objective: 4 AACSB: Application of knowledge
1235 richard@qwconsultancy.com
13) Timekeeper Inc. manufactures clocks on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Timekeeper Inc. uses weighted-average costing. Data for the Assembly Department for June 2020 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (50% complete)
350 units
Units started in June Work in process, ending inventory: Direct materials (100% complete) Conversion costs (85% complete)
1,040 units 220 units
Costs for June 2020: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$90,000 $137,000 $603,000 $400,500
What amount of conversion costs is assigned to the ending Work-in-Process account for June? (Round any intermediary calculations to the nearest cent.) A) $103,013.51 B) $74,068.83 C) $315.74 D) $400,500.00 Answer: B Explanation: B) Direct materials Conversion costs Completed and transferred out (350 + 1,040 - 220) 1,170 1,170 Work in process, ending 220 187.0 Total equivalent units 1,390.0 1,357.0 Conversion cost per equivalent unit = $537,500 / 1,357.0 = $396.09 Equivalent units in ending inventory = 220 × 85% = 187.0 equivalent units Conversion cost to be assigned to ending Work-in-Process account = 187.0 × $396.09 = $74,068.83 Diff: 3 Objective: 4 AACSB: Application of knowledge
1236 richard@qwconsultancy.com
14) Shiffon Electronics manufactures music players. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department, the Programming department, and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Shiffon Electronics uses weighted-average costing. The following information is available for the month of March 2020 for the Assembly department. Work in process, beginning inventory Conversion costs (30% complete) Units started during March Work in process, ending inventory: Conversion costs (60% complete)
360 units 830 units 200 units
The cost details for the month of March are as follows: Work in process, beginning inventory Direct materials $346,000 Conversion costs $366,500 Direct materials costs added during March $708,500 Conversion costs added during March $1,120,000 What are the equivalent units for direct materials and conversion costs, respectively, for March? A) 1,190 units; 1,190 units B) 1,110 units; 1,190 units C) 1,190 units; 1,110 units D) 990 units; 1,110 units Answer: C Explanation: C) Direct materials Conversion costs Completed and transferred out (360 + 830 - 200) 990 990 Work in process, ending 200 120 Total equivalent units 1,190 1,110 Diff: 2 Objective: 4 AACSB: Application of knowledge
1237 richard@qwconsultancy.com
15) Shiffon Electronics manufactures music players. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department, the Programming department, and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Shiffon Electronics uses weighted-average costing. The following information is available for the month of March 2020 for the Assembly department. Work in process, beginning inventory Conversion costs (25% complete) Units started during March Work in process, ending inventory: Conversion costs (55% complete)
350 units 860 units 120 units
The cost details for the month of March are as follows: Work in process, beginning inventory Direct materials $347,000 Conversion costs $361,000 Direct materials costs added during March $703,500 Conversion costs added during March $1,127,000 What is the total amount debited to the Work-in-Process account during the month of March? A) $2,538,500 B) $2,191,500 C) $1,830,500 D) $703,500 Answer: C Explanation: C) The total amount debited to the Work-in-Process account = $703,500 + $1,127,000 = $1,830,500 Diff: 1 Objective: 4 AACSB: Application of knowledge
1238 richard@qwconsultancy.com
16) Shiffon Electronics manufactures music players. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department, the Programming department, and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Shiffon Electronics uses weighted-average costing. The following information is available for the month of March 2020 for the Assembly department. Work in process, beginning inventory Conversion costs (40% complete) Units started during March Work in process, ending inventory: Conversion costs (65% complete)
400 units 840 units 180 units
The cost details for the month of March are as follows: Work in process, beginning inventory Direct materials $348,500 Conversion costs $366,000 Direct materials costs added during March $709,000 Conversion costs added during March $1,128,000 What is the direct materials cost per equivalent unit during March? (round to the nearest dollar) A) $898 B) $853 C) $572 D) $281 Answer: B Explanation: B) Direct materials Conversion costs Completed and transferred out (400 + 840 - 180) 1,060 1,060 Work in process, ending 180 117 Total equivalent units 1,240 1,177
Total cost of direct materials = $348,500 + $709,000 = $1,057,500 Direct material cost per equivalent unit = $1,057,500 / 1,240 units = $853 Diff: 3 Objective: 4 AACSB: Application of knowledge
1239 richard@qwconsultancy.com
17) Shiffon Electronics manufactures music players. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department, the Programming department, and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Shiffon Electronics uses weighted-average costing. The following information is available for the month of March 2020 for the Assembly department. Work in process, beginning inventory Conversion costs (40% complete) Units started during March Work in process, ending inventory: Conversion costs (55% complete)
340 units 900 units 130 units
The cost details for the month of March are as follows: Work in process, beginning inventory Direct materials $346,500 Conversion costs $361,500 Direct materials costs added during March $705,500 Conversion costs added during March $1,130,000 What is the conversion cost per equivalent unit in March? (Round to the nearest cent) A) $911.29 B) $1,261.84 C) $1,249.15 D) $956.01 Answer: B Explanation: B) Direct materials Conversion costs Completed and transferred out (340 + 900 - 130) 1,110 1,110 Work in process, ending 130 72 Total equivalent units 1,240 1,182 Total conversion cost = 361,500 + $1,130,000 = $1,491,500 Conversion cost per equivalent unit in June = $1,491,500 / 1,182 = 1,261.84 Diff: 3 Objective: 4 AACSB: Application of knowledge
1240 richard@qwconsultancy.com
18) Shiffon Electronics manufactures music players. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department, the Programming department, and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Shiffon Electronics uses weighted-average costing. The following information is available for the month of March 2020 for the Assembly department. Work in process, beginning inventory Conversion costs (35% complete) Units started during March Work in process, ending inventory: Conversion costs (60% complete)
380 units 840 units 160 units
The cost details for the month of March are as follows: Work in process, beginning inventory Direct materials $347,000 Conversion costs $362,500 Direct materials costs added during March $707,000 Conversion costs added during March $1,123,500 What amount of direct materials costs is assigned to the ending Work-in-Process account for March? (Round intermediary calculations to the nearest whole dollar.) A) $45,508 B) $92,721 C) $98,201 D) $138,240 Answer: D Explanation: D) Direct materials Conversion costs Completed and transferred out (380 + 840 - 160) 1,060 1,060 Work in process, ending 160 96 Total equivalent units 1,220 1,156 Direct material cost per equivalent unit = $1,054,000 / 1,220 = $864 Direct materials cost to be assigned to ending Work-in-Process account = 160 units × $864 = $138,240 Diff: 3 Objective: 4 AACSB: Application of knowledge
1241 richard@qwconsultancy.com
19) Shiffon Electronics manufactures music players. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department, the Programming department, and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Shiffon Electronics uses weighted-average costing. The following information is available for the month of March 2020 for the Assembly department. Work in process, beginning inventory Conversion costs (40% complete) Units started during March Work in process, ending inventory: Conversion costs (60% complete)
360 units 800 units 130 units
The cost details for the month of March are as follows: Work in process, beginning inventory Direct materials $347,000 Conversion costs $369,500 Direct materials costs added during March $709,500 Conversion costs added during March $1,129,500 What amount of conversion costs is assigned to the ending Work-in-Process account for March? (Round intermediary dollar amounts to the nearest cent and unit amounts to the nearest whole unit.) A) $175,875 B) $118,401 C) $105,525 D) $266,787 Answer: C Explanation: C) Direct materials Conversion costs Completed and transferred out (360 + 800 - 130) 1,030 1,030 Work in process, ending 130 78 Total equivalent units 1,160 1,108 Conversion cost per equivalent unit = $1,499,000 / 1,108 = $1,352.89 Ending inventory = 130 × 60% = 78 units Conversion cost to be assigned to ending Work-in-Process account = 78 units × $1,352.89 = $105,525 Diff: 3 Objective: 4 AACSB: Application of knowledge
1242 richard@qwconsultancy.com
20) The Swivel Chair Company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 155,000 chairs. During the month, the firm completed 183,000 chairs and transferred them to the Finishing Department. The firm ended the month with 23,000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Swivel. How many chairs were in inventory at the beginning of the month? Conversion costs are incurred uniformly over the production cycle. A) 46,000 chairs B) 23,000 chairs C) 42,500 chairs D) 51,000 chairs Answer: D Explanation: D) Beginning inventory = 23,000 chairs (ending inventory) + 183,000 chairs (finished and transferred during the month) – 155,000 chairs (started production during the month) = 51,000 chairs Diff: 2 Objective: 4 AACSB: Application of knowledge
21) The Swivel Chair Company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 147,000 chairs. During the month, the firm completed 184,000 chairs and transferred them to the Finishing Department. The firm ended the month with 26,000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Swivel. What were the equivalent units for materials for February? A) 210,000 chairs B) 184,000 chairs C) 173,000 chairs D) 194,500 chairs Answer: A Explanation: A) Equivalent units for materials = 26,000 units (ending units) + 184,000 units (completed and transferred) = 210,000 units Diff: 3 Objective: 4 AACSB: Application of knowledge
1243 richard@qwconsultancy.com
22) The Swivel Chair Company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 145,000 chairs. During the month, the firm completed 178,000 chairs and transferred them to the Finishing Department. The firm ended the month with 18,000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Swivel. What were the equivalent units for conversion costs for February if the beginning inventory was 65% complete as to conversion costs and the ending inventory was 50% complete as to conversion costs? A) 187,000 B) 154,000 C) 178,000 D) 161,200 Answer: A Explanation: A) Equivalent units for conversion costs for February = 178,000 units + (18,000 × 50%) equivalent units = 187,000 units Diff: 3 Objective: 4 AACSB: Application of knowledge
23) The Swivel Chair Company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 154,000 chairs. During the month, the firm completed 178,000 chairs and transferred them to the Finishing Department. The firm ended the month with 24,000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Swivel. Of the 154,000 units Swivel started during February, how many were finished during the month? A) 193,400 B) 216,300 C) 130,000 D) 207,900 Answer: C Explanation: C) Number of units started and finished during the month = 154,000 units – 24,000 units = 130,000 units Diff: 3 Objective: 4 AACSB: Application of knowledge
1244 richard@qwconsultancy.com
24) Weighty Steel processes a single type of steel. For the current period the following information is given:
Beginning Inventory Started During the Current Period Ending Inventory
Units Material Costs Conversion Costs 3,500 $4,700 $5,600 20,000 32,200 79,000 2,500
All materials are added at the beginning of the production process. The beginning inventory was 40% complete as to conversion, while the ending inventory was 30% completed for conversion purposes. Weighty uses the weighted-average costing method. What is the total cost assigned to the units completed and transferred this period? (Round intermediary dollar amounts to the nearest cent and total costs to the nearest whole dollar.) A) $109,350 B) $105,440 C) $114,660 D) $121,500 Answer: C Explanation: C) EU (materials) = 21,000 + (2,500 × 100%) = 23,500. ($4,700 + $32,200) / 23,500 = $1.57 per unit for material EU (conversion) = 21,000 + (2,500 × 30%) = 21,750. ($5,600 + $79,000) / 21,750 = $3.89 per unit for conversion. Total cost per unit = $1.57 + $3.89 = $5.46 Cost of transferred units = 21,000 × $5.46 = $114,660 Diff: 3 Objective: 4 AACSB: Application of knowledge
25) A distinct feature of the FIFO process-costing method is that the: A) work done on beginning inventory before the current period is blended with the work done during the current period in the calculation of equivalent units B) work done on beginning inventory before the current period is kept separate from the work done during the current period in the calculation of equivalent units C) work done on ending inventory is kept separate from the work done during the current period in the calculation of equivalent units and is usually not included in the calculation D) FIFO process-costing method is only minimally different from the weighted-average process-costing method Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
1245 richard@qwconsultancy.com
26) Which of the following steps are part of the first-in, first-out (FIFO) process-costing method? A) assignment of costs of the current period's equivalent units to the first units completed and transferred out of the process B) assumes as part of its first step that the most recently worked on units are completed and transferred out first C) assumes as part of its first step that there is no beginning work-in-process D) assignment of costs of the previous period's equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
27) An assumption of the FIFO process-costing method is that: A) the units in beginning inventory are not necessarily assumed to be completed by the end of the period B) the units in beginning inventory are assumed to be completed first C) ending inventory will always be completed in the next accounting period D) no calculation of conversion costs is possible Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
1246 richard@qwconsultancy.com
28) Comfort chair company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 73,200 chairs. During the month, the firm completed 78,600 chairs, and transferred them to the Finishing Department. The firm ended the month with 10,600 chairs in ending inventory. There were 16,000 chairs in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is used by Comfort. Beginning work in process was 20% complete as to conversion costs, while ending work in process was 80% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$24,200 $35,500
Manufacturing costs added during the accounting period: Direct materials $168,200 Conversion costs $278,000 How many of the units that were started and completed during February? A) 83,800 B) 78,600 C) 73,200 D) 62,600 Answer: D Explanation: D) Number of units started and completed during February = 73,200 chairs (units started in production) – 10,600 chairs (ending inventory) = 62,600 chairs Diff: 2 Objective: 4 AACSB: Application of knowledge
1247 richard@qwconsultancy.com
29) Comfort chair company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 73,400 chairs. During the month, the firm completed 78,100 chairs, and transferred them to the Finishing Department. The firm ended the month with 10,500 chairs in ending inventory. There were 15,200 chairs in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is used by Comfort. Beginning work in process was 35% complete as to conversion costs, while ending work in process was 70% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$24,100 $35,600
Manufacturing costs added during the accounting period: Direct materials $168,000 Conversion costs $278,300 What were the equivalent units for conversion costs during February? A) 80,130 B) 83,900 C) 73,400 D) 78,720 Answer: A Explanation: A) Number of equivalent units in beginning inventory = 9,880 (15,200 × 0.65) Total equivalent units for conversion costs = 9,880 + 62,900 + 7,350 = 80,130 units Diff: 2 Objective: 4 AACSB: Application of knowledge
1248 richard@qwconsultancy.com
30) Comfort chair company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 73,400 chairs. During the month, the firm completed 78,700 chairs, and transferred them to the Finishing Department. The firm ended the month with 10,300 chairs in ending inventory. There were 15,600 chairs in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is used by Comfort. Beginning work in process was 35% complete as to conversion costs, while ending work in process was 70% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$25,000 $35,300
Manufacturing costs added during the accounting period: Direct materials $168,400 Conversion costs $278,700 What is the amount of direct materials cost assigned to ending work-in-process inventory at the end of February? (Round intermediary calculations to the nearest cent.) A) $17,615 B) $23,587 C) $25,900 D) $26,520 Answer: B Explanation: B) Direct material cost per unit = $168,400 / 73,400 = $2.29 Direct materials cost assigned to ending work-in-process inventory = $2.29 × 10,300 = $23,587 Diff: 3 Objective: 4 AACSB: Application of knowledge
1249 richard@qwconsultancy.com
31) Comfort chair company manufacturers a standard recliner. During February, the firm's Assembly Department started production of 74,000 chairs. During the month, the firm completed 78,300 chairs, and transferred them to the Finishing Department. The firm ended the month with 11,600 chairs in ending inventory. There were 15,900 chairs in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is used by Comfort. Beginning work in process was 35% complete as to conversion costs, while ending work in process was 75% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$24,600 $35,500
Manufacturing costs added during the accounting period: Direct materials $168,000 Conversion costs $278,000 What is the cost of the goods transferred out during February? (Round intermediary calculations to the nearest cent.) A) $421,886.72 B) $449,774.35 C) $476,380.24 D) $506,100.00 Answer: B Explanation: B) Number of units started and completed during February = 74,000 chairs (Units started in production) – 11,600 chairs (Ending inventory) = 62,400 chairs Number of equivalent units in beginning inventory = 10,335 (15,900 × 0.65) Total equivalent units for conversion costs = 10,335 + 62,400 + 8,700 = 81,435 units Direct material cost per unit = $168,000 / 74,000 = $2.27 Direct materials cost assigned to ending work-in-process inventory = $2.27 × 11,600 = $26,332 Work in process, beginning inventory $24,600 + $35,500 = $60,100 Costs added to beginning inventory = 15,900 × 0.65 × $3.41 = $35,242.35 Started and completed Direct materials = $2.27 × 62,400 =$141,648 Conversion costs = [$278,000 /(10,335 + 8,700 + 62,400)] × 62,400 = $212,784.00 Total costs of units completed and transferred out = $449,774.35 Diff: 3 Objective: 4 AACSB: Application of knowledge
1250 richard@qwconsultancy.com
32) Jane Industries manufactures plastic toys. During October, Jane's Fabrication Department started work on 10,300 models. During the month, the company completed 11,100 models, and transferred them to the Distribution Department. The company ended the month with 2,000 models in ending inventory. There were 2,800 models in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is being followed. Beginning work in process was 30% complete as to conversion costs, while ending work in process was 50% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$19,200 $10,800
Manufacturing costs added during the accounting period: Direct materials $70,500 Conversion costs $240,400 How many of the units that were started and completed during October? A) 13,900 B) 8,300 C) 9,210 D) 10,300 Answer: B Explanation: B) Number of units started and completed during October = 11,100 units – 2,800 units (ending inventory) = 8,300 units Diff: 2 Objective: 4 AACSB: Application of knowledge
1251 richard@qwconsultancy.com
33) Jane Industries manufactures plastic toys. During October, Jane's Fabrication Department started work on 10,000 models. During the month, the company completed 11,500 models, and transferred them to the Distribution Department. The company ended the month with 1,000 models in ending inventory. There were 2,500 models in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is being followed. Beginning work in process was 25% complete as to conversion costs, while ending work in process was 50% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$20,100 $11,100
Manufacturing costs added during the accounting period: Direct materials $70,300 Conversion costs $240,600 What were the equivalent units for conversion costs during October? A) 9,250 B) 11,750 C) 11,375 D) 8,500 Answer: C Explanation: C) Number of equivalent units in beginning inventory = 2,500 × 0.75 = 1,875 units Units started and completed during October = 11,500 - 2,500 = 9,000 units Number of equivalent units in ending inventory = 1,000 × 50% = 500 units Total equivalent units = 1,875 + 9,000 + 500 = 11,375 units Diff: 2 Objective: 4 AACSB: Application of knowledge
1252 richard@qwconsultancy.com
34) Jane Industries manufactures plastic toys. During October, Jane's Fabrication Department started work on 10,500 models. During the month, the company completed 11,500 models, and transferred them to the Distribution Department. The company ended the month with 2,500 models in ending inventory. There were 3,500 models in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is being followed. Beginning work in process was 25% complete as to conversion costs, while ending work in process was 55% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$19,700 $11,800
Manufacturing costs added during the accounting period: Direct materials $70,900 Conversion costs $240,000 What is the amount of direct materials cost assigned to ending work-in-process inventory at the end of October? (Round intermediary calculations to the nearest cent.) A) $20,551 B) $23,633 C) $11,817 D) $16,875 Answer: D Explanation: D) Direct material cost per unit = $70,900 / 10,500 units = $6.75 Direct materials cost assigned to ending work-in-process inventory = $6.75 × 2,500 = $16,875 Diff: 3 Objective: 4 AACSB: Application of knowledge
1253 richard@qwconsultancy.com
35) Jane Industries manufactures plastic toys. During October, Jane's Fabrication Department started work on 10,800 models. During the month, the company completed 11,700 models, and transferred them to the Distribution Department. The company ended the month with 2,600 models in ending inventory. There were 3,500 models in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is being followed. Beginning work in process was 25% complete as to conversion costs, while ending work in process was 55% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$19,600 $11,200
Manufacturing costs added during the accounting period: Direct materials $70,600 Conversion costs $240,500 What is the cost assigned to ending inventory during October? (Round intermediary calculations to the nearest cent.) A) $45,061 B) $53,444 C) $57,898 D) $41,138 Answer: A Explanation: A) Number of units started and completed during October = 11,700 units – 3,500 units (ending inventory) = 8,200 units Number of equivalent units in beginning inventory = 2,625 equivalent units (3,500 × 0.75) Total of equivalent units = 2,625 units + 8,200 units + 1,430 units = 12,255 units Direct material cost per unit = $70,600 / 10,800 units = $6.54 Conversion cost per unit = $240,500 / 12,255 = $19.62 Work in process, ending Direct material 2,600 × $6.54 = $17,004 Conversion costs = 2,600 × 0.55 × $19.62 = $28,057 Total cost of work in process, ending = $45,061 Diff: 3 Objective: 4 AACSB: Application of knowledge
1254 richard@qwconsultancy.com
36) Which of the following is true of weighted-average process-costing? A) It does not represent the average cost of units when inputs prices fluctuates markedly from month to month. B) It facilitates period-to-period comparisons and hence is very useful in analyzing the performances of managers for different periods. C) It arrives at the same unit costs as arrived under FIFO method, but the computations are easier under weighted-average process-costing. D) It calculates the cost per equivalent unit of all work done to date, regardless of the accounting period in which it was done. Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
37) Which of the following is an assumption under FIFO process-costing method? A) It assumes some of the higher-cost units are placed in ending work in process. B) It assumes that all the lower-cost units from the previous period in beginning work in process are the first to be completed and transferred out of the process. C) It assumes that unit inputs costs are constant and do not fluctuate in the short run. D) It assumes that the ending work in process consists of only the lower-cost current-period units. Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
38) A major advantage of using the FIFO process-costing method is that: A) FIFO makes the unit cost calculations simpler B) in contrast with the weighted-average method, FIFO is considered GAAP C) FIFO provides managers with information about changes in the costs per unit from one period to the next D) in the period of rising prices, it leads to lower operating income and lower tax payments, saving the company cash and increasing the company's value Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
39) Which of the following is a disadvantage of the weighted-average method compared to the FIFO process-costing method? A) FIFO is computationally simpler B) FIFO provides better management information for planning and control purposes C) when unit cost per input prices fluctuate markedly from month to month, its per unit cost is less representative than FIFO D) the information it provides about changes in unit prices from one period to the next is less useful than the information provided by FIFO Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
1255 richard@qwconsultancy.com
40) Which of the following statements is true of process costing? A) In the period of rising prices, weighted-average process-costing method will result in higher operating income as compared to FIFO process-costing method. B) The operating income and the income tax liability of a company are not affected by the method of process-costing being followed by the company. C) In the period of rising prices, weighted-average process-costing method will result in lower cost of goods sold as compared to FIFO process-costing method. D) In a period of falling prices, weighted-average process-costing method will result in a higher income tax liability as compared to FIFO process-costing method. Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
41) FIFO Aluminum processes a single type of aluminum. During the current period the following information was given:
Beginning Inventory Started During the Current Period Ending Inventory
Units Material Costs Conversion Costs 4,800 $6,100 $5,600 21,400 48,800 66,400 4,500
All materials are added at the beginning of the production process. The beginning inventory was 25% complete as to conversion, while the ending inventory was 40% completed for conversion purposes. FIFO Aluminum uses the first-in, first-out system of process costing. What were the costs assigned to the units transferred out this period (Round intermediary calculations to the nearest cent)? A) $110,658 B) $111,322 C) $254,416 D) $165,143 Answer: B Explanation: B) (4,800 × 75%) + 16,900 + (4,500 × 40%) = 22,300 EU (conversion). $66,400 / 22,300 = $2.98 per unit for conversion costs. $48,800 / 21,400 = $2.28 cost per unit for materials. $5,600 conversion costs already incurred. $2.98 × (1 - 25%) × 4,800 = $10,728 to complete beginning inventory. $5,600 + $10,728 = $16,328 conversion costs assigned to beginning inventory transferred out this period. $6,100 material costs assigned to beginning inventory transferred out this period. Unit cost for units started and completed this period = $2.98 + $2.28 = $5.26 Cost for units started and completed = $5.26 × 16,900 = $88,894 Total costs transferred out = $16,328 + $6,100+ $88,894 = $111,322. Diff: 3 Objective: 4 AACSB: Analytical thinking
1256 richard@qwconsultancy.com
42) Which of the following entries is correct to record depreciation expense of Assembly Department? A) Debit: Work in Process—Assembly Credit: Finished Goods B) Debit: Work in Process—Assembly Credit: Accumulated Depreciation C) Debit: Finished Goods Credit: Work in Process—Assembly D) Debit: Accumulated Depreciation Credit: Work in Process—Assembly Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
43) Audrey Auto Accessories manufactures plastic moldings for car seats. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Department A for February 2020 are: Work in process, beginning inventory, 40% converted Units started during February Work in process, ending inventory: 30% complete as to conversion costs 100% complete as to materials Costs for the Department A for February 2020 are: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during February Conversion costs added during February
360 units 900 units 300 units
$602,000 $151,000 $4,004,000 $2,256,000
What were the equivalent units of direct materials and conversion costs, respectively, at the end of February? Assume Audrey uses the weighted-average process costing method. A) 1,260; 1,050 B) 1,260; 1,260 C) 1,260; 960 D) 900; 600 Answer: A Explanation: A) Equivalent units of direct materials under weighted average = units completed + equivalent units in ending inventory = 960 + 300 = 1,260 equivalent units Conversion costs = 960 + (300 × 30%) = 1,050 equivalent units Diff: 2 Objective: 4 AACSB: Application of knowledge
1257 richard@qwconsultancy.com
44) The weighted-average process costing method does not distinguish between units started in the previous period but completed during the current period and units started and completed during the current period. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
45) Activity -based costing plays a more significant role in job costing as compared to process costing as companies using process costing have homogeneous products. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
46) In the weighted-average costing method, the costs of direct materials in beginning inventory are NOT included in the cost per unit calculation since direct materials are almost always added at the start of the production process. Answer: FALSE Explanation: The costs of the direct materials are included in the cost per unit calculation. Diff: 2 Objective: 4 AACSB: Analytical thinking
47) Partially completed units in ending work in process are 100 percent complete with regard to their direct materials costs if the direct materials are introduced at the beginning of the process. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
48) The weighted-average cost is the total of all costs entering the Work-in-Process account (whether they are from beginning work-in-process or from work started during the current period) divided by total equivalent units of work done to date. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
49) Weighted-average cost per equivalent unit is obtained by dividing the sum of costs for beginning work in process plus costs for work done in the current period by total equivalent units of work done to date. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
1258 richard@qwconsultancy.com
50) The cost of units completed can differ materially between the weighted average and the FIFO methods of process costing. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
51) Under the FIFO method of process-costing, costs incurred and units produced in the current period are used to calculate the cost per equivalent unit of work in the current period in contrast the weighted-average method which merges the units and costs of the previous period with that of the current period. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
52) A distinctive feature of the FIFO process costing method is that the work done on beginning inventory before the current period is kept separate from work done in the current period. Answer: TRUE Explanation: A distinctive feature of the FIFO process costing method is that the work done on beginning inventory before the current period is kept separate from work done in the current period. Diff: 2 Objective: 4 AACSB: Analytical thinking
53) In a period of rising prices, the weighted-average method will result in higher tax payments. Answer: FALSE Explanation: In a period of rising prices, the weighted-average method will decrease taxes because cost of goods sold will be higher and operating income lower. Diff: 2 Objective: 4 AACSB: Analytical thinking
54) In calculating cost per equivalent unit, the FIFO method of process costing merges the work and the costs of the beginning inventory with the work and the costs done during the current period. Answer: FALSE Explanation: In calculating cost per equivalent unit, the FIFO method of process costing only includes the work and the costs done during the current period. Diff: 2 Objective: 4 AACSB: Analytical thinking
55) The first-in, first-out process-costing method assumes that the earliest equivalent units in work in process are completed first. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
1259 richard@qwconsultancy.com
56) In a period of falling prices, the lower cost of goods sold under the FIFO method leads to higher operating income and higher tax payments. Answer: FALSE Explanation: In a period of falling prices, the higher cost of goods sold under the FIFO method leads to lower operating income and lower tax payments. Diff: 3 Objective: 4 AACSB: Analytical thinking
57) The weighted average method of process costing assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory. Answer: FALSE Explanation: The FIFO method of process costing assigns the cost of equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory. Diff: 2 Objective: 4 AACSB: Analytical thinking
58) The weighted-average method merges unit costs from different accounting periods, obscuring period-to-period comparisons. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
59) With the weighted-average method, the costs in work in process (beginning work in process) when the period starts are not considered when calculating the weighted-average cost per equivalent unit. Answer: FALSE Explanation: The weighted-average process-costing method calculates the cost per equivalent unit of all work done to date (regardless of the accounting period in which it was done) and assigns this cost to equivalent units completed and transferred out of the process and to equivalent units in ending work-in-process inventory. Diff: 2 Objective: 4 AACSB: Analytical thinking
1260 richard@qwconsultancy.com
60) Pet Products Company uses an automated process to manufacture its pet replica products. For June, the company had the following activities:
Ending work in process inventory
4,500 items, 1/4 complete with regards to conversion costs 15,000 units 17,500 units 2,000 items, 3/4 complete with regards to conversion costs
Cost of beginning work in process Direct material costs, current Conversion costs, current
$5,250 $16,500 $23,945
Beginning work in process inventory Units placed in production Units completed
Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. Required: Prepare a production cost worksheet using the FIFO method.
1261 richard@qwconsultancy.com
Answer:
PRODUCTION COST WORKSHEET Physical Units Direct Materials Conversion 4,500 15,000 19,500
Flow of production Work in process, beginning Started during period To account for Units completed Work in process, beginning Started and completed Work in process, ending
4,500 13,000 2,000 19,500
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
13,000 2,000 15,000
3,375 13,000 1,500 17,875
Totals Direct Materials Conversion $5,250 40,445 $16,500 $23,945 $45,695 $16,500 $23,945 15,000 17,875 $2.44 $1.10 $1.34
Assignment of costs Work in process, beginning Completion of beginning (3,375 × $1.34) Total beginning inventory Started and Completed (13,000 × $2.44) Total costs transferred out Work in process, ending Direct materials (2,000 × $1.10) Conversion (2,000 × $1.34 × 0.75) Costs accounted for
5,250.00 4,522.50 9,772.50 31,720.00 $41,492.50 $2,200.00 2,010.00
Diff: 3 Objective: 4 AACSB: Analytical thinking
1262 richard@qwconsultancy.com
4,210.00 $45,702.50
61) Four Seasons Company makes snow blowers. Materials are added at the beginning of the process and conversion costs are uniformly incurred. At the beginning of September, work in process is 40% complete and at the end of the month it is 60% complete. Other data for the month include: Beginning work-in-process inventory Units started Units placed in finished goods Conversion costs Cost of direct materials Beginning work-in-process costs: Materials Conversion
1,600 units 2,000 units 3,200 units $200,000 $260,000 $154,000 $ 82,080
Required: a. Prepare a production cost worksheet with supporting schedules using the weighted-average method of process costing. b. Prepare journal entries to record transferring of materials to processing and from processing to finished goods.
1263 richard@qwconsultancy.com
Answer: a.
PRODUCTION COST WORKSHEET
Flow of production Physical Units Direct Materials Work in process, beginning 1,600 Started during period 2,000 To account for 3,600 Units completed Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
3,200 400 3,600
3,200 400 3,600
3,200 240 3,440
Totals Direct Materials Conversion $ 236,080 $154,000 $82,080 460,000 260,000 200,000 $696,080 $414,000 $282,080 3,600 3,440 $197 $115 $82
Assignment of costs Completed units (3,200 × $197) Work in process, ending Direct materials (400 × $115) Conversion (400 × $82 × 0.60) Costs accounted for b. Work in Process Materials Inventory Finished Goods Work in Process
Conversion
$630,400 $46,000 19,680
260,000 260,000 630,400 630,400
Diff: 3 Objective: 4 AACSB: Analytical thinking
1264 richard@qwconsultancy.com
65,680 $696,080
62) Shining Star Company uses an automated process to clean and polish its souvenir items. For March, the company had the following activities:
Ending work in process inventory
3,000 items, 1/3 complete with regards to conversion costs 12,000 units 9,000 units 6,000 items, 2/5 complete with regards to conversion costs
Cost of beginning work in process Direct material costs, current Conversion costs, current
$2,500 $9,000 $8,320
Beginning work in process inventory Units placed in production Units completed
Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. Required: Prepare a production cost worksheet using the FIFO method.
1265 richard@qwconsultancy.com
Answer:
PRODUCTION COST WORKSHEET Physical Units Direct Materials Conversion 3,000 12,000 15,000
Flow of production Work in process, beginning Started during period To account for Units completed Work in process, beginning Started and completed Work in process, ending
3,000 6,000 6,000 15,000
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent unit costs
6,000 6,000 12,000
2,000 6,000 2,400 10,400
Totals Direct Materials Conversion $2,500 0 17,320 $9,000 $8,320 $19,820 $9,000 $8,320 12,000 10,400 $1.55 $0.75 $0.80
Assignment of costs Work in process, beginning Completion of beginning (2,000 × $0.80) Total beginning inventory Started and Completed (6,000 × $1.55) Total costs transferred out Work in process, ending Direct materials (6,000 × $0.75) Conversion (6,000 × $0.80 × 0.40) Costs accounted for
2,500 1,600 4,100 9,300 $13,400 $4,500 1,920
Diff: 3 Objective: 4 AACSB: Analytical thinking
1266 richard@qwconsultancy.com
6,420 $19,820
63) What is the difference between a weighted-average method of process costing and a first-in, first-out method of process costing? Answer: The weighted average method computes unit costs by dividing total costs entering the work-in-process account (whether from beginning work-in-process or from work started during the period) by total equivalent units completed to date, and assigns this average cost to units completed and to units in ending work-in process inventory. The first-in, first-out (FIFO) method computes unit costs based on costs incurred during the current period and equivalent units of work done in the current period. It assigns the costs of beginning work-in-process inventory to the first units completed, and it assigns costs of the equivalent units worked on during the current period first to complete beginning inventory, next to start and complete new units, and finally to units in ending work-in-process inventory. Diff: 3 Objective: 4 AACSB: Analytical thinking
64) High Universal Industries operates a division in Brazil, a country with very high inflation rates. Traditionally, the company has used the same costing techniques in all countries to facilitate reporting to corporate headquarters. However, the financial accounting reports from Brazil never seem to match the actual unit results of the division. Management has studied the problem and it appears that beginning inventories may be the cause of the unmatched information. The reason for this is that the inventories have a different financial base because of the severe inflation. Required: How can process costing assist in addressing the problem facing Universal Industries? Answer: Probably the best way to address the problem of inflation is to use FIFO costing. This method keeps the cost of beginning inventories separate from production units started and completed in a given period. Therefore, the company may be able to track the cost of items that were actually produced in a given period, versus mixing the units and costs of multiple periods. Diff: 2 Objective: 4 AACSB: Analytical thinking
1267 richard@qwconsultancy.com
Objective 18.5 1) Which of the following best describes transferred-in costs? A) they are the cost of transferring products from a vendor B) they are value-added costs that are only considered in the first-in, first out process costing system C) costs incurred in a previous department or process that are carried forward as the product's cost as that product moves to another department or process in the production cycle D) they are the shipping costs related to finished goods that are transported to a customer's location Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
2) Which of the following best describes transferred-in costs in process costing? A) These costs are incurred in previous departments that are carried forward to subsequent departments. B) These costs are transferred in to the company by an external vendor. C) These costs are incurred in transferring raw materials and labor from the place of availability to the factory. D) These costs cannot be controlled by an organization as they are transferred to the organization from the market participants. Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
3) Transferred-in costs are treated as if they are: A) conversion costs added at the beginning of the process B) costs of beginning inventory added at the beginning of the process C) direct labor costs added at the beginning of the process D) a separate direct material added at the beginning of the process Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
1268 richard@qwconsultancy.com
4) Direct Disk Drive Company operates a computer disk manufacturing plant. Direct materials are added at the end of the process. The following data were for June 2020: Work in process, beginning inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (90% complete)
25,400 units
Transferred in during current period Completed and transferred out
165,700 units 185,100 units
Work in process, ending inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (65% complete)
6,000 units
How many units must be accounted for during the period? A) 216,500 units B) 191,100 units C) 171,100 units D) 140,300 units Answer: B Explanation: B) Number of units that must be accounted for in the period = 25,400 units (Beginning inventory) + 165,700 units (Transferred in during the current period) = 191,100 units Diff: 1 Objective: 5 AACSB: Analytical thinking
1269 richard@qwconsultancy.com
5) Direct Disk Drive Company operates a computer disk manufacturing plant. Direct materials are added at the end of the process. The following data were for August 2020: Work in process, beginning inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (80% complete)
150,800 units
Transferred in during current period Completed and transferred out
450,200 units 400,800 units
Work in process, ending inventory Transferred-in costs (100% complete) Direct materials (0% complete) Conversion costs (60% complete)
202,000 units
Calculate equivalent units for conversion costs using the FIFO method. A) 30,160 units B) 352,800 units C) 299,400 units D) 399,560 units Answer: D Explanation: D) Beginning work in process (150,800 × 0.2) 30,160 units Completed and transferred out (450,200 - 202,000) 248,200 units Ending work in process (202,000 × 0.6) 121,200 units 399,560 units Diff: 2 Objective: 5 AACSB: Analytical thinking
6) The journal entry for transfer from Department B to finished goods is: Debit: Work in Process—Department B Credit: Finished Goods Control Answer: FALSE Explanation: The correct entry is as follows: Finished Goods Control Work in Process—Department B Diff: 3 Objective: 5 AACSB: Analytical thinking
1270 richard@qwconsultancy.com
7) In a series of interdepartmental transfers, each department is regarded as separate and distinct for accounting purposes. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
8) When calculating the costs to be transferred using the FIFO method, we should not include costs assigned in the previous period to units that were in process at the beginning of the current period but are now included in the units transferred. Answer: FALSE Explanation: When calculating the costs to be transferred using the FIFO method, we should include costs assigned in the previous period to units that were in process at the beginning of the current period but are now included in the units transferred. Diff: 2 Objective: 5 AACSB: Analytical thinking
9) Transferred-in costs are treated as if they are 100 percent complete at the beginning of the process in the new department. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
10) Transferred-in costs are costs incurred in previous departments that are carried forward as the product's cost when it moves to a subsequent process in the production cycle. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
11) Transferred-in costs are treated as direct materials in which all the materials are added at the beginning of the process for that department. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
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12) Otylia Manufacturing Company assembles its product in several departments. It has two departments that process all units. During February, the beginning work in process in the cutting department was half completed as to conversion, and complete as to direct materials. The beginning inventory included $12,000 for materials and $3,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 75% complete as to conversion. Beginning inventories included $16,000 for transferred-in costs and $20,000 for conversion costs. Ending inventory was 25% complete. Additional information about the two departments follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Direct manufacturing labor Other conversion costs
Cutting 20,000 40,000 50,000 10,000 $42,000 $18,700 $21,500
Finishing 20,000 50,000 20,000 $28,000 $40,000 $24,000
Required: Prepare a production cost worksheet using weighted-average for the cutting department.
1272 richard@qwconsultancy.com
Answer:
Production Cost Worksheet Cutting Department Weighted-Average Method
Flow of production
Physical Units
Work in process, beginning Started during period To account for
20,000 40,000 60,000
Units transferred out Work in process, ending Accounted for
50,000 10,000 60,000
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
Totals $15,000 82,200 $97,200 $ 1.70
Direct Materials
50,000 10,000 60,000
Conversion
50,000 4,000 54,000
Direct Materials Conversion $12,000 $ 3,000 42,000 40,200 $54,000 43,200 60,000 54,000 $0.90 $ 0.80
Assignment of costs Transferred out (50,000 × $1.70) Work in process, ending Direct materials (10,000 × $0.90) Conversion (10,000 × 0.40 × $0.80) Costs accounted for
$85,000 $9,000 3,200
Diff: 3 Objective: 5 AACSB: Application of knowledge
1273 richard@qwconsultancy.com
12,200 $97,200
13) The Laramie Factory produces expensive boots. It has two departments that process all the items. During January, the beginning work in process in the tanning department was 40% complete as to conversion and 100% complete as to direct materials. The beginning inventory included $6,000 for materials and $18,000 for conversion costs. Ending work-in-process inventory in the tanning department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 60% complete as to conversion. Beginning inventories included $7,000 for transferred-in costs and $10,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units
Tanning 5,000 14,000 16,000 ?
Finishing 4,000 ? 18,000 2,000
Material costs added Conversion costs Transferred-out cost
$18,000 32,000 50,000
? $19,000 ?
Required: Prepare a production cost worksheet using weighted-average costing for the finishing department.
1274 richard@qwconsultancy.com
Answer:
Production Cost Worksheet Finishing Department Weighted-Average Method
Flow of production Work in process, beginning Transferred in during period To account for
Physical Units Conversion 4,000 16,000 20,000
Units transferred out Work in process, ending Accounted for Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
18,000 2,000 20,000
Trans-In
18,000 600 18,600
18,000 2,000 20,000
Totals Conversion $17,000 $10,000 69,000 19,000 $86,000 $29,000 18,600 $ 4.41 $ 1.56
Trans-in $ 7,000 50,000 $57,000 20,000 $ 2.85
Assignment of costs Transferred out (18,000 × $4.41) Work in process, ending Transferred-in costs (2,000 × $2.85) Conversion (600 × $1.56) Costs accounted for
$79,380 $5,700 936
Diff: 3 Objective: 5 AACSB: Application of knowledge
1275 richard@qwconsultancy.com
6,636 $86,016
14) Lexington Company produces baseball bats and cricket paddles. It has two departments that process all products. During July, the beginning work in process in the cutting department was half completed as to conversion, and complete as to direct materials. The beginning inventory included $40,000 for materials and $60,000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 80% complete as to conversion. Direct materials for finishing the units are added near the end of the process. Beginning inventories included $24,000 for transferred-in costs and $28,000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows:
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units
Cutting 20,000 60,000 64,000
Finishing 24,000
$48,000 28,000 128,000
$34,000 68,500
Material costs added Conversion costs Transferred-out cost
68,000 20,000
Required: Prepare a production cost worksheet, using FIFO for the finishing department.
1276 richard@qwconsultancy.com
Answer:
Production Cost Worksheet Finishing Department FIFO Method
Flow of production Work in process, beginning Started during period To account for Good units completed Beginning work in process Started and completed Ending work in process Accounted for
Costs WIP, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
Physical Direct Units Materials 24,000 64,000 88,000
24,000 44,000 20,000 88,000
24,000 44,000 0 68,000
Conversion
4,800 44,000 6,000 54,800
Trans-In
44,000 20,000 64,000
Direct Totals Materials Conversion Trans-in $52,000 230,500 $34,000 $68,500 $128,000 $282,500 $34,000 $68,500 $128,000 68,000 54,800 64,000 $ 3.75 $ 0.50 $1.25 $ 2.00
Assignment of costs Work in process, beginning Completion of beginning Direct Materials (24,000 × $0.50) Conversion (4,800 × $1.25) Total Beginning Inventory Started and Completed (44,000 × $3.75) Total costs transferred out Work in process, ending Transferred-in (20,000 × $2.00) Conversion (20,000 × $1.25 × 0.30) Costs accounted for
$52,000 $12,000 6,000
$40,000 7,500
$18,000 70,000 165,000 235,000
47,500 $282,500
Diff: 3 Objective: 5 AACSB: Analytical thinking
1277 richard@qwconsultancy.com
15) When there are multiple support departments within an organization, it is common to use journal entries to transfer-in costs from one department to another. What are some of the points to remember about these costs? Answer: 1. Be sure to include transferred-in costs from previous departments in your calculations. 2. If you are using a FIFO basis, do not overlook costs assigned in the previous period to units that were in process at the beginning of the current period but are now included in the units transferred. 3. Unit costs may fluctuate between periods, consequently, transferred units may contain batches accumulated at different unit costs. 4. Different departments may have different measurement denominations. If this is the case, as units are received in one department coming from another department, their measurements must be converted to the denomination of the receiving department. Diff: 2 Objective: 5 AACSB: Analytical thinking
Objective 18.6 1) Which of the following companies is most likely to use an operation-costing system? A) a company involved in manufacture of ball bearing on a large scale B) a company that has been awarded a contract to construct a bridge for the government C) a company that makes suits for which the basic design is same, but depending on specifications, each batch of suits varies somewhat from other batches D) a furniture making company which makes furniture pieces as per the specifications of the customers Answer: C Diff: 3 Objective: 6 AACSB: Application of knowledge
2) A golf shoe manufacturer makes and sells thousands of golf shoes each year through two channels: wholesale to sporting good stores and direct to consumers through it's custom portal. Customers can specify modifications to 6 basic golf shoe models including spiked or spikeless, traditional or casual, even laced or other closures. From there, customers can specify many details to their preferred model such as size and width (different for each foot), favorite colors for the base, saddle, accents and laces. A customer can choose to embroidered a name or initials or include the logo of their favorite MLB, NFL, NHL or NCAA team. Which of the following costing systems would make the most sense for the custom golf shoe operation and the main product operation (not customized/wholesale)? A) operation-costing and job costing B) job costing for both operations C) operation-costing and process costing D) process costing for both operations Answer: C Diff: 3 Objective: 6 AACSB: Analytical thinking
1278 richard@qwconsultancy.com
3) Managers find operation costing useful in cost management because it: A) often results in profit maximization B) results in cost minimization C) focuses on control of physical processes of a given production system D) uses job costing to account for the conversion costs and process costing for the material and customizable components Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
1279 richard@qwconsultancy.com
4) Silver Bowls for You Inc. utilizes operation costing as it produces large batches of very similar products but offers customer customization for some of its offerings. Below is summary cost data for the month of June:
Units produced Total Materials
Product A 42,000 $1,100,000
Product B 9,000 $1,850,000
Totals 51,000 $2,950,000
Conversion cost data follows for the 51,000 units produced. Please note that the custom design costs are only attributed to Product A. Conversion costs: Assembly Painting Custom design
$500,000 $600,000 $190,000
What is the cost per unit for product A and B respectively if operation costing is used? (Round any intermediary calculations to the nearest cent. Round final answer to the nearest dollar.) A) $52, $227 B) $51, $227 C) $51, $231 D) $48, $227 Answer: A Explanation: A) Product A Product B Units produced 42,000 9,000 Total Materials $1,100,000 $1,850,000 Conversion costs: Assembly $411,600 $88,200 Painting $493,920 $105,840 Custom design $190,000 $0 Total conversion costs $1,095,520 $194,040 Total product costs $2,195,520 $2,044,040 Product A Product B Cost per unit $52 $227 The assembly and painting costs are assigned using an allocation rate of $9.80 and $11.76 respectively ($500,000/51,000 = $9.80 and $600,000/51,000 = $11.76) while the custom design work is related to Product A only and therefore is allocated 100% to that product's cost. Diff: 2 Objective: 6 AACSB: Analytical thinking
1280 richard@qwconsultancy.com
5) An operation is a standardized method or technique performed repetitively, often on different materials, resulting in different finished goods. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
6) In hybrid-costing systems, managers use process costing to account for the conversion costs and job costing for the material and customizable components. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
7) A hybrid-costing system is a variant of process-costing that allows it to incorporate benefits of standard costing and activity-based costing. Answer: FALSE Explanation: A hybrid-costing system blends characteristics from both job-costing and process-costing systems. Diff: 2 Objective: 6 AACSB: Analytical thinking
8) An operation-costing system is a hybrid-costing system applied to batches of similar, but NOT identical, products. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
9) Ford Motor Company is said to use a hybrid costing system. What is a hybrid costing system, and what would be the advantage to Ford of such a system? Answer: A hybrid costing system is one that combines the elements of job costing and process costing systems. Important elements of profitability include knowing what the costs are, and controlling costs. Ford has a basic platform that they use to produce cars. Vehicles undergo essentially the same processing and are in effect manufactured in a continuous flow using standard parts and standardized manufacturing processes. Another important part of profitability is making a product different than other vehicles so buyers will be attracted to purchase the vehicle. Vehicles that are different can command a higher price and increase profitability. Costs are accumulated using process costing up to the point where the product is differentiated. Job costing is used from that point forward. Diff: 2 Objective: 6 AACSB: Analytical thinking
1281 richard@qwconsultancy.com
10) Compare and contrast process costing with operation costing. Answer: Process costing and operation costing systems are both used in manufacturing. Process costing is used in companies where the products that are produced are the exactly the same in that they utilize the same amount and quality of materials, labor and overhead. Operation costing, on the other hand, is used in companies where the products are similar but may have some variation in terms of parts and quality of materials. Operation costing is considered a hybrid costing method as it involves elements of process costing and job order costing. In job-order costing, it is necessary for costs to be accounted for as the product moves from one stage of production to the next with fairly accurate reporting of the use of direct cost resources. In process costing, the costs are accumulated by department and averaging is use to assign costs. Operation costing is used in situations where: (1) products are similar but initially use different materials, and then are finished using a common process that is the same for a group of products; or (2) products that initially have identical processing but are then finished using more product-specific activities/processing. Diff: 2 Objective: 6 AACSB: Analytical thinking
1282 richard@qwconsultancy.com
Objective 18.A 1) Emerging Dock Company manufactures boat docks on an assembly line. Its standard costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for May 2020 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (30% complete)
70 units
Units started during May
60 units
Work in process, ending inventory: Direct materials (100% complete) Conversion costs (55% complete)
12 units
Costs for May: Standard costs for Assembly: Direct materials Conversion costs
$11,000 per unit $33,000 per unit
Work in process, beginning inventory: Direct materials Conversion costs
$28,150 $524,500
What is the balance in ending work-in-process inventory? A) $217,861 B) $349,800 C) $470,445 D) $177,055 Answer: B Explanation: B) 12 units × $11,000 = $132,000 12 units × 55% × $33,000 = 217,800 $349,800 Diff: 3 Objective: A AACSB: Application of knowledge
1283 richard@qwconsultancy.com
2) Which of the following entries is used to record the standard costs of direct materials assigned to units worked on and total direct materials variances? A) Work in Process (at standard costs) Direct Materials Variances Direct Materials Control B) Work in Process (at actual costs) Direct Materials Variances Direct Materials Control C) Direct Materials Variances Direct Materials Control Work in Process (at standard costs) D) Direct Materials Variances Direct Materials Control Work in Process (at actual costs) Answer: A Diff: 3 Objective: A AACSB: Analytical thinking
3) Cook's Fancy Products uses a standard costing system and account for variances in the general ledger. Consider the following information for the month of June: Direct Materials Conversion Costs Actual costs $24,000 $18,000
Standard costs
Direct Materials $21,000
Conversion Costs $18,500
Which of the following entries would be made regarding the actual cost of direct materials? A) Debit $24,000 Direct material control B) Credit $24,000 Work-in-Process C) Debit $24,000 Work-in-Process D) Credit $24,000 Direct Material Control Answer: A Diff: 2 Objective: A AACSB: Application of knowledge
1284 richard@qwconsultancy.com
4) Cook's Fancy Products uses a standard costing system and account for variances in the general ledger. Consider the following information for the month of June: Direct Materials Conversion Costs Actual costs $20,000 $28,000
Standard costs
Direct Materials $19,300
Conversion Costs $28,900
Which of the following entries would be made regarding the standard costs for Direct Materials? A) Debit $20,000 Work-in-Process, Credit $700 Direct Material Variances, Credit $19,300 Direct Materials Control B) Debit $19,300 Work-in-Process, Credit $700 Direct Material Variances, Credit $20,000 Direct Materials Control C) Debit $19,300 Work-in-Process, Debit $700 Direct Material Variances, Credit $20,000 Direct Materials Control D) Debit $20,000 Work-in-Process, Debit $8900 Direct Material Variances, Credit $28,900 Direct Materials Control Answer: C Diff: 2 Objective: A AACSB: Application of knowledge
5) Cook's Fancy Products uses a standard costing system and account for variances in the general ledger. Consider the following information for the month of June: Direct Materials Conversion Costs Actual costs $24,000 $18,000
Standard costs
Direct Materials $21,000
Conversion Costs $18,500
Which of the following entries would be made regarding the actual conversion costs? A) Debit $18,000 Conversion costs control B) Credit $18,000 Work-in-Process C) Debit $18,000 Work-in-Process D) Credit $18,000 Direct Material Control Answer: A Diff: 2 Objective: A AACSB: Application of knowledge
1285 richard@qwconsultancy.com
6) Cook's Fancy Products uses a standard costing system and account for variances in the general ledger. Consider the following information for the month of June: Direct Materials Conversion Costs Actual costs $29,000 $19,000
Standard costs
Direct Materials $28,100
Conversion Costs $19,400
Which of the following entries would be made regarding the standard costs for Conversion Costs? A) Debit $19,000 Work-in-Process, Debit $400 Conversion Costs Variances, Credit $19,400 Direct Materials Control B) Debit $28,100 Work-in-Process, Debit $900 Direct Material Variances, Credit $29,000 Direct Materials Control C) Debit $19,400 Work-in-Process, Credit $400 Conversion Costs Variances, Credit $19,000 Conversion Cost Control D) Debit $19,400 Work-in-Process, Debit $9,600 Direct Material Variances, Credit $29,000 Direct Materials Control Answer: C Diff: 2 Objective: A AACSB: Application of knowledge
1286 richard@qwconsultancy.com
7) Emerging Dock Company manufactures boat docks on an assembly line. Its standard costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for May 2020 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (20% complete)
88 units
Units started during May
50 units
Work in process, ending inventory: Direct materials (100% complete) Conversion costs (40% complete)
26 units
Costs for May: Standard costs for Assembly: Direct materials Conversion costs
$9,500 per unit $35,500 per unit
Work in process, beginning inventory: Direct materials Conversion costs
$28,000 $521,000
Which of the following journal entries records the Assembly Department's conversion costs at actual costs for the month, assuming conversion costs are 20% higher than expected? A) Assembly Department Conversion Cost Control 4,464,480 Various accounts 4,464,480 B) Materials Inventory 4,464,480 Assembly Department Conversion Cost Control 4,464,480 C) Assembly Department Conversion Cost Control 3,720,400 Materials Inventory 3,720,400 D) Materials Inventory 4,464,480 Work in Process — Assembly 4,464,480 Answer: A Explanation: A) 88 units × 80% × $35,500 = $2,499,200 (50 - 26 units) × $35,500 = 852,000 26 units × 40% × $35,500 = 369,200 Budgeted 3,720,400 $3,720,400 × 1.20 = $4,464,480 Diff: 3 Objective: A AACSB: Application of knowledge
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8) Emerging Dock Company manufactures boat docks on an assembly line. Its standard costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for May 2020 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (35% complete)
82 units
Units started during May
44 units
Work in process, ending inventory: Direct materials (100% complete) Conversion costs (40% complete)
10 units
Costs for May: Standard costs for Assembly: Direct materials Conversion costs
$13,000 per unit $34,500 per unit
Work in process, beginning inventory: Direct materials Conversion costs
$28,000 $525,000
Which of the following journal entries records the total conversion costs variances of the Assembly Department, assuming that conversion costs are 10% higher than expected? A) Work in Process — Assembly 3,464,835 Conversion-Cost Variances 314,985 Assembly Department Conversion Cost Control 3,149,850 B) Assembly Department Conversion Costs Allocated 3,464,835 Direct Materials Variances 314,985 Finishing Department Conversion Cost Control 3,149,850 C) Assembly Department Conversion Costs Allocated 3,149,850 Conversion-Cost Variances 314,985 Assembly Department Conversion Cost Control 3,464,835 D) Work in Process — Assembly 314,985 Assembly Department Conversion Cost Control 314,985
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Answer: C Explanation: C) 82 units × 65% × $34,500 = (44 - 10 units) × $34,500 = 10 units × 40% × $34,500 = Budgeted
$1,838,850 1,173,000 138,000 $3,149,850
$3,149,850 × 1.1 = $3,464,835 $3,464,835 - $3,149,850 = $314,985 conversion cost variances Diff: 3 Objective: A AACSB: Application of knowledge
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9) Emerging Dock Company manufactures boat docks on an assembly line. Its standard costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Assembly Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for May 2020 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (25% complete)
74 units
Units started during May
54 units
Work in process, ending inventory: Direct materials (100% complete) Conversion costs (45% complete)
26 units
Costs for May: Standard costs for Assembly: Direct materials Conversion costs
$8,500 per unit $36,500 per unit
Work in process, beginning inventory: Direct materials Conversion costs
$28,350 $522,000
Which of the following journal entries records the standard costs of direct materials assigned to units worked on and total direct materials variances assuming that the Assembly Department used 15% less materials than expected? A) Work in Process — Assembly 459,000 Assembly Department Materials Cost Control 459,000 B) Work in Process — Assembly 459,000 Direct Materials Variance 68,850 Assembly Department Materials Cost Control 390,150 C) Work in Process — Assembly 68,850 Assembly Department Materials Cost Control 68,850 D) Work in Process — Assembly 390,150 Direct Materials Variances 68,850 Assembly Department Materials Cost Control 459,000 Answer: B Explanation: B) 54 × $8,500 = $459,000 $459,000 × 0.85 = $390,150 Diff: 2 Objective: A AACSB: Application of knowledge
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10) Morgan Clay Products manufactures clay molded pottery on an assembly line. Its standard costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Molding Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for August 2020 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (30% complete)
1,800 units
Units started during August
755 units
Work in process, ending inventory: Direct materials (100% complete) Conversion costs (70% complete)
510 units
Costs for August: Standard costs for Assembly: Direct materials Conversion costs
$16 per unit $35.50 per unit
Work in process, beginning inventory: Direct materials Conversion costs
$12,200 $10,050
What is the balance in ending work-in-process inventory? A) $35,100 B) $22,250 C) $19,199 D) $20,834 Answer: D Explanation: D) 510 units × $16 = $8,160 510 units × 70% × $35.50 = 12,674 Budgeted $20,834 Diff: 3 Objective: A AACSB: Application of knowledge
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11) Morgan Clay Products manufactures clay molded pottery on an assembly line. Its standard costing system uses two cost categories, direct materials and conversion costs. Each product must pass through the Molding Department and the Finishing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Data for the Assembly Department for August 2020 are: Work in process, beginning inventory: Direct materials (100% complete) Conversion costs (30% complete)
1,400 units
Units started during August
765 units
Work in process, ending inventory: Direct materials (100% complete) Conversion costs (70% complete)
490 units
Costs for August: Standard costs for Assembly: Direct materials Conversion costs
$15 per unit $27.50 per unit
Work in process, beginning inventory: Direct materials Conversion costs
$11,000 $10,250
Which of the following journal entries records the Molding Department's conversion costs for the month, assuming conversion costs are 15% higher than expected? A) Molding Department Conversion Cost Control 6,591.83 Various accounts 6,591.83 B) Materials Inventory 43,945.50 Molding Department Conversion Cost Control 43,945.50 C) Molding Department Conversion Cost Control 50,537.33 Various accounts 50,537.33 D) Materials Inventory 50,537.33 Work in Process — Molding 50,537.33 Answer: C Explanation: C) 1,400 units × 70% × $27.50 = $26,950.00 (765 - 490 units) × $27.50 = 7,562.5 490 units × 70% × $27.50 = 9,433 Budgeted $43,945.50
$43,945.50 × 1.15 = $50,537.33 Diff: 3 Objective: A AACSB: Application of knowledge
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12) A company that uses standard costing does so for budgeting purposes but cannot utilize standard costs in the general ledger. Answer: FALSE Explanation: The company can choose to carry inventories at standard, recording the variances in the journal entries for process costing. Diff: 2 Objective: A AACSB: Application of knowledge
13) Process-costing systems using standard costs record actual direct materials costs in Direct Materials Control and actual conversion costs in Conversion Costs Control with standard costs recorded in Work-in-Process. Answer: TRUE Diff: 2 Objective: A AACSB: Application of knowledge
14) From an accounting standpoint, favorable cost variances are debit entries, while unfavorable ones are credits. Answer: FALSE Explanation: From an accounting standpoint, favorable cost variances are credit entries, while unfavorable ones are debits. Diff: 2 Objective: A AACSB: Analytical thinking
15) Under standard costing the cost per equivalent-unit calculation is more difficult than in either weighted average or FIFO. Answer: FALSE Explanation: The cost per equivalent-unit calculation is simpler because the cost is assumed constant during the accounting period. Diff: 2 Objective: A AACSB: Analytical thinking
16) Both, the standard-costing method and FIFO, assumes that the earliest equivalent units in beginning work in process are completed first. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
17) Standard costing is NOT possible in a firm that uses process costing. Answer: FALSE Explanation: Standard costing is possible in a firm that uses process costing. Diff: 2 Objective: A AACSB: Analytical thinking
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18) Process-costing systems using standard costs record standard direct material costs in Direct Materials Control and standard conversion costs in Conversion Costs Control. Answer: FALSE Explanation: Process-costing systems using standard costs record actual direct material costs in Direct Materials Control and actual conversion costs in Conversion Costs Control. Diff: 2 Objective: A AACSB: Application of knowledge
19) In companies that produce masses of identical or similar units of output and consequently use process-costing systems, it is relatively easy to set standards and use a standard cost as the cost per equivalent unit. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
20) BIG Manufacturing Products has been using FIFO process costing for tracking the costs of its manufacturing activities. However, in recent months, the system has become somewhat bogged down with details. It seems that, when the company purchased Brown Electronics last year, its product lines increased six-fold. This has caused both the accountants and the suppliers of the information, the line managers, great difficulty in keeping the costs of each product line separate. Likewise, the estimation of the completion of ending work-in-process inventories and the associated costs has become very cumbersome. The chief financial officer of the company is looking for ways to improve the reporting system of product costs. Required: What can you recommend to improve the situation? Answer: A beginning point would be to change to a standard costing system. Standard costing eliminates many of the problems of FIFO costing in tracking actual costs to products. With standard costing, only the equivalent units have to be determined immediately, not the actual cost of the period. A standard cost for materials and conversion is then applied to the equivalent units for the reporting period. Actual costs and variances from standard costing can be determined later. This approach is very appropriate for a company that has many products. Diff: 3 Objective: A AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 19 Spoilage, Rework, and Scrap Objective 19.1 1) Which of the following defines spoilage? A) units of production that do not meet the specifications required by customers but that are subsequently repaired and sold as good finished units B) units of production whether fully or partially completed, that do not meet the specifications required by customers for good units and are discarded or sold at reduced prices C) residual material that results from manufacturing a product
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D) products of a joint production process that have low total sales values relative to the total sales value of the main product Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
2) Which of the following describes rework? A) units of production that do not meet the specifications required by customers but that are subsequently repaired and sold as good finished units B) products of a joint production process that have low total sales values relative to the total sales value of the main product C) units of production whether fully or partially completed, that do not meet the specifications required by customers for good units and are discarded or sold at reduced prices D) residual material that results from manufacturing a product Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Rework units are: A) remanufactured and sold after they are returned from customers B) repaired and sold units that are first quality items C) produced from residual materials that were byproducts of a prior processing run D) units with low or zero sales value but have some utility Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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4) Which of the following is an example of spoilage? A) short lengths from woodworking operations that cannot be used to make another product B) edges from plastic molding operations that result from the main product's manufacturing process but have little or no value C) defective units of laptops detected after the production process but reworked before the units are sold as good products to customers D) defective men's button down cotton collar dress shirts that have small pulls in the material and must be sold as discounted "seconds" in the factory store Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
5) Which of the following best describes scrap? A) units of production that do not meet the specifications required by customers but that are subsequently repaired and sold as good finished units B) products of a joint production process that have low total sales values relative to the total sales value of the main product C) residual material that results from manufacturing a product D) units of production whether fully or partially completed, that do not meet the specifications required by customers for good units and are discarded or sold at reduced prices Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
6) A leather shoe manufacturer makes "duck" boots that consist of leather and rubber. Some of the books are defective and are sold in the factory store at deep discounts. Leather strips from the cutting process and rubber shavings are byproducts of the process. The leather strips have no use and are discarded while the rubber scraps are collected and periodically picked up by a recycling company at no cost to the shoe manufacturer. Which of the following classifications of these items would be accurate? A) the defective boots are spoilage and the leather and the rubber are scrap B) the defective boots, leather and rubber are scrap but the shoes are more valuable scrap as they can be sold C) the defective boots are spoilage , the leather strips are scrap, and the rubber is rework D) all three items are spoilage Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
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7) Which of the following is an example of scrap? A) short lengths from woodworking operations that must be discarded B) defective units of laptops detected after the production process but reworked before the units are sold as good products to customers C) defective aluminum cans sold to aluminum manufacturers for remelting to produce other aluminum products D) defective shirts, jeans, shoes, and carpeting sold as seconds Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Some amounts of spoilage, rework, or scrap are inherent in many production processes. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
9) An item classified as spoilage has no value. Answer: FALSE Explanation: Although the item does not meet the specifications, it may be sold as a "second" or for its scrap value. It is not necessarily thrown out. Diff: 2 Objective: 1 AACSB: Analytical thinking
10) Reworked goods are unacceptable units of production usually NOT capable of being repaired or converted into a salable product. Answer: FALSE Explanation: Rework is units of production that do not meet the specifications required by customers but that are subsequently repaired and sold as good finished units. Diff: 2 Objective: 1 AACSB: Analytical thinking
11) Rework is finished production that is NOT in accordance with customer desires. The product is redone and sold as finished goods. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
12) Rework is residual material that results from manufacturing a product and can have either a high or low sales value relative to the product with which it is associated. Answer: FALSE Explanation: Scrap is residual material that results from manufacturing a product. Examples are short lengths from woodworking operations, edges from plastic molding operations, and frayed cloth and end cuts from suit-making operations. Scrap can sometimes be sold for relatively small amounts. Diff: 2 Objective: 1 AACSB: Analytical thinking
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13) Scrap and rework are considered to be the same thing by managerial accountants. Answer: FALSE Explanation: Scrap and rework are not considered to be the same thing by managerial accountants. Diff: 2 Objective: 1 AACSB: Analytical thinking
14) There is no difference between scrap which can be sold for relatively small amount and a byproduct. Answer: FALSE Explanation: The difference is that scrap arises as a residual from the manufacturing process and is not a product targeted for manufacture or sale by the firm. Diff: 2 Objective: 1 AACSB: Analytical thinking
15) Distinguish among spoilage, reworked units, and scrap. Give an example of each. Answer: Spoilage refers to unacceptable units of production that are discarded or are sold for reduced prices. Both partially completed or fully completed units of output can be spoiled. Examples are defective clothes sold as seconds. Reworked units are unacceptable units of production that are subsequently repaired and sold as acceptable finished goods. Defective units of product (such as pagers, computer disk drives, computers, and telephones) detected during production or immediately after production but before units are shipped to customers, can sometimes be reworked and sold as good products. Scrap is material left over when making a product. It has low sales value compared with the sales value of the product. Examples are shavings and short lengths from woodworking operations and edges left over from plastic molding operations. Diff: 2 Objective: 1 AACSB: Analytical thinking
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16) For each of the following items identify whether it is spoilage, reworked units, or scrap. ________ ________ ________ ________ ________
a. b. c. d. e.
Defective shirts sold as seconds End cuts from suit-making operations that are discarded Edges from plastic moldings that is a low value byproduct Carpets sold as seconds in a factory outlet at a deep discount Precision tools that are not built successfully to the necessary tolerance, but which can be successfully converted to a saleable product Rock extracted as a result of mining processing Complex defective products such as semiconductors
________ f. ________ g. Answer: a. spoilage b. scrap c. scrap d. spoilage e. spoilage and rework f. scrap g. spoilage (usually too complex to rework) Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 19.2 1) Spoilage that is an inherent result of the particular production process and arises even under efficient operating conditions is referred to as: A) incremental spoilage B) normal spoilage C) irregular spoilage D) direct spoilage Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Spoilage that is not inherent in a particular production process and would not arise under efficient operating conditions is referred to as: A) incremental spoilage B) usual spoilage C) abnormal spoilage D) indirect spoilage Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
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3) Costs of normal spoilage are usually accounted for as: A) a deduction from the cost of goods sold B) a component of the costs of good units manufactured C) a "loss from normal spoilage account" in income statement D) a liability on a balance sheet Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
4) Costs of abnormal spoilage are usually accounted for as: A) a deduction from the cost of goods sold B) a component of the costs of good units manufactured C) a separate line item in an income statement D) an asset on a balance sheet Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
5) The loss from abnormal spoilage account would appear: A) on a balance sheet B) as a detailed item in the retained earnings schedule of a balance sheet C) a separate line item on an income statement D) a deduction from the cost of goods sold Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
6) A company produces 12,000 units of which 200 are spoiled units because the process, even though carefully and efficiently executed is unable to produce good units 100% of the time. Another 70 units are spoiled because machines broke down and there also were operator errors. What is the normal spoilage rate (round to two decimal places) A) 2.25% B) 1.71% C) 1.67% D) 0.58% Answer: B Explanation: B) 200/(12,000 - 200 - 70) = 1.71% Diff: 2 Objective: 2 AACSB: Analytical thinking
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7) Companies that attempt to achieve zero defects in the manufacturing process treat spoilage as: A) scrap B) reworked units C) abnormal spoilage D) indirect spoilage Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
8) Which one of the following conditions usually exists when comparing normal and abnormal spoilage to controllability? A) Normal is Controllable and Abnormal is Controllable B) Normal is Controllable and Abnormal is Uncontrollable C) Normal is Uncontrollable and Abnormal is Uncontrollable D) Normal is Uncontrollable and Abnormal is Controllable Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
9) Which of the following statements is true of normal spoilage? A) It is a spoilage which is not inherent in a particular production process. B) It occurs due to machine breakdowns and operator errors. C) It is usually regarded as avoidable and controllable. D) It arises even when the process is carried out in an efficient manner. Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
10) Which of the following statements is true of an abnormal spoilage? A) It is a spoilage which is inherent in a particular production process. B) It arises even when the process is carried out in an efficient manner. C) It is usually regarded as avoidable and controllable. D) The costs of abnormal spoilage are typically included as a component of the costs of good units manufactured. Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
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11) Which of the following statements is true of normal spoilage and abnormal spoilage? A) Normal spoilage is inherent in a particular production process, whereas abnormal spoilage is not inherent in a particular production process. B) Abnormal spoilage arises even when the process is carried out in an efficient manner, whereas normal spoilage does not arise when the process is carried out in an efficient manner. C) Normal spoilage is usually regarded as avoidable and controllable, whereas abnormal spoilage is unavoidable and uncontrollable. D) The costs of normal spoilage are recorded as a loss as a separate line item in an income statement, whereas costs of abnormal spoilage are included as a component of the costs of good units manufactured. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
12) Consider the following production information: Units in beginning work-in-process Units started Goods completed and transferred out (units) Units in ending work-in-process inventory Normal spoilage
3,000 8,800 7,000 3,700 10%
What is the total spoilage? A) 7,000 B) 110 C) 880 D) 1,100 Answer: D Explanation: D) The total spoilage is found by using the following formula: (Units in beginning work-in-process + Units started) - (Goods completed and transferred out+ Units in ending work-in-process inventory): (3,000 + 8,800) — (7,000 + 3,700) = 1,100 units. Diff: 2 Objective: 2 AACSB: Analytical thinking
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13) Consider the following production information: Units in beginning work-in-process Units started Goods completed and transferred out (units) Units in ending work-in-process inventory Normal spoilage
2,300 8,800 6,200 3,600 10%
What is the amount of abnormal spoilage? A) 1,300 B) 2,600 C) 680 D) 130 Answer: C Explanation: C) Abnormal spoilage is the difference between total spoilage and normal spoilage. Normal spoilage is the Normal spoilage percentage × Goods completed and transferred out: 6,200 × .1 = 620. Total spoilage is found by using the following formula: (Units in beginning work-in-process + Units started) (Goods completed and transferred out+ Units in ending work-in-process inventory): (2,300 + 8,800) - (6,200 + 3,600) = 1,300 units. Therefore, 1,300 units of total spoilage less 620 of normal spoilage is 680 of abnormal spoilage. Diff: 2 Objective: 2 AACSB: Analytical thinking
14) The costs of normal spoilage are typically included as a component of the costs of good units manufactured. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
15) Abnormal spoilage is spoilage inherent in a particular production process. Answer: FALSE Explanation: Normal spoilage is spoilage inherent in a particular production process. Diff: 2 Objective: 2 AACSB: Analytical thinking
16) Abnormal spoilage is spoilage that should arise under efficient operating conditions. Answer: FALSE Explanation: Abnormal spoilage should not arise under efficient operating conditions. Diff: 1 Objective: 2 AACSB: Analytical thinking
17) Companies calculate the units of abnormal spoilage and record the cost in the Loss from Abnormal Spoilage account, which appears as a separate line item in an income statement. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
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18) Spoilage can be considered either normal or abnormal. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
19) Normal spoilage is spoilage that is NOT considered to be inherent in a production process. Answer: FALSE Explanation: Normal spoilage is spoilage that is considered to be inherent in a production process. Diff: 1 Objective: 2 AACSB: Analytical thinking
20) Under efficient operating conditions, all spoilage is considered to be abnormal spoilage. Answer: FALSE Explanation: Normal spoilage is spoilage that is considered to be inherent in a production process. It arises even when the process is operated in an efficient manner. Diff: 1 Objective: 2 AACSB: Analytical thinking
21) Normal spoilage rates are computed by dividing units of normal spoilage by total good units completed, NOT total actual units started in production. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
22) Costs of abnormal spoilage are separately accounted for as losses of the period. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
23) There is a tradeoff between the speed of production and the normal spoilage rate. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
24) Normal spoilage is usually regarded as avoidable and controllable. Answer: FALSE Explanation: Abnormal spoilage is usually regarded as avoidable and controllable. Diff: 2 Objective: 2 AACSB: Analytical thinking
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25) Units spoiled due to machine breakdowns and operator errors are normal spoilage. Answer: FALSE Explanation: Units spoiled due to machine breakdowns and operator errors are abnormal spoilage. Diff: 2 Objective: 2 AACSB: Analytical thinking
26) Line operators and other plant personnel generally can decrease or eliminate normal spoilage by identifying the reasons for machine breakdowns, operator errors. Answer: FALSE Explanation: Line operators and other plant personnel generally can decrease or eliminate abnormal spoilage by identifying the reasons for machine breakdowns, operator errors. Diff: 2 Objective: 2 AACSB: Analytical thinking
27) Costs of abnormal spoilage are considered inventoriable and are written off as a period expense. Answer: FALSE Explanation: Costs of abnormal spoilage are not considered inventoriable and are not written off as a period expense. But it is true for normal spoilage. Diff: 2 Objective: 2 AACSB: Analytical thinking
28) What are the objectives in accounting for spoilage? Answer: The key objectives in accounting for spoilage are determining the magnitude of the costs of the spoilage and distinguishing between the costs of normal and abnormal spoilage. To effectively manage a company (or a division of a business), a manager needs information concerning how his business is performing. Spoilage is a cost which should be controlled and minimized. The dimensions of the cost must be known (the dollar amount of the spoilage). The accounting system must be capable of determining the dollar amount of the spoilage costs while distinguishing between normal and abnormal spoilage. This information must be reported and available to management on a timely basis. Diff: 2 Objective: 2 AACSB: Analytical thinking
29) What is the distinction between normal and abnormal spoilage? Answer: Normal spoilage is inherent in a particular production process and arises when the process is done in an efficient manner. Abnormal spoilage, on the other hand, is not inherent in a particular production process and would not arise under efficient operating conditions. Abnormal spoilage is usually regarded as avoidable and controllable. Diff: 2 Objective: 2 AACSB: Analytical thinking
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Objective 19.3 1) Colil Computer Systems, Inc., manufactures printer circuit cards. All direct materials are added at the inception of the production process. During January, the accounting department noted that there was no beginning inventory. Direct materials of $302,000 were used during the month. Work-in-process records revealed that 14,500 card units were started in January, 7,250 card units were complete, and 6,400 card units were spoiled as expected. Ending work-in-process card units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. What is the direct material cost per equivalent unit? (Please round the final answer to the nearest cent.) A) $13.89 B) $20.83 C) $17.06 D) $24.59 Answer: B Explanation: B) Cost to account for: $302,000 Divided by equivalent units 14,500 Cost per equivalent unit $20.83 Diff: 2 Objective: 3 AACSB: Application of knowledge
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2) Colil Computer Systems, Inc., manufactures printer circuit cards. All direct materials are added at the inception of the production process. During January, the accounting department noted that there was no beginning inventory. Direct materials of $310,000 were used in production during the month. Work-in-process records revealed that 16,000 card units were started in January, 8,000 card units were complete, and 5,600 card units were spoiled as expected. Ending work-in-process card units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. What is the direct material cost assigned to good units completed? (Please round interim calculations to the nearest cent, and final calculations to the nearest whole dollar.) A) $155,040 B) $263,830 C) $108,528 D) $263,568 Answer: D Explanation: D) Cost to account for: $310,000 Divided by equivalent units 16,000 Cost per equivalent unit $19.38 Assigned to: Good units completed (8,000 × $19.38) Normal spoilage (5,600 × $19.38)
$155,040
Costs transferred out
263,568
108,528
Diff: 3 Objective: 3 AACSB: Analytical thinking
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3) Colil Computer Systems, Inc., manufactures printer circuit cards. All direct materials are added at the inception of the production process. During January, the accounting department noted that there was no beginning inventory. Direct materials of $304,000 were used during the month. Work-in-process records revealed that 14,000 card units were started in January, 7,000 card units were complete, and 4,600 card units were spoiled as expected. Ending work-in-process card units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. What is the amount allocated to the work-in-process ending inventory? (Round any cost per unit calculations to the nearest cent.) A) $33,276 B) $42,896 C) $52,104 D) $75,985 Answer: C Explanation: C) Cost to account for: $304,000 Divided by equivalent units 14,000 Cost per equivalent unit $21.71 Assigned to: Good units completed (7,000 × $21.71) Normal spoilage (4,600 × $21.71)
$151,970
Costs transferred out
251,836
WIP ending inventory (2,400 × $21.71)
52,104
Cost accounted for:
99,866
$303,940
Diff: 3 Objective: 3 AACSB: Application of knowledge
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4) Outose Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to undetectable materials defects. Inspection occurs when units are 60% converted. Spoiled units generally constitute 5% of the good units. Data for December 2020 are as follows: WIP, beginning inventory 12/1/2020 Direct materials (100% complete) Conversion costs (80% compete) Started during December Completed and transferred out 12/31/2020 WIP, ending inventory 12/31/2020 Direct materials (100% complete) Conversion costs (70% complete)
22,500 units
77,000 units 72,900 units 18,600 units
Costs for December: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$153,000 77,400 230,400 295,000
What is the number of total spoiled units? A) 12,420 units B) 3,645 units C) 4,355 units D) 8,000 units Answer: D Explanation: D) Spoiled units = (22,500 units + 77,000) - (72,900 units + 18,600) = 8,000 units Diff: 2 Objective: 3 AACSB: Application of knowledge
1309 richard@qwconsultancy.com
5) Outose Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to undetectable materials defects. Spoiled units generally constitute 3% of the good units. Data for December 2020 are as follows: WIP, beginning inventory 12/1/2020 Direct materials (100% complete) Conversion costs (80% compete) Started during December Completed and transferred out 12/31/2020 WIP, ending inventory 12/31/2020 Direct materials (100% complete) Conversion costs (60% complete)
22,100 units
76,300 units 72,000 units 18,300 units
Costs for December: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$156,000 77,400 227,400 293,000
Normal spoilage totals: A) 2,403 units B) 8,100 units C) 2,160 units D) 5,940 units Answer: C Explanation: C) Normal spoilage = 3% × 72,000 units = 2,160 spoiled units Diff: 2 Objective: 3 AACSB: Application of knowledge
1310 richard@qwconsultancy.com
6) Outose Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to undetectable materials defects. Spoiled units generally constitute 4% of the good units. Data for December 2020 are as follows: WIP, beginning inventory 12/1/2020 Direct materials (100% complete) Conversion costs (75% compete) Started during December Completed and transferred out 12/31/2020 WIP, ending inventory 12/31/2020 Direct materials (100% complete) Conversion costs (70% complete)
23,000 units
76,900 units 72,700 units 18,800 units
Costs for December: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$160,000 77,300 224,400 293,000
Abnormal spoilage totals: A) 3,244 units B) 8,400 units C) 5,492 units D) 2,908 units Answer: C Explanation: C) Spoiled units = (23,000 units + 76,900) - (72,700 units + 18,800) = 8,400 units Normal spoilage = 4% × 72,700 units = 2,908 spoiled units Abnormal spoilage = 8,400 units - 2,908 units = 5,492 units Diff: 3 Objective: 3 AACSB: Application of knowledge
1311 richard@qwconsultancy.com
7) Outose Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to undetectable materials defects. Spoiled units generally constitute 4% of the good units. Data for December 2020 are as follows: WIP, beginning inventory 12/1/2020 Direct materials (100% complete) Conversion costs (80% compete) Started during December Completed and transferred out 12/31/2020 WIP, ending inventory 12/31/2020 Direct materials (100% complete) Conversion costs (65% complete)
23,000 units
77,000 units 72,900 units 18,700 units
Costs for December: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$153,000 77,400 225,400 296,000
What is the total cost per equivalent unit using the weighted-average method of process costing? (Round any cost per unit calculations to the nearest cent.) A) $3.78 B) $3.62 C) $7.78 D) $4.00 Answer: C Explanation: C) Direct Materials Conversion Costs WIP, beginning inventory $153,000 $77,400 Costs added during period 225,400 296,000 Total cost to account for 378,400 373,400 Divide by equivalent units* 100,000 93,455 Equivalent-unit costs $3.78 $4.00 *Equivalent unit calculations: Direct Materials: 23,000 + 77,000 = 100,000 units Conversion Costs: 72,900 + (18,700 × 65%) + 8,400 = 93,455 units Total cost per equivalent unit = $3.78 + $4.00 = $7.78 Diff: 2 Objective: 3 AACSB: Application of knowledge
1312 richard@qwconsultancy.com
8) Outose Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to undetectable materials defects. Spoiled units generally constitute 4% of the good units. Data for December 2020 are as follows: WIP, beginning inventory 12/1/2020 Direct materials (100% complete) Conversion costs (75% compete) Started during December Completed and transferred out 12/31/2020 WIP, ending inventory 12/31/2020 Direct materials (100% complete) Conversion costs (70% complete)
22,600 units
76,100 units 72,500 units 18,300 units
Costs for December: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$156,000 77,600 224,400 299,000
What cost is allocated to abnormal spoilage using the weighted-average process-costing method? (Round any cost per unit calculations to the nearest cent.) A) $ 0 B) $29,768 C) $39,450 D) $77,600 Answer: C Explanation: C) Spoiled units = (22,600 units + 76,100) - (72,500 units + 18,300) = 7,900 units Normal spoilage = 4% × 72,500 units = 2,900 spoiled units Abnormal spoilage = 7,900 units - 2,900 units = 5,000 units
WIP, beginning inventory Costs added during period Total cost to account for Divide by equivalent units* Equivalent-unit costs
Direct Materials $156,000 224,400 380,400 98,700 $3.85
Conversion Costs $77,600 299,000 376,600 93,210 $4.04
* Equivalent unit calculations: Direct Materials: 22,600 + 76,100 = 98,700 units Conversion Costs: 72,500 + (18,300 × 70%) + 7,900 = 93,210 units Total cost per equivalent unit = $3.85 + $4.04 = $7.89 5,000 units × $7.89 = $39,450 Diff: 3 Objective: 3 AACSB: Application of knowledge
1313 richard@qwconsultancy.com
9) Outose Concept manufactures small tables in its Processing Department. Direct materials are added at the initiation of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some units are spoiled due to undetectable materials defects. Inspection occurs when units are 50% converted. Spoiled units generally constitute 4% of the good units. Data for December 2020 are as follows: WIP, beginning inventory 12/1/2020 Direct materials (100% complete) Conversion costs (75% compete) Started during December Completed and transferred out 12/31/2020 WIP, ending inventory 12/31/2020 Direct materials (100% complete) Conversion costs (65% complete)
22,800 units
76,100 units 72,500 units 18,900 units
Costs for December: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$156,000 76,900 223,400 296,000
What is the amount of direct materials and conversion costs assigned to ending work in process using the weighted-average process-costing method? (Round any cost per unit calculations to the nearest cent.) A) $37,798; $46,056 B) $76,356; $47,174 C) $72,576; $49,631 D) $153,216; $11,397 Answer: C Explanation: C) Direct Materials Conversion Costs WIP, beginning inventory $156,000 $76,900 Costs added during period 223,400 296,000 Total cost to account for 379,400 372,900 Divide by equivalent units* 98,900 92,285 Equivalent-unit costs $3.84 $4.04 * Equivalent unit calculations: Direct Materials: 22,800 + 76,100 = 98,900 units Conversion Costs: 72,500+ (18,900 × 65%) + 7,500= 92,285 units Total cost per equivalent unit = $3.84 + $4.04 = $7.88 Direct materials = 18,900 units × $3.84 = $72,576 Conversion costs = 12,285 units × $4.04 = $49,631 Diff: 3 Objective: 3 AACSB: Application of knowledge
1314 richard@qwconsultancy.com
10) Fish Fillet Incorporated obtains fish and then processes them into frozen fillets and then prepares the frozen fish fillets for distribution to its retail sales department. Direct materials are added at the initiation of the cycle. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some fillets are spoiled due to undetectable defects. Inspection occurs when units are 40% converted. Spoiled fillets generally constitute 5% of the good fillets. Data for April 2020 are as follows: WIP, beginning inventory 4/1/2020 Direct materials (100% complete) Conversion costs (50% compete) Started during April Completed and transferred out 4/30/2020 WIP, ending inventory 4/30/2020 Direct materials (100% complete) Conversion costs (30% complete)
87,000 fillets
137,000 fillets 183,000 fillets 31,000 fillets
Costs for April: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$130,000 98,910 310,000 393,130
What is the number of total spoiled units? A) 45,000 units B) 72,650 units C) 5,000 units D) 10,000 units Answer: D Explanation: D) Spoiled units = 87,000 + 137,000 - 183,000 - 31,000 = 10,000 units Diff: 2 Objective: 3 AACSB: Application of knowledge
1315 richard@qwconsultancy.com
11) Fish Fillet Incorporated obtains fish and then processes them into frozen fillets and then prepares the frozen fish fillets for distribution to its retail sales department. Direct materials are added at the initiation of the cycle. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some fillets are spoiled due to undetectable defects. Spoiled fillets generally constitute 5% of the good fillets. Data for April 2020 are as follows: WIP, beginning inventory 4/1/2020 Direct materials (100% complete) Conversion costs (50% compete) Started during April Completed and transferred out 4/30/2020 WIP, ending inventory 4/30/2020 Direct materials (100% complete) Conversion costs (30% complete)
89,000 fillets
130,000 fillets 186,000 fillets 23,000 fillets
Costs for April: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$134,000 101,910 308,000 389,130
Normal spoilage totals: A) 9,300 units B) 0 units C) 10,000 units D) 700 units Answer: A Explanation: A) Normal spoilage = 5% × 186,000 units = 9,300 spoiled units Diff: 2 Objective: 3 AACSB: Application of knowledge
1316 richard@qwconsultancy.com
12) Fish Fillet Incorporated obtains fish and then processes them into frozen fillets and then prepares the frozen fish fillets for distribution to its retail sales department. Direct materials are added at the initiation of the cycle. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some fillets are spoiled due to undetectable defects. Spoiled fillets generally constitute 5% of the good fillets. Data for April 2020 are as follows: WIP, beginning inventory 4/1/2020 Direct materials (100% complete) Conversion costs (50% compete) Started during April Completed and transferred out 4/30/2020 WIP, ending inventory 4/30/2020 Direct materials (100% complete) Conversion costs (25% complete)
89,000 fillets
135,000 fillets 185,000 fillets 24,000 fillets
Costs for April: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$139,000 103,910 307,000 389,130
Abnormal spoilage totals: A) 5,750 units B) 0 units C) 9,250 units D) 15,000 units Answer: A Explanation: A) Spoiled units =89,000 + 135,000 - 185,000 - 24,000 = 15,000 units Normal spoilage = 5% × 185,000 units = 9,250 spoiled units Abnormal spoilage = 15,000 units - 9,250 units = 5,750 units Diff: 3 Objective: 3 AACSB: Application of knowledge
1317 richard@qwconsultancy.com
13) Fish Fillet Incorporated obtains fish and then processes them into frozen fillets and then prepares the frozen fish fillets for distribution to its retail sales department. Direct materials are added at the initiation of the cycle. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some fillets are spoiled due to undetectable defects. Inspection occurs when units are 40% converted. Spoiled fillets generally constitute 6% of the good fillets. Data for April 2020 are as follows: WIP, beginning inventory 4/1/2020 Direct materials (100% complete) Conversion costs (50% compete) Started during April Completed and transferred out 4/30/2020 WIP, ending inventory 4/30/2020 Direct materials (100% complete) Conversion costs (20% complete)
94,000 fillets
139,000 fillets 185,000 fillets 29,000 fillets
Costs for April: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$135,000 101,910 304,000 389,130
What is the total cost per equivalent unit using the weighted-average method of process costing? (Round any cost per unit calculations to the nearest cent.) A) $3.77 B) $2.34 C) $1.88 D) $4.22 Answer: D Explanation: D) Direct Materials Conversion Costs WIP, beginning inventory $135,000 $101,910 Costs added during period 304,000 389,130 Total cost to account for 439,000 491,040 Divide by equivalent units* 233,000 209,800 Equivalent-unit costs $1.88 $1.93 * Equivalent unit calculations: Direct Materials: 94,000 + 139,000 = 233,000 units Conversion Costs: 185,000 + 19,000 + (29,000 × 20%) = 209,800 units Total cost per equivalent unit = $1.88 + $1.93 = $4.22 Diff: 2 Objective: 3 AACSB: Application of knowledge
1318 richard@qwconsultancy.com
14) Fish Fillet Incorporated obtains fish and then processes them into frozen fillets and then prepares the frozen fish fillets for distribution to its retail sales department. Direct materials are added at the initiation of the cycle. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some fillets are spoiled due to undetectable defects. Inspection occurs when units are 50% converted. Spoiled fillets generally constitute 6% of the good fillets. Data for April 2020 are as follows: WIP, beginning inventory 4/1/2020 Direct materials (100% complete) Conversion costs (60% compete) Started during April Completed and transferred out 4/30/2020 WIP, ending inventory 4/30/2020 Direct materials (100% complete) Conversion costs (25% complete)
95,000 fillets
133,000 fillets 182,000 fillets 28,000 fillets
Costs for April: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$140,000 102,910 307,000 386,130
What cost is allocated to abnormal spoilage using the weighted-average process-costing method? (Round any cost per unit calculations to the nearest cent.) A) $ 0 B) $30,586 C) $13,881 D) $14,020 Answer: B Explanation: B) Spoiled units = 95,000 + 133,000 - 182,000 - 28,000 = 18,000 units Normal spoilage = 6% × 182,000 units = 10,920 spoiled units Abnormal spoilage = 18,000 units - 10,920 units = 7,080 units
WIP, beginning inventory Costs added during period Total cost to account for Divide by equivalent units* Equivalent-unit costs
Direct Materials $140,000 307,000 $447,000 228,000 $1.96
Conversion Costs $102,910 386,130 $489,040 207,000 $2.36
* Equivalent unit calculations: Direct Materials: 95,000 + 133,000 = 228,000 units Conversion Costs: 182,000 + 18,000 + (28,000 × 25%) = 207,000 units Total cost per equivalent unit = $1.96 + $2.36 = $4.32 7,080 units × $4.32 = $30,586 Diff: 3 Objective: 3 AACSB: Application of knowledge
1319 richard@qwconsultancy.com
15) Fish Fillet Incorporated obtains fish and then processes them into frozen fillets and then prepares the frozen fish fillets for distribution to its retail sales department. Direct materials are added at the initiation of the cycle. Conversion costs are incurred evenly throughout the production cycle. Before inspection, some fillets are spoiled due to undetectable defects. Spoiled fillets generally constitute 4% of the good fillets. Data for April 2020 are as follows: WIP, beginning inventory 4/1/2020 Direct materials (100% complete) Conversion costs (55% compete) Started during April Completed and transferred out 4/30/2020 WIP, ending inventory 4/30/2020 Direct materials (100% complete) Conversion costs (20% complete)
90,000 fillets
137,000 fillets 181,000 fillets 23,000 fillets
Costs for April: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$137,000 99,910 306,000 385,130
What is the amount of direct materials and conversion costs assigned to ending work in process using the weighted-average process-costing method? (Round any cost per unit calculations to the nearest cent.) A) $1,795; $59,015 B) $44,850; $10,718 C) $101,402; $81,610 D) $81,610; $24,824 Answer: B Explanation: B) Direct Materials Conversion Costs WIP, beginning inventory $137,000 $99,910 Costs added during period 306,000 385,130 Total cost to account for 485,040 485,040 Divide by equivalent units* 227,000 208,600 Equivalent-unit costs $1.95 $2.33 * Equivalent unit calculations: Direct Materials: 90,000 + 137,000 = 227,000 units Conversion Costs: 181,000 + 23,000 + (23,000 × 20%) = 208,600 units Total cost per equivalent unit = $1.95 + $2.33 = $4.28 Direct materials = 23,000 units × $1.95 = $44,850 Conversion costs = 23,000 units × 30% × $2.33 = $10,718 Diff: 3 Objective: 3 AACSB: Application of knowledge
1320 richard@qwconsultancy.com
16) Which of the following is true of the calculation of the cost per good unit (a unit that is completed and transferred out) under the weighted-average process costing method? A) the equivalent units in the denominator include goods completed and transferred out and all units that were spoiled B) the numerator only includes the materials and conversion costs of good units and excludes the costs of spoiled units C) the equivalent units in the denominator include goods completed and transferred out and excludes the units that were spoiled D) the calculation is total costs transferred out divided by the good units that were transferred out Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
17) Excluding spoiled units in the equivalent-unit calculation results in: A) lower cost per good unit. B) higher cost per good unit C) better management information D) higher cost for spoiled units Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
18) The inspection point is the: A) stage of the production cycle where products are checked to determine whether they are acceptable or unacceptable units B) point at which costs are allocated between normal and abnormal spoilage C) point at which the calculation of equivalent units is made D) stage of allocating total costs transferred out to good units completed and transferred Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
19) Under the FIFO method, all spoilage costs are assumed to be related to the units: A) in beginning inventory, plus the units completed during the period B) completed during the period, using the unit costs of that period C) in ending inventory D) in both beginning and ending inventory plus the units completed during the period Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
1321 richard@qwconsultancy.com
20) Verer Custom Carpentry manufactures chairs in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 4% of the good units. Data provided for March 2020 are as follows: WIP, beginning inventory 3/1/2020 Direct materials (100% complete) Conversion costs (90% complete)
32,000 units
Started during March Completed and transferred out
70,800 units 80,400 units
WIP, ending inventory 3/31/2020 Direct materials (100% complete) Conversion costs (80% complete)
18,700 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$70,200 40,500 106,000 128,160
What are the normal and abnormal spoilage units, respectively, for March when using FIFO? A) 3,216 units; 484 units B) 1,982 units; 1,404 units C) 6,399 units; 1,528 units D) 590 units; 2,028 units Answer: A Explanation: A) Normal spoilage = 4% × 80,400 units = 3,216 spoiled units Abnormal spoilage = (32,000 units + 70,800) - (80,400 units + 18,700) - 3,216 = 484 units Diff: 3 Objective: 3 AACSB: Application of knowledge
1322 richard@qwconsultancy.com
21) Verer Custom Carpentry manufactures chairs in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 4% of the good units. Data provided for March 2020 are as follows: WIP, beginning inventory 3/1/2020 Direct materials (100% complete) Conversion costs (90% complete)
32,900 units
Started during March Completed and transferred out
70,900 units 80,000 units
WIP, ending inventory 3/31/2020 Direct materials (100% complete) Conversion costs (70% complete)
18,000 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$70,000 40,100 105,900 128,160
What costs would be associated with normal and abnormal spoilage, respectively, using the FIFO method of process costing? (Round any cost per unit calculations to the nearest cent.) A) $146,378; $8,121 B) $4,844; $4,780 C) $4,780; $8,710 D) $10,720; $8,710
1323 richard@qwconsultancy.com
Answer: D Explanation: D) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$105,900
$128,160
105,900 70,900 *
128,160 68,790 **
$1.49
$1.86
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total cost per equivalent unit: $1.49 + $1.86 = $3.35 per unit Normal spoilage (units): 4% × 80,000 = 3,200 spoiled units Abnormal spoilage (units): (32,900 + 70,900) - 80,000 + 18,000) - 3,200 = 2,600 spoiled units * Equivalent units, Direct Materials: (80,000 - 32,900) + 3,200 + 2,600 + 18,000 = 70,900 units ** Equivalent units, Conversion Costs: (32,900 × (100% - 90%)) + (80,000 - 32,900) + 3,200 + 2,600 + (18,000 × 70%) = 68,790 units Normal spoilage (cost): 3,200 units × $3.35 = $10,720 Abnormal spoilage (cost): 2,600 units × $3.35 = $8,710 Diff: 3 Objective: 3 AACSB: Application of knowledge
1324 richard@qwconsultancy.com
22) Verer Custom Carpentry manufactures chairs in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 4% of the good units. Data provided for March 2020 are as follows: WIP, beginning inventory 3/1/2020 Direct materials (100% complete) Conversion costs (90% complete)
32,800 units
Started during March Completed and transferred out
70,800 units 80,100 units
WIP, ending inventory 3/31/2020 Direct materials (100% complete) Conversion costs (80% complete)
18,800 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$70,800 40,000 105,300 128,160
What costs are allocated to the ending work-in-process inventory for direct materials and conversion costs, respectively, using the FIFO method of process costing? (Round any cost per unit calculations to the nearest cent.) A) $36,496; $25,807 B) $28,012; $27,373 C) $27,502; $25,165 D) $25,736; $14,598
1325 richard@qwconsultancy.com
Answer: B Explanation: B) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$105,300
$128,160
105,300 70,800 *
128,160 70,320 **
$1.49
$1.82
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total cost per equivalent unit: $1.49 + $1.82 = $3.31 per unit Normal spoilage (units): 4% × 80,100 = 3,204 spoiled units Abnormal spoilage (units): (32,800 + 70,800) - 80,100 + 18,800) - 3,204 = 1,496 spoiled units * Equivalent units, Direct Materials: (80,100 - 32,800) + 3,204 + 1,496 + 18,800 =70,800 units ** Equivalent units, Conversion Costs: (32,800 × (100% - 90%)) + (80,100 - 32,800) + 3,204 + 1,496 + (18,800 × 80%) = 70,320 units Direct materials: 18,800 units × $1.49 = $28,012 Conversion costs: (18,800 × 80%) units × $1.82 = $27,373 Diff: 3 Objective: 3 AACSB: Application of knowledge
23) Consider the following data from the month of June: Costs to account for Equivalent units of output Good units completed and transferred out Normal spoilage
$264,000 11,000 units 7,000 units 500 units
What is the total costs of good units completed and transferred out and the work-in-process, ending? A) $168,000, $180,000 B) $84,000, $180,000 C) $180,000, $84,000 D) $168,000, $96,000 Answer: C Explanation: C) The total costs of good units completed and transferred out is $180,000 which is the value of the good units completed (7,000 × $24 = $168,000) + normal spoilage (500 × $24 = $12,000.) The work-in-process ending amount is $84,000 which is 3,500 units × $24. Diff: 3 Objective: 3 AACSB: Application of knowledge
1326 richard@qwconsultancy.com
24) Based on the following information from a company's process costing system that is reporting on the month of May's activity in one of its departments, which journal entries would be correct? Cost of goods completed and transferred out (before adding normal spoilage) Normal spoilage Total cost of goods completed and transferred out Abnormal spoilage Work in process ending Total costs accounted for
$140,000 $14,000 $154,000 $5,000 $24,000 $183,000
A) Finished Goods $154,000 Work in Process $154,000 Finished Goods $5,000 Loss from Spoilage $5,000 B) Loss from Spoilage $19,000 Finished Goods $19,000 C) Finished Goods $154,000 Work in Process $154,000 Loss from Abnormal Spoilage $5,000 Work in process $5,000 D) Finished Goods $135,000 Work in Process $135,000 Answer: C Explanation: C) The finished goods is increased by the value for the cost of the "good" goods (transferred) plus the value of the normal spoilage with the loss being recognized for the abnormal spoilage. Diff: 3 Objective: 3 AACSB: Application of knowledge
1327 richard@qwconsultancy.com
25) Samantha's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 4% of the good units. Data provided for February 2020 are as follows: WIP, beginning inventory 2/1/2020 Direct materials (100% complete) Conversion costs (60% complete)
51,400 units
Started during February Completed and transferred out
170,700 units 180,400 units
WIP, ending inventory 2/28/2020 Direct materials (100% complete) Conversion costs (20% complete)
26,900 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$280,700 80,900 408,800 264,900
What are the normal and abnormal spoilage units, respectively, for February when using FIFO? A) 2,328 units; 4,180 units B) 6,828 units; 3,016 units C) 7,216 units; 7,584 units D) 7,216 units; 14,800 units Answer: C Explanation: C) Normal spoilage = 4% × 180,400 units = 7,216 spoiled units Abnormal spoilage = (51,400 + 170,700 - 180,400 - 26,900 - 7,216) = 7,584 units Diff: 3 Objective: 3 AACSB: Application of knowledge
1328 richard@qwconsultancy.com
26) Samantha's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 3% of the good units. Data provided for February 2020 are as follows: WIP, beginning inventory 2/1/2020 Direct materials (100% complete) Conversion costs (50% complete)
51,800 units
Started during February Completed and transferred out
170,800 units 180,700 units
WIP, ending inventory 2/28/2020 Direct materials (100% complete) Conversion costs (30% complete)
27,000 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$280,000 80,800 408,100 265,000
What costs would be associated with normal and abnormal spoilage, respectively, using the FIFO method of process costing? (Round any cost per unit calculations to the nearest cent.) A) $21,033; $36,779 B) $12,953; $36,779 C) $14,128; $12,953 D) $31,428; $8,080
1329 richard@qwconsultancy.com
Answer: A Explanation: A) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$408,100
$265,000
408,100 170,800 *
265,000 177,800 **
$2.39
$1.49
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total Cost per equivalent unit = $2.39 + $1.49 = $3.88 Normal spoilage = 3% × 180,700 units = 5,421 spoiled units Abnormal spoilage = (51,800 units + 170,800) - (180,700 units + 27,000) - 5,421 = 9,479 units * (180,700 - 51,800) + 5,421 + 9,479 + 27,000 = 170,800 units ** (25,900 + 128,900 + 5,421 + 9,479 + 8,100) = 177,800 units Normal Spoilage = 5,421 units × $3.88 = $21,033 Abnormal Spoilage = 9,479 units × $3.88 = $36,779 Diff: 3 Objective: 3 AACSB: Application of knowledge
1330 richard@qwconsultancy.com
27) Samantha's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 5% of the good units. Data provided for February 2020 are as follows: WIP, beginning inventory 2/1/2020 Direct materials (100% complete) Conversion costs (55% complete)
51,900 units
Started during February Completed and transferred out
170,000 units 180,500 units
WIP, ending inventory 2/28/2020 Direct materials (100% complete) Conversion costs (30% complete)
26,700 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$280,000 80,700 408,100 264,700
What costs are allocated to the ending work-in-process inventory for direct materials and conversion costs, respectively, using the FIFO method of process costing? (Round any cost per unit calculations to the nearest cent.) A) $1,922,400; $12,175 B) $55,222; $49,543 C) $64,080; $12,175 D) $40,584; $18,715
1331 richard@qwconsultancy.com
Answer: C Explanation: C) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$408,100
$264,700
408,100 170,000 *
264,700 174,665 **
$2.40
$1.52
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total Cost per equivalent unit = $2.40 + $1.52 = $3.92 Normal spoilage = 5% × 180,500 units = 9,025 spoiled units Abnormal spoilage = (51,900 units + 170,000) -(180,500 units + 26,700) - 9,025 = 5,675 units * (180,500 - 51,900) + 9,025 + 5,675 + 26,700 = 170,000 units ** ((100% - 55%) × 51,900) + 180,500 - 51,900 + 9,025 + 5,675 + (26,700 × 30%) = 174,665 units Normal Spoilage = 9,025 units × $3.92 = $35,378.00 Abnormal Spoilage = 5,675 units × $3.92 = $22,246.00 Direct materials: 26,700 units × $2.40 = $64,080 Conversion costs: 26,700 units × 0.3 × $1.52 = $12,175 Diff: 3 Objective: 3 AACSB: Application of knowledge
1332 richard@qwconsultancy.com
28) Samantha's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 4% of the good units. Data provided for February 2020 are as follows: WIP, beginning inventory 2/1/2020 Direct materials (100% complete) Conversion costs (60% complete)
51,600 units
Started during February Completed and transferred out
170,600 units 180,400 units
WIP, ending inventory 2/28/2020 Direct materials (100% complete) Conversion costs (25% complete)
26,800 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$280,900 80,700 408,200 264,100
What are the direct material and conversion costs of all the units that were initially in the beginning work-in-process inventory and were subsequently shipped? Take into account the costs related to the completion of the conversion of the units during the month. Use the FIFO method of process costing. (Round any cost per unit calculations to the nearest cent.) A) $79,464; $48,039 B) $0; $47,678 C) $59,598; $41,149 D) $41,272; $15,981
1333 richard@qwconsultancy.com
Answer: B Explanation: B) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$408,200
$264,100
408,200 170,600 *
264,100 171,140 **
$2.39
$1.54
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total Cost per equivalent unit = $2.39 + $1.54 = $3.93 Normal spoilage = 4% × 180,400 units = 7,216 spoiled units Abnormal spoilage = (51,600 units + 170,600) -(180,400 units + 26,800) - 7,216 = 7,784 units * (180,400 - 51,600) + 7,216 + 7,784 + 26,800 = 170,600 units ** ((100% - 60%) × 51,600) + 180,400 - 51,600 + 7,216 + 7,784 + (26,800 × 25%) = 171,140 units Normal Spoilage = 7,216 units × $3.93 = $28,358.88 Abnormal Spoilage = 7,784 units × $3.93 = $30,591.12 Direct materials: 26,800 units × $2.39 = $64,052 Conversion costs: 26,800 units × 0.25 × $1.54 = $10,318 Beginning WIP: Direct Material cost = $0 Conversion Cost = 51,600 units × 60% × $1.54 = $47,678 Diff: 3 Objective: 3 AACSB: Application of knowledge
1334 richard@qwconsultancy.com
29) Samantha's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 5% of the good units. Data provided for February 2020 are as follows: WIP, beginning inventory 2/1/2020 Direct materials (100% complete) Conversion costs (55% complete)
51,100 units
Started during February Completed and transferred out
170,400 units 180,500 units
WIP, ending inventory 2/28/2020 Direct materials (100% complete) Conversion costs (25% complete)
27,000 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$280,800 80,400 408,100 264,900
What is the total costs of all the units that were initially in the beginning work-in-process inventory and were subsequently shipped? Take into account the costs related to the completion of the conversion of the units during the month. Use the FIFO method of process costing. (Round any cost per unit calculations to the nearest cent.) A) $35,182 B) $361,200 C) $396,382 D) $197,982
1335 richard@qwconsultancy.com
Answer: C Explanation: C) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$408,100
$264,900
408,100 170,400 *
264,900 173,145 **
$2.39
$1.53
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total Cost per equivalent unit = $2.39 + $1.53 = $3.92 Normal spoilage = 5% × 180,500 units = 9,025 spoiled units Abnormal spoilage = (51,100 units + 170,400) - (180,500 units + 27,000) - 9,025 = 4,975 units * (180,500 - 51,100)+ 9,025 + 4,975 + 27,000 = 170,400 units ** ((100% - 55%) × 51,100) + 180,500 - 51,100 + 9,025 + 4,975 + (27,000 × 25%) = 173,145 units Normal Spoilage = 9,025 units × $3.92 = $35,378.00 Abnormal Spoilage = 4,975 units × $3.92 = $19,502.00 Direct materials: 27,000 units × $2.39 = $64,530 Conversion costs: 27,000 units × 0.25 × $1.53 = $10,328 Costs related to Beginning WIP: Costs Carried Forward from Previous period = $280,800 + $80,400 = $361,200 Additional Conversion Cost = 51,100 units × (100% - 55%) × $1.53 = $35,182 Total = $396,382 Diff: 3 Objective: 3 AACSB: Application of knowledge
1336 richard@qwconsultancy.com
30) Samantha's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 5% of the good units. Data provided for February 2020 are as follows: WIP, beginning inventory 2/1/2020 Direct materials (100% complete) Conversion costs (50% complete)
51,200 units
Started during February Completed and transferred out
170,400 units 180,800 units
WIP, ending inventory 2/28/2020 Direct materials (100% complete) Conversion costs (25% complete)
26,600 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$280,700 80,500 408,700 264,200
What are the total costs of all the units that were started during February and subsequently shipped before the end of the period? (Round any cost per unit calculations to the nearest cent.) A) $609,180 B) $505,440 C) $560,820 D) $403,200
1337 richard@qwconsultancy.com
Answer: B Explanation: B) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$408,700
$264,200
408,700 170,400 *
264,200 176,050 **
$2.40
$1.50
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total Cost per equivalent unit = $2.40 + $1.50 = $3.90 Normal spoilage = 5% × 180,800 units = 9,040 spoiled units Abnormal spoilage = (51,200 units + 170,400) - (180,800 units + 26,600) - 9,040 = 5,160 units * (180,800 - 51,200) + 9,040 + 5,160 + 26,600 = 170,400 units ** ((100% - 50%) × 51,200) + 180,800 - 51,200 + 9,040 + 5,160 + (26,600 × 25%) = 176,050 units Normal Spoilage = 9,040 units × $3.90 = $35,256.00 Abnormal Spoilage = 5,160 units × $3.90 = $20,124.00 Direct materials: 26,600 units × $2.40 = $63,840 Conversion costs: 26,600 units × 0.25 × $1.50 = $9,975 Costs related to Beginning WIP: Costs Carried Forward from Previous period = $280,700 + $80,500 = $361,200 Additional Conversion Cost = 51,200 units × (100 - 50%) × $1.50 = $38,400 Total = $399,600 Costs related to units that were started and completed in the period: Started and Completed = Shipped Units less beginning Inventory = 180,800 - 51,200 = 129,600 units Cost = 129,600 units × $3.90 = $505,440 Diff: 3 Objective: 3 AACSB: Application of knowledge
1338 richard@qwconsultancy.com
31) Samantha's Office Supplies manufactures desk organizers in its Processing Department. Direct materials are included at the inception of the production cycle and must be bundled in single kits for each unit. Conversion costs are incurred evenly throughout the production cycle. Inspection takes place as units are placed into production. After inspection, some units are spoiled due to undetectable material defects. Spoiled units generally constitute 4% of the good units. Data provided for February 2020 are as follows: WIP, beginning inventory 2/1/2020 Direct materials (100% complete) Conversion costs (50% complete)
51,500 units
Started during February Completed and transferred out
170,400 units 180,300 units
WIP, ending inventory 2/28/2020 Direct materials (100% complete) Conversion costs (30% complete)
26,700 units
Costs: WIP, beginning inventory: Direct materials Conversion costs Direct materials added Conversion costs added
$280,100 80,400 408,300 264,800
Which of the following journal entries correctly represents the transfer of completed goods begun during February using the FIFO method of process costing? (Round any cost per unit calculations to the nearest cent.) A) Finished Goods 501,032 Work in Process 501,032 B) Loss from Spoilage 29,906 Finished Goods 29,906 C) Finished Goods 927,955 Work in Process 927,955 D) Finished Goods 398,868 Work in Process 398,868
1339 richard@qwconsultancy.com
Answer: C Explanation: C) WIP, beginning inventory Costs added during period
Direct Materials
Conversion Costs
$408,300
$264,800
408,300 170,400 *
264,800 177,460 **
$2.40
$1.49
Total cost to account for Divided by equivalent units Equivalent-unit costs
Total Cost per equivalent unit = $2.40 + $1.49 = $3.89 Normal spoilage = 4% × 180,300 units = 7,212 spoiled units Abnormal spoilage = (51,500 units + 170,400) - (180,300 units + 26,700) - 7,212 = 7,688 units * (180,300 - 51,500)+ 7,212 + 7,688 + 26,700 = 170,400 units ** ((100% - 50%) × 51,500) + 180,300 - 51,500 + 7,212 + 7,688 + (26,700 × 30%) = 177,460 units Normal Spoilage = 7,212 units × $3.89 = $28,054.68 Abnormal Spoilage = 7,688 units × $3.89 = $29,906.32 Direct materials: 26,700 units × $2.40 = $64,080 Conversion costs: 26,700 units × 0.3 × $1.49 = $11,935 Costs related to Beginning WIP: Costs Carried Forward from Previous period = $280,100 + $80,400 = $360,500 Additional Conversion Cost = 51,500 units × (100 - 50%) × $1.49 = $38,368 Total = $398,868 Costs related to units that were started and completed in the period: Started and Completed = Shipped Units less beginning Inventory = 180,300 - 51,500 = 128,800 units Cost = 128,800 units × $3.89 = $501,032 Costs to transfer out = $28,054.68 + $501,032 + $398,868 = $927,955 Diff: 3 Objective: 3 AACSB: Application of knowledge
32) The first step in the five-step procedure for process costing with spoilage is to compute the output in terms of equivalent units. Answer: FALSE Explanation: The first step in the five-step procedure for process costing with spoilage is to summarize the flow of physical units. Diff: 2 Objective: 3 AACSB: Analytical thinking
1340 richard@qwconsultancy.com
33) The last step in the five-step procedure for process costing with spoilage is to summarize total costs to account for. Answer: FALSE Explanation: The last step in the five-step procedure for process costing with spoilage is to assign total costs to units completed, to spoiled units, and to units in ending work in process. Diff: 2 Objective: 3 AACSB: Analytical thinking
34) Counting spoiled units as part of output units in a process-costing system usually results in a higher cost per unit. Answer: FALSE Explanation: Counting spoiled units usually results in a lower cost per unit. Diff: 3 Objective: 3 AACSB: Analytical thinking
35) Costs in beginning inventory are pooled with costs in the current period when determining the costs of good units under the weighted-average method of process costing. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
36) Under the weighted-average method, the costs of normal spoilage are added to the costs of their related good units. Hence, the cost per good unit completed and transferred out equals the total costs transferred out divided by the number of good units produced. Answer: TRUE Diff: 3 Objective: 3 AACSB: Analytical thinking
37) Spoilage is typically assumed to occur at the stage of completion where inspection takes place. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
38) Spoilage and rework costs are thoroughly captured in the accounting system. Answer: FALSE Explanation: The actual costs of spoilage and rework are often greater than the costs recorded in the accounting system because the opportunity costs of disruption of the production line, storage, and lost contribution margin are not recorded in accounting systems. Diff: 2 Objective: 3 AACSB: Analytical thinking
1341 richard@qwconsultancy.com
39) Under the FIFO method, all spoilage costs are assumed to be related to the units completed during this period using the unit costs of the current period. Answer: TRUE Diff: 3 Objective: 3 AACSB: Analytical thinking
40) To simplify calculations under FIFO, spoiled units are accounted for as if they were started in the current period. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
41) Normal spoilage costs are usually deducted from the costs of good units. Answer: FALSE Explanation: Normal spoilage is usually added to the cost of the good units. Diff: 2 Objective: 3 AACSB: Analytical thinking
42) Identify the appropriate order of the following steps in the procedure for process costing with spoilage. a. b. c. d. e.
summarize total costs to account for assign total costs to units completed, to spoiled units, and to units in ending inventory summarize the flow of physical units compute output in terms of equivalent units compute cost per equivalent unit
Step 1 ________ Step 2 ________ Step 3 ________ Step 4 ________ Step 5 ________ Answer: Step 1 c. summarize the flow of physical units Step 2 d. compute output in terms of equivalent units Step 3 a. summarize total costs to account for Step 4 e. compute cost per equivalent unit Step 5 b. assign total costs to units completed, to spoiled units, and to units in ending inventory Diff: 2 Objective: 3 AACSB: Analytical thinking
1342 richard@qwconsultancy.com
43) Maxire Shoes manufactures shoes. All direct materials are included at the inception of the production process. For March, there were 2,800 units in beginning inventory with a direct material cost of $1,400. Direct materials totaled $35,000 for the month. Work-in-process records revealed that 70,000 units were started in March and that 60,000 were finished. When March ended there were 12,800 units in work-in-process. Normal spoilage of 2% of units finished was incurred. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. Endicott uses the weighted-average method. Required: a. What are the direct materials costs assigned to completed good units? b. What are the direct material amounts allocated to the work-in-process ending inventory? Answer: a. Equivalent units (spoilage recognized) = 2,800 + 70,000 = 72,800 Cost to account for: Beginning work in process Current period Total costs to account for Divided by equivalent units Cost per equivalent unit
b.
$ 1,400 35,000 $36,400 72,800 $ 0.50
Assigned to good units: (58,800 × $0.50)
$29,400
Ending work in process: (12,800 × $0.50)
$ 6,400
Diff: 3 Objective: 3 AACSB: Application of knowledge
1343 richard@qwconsultancy.com
44) Venosis Sports is a manufacturer of sportswear. It produces all of its products in one department. The information for the current month is as follows: Beginning work in process Units started Units completed Ending work in process Spoilage
22,000 units 44,000 units 55,000 units 10,000 units 1,000 units
Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labor during month
$15,000 $ 6,000 $70,800 $37,400
Beginning work in process was half complete as to conversion. Direct materials are added at the beginning of the process. Factory overhead is applied at a rate equal to 50% of direct manufacturing labor. Ending work in process was 60% complete. All spoilage is normal and is detected at end of the process. Required: Prepare a production cost worksheet if spoilage is recognized and the weighted-average method is used.
1344 richard@qwconsultancy.com
Answer:
PRODUCTION COST WORKSHEET
Flow of Production Work in process, beginning Started during period To account for
Physical units 22,000 44,000 66,000
Direct materials
Conversion
Good units completed Normal spoilage Work in process, ending Accounted for
55,000 1,000 10,000 66,000
55,000 1,000 10,000 66,000
55,000 1,000 6,000 62,000
Costs Work in process, beginning Costs added during period
Totals $ 21,000 108,200
Direct Materials $15,000 70,800
Conversion $ 6,000 37,400
Total costs to account for Divided by equivalent units Equivalent unit costs
129,200
85,800 66,000 $ 1.30
43,400 62,000 $ 0.70
$ 2.00
Assignment of costs Costs transferred out (55,000 × $2.00) Normal spoilage (1,000 × $2.00) Work in process, ending Direct materials (10,000 × $1.30) Conversion (10,000 × $0.60 × 0.70)
$ 110,000 2,000 13,000 4,200
Costs accounted for
$129,200
Diff: 3 Objective: 3 AACSB: Application of knowledge
1345 richard@qwconsultancy.com
45) Silver Spoon Incorporated is a manufacturer of kitchen utensils. It produces all of its products in one department. The information for the current month is as follows: Beginning work in process Units started Units completed Ending work in process Spoilage
40,000 units 52,000 units 73,000 units 16,000 units 3,000 units
Beginning work-in-process direct materials Beginning work-in-process conversion Direct materials added during month Direct manufacturing labor during month
$30,000 $ 8,000 $126,400 $60,480
Beginning work in process was 25% complete as to conversion. Direct materials are added at the beginning of the process. Factory overhead is applied at a rate equal to 40% of direct manufacturing labor. Ending work in process was 60% complete. All spoilage is normal and is detected at the end of the process. Required: Prepare a production cost worksheet if spoilage is recognized and the weighted-average method is used.
1346 richard@qwconsultancy.com
Answer:
PRODUCTION COST WORKSHEET
Flow of Production Work in process, beginning Started during period To account for
Physical units 40,000 52,000 92,000
Direct materials
Conversion
Good units completed Normal spoilage Work in process, ending Accounted for
73,000 3,000 16,000 92,000
73,000 3,000 16,000 92,000
73,000 3,000 9,600 85,600
Costs Work in process, beginning Costs added during period
Totals $ 38,000 186,880
Direct Materials $30,000 126,400
Conversion $ 8,000 60,480
Total costs to account for Divided by equivalent units Equivalent unit costs
224,880
156,400 92,000 $ 1.70
68,480 85,600 $ 0.80
$ 2.50
Assignment of costs Costs transferred out (73,000 × $2.50) Normal spoilage (3,000 × $2.50) Work in process, ending Direct materials (16,000 × $1.70) Conversion (16,000 × $0.75 × 0.80)
$ 182,500 7,500 27,200 7,680
Costs accounted for
$224,880
Diff: 3 Objective: 3 AACSB: Application of knowledge
1347 richard@qwconsultancy.com
46) New Image Sports uses a process-costing system. For March, the company had the following activities: Beginning work-in-process inventory (1/3 complete) Units placed in production Good units completed Ending work-in-process inventory Cost of beginning work in process Direct material costs, current Conversion costs, current
7,200 units 28,800 units 21,600 units 12,000 units $ 6,000 $21,600 $14,400
Direct materials are placed into production at the beginning of the process. All spoilage is normal and is detected at the end of the process. Ending WIP is 60% completed as to conversion. Required: Prepare a production cost worksheet using the FIFO method.
1348 richard@qwconsultancy.com
Answer: Normal spoilage = 7,200 + 28,800 - 21,600 - 12,000 = 2400 Started and completed = 21,600 - 2,400 = 14,400 PRODUCTION COST WORKSHEET Flow Of Production Work in process, beginning Started during period To account for
Physical Units 7,200 28,800 36,000
Direct Materials
Conversion
Good units completed: Beginning work in process Started and completed Normal spoilage Work in process, ending
7,200 14,400 2,400 12,000
14,400 2,400 12,000
4,800 14,400 2,400 7,200
Accounted for
36,000
28,800
28,800
Costs Work in process, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
Totals $ 6,000 36,000 $42,000
Direct Materials
Conversion
$21,600 $21,600 28,800 $ 0.75
$14,400 $14,400 28,800 $ 0.50
$ 1.25
Assignment of cost: Work in process, beginning Completion of beginning (4,800 × $0.50)
$ 6,000 2,400
Total beginning inventory Started and completed (14,400 × $1.25) Normal spoilage (2,400 × $1.25)
8,400 18,000 3,000
Total costs transferred out Work in process, ending Direct materials (12,000 × $0.75) Conversion (12,000 × $0.50 × 0.6)
29,400 $9,000 3,600
12,600
Costs accounted for
$42,000
Diff: 3 Objective: 3 AACSB: Application of knowledge
1349 richard@qwconsultancy.com
47) Weather Instruments assembles products from component parts. It has two departments that process all products. During January, the beginning work in process in the assembly department was half complete as to conversion and complete as to direct materials. The beginning inventory included $12,000 for materials and $4,000 for conversion costs. Overhead is applied at the rate of 50% of direct manufacturing labor costs. Ending work-in-process inventory in the assembly department was 40% complete. All spoilage is considered normal and is detected at the end of the process.
Beginning work-in-process units Units started this period Units transferred this period Ending work-in-process units Material costs added Direct manufacturing labor
Assembly 20,000 40,000 50,000 8,000 $44,000 $16,000
Finishing 24,000 ? 54,000 20,000 $28,000 $24,000
Required: Prepare a production cost worksheet using weighted-average for the assembly department>
1350 richard@qwconsultancy.com
Answer: Normal spoilage in assembly = 20,000 + 40,000 - 50,000 - 8,000 = 2,000 PRODUCTION COST WORKSHEET Assembly Department Weighted-Average Method Flow of production Work in process, beginning Started during period To account for
Physical Units 20,000 40,000 60,000
Direct Materials
Conversion
Good units completed and Transferred out Normal spoilage Work in process, ending Accounted for
50,000 2,000 8,000 60,000
50,000 2,000 8,000 60,000
50,000 2,000 3,200 55,200
Costs Work in process, beginning Costs added during period
Totals $16,000 68,000
Direct materials $12,000 44,000
Conversion $ 4,000 24,000
Total costs to account for Divided by equivalent units
84,000
56,000 60,000
28,000 55,200
Equivalent-unit costs
$ 1.44
$ 0.93
$ 0.51
Assignment of costs Transferred out (50,000 × $1.44) Normal spoilage (2,000 × $1.44) Total costs transferred out Work in process, ending Direct materials (8,000 × $0.93) Conversion (8,000 × 0.40 × $0.51)
$72,000 2,880 74,880 $7,440 1,632
9,072
Costs accounted for (Differences due to rounding)
$83,952
Diff: 3 Objective: 3 AACSB: Application of knowledge
1351 richard@qwconsultancy.com
48) The Duolane Pottery manufactures pottery products. All direct materials are included at the inception of the production process. For April, there was no beginning inventory in the processing plant. Direct materials totaled $180,000 for the month. Work-in-process records revealed that 3,000 tons were started in April and that 2,100 tons were finished; 500 tons were spoiled as expected. Ending work-in-process units are complete in respect to direct materials costs. Spoilage is not detected until the process is complete. Required: a. What is the cost per equivalent unit? b. What are the costs assigned to completed units? c. What are the costs transferred out? d. What are the amounts allocated to the work-in-process ending inventory? Answer: a. Cost to account for $180,000 Divided by equivalent units 3,000 Cost per equivalent unit $ 60 b.
Assigned to good units completed: (2,100 × $60)
$126,000
Transferred out — Finished Normal spoilage (500 × $60) Total
$126,000 30,000 $156,000
d. Ending work-in-process inventory: (400 × $60)
$ 24,000
c.
Diff: 3 Objective: 3 AACSB: Application of knowledge
49) Harriet has been reviewing the accounting system for her company and she is very concerned about the accounting for spoilage. It appears that spoilage is accounted for only at the end of the processing cycle. While this concept is acceptable in general, Harriet believes that a better method can be found to properly account for the spoilage when it occurs. She believes that there must be something better than the weighted-average method of accounting for spoilage. She would like the company to use a method that provides closer tracking of the spoilage with the accounting for the spoilage. Required: Discuss the problems Harriet is having with the accounting system. Answer: The main problem Harriet has is that she does not understand the accounting system. The use of weighted-average or FIFO is not for addressing the problems of spoilage tracking. While the methods differ slightly in the tracking of costs, FIFO keeps beginning inventories separate, and the point of accounting for spoilage is not affected by the accounting method. If the company can account for spoilage at different stages of completion, these stages can be converted into percentage of completion points, and the spoilage can be accounted for as the process completes each stage. Diff: 3 Objective: 3 AACSB: Application of knowledge
1352 richard@qwconsultancy.com
Objective 19.4 1) When spoiled goods have a disposal value, the net cost of the spoilage is computed by: A) deducting disposal value from the costs of the spoiled goods accumulated to the inspection point B) adding the costs to complete a saleable product to the costs accumulated to the inspection point C) deducting the costs to complete a saleable product from the costs accumulated to the inspection point D) adding disposal value to the costs of the good units transferred Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
2) The costs of normal spoilage are allocated to the units in ending work-in-process inventory, in addition to completed units if the units: A) in ending inventory have not passed the inspection point B) in ending work-in-process inventory have passed the inspection point C) in ending work in process inventory are more than 25% complete D) in ending work-in-process inventory are less than 25% complete Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
3) Normal spoilage is computed on the basis of the number of: A) good units that pass inspection during the current period B) units that pass the inspection point during the current period C) units that are in ending work in process D) units that started during the particular period Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
1353 richard@qwconsultancy.com
4) Assume the following: WIP, beginning 3,500 units (100% complete as to direct materials, 40% complete as to conversion costs) Started 10,500 units during the period Total spoilage is 600 with normal spoilage is calculated to be 450 units Completed and transferred out during the period 6,000 units WIP, ending 7,400 units (100% complete as to direct materials, 50% complete as to conversion costs) Spoiled units 600 and inspection happens when the process is 20% complete All materials are added at the start of the process Under the weighted average method, what would be the equivalent units of work done for the period? A) 11,190 B) 6,000 C) 7,400 D) 9,820 Answer: D Explanation: D) Goods transferred out of 6,000 + normal spoilage equivalent units 90 (450 × 20%) + abnormal spoilage 30 (150 × 20%) + WIP equivalent units 3,700 (7,400 × 50%) Diff: 3 Objective: 4 AACSB: Analytical thinking
5) Early inspections can: A) prevent any further conversion costs being wasted on units that are already good B) increase conversion costs on units that are already spoiled C) increase any further costs being spent on units that are already spoiled D) prevent any further costs being wasted on units that are already spoiled Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
6) Cost of spoiled units equals: A) all costs incurred in producing them up to the point of delivery B) all costs incurred in producing them up to the point of inspection C) all costs incurred in producing them up to the point of selling D) all costs incurred in producing them up to the point of packaging Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
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7) Which of the following is true of unit costs of normal and abnormal spoilage when they are detected at the same inspection point? A) Unit cost of normal spoilage is more than unit cost of abnormal spoilage. B) Unit cost of normal spoilage is equal to unit cost of abnormal spoilage. C) Unit cost of abnormal spoilage is more than unit cost of normal spoilage. D) Addition of unit cost of normal spoilage and unit cost of abnormal spoilage is equal to unit cost of good units produced and transferred. Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
8) Which of the following statement is true of costs of normal and abnormal spoilage? A) Costs of normal spoilage are shown as an asset in a balance sheet; however, abnormal spoilage costs are shown as liabilities in a balance sheet. B) Costs of abnormal spoilage are shown as an asset in a balance sheet; however, normal spoilage costs are shown as liabilities in a balance sheet. C) Costs of abnormal spoilage are separately accounted for as losses of the accounting period in which they are detected. D) Costs of normal spoilage are separately accounted for as losses of the accounting period in which they are detected. Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
9) 700 shirts are sold as seconds at $19 per shirt. Cost of spoiled shirts is $500,200. Cost of shirts at inspection point equals $9,500,000. Calculate the net cost of the spoilage. A) $9,486,700 B) $486,900 C) $513,500 D) $9,513,300 Answer: B Explanation: B) Net cost of the spoilage = $500,200 - ($19 × 700) = $486,900 Diff: 2 Objective: 4 AACSB: Analytical thinking
10) In general, it is presumed that normal spoilage occurs halfway between the beginning of the production process and the inspection point in the production cycle. This is because there is no easy way to determine where the spoilage has happened until the inspection has occurred. Answer: FALSE Explanation: The common approach is to presume that normal spoilage occurs at the inspection point in the production cycle. Diff: 2 Objective: 4 AACSB: Analytical thinking
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11) All accounting systems must assume that the inspection point occurs when a process is 100% complete. Answer: FALSE Explanation: All accounting systems do not have to assume that the inspection point occurs when a process is 100% complete. Some companies perform inspections before the product is 100% complete and some use multiple inspection points. Diff: 2 Objective: 4 AACSB: Analytical thinking
12) The downside to conducting inspections at too early a stage is that units spoiled at later stages of the process may go undetected. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
13) Firms often conduct multiple inspections to avoid instances of undetected spoiled units at later stages of the process. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
14) When spoiled goods have a disposal value, the net cost of spoilage is computed by adding the disposal value to the costs of the spoiled goods accumulated to the inspection point. Answer: FALSE Explanation: The net cost of spoilage is computed by subtracting the disposal value from the costs of the spoiled goods accumulated to the inspection point. Diff: 2 Objective: 4 AACSB: Analytical thinking
15) Spoilage always occurs at beginning stages of a production process and can be detected only at the end of process. Answer: FALSE Explanation: Spoilage might occur at various stages of a production process, but it is typically detected only at one or more inspection points. Diff: 1 Objective: 4 AACSB: Analytical thinking
16) If a company inspects units only at the end of the production process, the units in ending work-in-process inventory are not assigned any costs of normal spoilage. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
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17) Costs of abnormal spoilage are separately accounted for as losses of the accounting period in which they are detected. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
18) The unit costs of normal and abnormal spoilage are the same when the two are detected at the same inspection point. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
19) How does inspecting at various stages of completion affect the amount of normal and abnormal spoilage? Answer: The cost of spoiled units is assumed to equal all costs incurred in producing spoiled units up to the point of inspection. Spoilage costs, therefore, vary based on different inspection points. Diff: 2 Objective: 4 AACSB: Analytical thinking
20) Why do firms often conduct multiple inspections? Answer: Early inspections can help prevent any further costs being wasted on units that are already spoiled. But conducting inspections at too early stages can result in instances of spoiled units may go undetected at later stages of the process. Diff: 2 Objective: 4 AACSB: Analytical thinking
21) What is the advantage and disadvantage of early inspections? Answer: Early inspections can help prevent any further costs being wasted on units that are already spoiled. But conducting inspections at too early stages can result in instances of spoiled units may go undetected at later stages of the process. Diff: 2 Objective: 4 AACSB: Analytical thinking
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22) Spoilage can be a significant cost for many organizations. Discuss when spoilage might happen and how the costs of normal spoilage get allocated. Answer: Spoilage may occur at various stages of the production process. In general, the cost of spoiled units is equal to the all costs incurred in producing the spoiled units up to the point of inspection. The costs of normal spoilage are allocated to units in ending work-in-process inventory. The most common approach is to presume that normal spoilage occurs at the inspection point in the production cycle and to allocate its cost over all units that have passed that point during the accounting period. One cost-benefit decision to be made is when to do inspections. Naturally, the earlier the spoilage is caught, the less costly it will be as the conversion costs will be lower in the early stages of production. The costs of performing inspections can be compared to the expected savings from reducing the spoilage costs as part of the determination of when in the process the inspections should happen. Diff: 3 Objective: 4 AACSB: Analytical thinking
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Objective 19.5 1) The Peric Manufacturing Shop produces motorcycle parts. Typically, 20 pieces out of a job lot of 1,500 parts are spoiled. Spoilage is considered a normal part of Peric's production process. Costs are assigned at the inspection point, $48.00 per unit. Spoiled pieces may be disposed at $18.00 per unit. The spoiled goods must be inventoried appropriately when the normal spoilage is detected. The current job requires the production of 3,000 good parts. Which of the following journal entries properly reflects the recording of spoiled goods? A) Work-in-Process Control 450 Manufacturing Overhead Control 750 Materials Control 1,200 B) Materials Control 720 Manufacturing Overhead Control 1,200 Work-in-Process Control 1,920 C) Work-in-Process Control 1,920 Materials Control 720 Manufacturing Overhead Control 1,200 D) Manufacturing Overhead Control 750 Materials Control 450 Work-in-Process Control 1,200 Answer: B Explanation: B) Materials Control: 40 pieces × $18.00 = $720 Manufacturing Overhead Control: 40 pieces × ($48.00 - $18.00) = $1,200 WIP Control: 40 pieces × $48.00 = $1,920 Diff: 2 Objective: 5 AACSB: Application of knowledge
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2) The Peric Manufacturing Shop produces motorcycle parts. Typically, 18 pieces out of a job lot of 800 parts are spoiled. Costs are assigned at the inspection point, $42.00 per unit. Spoiled pieces may be disposed at $26.00 per unit. The spoiled goods must be inventoried appropriately when the normal spoilage is detected. The current job requires the production of 2,400 good parts. Which of the following journal entries would be correct if the spoilage occurred due to specifications required for Job 101? A) Work-in-Process Control 468 Materials Control 468 B) Materials Control 468 Work-in-Process Control 468 C) Materials Control 1,404 Work-in-Process Control 1,404 D) Work-in-Process Control 1,404 Materials Control 1,404 Answer: C Explanation: C) 54 pieces × $26.00 = $1,404 Diff: 2 Objective: 5 AACSB: Application of knowledge
3) Which of the following is a journal entry to recognize the disposal value? A) Materials Control XXX Work-in-Process Control XXX Manufacturing Overhead Control XXX B) Work-in-Process Control XXX Manufacturing Overhead Control XXX Materials Control XXX C) Manufacturing Overhead Control XXX Work-in-Process Control XXX D) Materials Control XXX Work-in-Process Control XXX Answer: D Diff: 3 Objective: 5 AACSB: Analytical thinking
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4) To recognize the disposal value of normal spoilage: A) Manufacturing Overhead Control account is debited with spoiled goods at current net disposal value B) Materials Control account is debited with spoiled goods at current net disposal value C) Work-in-Process Control account is debited with spoiled goods at current net disposal value D) Manufacturing Overhead Control account is credited with spoiled goods at current net disposal value Answer: B Diff: 3 Objective: 5 AACSB: Analytical thinking
5) Which of the following sentences is true of classification of spoilage as normal or abnormal when inventories are present? A) Classifying spoilage as normal rather than abnormal results in same current operating income. B) Classifying spoilage as normal rather than abnormal results in a decrease in current operating income. C) Classifying spoilage as abnormal rather than normal results in an increase in current operating income. D) Classifying spoilage as normal rather than abnormal results in an increase in current operating income. Answer: D Diff: 3 Objective: 5 AACSB: Analytical thinking
6) Which of the following sentences is true of normal spoilage and abnormal spoilage? A) Normal spoilage costs are inventoriable and are added to the cost of good units produced, while abnormal spoilage costs are deducted from the cost of good units produced. B) Abnormal spoilage costs are inventoriable and are deducted from the cost of good units produced, while normal spoilage costs are expensed in the accounting period in which they occur. C) Abnormal spoilage costs are inventoriable and are added to the cost of good units produced, while normal spoilage costs are expensed in the accounting period in which they occur. D) Normal spoilage costs are inventoriable and are deducted from the cost of good units produced, while abnormal spoilage costs are expensed in the accounting period in which they occur. Answer: A Diff: 3 Objective: 5 AACSB: Analytical thinking
7) How do job-costing systems account for spoilage? A) Normal spoilage specific to a job and the cost of abnormal spoilage are both allocated as part of manufacturing overhead. B) Normal spoilage specific to a job is assigned to that job or, when common to all jobs, is allocated as part of manufacturing overhead. The cost of abnormal spoilage is written off as a loss in the accounting period. C) Normal spoilage and abnormal spoilage are both written off as a loss in the accounting period. D) Normal spoilage that is common to all jobs is allocated to specific jobs by dividing total normal spoilage by the jobs worked on during the period while abnormal spoilage is allocated to overhead. Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
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8) Costs of abnormal spoilage are NOT considered to be inventoriable costs and are written off as costs of the accounting period in which the abnormal spoilage is detected. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
9) When assigning costs, job-costing systems generally distinguish normal spoilage attributable to a specific job from normal spoilage common to all jobs. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
10) In job-costing systems, abnormal spoilage costs are considered to be inventoriable costs and normal spoilage costs are not considered to be inventoriable costs and are written off as costs of the accounting period in which the abnormal spoilage is detected. Answer: FALSE Explanation: In job-costing systems, normal spoilage costs are considered to be inventoriable costs and abnormal spoilage costs are not considered to be inventoriable costs and are written off as costs of the accounting period in which the abnormal spoilage is detected. Diff: 3 Objective: 5 AACSB: Analytical thinking
11) Normal spoilage costs in job-costing systems are treated differently than in process-costing systems. Answer: FALSE Explanation: Normal spoilage costs in job-costing systems–as in process-costing systems–are inventoriable costs, although increasingly companies are tolerating only small amounts of spoilage as normal. Diff: 3 Objective: 5 AACSB: Analytical thinking
12) When normal spoilage is common to all jobs, the budgeted manufacturing overhead rate includes a provision for the normal spoilage cost. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
13) When inventories are present, classifying spoilage as normal rather than abnormal results in a decrease in current operating income. Answer: FALSE Explanation: When inventories are present, classifying spoilage as normal rather than abnormal results in an increase in current operating income. Diff: 2 Objective: 5 AACSB: Analytical thinking
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14) Shazam Machines produces numerous types of money change machines. All machines are made in the same production department and many use exactly the same processes. Because customers have such different demands for the machine characteristics, the company uses a job-costing system. Unfortunately, some of the production managers have been upset for the last few months when their jobs were charged with the spoilage that occurred over an entire processing run of several types of machines. Some of the best managers have even threatened to quit unless the accounting system is changed. Required: What recommendations can you suggest to improve the accounting for spoilage? Answer: Because the manufacturing process uses similar workstations for the products, it may be best to let the spoilage be considered a manufacturing problem rather than a job problem. With this assumption, the spoilage will be spread over the entire production process with each job being charged an appropriate amount of spoilage, thereby relieving some jobs of bearing the entire burden of spoilage just because they were being worked on when the machines or process malfunctioned. Diff: 2 Objective: 5 AACSB: Analytical thinking
15) How do job-costing systems account for spoilage? Answer: Normal spoilage specific to a job is assigned to that job or, when common to all jobs, is allocated as part of manufacturing overhead. The cost of abnormal spoilage is written off as a loss in the accounting period. Diff: 2 Objective: 5 AACSB: Analytical thinking
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Objective 19.6 1) Which of the following entries reflects the original cost assignment to spoiled units before considering rework cost? A) Work-in-Process Control XXX Materials Control XXX Wages Payable Control XXX Manufacturing Overhead Allocated XXX B) Finished Goods Control XXX Work-in-Process Control XXX C) Manufacturing Overhead Allocated XXX Materials Control XXX Wages Payable Control XXX Work-in-Process Control XXX D) Materials Control XXX Wages Payable Control XXX Work-in-Process Control XXX Manufacturing Overhead Allocated XXX Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
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2) Which of the following entries is correct when the costs of the rework is normal and common to all the jobs? A) Manufacturing Overhead Control XXX Materials Control XXX Wages Payable Control XXX Manufacturing Overhead Allocated XXX B) Work-in-Process Control XXX Materials Control XXX Wages Payable Control XXX Manufacturing Overhead Allocated XXX C) Wages Payable Control XXX Manufacturing Overhead Allocated XXX D) Wages Payable Control XXX Manufacturing Overhead Allocated XXX Manufacturing Overhead Control XXX Materials Control XXX Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
3) If the rework is abnormal: A) it is debited to Wages Payable Control B) it is credited to Wages Payable Control C) it is credited to Loss from Abnormal Rework D) it is debited to Loss from Abnormal Rework Answer: D Diff: 3 Objective: 6 AACSB: Analytical thinking
4) If the rework is normal but occurs because of the requirements of a specific job: A) the rework cost is spread among all jobs that are in work-in-process B) the rework costs are charged to that job C) the rework costs are charged to finished goods D) the rework costs are charged to cost of goods sold or taken as a loss for the period Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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5) If it is normal rework common to all jobs, the costs are charged to: A) manufacturing overhead and spread over all jobs B) specific jobs that are still in process C) finished goods D) cost of goods sold Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
6) If a company set a standard of zero rework: A) all rework is treated as abnormal and is written off as a cost of the current period B) all rework is treated as normal and is written off as a cost of the current period C) all rework is treated as abnormal and is shown as a liability of the current period D) all rework is treated as normal and is shown as a liability of the current period Answer: A Diff: 3 Objective: 6 AACSB: Analytical thinking
7) When rework is normal and NOT attributable to a specific job, the costs of rework are charged to manufacturing overhead and are spread, through overhead allocation, over all jobs. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
8) If the rework is considered abnormal, the costs of the rework are charged to a "Loss from Abnormal Rework" account. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
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9) Dynalia Florists operate a flower shop. Because most of their orders are via telephone or fax, numerous orders have to be reworked. The average cost of the reworked orders is $5.25: $3.50 for labor, $1.25 for more flowers, and $0.50 for overhead. This ratio of costs holds for the average original order. On a recent day, the shop reworked 40 orders out of 250. The original cost of the 40 orders totaled $700. The average cost of all orders is $18.34, including rework, with an average selling price of $25. Required: Prepare the necessary journal entry to record the rework for the day if the shop charges such activities to Arrangement Department Overhead Control. Prepare a journal entry to transfer the finished goods to Finished Goods Inventory. Answer: Arrangement Department Overhead Control 210 Materials Control (40 × $1.25) 50 Wages Payable Control (40 × $3.50) 140 Shop Overhead Control (40 × $0.50) 20 Finished Goods Work-in-Process Control
700 700
Diff: 2 Objective: 6 AACSB: Analytical thinking
10) Robolane Incorporated manufactures and distributes small robotic toys. Because most of its orders are via telephone or fax, numerous orders have to be reworked. The average cost of the reworked orders is $12.45: $5 for labor, $5.15 for more materials, and $2.30 for overhead. This ratio of costs holds for the average original order. On a recent day, the shop reworked 80 orders out of 800. The original cost of the 80 orders totaled $2,000. The average cost of all orders is $26.245, including rework, with an average selling price of $35. Required: Prepare the necessary journal entry to record the rework for the day if the shop charges such activities to Robo Department Overhead Control. Prepare journal entries to record all relevant rework charges as well as to transfer the reworked items finished goods to Finished Goods Inventory. Answer: Robo Department Overhead Control 996.00 Materials Control (80 × $5.15) 412.00 Wages Payable Control (80 × $5.00) 400.00 Shop Overhead Control (80 × $2.30) 184.00 Finished Goods Work-in-Process Control
2,000 2,000
Diff: 2 Objective: 6 AACSB: Application of knowledge
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11) When a unit has to be reworked, the rework may be classified in three ways. What are those ways, and how does the accounting for each differ? Answer: The rework may be (1) normal rework attributable to a specific job; (2) normal rework common to all jobs; or (3) abnormal rework. If the rework is attributable to a specific job, then the cost of such rework should be charged to that job. If the rework is common to all jobs, then the cost of the rework should be charged to manufacturing overhead and spread across all jobs. If the rework is abnormal rework then the cost of the rework should be charged as a loss to the period in which the rework is required. Diff: 2 Objective: 6 AACSB: Analytical thinking
12) What are the advantages of costing rework? Answer: Costing rework focuses managers' attention on the resources wasted on activities that would not have to be undertaken if the product had been made correctly. The cost of rework prompts managers to seek ways to reduce rework, for example, by designing new products or processes, training workers, or investing in new machines. Diff: 2 Objective: 6 AACSB: Analytical thinking
Objective 19.7 1) When the amount of scrap is immaterial, which of the following is the easiest accounting entry when recording scrap sold for cash? A) Sales of Scrap Cash B) Manufacturing Overhead Control Cash C) Cash Scrap Revenues D) Sales of scrap Accounts Receivable Answer: C Diff: 3 Objective: 7 AACSB: Analytical thinking
2) In accounting for scrap, which of the following statements is true? A) Normal scrap is accounted for separately from abnormal scrap. B) In accounting for scrap, there is no distinction between the scrap attributable to a specific job and scrap common to all jobs. C) No amount or value of scrap should be entered into the accounting records. D) Scrap records not only help measure efficiency, but also help keep track of scrap, and so reduce the chances of theft. Answer: D Diff: 3 Objective: 7 AACSB: Analytical thinking
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3) When the amount of scrap is material and the scrap is sold immediately after it is produced, which of the following is the journal entry if the scrap attributable to a specific job is sold on account? A) Scrap Revenues Accounts Payable B) Work-in-Process Control Accounts Receivable C) Accounts Receivable Work-in-Process Control D) Work-in-Process Control Accounts Payable Answer: C Diff: 3 Objective: 7 AACSB: Analytical thinking
4) If scrap, common to all jobs, is returned to the storeroom, the journal entry is: A) Accounts Receivable Materials Control B) Materials Control Work-in-Process Control C) Work-in-Process Control Materials Control D) Materials Control Manufacturing Overhead Control Answer: D Diff: 3 Objective: 7 AACSB: Analytical thinking
5) If scrap is reused as direct material rather than sold as scrap, which of the following would be the proper account? A) Accounts Receivable is debited at its estimated net realizable value and then credited when the scrap is reused. B) Materials Control is debited at its estimated net realizable value and then credited when the scrap is reused. C) Manufacturing Overhead Control is debited at its estimated net realizable value and then credited when the scrap is reused. D) Work-in-Process Control is debited at its estimated net realizable value and then credited when the scrap is reused. Answer: B Diff: 3 Objective: 7 AACSB: Analytical thinking
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6) Which of the following statements is true of scrap? A) When a production process yields two or more products with high total sales values relative to the total sales values of other products, those are called scrap. B) For accounting purpose, distinction is made between normal and abnormal scrap. C) Scrap refers to units of production, fully or partially completed, that do not meet the specifications required by customers for good units and are discarded or sold at reduced prices. D) Scrap is either sold or disposed of quickly or it is stored for later sale, disposal, or reuse. Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
7) Job-costing systems sometimes allocate scrap revenues: A) to increase the revenues earned as a result of specific job B) only when it is not economically feasible to trace it to the cost of the job C) only when the scrap can eventually be sold D) to the jobs that yielded the scrap and only then as a reduction in cost Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
8) Scrap is usually divided between normal and abnormal scrap. Answer: FALSE Explanation: No distinction is made between normal and abnormal scrap because no cost is assigned to scrap. Diff: 2 Objective: 7 AACSB: Analytical thinking
9) If scrap is returned to the company's storeroom and inventoried, it should NOT have any value in the accounting records. Answer: FALSE Explanation: The scrap will be inventoried. It might not have a value in dollars but it will have a physical quantity value. Diff: 3 Objective: 7 AACSB: Analytical thinking
10) One way of accounting for scrap is to recognize it at the time of sale. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
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11) Costs are assigned to scrap only if it is abnormal scrap. Answer: FALSE Explanation: No distinction is made between normal and abnormal scrap because no cost is assigned to scrap. Diff: 2 Objective: 7 AACSB: Analytical thinking
12) Scrap is residual material that results from manufacturing a product; it has low total sales value compared with the total sales value of the product. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
13) Recognizing the value of scrap in the accounting records is always done at the time the scrap is produced. Answer: FALSE Explanation: There are methods in which the value of scrap is recognized at the time it is produced and there are methods in which the value of scrap is recognized at the time of its sale. Diff: 2 Objective: 7 AACSB: Analytical thinking
14) Busy Hands Craft Company is a small manufacturing company that specializes in arts and crafts items. It recently bought an old textile mill that it has refurbished to manufacture and dye special cloth to be sold in its craft shops. However, it discovered something new for its accounting system. The company never before had finished goods that did not meet standard, leftover materials from processing runs, or unacceptable outputs. Required: As the business consultant for the company, explain how it can handle the items mentioned. Include any potential problems with the accounting procedures. Answer: First, an explanation of each item is needed. 1. Rework units are those units that are defective but can be reworked and sold as acceptable finished goods. 2. Scrap is leftover material that may have a minimal sales value. Scrap may be either sold, disposed, or reused in another job or processing run. 3. Spoilage is the production outputs that cannot be reworked. These units are discarded or sold for minimal value. The potential problem with these areas is that they may be treated differently by the accounting system. The company should establish an acceptable and consistent method of handling each area. A consistent policy also aids the managers who are being evaluated by their department's efforts. Diff: 2 Objective: 7 AACSB: Analytical thinking
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15) Explain the meaning of the terms spoilage, scrap, and rework. Provide an example of each. Is it possible for a single firm to have all three from a single productive process? Answer: Spoilage is units of production that do not meet the specifications required by customers for good units, and are discarded or sold for reduced prices. An example of spoilage would be a damaged pair of Levi's Jeans sold as a "second." Rework is unacceptable units that are subsequently repaired and sold as acceptable finished goods. An example of rework would be a pair of Jeans that might require some additional trimming before they become acceptable. Scrap is residual material that results from manufacturing a product; it has low retail sales value compared with the total sales value of the product. An example of scrap would be any leftover material from a cutting process that is too small to use in any other clothing. As the above examples indicate, a single productive process might generate, spoilage, scrap, and rework simultaneously. Diff: 2 Objective: 7 AACSB: Analytical thinking
16) You are the chief financial officer of a lumber mill, and you are becoming quite concerned about the spoilage, scrap, and reworked items associated with your production processes. Your firm produces mainly products for the building industry. Required: Discuss the problems associated with these items and the methods your company can use to reduce spoilage, scrap, and reworked items. Answer: The problems associated with these items include: 1. your company pays for the total raw material, not just the portion converted into a salable product; 2. the cost of disposing these unsalable or unused items, both the disposal costs and the costs and problems associated with finding a landfill site or other disposal site; 3. these disposed or unused items can create an eyesore, and attract the wrath of the environmentalists; and 4. developing high-value added products that can be produced from these various items. The methods your company can use to reduce these items include: 1. calculating the costs of these problems because an accurate assessment of the total costs should certainly provide an incentive to your firm to investigate possible actions; 2. exploring methods of redesigning the production process to minimize these costs; and 3. investing in more sophisticated capital equipment that can be designed to reduce these costs. Diff: 3 Objective: 7 AACSB: Analytical thinking
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17) How can a company account for scrap? Include in your explanation a discussion of the two aspects of accounting for scrap. Answer: Since scrap is a residual material that results from manufacturing a product, it has a low sales value as compared to the actual value of the product. The aspects of accounting for scrap are (1) planning and control of the scrap (which includes the physical tracking), and (2) inventory costing (which includes when and how scrap affects operating income). Regarding the planning and control of the scrap it is important to measure how much scrap is being generated (by weighing or counting the pieces) and then keep records to indicate where the scrap is keeping a log of quantity and location. This will help to develop records that can be used to compare the amount of scrap generated to the expected amount generated based on budgets and units of good product completed. Also, since scrap has a value, it will reduce the likelihood that the scrap gets stolen. In terms of the cost accounting for the scrap there are two options regarding when the scrap is potentially recognized in the accounting records: (1) at the time the scrap is produced, or (2) at the time the scrap is sold. If the dollar value of the scrap is immaterial, the simplest accounting method is to record the quantity of scrap returned to the storage area and then regard the scrap sales as a separate line item in the income statement. If the scrap is material in value, then it can be recognized at the time of its production and can have journal entries returning it to a materials control asset account (as a debit) and then credited when it later gets sold. Diff: 2 Objective: 7 AACSB: Analytical thinking
18) For each of the following (actual real-world examples), develop products that can be sold from the listed scrap. a. The Federal Reserve Banks destroy old money. Burning this money is usually forbidden under the environmental laws of most municipalities. b. A manufacturer of cotton undergarments for prisoners has much cotton left over. The manufacturer is located in a very rural area of Alabama. c. A hog renderer has hog bristles as a result of the slaughtering process. Answer: a. The Federal Reserve Banks bag up the shredded money and sell it in gift shops. This is a very efficient use of the scrap. The purchasers pay a price in excess of what the Federal Reserve would receive from any other source. Other uses might include selling for use as packaging materials. b. The above manufacturer sells the scrap for use in the cleaning of guns. Other uses would include similar cleaning uses or dyeing the cloth and selling it for ornaments. c.
The hog bristles can be used in shaving equipment and for bristle brushes.
Diff: 2 Objective: 7 AACSB: Analytical thinking
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Objective 19.A 1) The standard-costing method: A) adds a layer of complexity to the calculation of equivalent-unit costs in a process-costing environment B) makes calculating equivalent-unit costs unnecessary C) requires an analysis of the spoilage costs in beginning inventory D) requires an analysis of the spoilage costs in ending inventory Answer: B Diff: 2 Objective: A AACSB: Analytical thinking
2) Under standard costing, there is no need to calculate a cost per equivalent unit. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
3) Under standard costing, costs are assigned to normal and abnormal spoilage units using actual costs of the units up to the inspection point. Answer: FALSE Diff: 2 Objective: A AACSB: Analytical thinking
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4) Springfield Sign Shop manufactures only specific orders. It uses a standard cost system. During one large order for the airport authority, an unusual number of signs were spoiled. The normal spoilage rate is 10% of units started. The point of first inspection is half way through the process, the second is three-fourths through the process, and the final inspection is at the end of the process. Other information about the job is as follows: Signs started Signs spoiled
3,000 450
Direct materials put into process at beginning Conversion costs for job Standard direct material costs per sign Standard conversion cost per sign Average point of spoilage is the 3/4 completion point Average current disposal cost per spoiled sign
$ 60,000 $120,000 $27 $54 $15
Required: Make necessary journal entries to record all spoilage. Answer: Average cost per sign when spoiled: Direct material cost $27.00 Conversion ($54 × 3/4) 40.50 Total cost per spoiled sign $67.50 Abnormal spoilage
= Total spoilage - normal spoilage = 450 - 300 = 150
Materials Control (450 × $15) Loss from Abnormal Spoilage (150 × $52.50) Manufacturing Overhead Control (300 × $52.50) Work-in-Process Control, airport job (450 × $67.50)
6,750 7,875 15,750 30,375
Diff: 3 Objective: A AACSB: Application of knowledge
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 20 Balanced Scorecard: Quality and Time Objective 20.1 1) Which of the following is true of ISO 9000? A) It is a quality management system comprising different process improvement such as six sigma and lean manufacturing. B) It is mandatory for all listed companies in US to get ISO certified. C) It helps companies monitor, document, and certify the elements of their production processes that lead to quality. D) It is a disciplined, data-driven, and statistical approach to improve the quality of products or services by identifying and removing the causes of defects.
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Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Which of the following best describes conformance quality? A) it is the first step of a quality management system such as ISO 9000 B) it is the performance of a product or service according to design and product specifications C) it is making the product according to design, engineering, and manufacturing specifications D) it focuses on how a product meets customer needs and wants Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) The characteristics of a product or service meet the needs and wants of customers is most closely related to which of the following qualities? A) conformance B) design C) performance D) adaptation Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
4) The costs of quality are the costs incurred: A) to enhance large scale production B) to prevent the production of a low quality product C) due to defective and low quality product D) because of warranties, normal spoilage, abnormal spoilage, and scrap Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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5) Which of the following types of costs are incurred in precluding the production of products that do not conform to specifications? A) prevention costs B) appraisal costs C) internal failure costs D) external failure costs Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Which of the following describes appraisal costs? A) they are incurred to prevent the production of products that do not conform to specifications B) they are incurred to detect which of the individual units of products do not conform to specifications C) they are incurred on defective products before they are shipped to customers D) they are incurred on defective products after they have been shipped to customers Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Spoilage, rework, scrap, and machine repairs are all examples of: A) prevention costs B) appraisal costs C) internal failure costs D) external failure costs Answer: C Diff: 1 Objective: 1 AACSB: Analytical thinking
8) Process engineering is an example of: A) prevention costs B) appraisal costs C) internal failure costs D) external failure costs Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
9) Rework is an example of: A) prevention costs B) appraisal costs C) internal failure costs D) external failure costs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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10) Warranty repair cost is an example of which of the following? A) prevention costs B) appraisal costs C) internal failure costs D) external failure costs Answer: D Diff: 2 Objective: 1 AACSB: Application of knowledge
11) Process engineering is an example of: A) prevention costs B) appraisal costs C) internal failure costs D) external failure costs Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
12) Product testing is an example of: A) prevention costs B) appraisal costs C) internal failure costs D) external failure costs Answer: B Diff: 2 Objective: 1 AACSB: Application of knowledge
13) Monticello Corp manufactures expensive tables. Its varnishing department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly varnished table is very expensive to correct. Inspection hours for the 6,000 tables varnished in September totaled 2,200 hours by 10 employees. Eight quarts of varnish were used, on average, for each table. The standard amount of varnish per table is nine quarts. The cost of inspection for September was equal to the budgeted amount of $40,500. The $40,500 represents a(n): A) activity cost pool B) possible cost allocation base C) internal failure cost D) work-in-process control Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
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14) Monticello Corp manufactures expensive tables. Its varnishing department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly varnished table is very expensive to correct. Inspection hours for the 5,400 tables varnished in September totaled 1,800 hours by 12 employees. Eight quarts of varnish were used, on average, for each table. The standard amount of varnish per table is nine quarts. The cost of inspection for September was equal to the budgeted amount of $40,200. What is the inspection cost per unit? (Round the final answer to the nearest cent.) A) $28.18 B) $7.44 C) $8.44 D) $21.13 Answer: B Explanation: B) Rate per unit = $40,200 / 5,400 units = $7.44 per unit Diff: 3 Objective: 1 AACSB: Application of knowledge
15) Which of the following is considered a cost of quality? A) external failure costs B) opportunity costs C) sunk costs D) contingent liabilities Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
16) Which of the following is an opportunity cost? A) lost sales B) cost of production C) marginal cost D) cost of sales Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
17) Which of the following is a financial measure of quality? A) operating income growth B) percentage of highly satisfied customers C) number of defective units shipped to customers as a percentage of total units shipped D) interest costs Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
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18) One of the most direct financial measures of quality is the costs of quality. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
19) ISO 9000 developed by the International Organization for Standardization is a set of five international standards for quality management. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
20) Quality is defined as the total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
21) Conformance quality is the performance of a product or service relative to its design and product specifications. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
22) When Actual performance falls short of customer satisfaction, it is because of a design-quality failure. Answer: FALSE Explanation: Actual performance can fall short of customer satisfaction because of design-quality failure or because of conformance-quality failure. Diff: 1 Objective: 1 AACSB: Analytical thinking
23) In the banking industry, depositing a customer's check into the wrong bank account is an example of quality of design failure. Answer: FALSE Explanation: This is an example of conformance quality failure. Diff: 2 Objective: 1 AACSB: Analytical thinking
24) Costs of quality (COQ) reports usually consider opportunity costs. Answer: FALSE Explanation: Costs of quality (COQ) reports usually do not consider opportunity costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
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25) ISO 9000 are standards designed to encourage organizations to develop environmental management systems to reduce environmental costs. Answer: FALSE Explanation: ISO 14000 are standards designed to encourage organizations to develop environmental management systems to reduce environmental costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
26) Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, opportunity costs, and sales costs. Answer: FALSE Explanation: Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, internal failure costs, and external failure costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
27) Appraisal costs are costs incurred to preclude the production of products that do not conform to specifications. Answer: FALSE Explanation: Prevention costs are costs incurred to preclude the production of products that do not conform to specifications. Diff: 2 Objective: 1 AACSB: Analytical thinking
28) External failure costs are costs incurred on defective products after they have been shipped to customers. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
29) When evaluating alternatives to improve quality, both the relevant benefits as well as the relevant costs should be considered. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
30) Prevention costs include inspection and product testing. Answer: FALSE Explanation: Appraisal costs include inspection and product testing. Diff: 2 Objective: 1 AACSB: Application of knowledge
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31) Warranty costs is an example of external failure costs. Answer: TRUE Diff: 2 Objective: 1 AACSB: Application of knowledge
32) What are ISO 9000 and ISO 14000? Answer: ISO 9000, developed by the International Organization for Standardization, is a set of five international standards for quality management adopted by more than 85 countries. The standards help companies monitor, document, and certify the elements of their production processes that lead to quality. ISO 14000, also developed by the International Organization for Standardization, are standards designed to encourage organizations to develop (1) environmental management systems to reduce environmental costs and (2) environmental auditing and performance-evaluation systems to review and monitor their progress toward their environmental goals. Diff: 2 Objective: 1 AACSB: Analytical thinking
33) The two basic aspects of quality are quality of design and conformance quality. Define and give an example of each. Answer: Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers. For example, customers of photocopying machines want copiers that combine copying, faxing, scanning, and electronic printing. If the photocopy machines fail to meet these customer needs, sales will fall. Conformance quality refers to the performance of a product or service according to design and product specifications. For example, if a photocopy machine constantly has paper jams or breaks down, it fails to satisfy conformance quality. Diff: 1 Objective: 1 AACSB: Analytical thinking
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34) Ply Corp manufactures doors. Classify each of the following quality costs as prevention costs, appraisal costs, internal failure costs, or external failure costs. a. Retesting of reworked products b. Downtime due to quality problems c. Analysis of the cause of defects in production d. Depreciation of test equipment e. Warranty repairs f. Lost sales arising from a reputation for poor quality g. Quality circles h. Rework direct manufacturing labor and overhead i. Net cost of spoilage j. Technical support provided to suppliers k. Audits of the effectiveness of the quality system l. Plant utilities in the inspection area m. Reentering data because of keypunch errors ________
Prevention costs
________
Appraisal costs
________
Internal failure costs
________ Answer: g, j
External failure costs
d, l, k
Prevention costs Appraisal costs
a, b, c, h, i, m Internal failure costs e, f,
External failure costs
Diff: 3 Objective: 1 AACSB: Application of knowledge
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35) Dawn and Kim just bought a bed and breakfast inn at a very attractive price. The business had been doing poorly. Before they reopened the inn for business, they attended a seminar on operating a high quality business. Now that they are ready to open the inn, they need some advice on quality costs and management. Required: Identify four categories of quality costs. In addition, identify three items that would be classified in each of the categories. Answer: Prevention: Hiring employees with good references Training of owners and employees Good security Good reservation system Purchasing quality furniture Appraisal:
Verifying accuracy of reservation and registration procedures Inspecting rooms, facilities, building and grounds regularly Observing activities of employees Testing furniture and fixtures Taste testing food
Internal failure:
Recleaning rooms and facilities Restocking rooms with linens, glasses, etc. Out-of-stock supplies Reinspection Failure to bill on a timely basis
External failure:
Responding to complaints about rooms and food Responding to complaints about reservations Emergency cleaning of rooms when not ready on time Customer refunds because of unsatisfactory conditions Opportunity cost of lost revenue resulting from unhappy customers
Diff: 3 Objective: 1 AACSB: Application of knowledge
36) Wilson's Language School manufactures CDs and DVDs to teach English as a Second Language. Wilson has just prepared a Cost of Quality Report, and the staff has noticed a decline in prevention costs as a percentage of total sales over a three-year period. What changes might Wilson expect to see in appraisal costs as a percentage of sales, internal failure costs as a percentage of sales, and external failure costs as a percentage of sales given this trend? Answer: Most likely, the decline in prevention costs as a percentage of sales over a three-year period would result in increased internal and external failure costs as a percentage of sales during this same period. The reduced prevention activities might result in more defective products. Appraisal costs as a percentage of sales might also rise as management attempts to compensate for the higher failure rates by increasing inspection and appraisal costs to prevent defects from reaching the final customer. Diff: 3 Objective: 1 AACSB: Application of knowledge
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37) A quality improvement program is very costly to implement across a large corporation. Why do they do it? Explain. Answer: A focus on quality within an organization will have the long run benefit of reducing costs and increasing customer satisfaction. The corporation must consider four key cost of quality areas where costs are most likely to occur: (1) prevention costs - which arise when the product does not meet the specifications, (2) appraisal costs incurred by actions which must be taken to detect which of the individual units of products do not conform with the specification(s), (3) internal failure costs - incurred on defective products before they are shipped to customers, and (4) external failure costs - incurred on defective products after they are shipped to customers. Any company which does not invest in quality improvement by constantly reviewing, revising, and implementing procedures to maintain focus on the four key cost of quality areas will be almost certain to have lower profits, revenues, and market share. Diff: 3 Objective: 1 AACSB: Analytical thinking
Objective 20.2 1) An example of a nonfinancial measure for customer satisfaction is: A) number of defective units shipped as a percentage of total units shipped B) the cost of warranty claims by customers C) liability claims incurred to the company D) rework costs due to inefficiency Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
2) Which of the following is an example of a nonfinancial measure for customer satisfaction? A) average manufacturing time for key products B) contribution margin earned on popular products C) on time delivery rates D) time and effort spent on machine repairs Answer: C Diff: 3 Objective: 2 AACSB: Analytical thinking
3) Which of the following is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time? A) control chart B) Pareto diagram C) cause-and-effect diagram D) fishbone diagrams Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
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4) What is it that a statistical quality control chart does? A) it shows a graph of a series of random events of a process B) it plots each observation relative to specified ranges that represent the expected distribution C) it plots control observations over various periods of time D) it plots only those observations outside specified limits Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
5) As per control charts, random variations would most likely occur when: A) there is a sudden increase in production B) chance fluctuations in the speed of equipment cause defective products to be produced C) defective products are produced as a result of a systematic problem D) chance fluctuations in the speed of the equipment cause defective products to be produced Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Which of the following is a chart which indicates how frequently each type of defect occurs? A) control chart B) Pareto diagram C) scatter diagram D) fishbone diagram Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
7) An important difference between financial measures of quality and nonfinancial measures of quality is that: A) financial measures of quality tend to be useful indicators of future long-term performance, while nonfinancial measures have more of a short-term focus B) nonfinancial measures of quality tend to be useful indicators of future long-term performance, while financial measures of quality have more of a short-term focus C) nonfinancial measures are generally too subjective to have any long-term value, while financial measures are too objective for taxation purposes D) nonfinancial measures are generally too subjective to have any short-term value, while financial measures are too objective to have medium-term value Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
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8) Examples of nonfinancial measures of quality include the: A) inspection costs incurred B) number of customer complaints C) design engineering costs D) quality training costs Answer: B Diff: 2 Objective: 2 AACSB: Application of knowledge
9) Cause-and-effect diagrams are used in quality management systems to: A) identify and respond to potential reasons of failure B) indicate how frequently each type of failure occurs C) distinguish random from nonrandom variations in an operating process D) evaluate the tradeoffs among prevention costs, appraisal costs, and failure costs Answer: A Diff: 2 Objective: 2 AACSB: Application of knowledge
10) An illustration that resembles the bone structure of a fish and identifies potential reasons why a problem exists is called: A) control chart B) Pareto diagram C) cause-and-effect diagram D) time-series graphs Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
11) When considering how well a company is doing keeping customers happy and understanding their needs and wants, financial and nonfinancial measures can be used. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
12) An example of a financial measure of customer satisfaction would be the percentage of defective products produced during a particular month. Answer: FALSE Explanation: A measure of defective products (such as a percentage of defective products of all products produced during a period of time) is an example of nonfinancial measure of customer satisfaction. Diff: 2 Objective: 2 AACSB: Application of knowledge
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13) An on-time delivery rate is considered a nonfinancial measure of customer satisfaction. Answer: TRUE Diff: 2 Objective: 2 AACSB: Application of knowledge
14) A control chart identifies potential causes of failures or defects. Answer: FALSE Explanation: A cause and effect chart identifies potential causes of failures or defects. Diff: 2 Objective: 2 AACSB: Analytical thinking
15) When using a control chart, the observations outside the upper and lower control limits are ordinarily regarded as nonrandom and worth investigating. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
16) The implication of controlling a process at a Six Sigma level is that the process produces only 3.4 defects per million products produced. Answer: TRUE Diff: 2 Objective: 2 AACSB: Application of knowledge
17) A Pareto diagram is usually in a bar-chart format, that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
18) If Six Sigma's goal is to get defect rates down to 3.4 defects per every 100,000 units produced. Answer: FALSE Explanation: Six Sigma 's goal is 3.4 defects per million products produced. Diff: 2 Objective: 2 AACSB: Analytical thinking
19) Percentage of reworked products is an example of a nonfinancial measure of internal business-process quality. Answer: TRUE Diff: 2 Objective: 2 AACSB: Application of knowledge
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20) Average delivery delays (difference between the scheduled delivery date and the date requested by the customer), is a measure of customer satisfaction. Answer: TRUE Diff: 2 Objective: 2 AACSB: Application of knowledge
21) Experience and qualifications of design engineers could be a measure in the learning-and-growth perspective in the balanced scorecard of a manufacturer. Answer: TRUE Diff: 2 Objective: 2 AACSB: Application of knowledge
22) Discuss the methods used to identify quality problems. Answer: 1. A control chart is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. Each observation is plotted relative to specified ranges that represent the limits within which observations are expected to fall. Observations that fall outside the control limits are regarded as nonrandom and worth investigating. 2. A Pareto diagram indicates how frequently each type of failure (defect) occurs. Observations outside control limits serve as inputs for Pareto diagrams. 3. A cause-and-effect diagram helps to identify potential causes of failures or defects. The"backbone" of the diagram represents the problem being examined. The large "bones" coming off the backbone represent the main categories of potential causes of failure. Diff: 2 Objective: 2 AACSB: Analytical thinking
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23) A corporation can measure its quality performance by using financial or nonfinancial measures of quality. Discuss the merits of each method and whether the use of one precludes the use of the other. Answer: Financial measures of quality are quantifiable. The business can calculate the costs of setting up quality control systems, the costs of noncompliance with quality in terms of the internal and external costs (rework, warranty costs, etc.), and estimate the revenues lost as a result of quality problems. Nonfinancial measures of quality are useful indicators of future long-run performance. They are helpful in revealing future needs and preferences of customers and in indicating the specific areas that need improvement. The use of one measure does not preclude the use of the other. Financial measures tend to be short term in nature (what is happening now). Nonfinancial measures tend to be long term and are useful in terms of estimating trends. Financial performance measures are more readily available than nonfinancial measures, but they are no more important to the overall goals of the organization. By considering nonfinancial measures, the organization can improve operational control. Superior financial performance usually follows from superior nonfinancial performance. Diff: 2 Objective: 2 AACSB: Analytical thinking
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24) Komerica Corp is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 2018, it has budgeted $1,000,000 for prevention costs and $900,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000. Product Testing has proposed to management a change in the 2018 budget for a new method of testing products. If management decides to implement the new method, $1.50 per unit of appraisal costs will be saved, up to a level of 150,000 tests. No additional savings are expected past the 150,000 level. The new method involves $95,000 in training costs and $65,000 in yearly testing supplies. Traditionally, 5% of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories. Required: a. What is the adjusted budget for appraisal costs, assuming the new method is implemented and 800,000 units are tested during the manufacturing process in 2020? b. How much do internal failure costs change, assuming 500,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40%? c. What would be the change in the external failure budget, assuming external failures are reduced by 60% and the same facts as in part (b)? Answer: a. Current Budget $ 900,000 Additions: Training $95,000 Additions: Supplies 65,000 160,000 Savings: 150,000 × $1.50 (225,000) Adjusted budget $ 515,000 b. Current budget $100 × 0.05 × 500,000 = Savings rate Net savings (reduction in internal failure costs)
$2,500,000 × 0.40 $ 1,000,000
c. Current budget $120 × 0.01 × 500,000 = Savings rate Net savings (reduction in external failure costs)
$600,000 × 0.60 $ 360,000
Diff: 3 Objective: 2 AACSB: Application of knowledge
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25) Northern Corp is concerned about its declining sales, especially the reduction in the number of customers. For the last two years, its shirts have won industry awards for high quality and trend-setting styles. At the latest executive managers' meeting, all were blaming each other for the decline. After much discussion and presenting some fact-finding information, it was determined that sales relationships were the cause of most of the problems. Required: What may be some of the causes and how can the causes be detected if product quality is not an issue? Answer: The causes may be the lack of customer satisfaction with sales staff (poor sales skills), delivery problems (delayed deliveries), accounting problems (poor billing and collection procedures), or poor returns and allowance policies. The causes may be detected by comparing nonfinancial measures of the company with those found in the industry. These might include measures of the number of incorrect shipments or not on time; the number of customer complaints about certain areas (billing, shipping, etc.); response time to customer complaints; or a questionnaire about why former customers quit buying from the company. Diff: 2 Objective: 2 AACSB: Application of knowledge
26) Baby Care Products has just completed a very successful program of improving quality in its manufacturing operations. The next step is to improve the operations of its administrative functions, starting with the accounting information system. As the manager of the accounting operations, you are requested to begin a quality improvement program. Required: What are some possibilities of finding out about the current status of quality in the accounting system? Answer: The manager might begin by identifying "customer" needs. Then the manager might use one of the methods of identifying quality problems. Statistical quality control helps to distinguish between random variation and nonrandom variation. A control chart of observations usually accompanies this. Another method is the use of a Pareto diagram. This indicates how frequently each type of failure occurs. Also, cause-and-effect diagrams help to identify potential causes of failure. A fishbone diagram is often used here to identify multiple causes of failure. Quality of design could potentially be the biggest problem. Diff: 2 Objective: 2 AACSB: Application of knowledge
27) What are control charts and how can inferences be drawn from them? Answer: A control chart is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. These charts might indicate when a process is out of control by comparing observations to statistically determined upper and lower level control limits. Each observation is plotted relative to specified ranges that represents the limits within which observations are expected to fall. Observations that fall outside the control limits are regarded as nonrandom and worth investigating. Diff: 2 Objective: 2 AACSB: Application of knowledge
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28) Discuss the means by which a company goes about evaluating and installing a new quality improvement program. Answer: 1. The managers will have previously identified the quality problems by using analytical tools such as control charts, pareto diagrams, and cause and effect diagrams. These tools analyze quality problems and help in improving quality. 2. The mangers will then develop various solution options for improvement and project how total costs and total revenues for the company will change under each alternative solution. Once having done this analysis, they will select and implement the optimal solution. 3. The managers will then establish and implement nonfinancial measures of internal business process quality in order to assure the ongoing success of the solution that has been put in place. These measures include percentage of defective products, percentage of reworked products, and others. Improving these measures will lead to greater customer satisfaction, lower costs of quality, and better financial performance. 4. The managers will then establish and implement measures of learning and growth perspective for quality improvements. These include such measures as employee turnover, employee training, and others. This will encourage a continual focus on quality within the corporation. Diff: 3 Objective: 2 AACSB: Analytical thinking
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Objective 20.3 1) Managers identify the relevant costs and benefits for each solution by focusing on: A) the alternative solution that will derive maximum customer satisfaction B) how total costs and total revenues will change under each alternative solution related to quality improvements C) how the employees of a company would be able to implement a change D) how long it will take for the improved program to be fully functional Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
2) Premier Corp expects to spend $800,100 in 2020 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,800 in fixed appraisal costs and variable costs of $0.50 per materials units received. The new method involves $141,000 in training costs and an additional $150,100 in annual equipment rental. Internal failure costs average $190 per failed unit of finished goods. During 2019, 4% of all completed items had to be reworked. External failure costs average $500 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used. What is the net effect on appraisal costs for 2020, assuming the new receiving method is implemented and that 800,100 material units are received? A) $1,520 increase B) $169,750 decrease C) $291,100 decrease D) $4,001 increase Answer: B Explanation: A) Current costs $800,100 Savings: Fixed $ (60,800) Variable (400,050) ($460,850) New method: Training cost $141,000 Equipment cost 150,100 291,100 (169,750) New costs of method 630,350 Net change—Decrease $169,750 Diff: 2 Objective: 3 AACSB: Application of knowledge
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3) Premier Corp expects to spend $800,500 in 2020 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,500 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $140,000 in training costs and an additional $150,300 in annual equipment rental. Internal failure costs average $200 per failed unit of finished goods. During 2019, 4% of all completed items had to be reworked. External failure costs average $460 per failed unit. The company's average external failures are 2% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.
What would be the change in the external failure budget, if 600,500 units are used and assuming external failures are reduced by 12%? A) $32,020 increase B) $249,950 decrease C) $662,952 decrease D) $304,190 decrease Answer: C Explanation: C) External failure costs [(600,500) × 0.02 × $460 $5,524,600 12% reduction from new method × 0.12 Savings $662,952 Diff: 3 Objective: 3 AACSB: Application of knowledge
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4) LaCrosse Products has a budget of $902,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,200 in variable costs. The new method will require $40,300 in training costs and $110,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 158,000 units. Appraisal costs for the year are budgeted at $609,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $18 per failed unit of finished goods. The internal failure rate is expected to be 2% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 2% of units sold. The new proposal will reduce this rate by 45%. Assume all units produced are sold and there are no ending inventories. What is the net change in the budget for prevention costs if the procedures are automated in 2020? Will management agree with the changes? A) $70,100 decrease, yes B) $70,100 increase, yes C) $150,300 increase, no D) $80,200 decrease, yes Answer: B Explanation: B) New costs: Training $40,300 New equipment 110,000 $150,300 Savings Variable costs (80,200) Net increase in budget
$70,100
Diff: 3 Objective: 3 AACSB: Application of knowledge
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5) LaCrosse Products has a budget of $910,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,800 in variable costs. The new method will require $40,600 in training costs and $104,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 151,000 units. Appraisal costs for the year are budgeted at $608,000. The new prevention procedures will save appraisal costs of $50,900. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 2% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 2% of units sold. The new proposal will reduce this rate by 55%. Assume all units produced are sold and there are no ending inventories. How much will appraisal costs change assuming the new prevention methods reduce material failures by 30% in the appraisal phase? A) $144,600 decrease B) $63,800 increase C) $50,900 decrease D) $15,100 decrease Answer: C Explanation: C) Implementing the new prevention procedure automatically will cause a savings of $50,900 in appraisal costs. Diff: 2 Objective: 3 AACSB: Application of knowledge
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6) LaCrosse Products has a budget of $904,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,100 in variable costs. The new method will require $41,000 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 151,000 units. Appraisal costs for the year are budgeted at $610,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $14 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $60 per failed unit. The company's average external failures average 4% of units sold. The new proposal will reduce this rate by 55%. Assume all units produced are sold and there are no ending inventories. How much will internal failure costs change if the internal product failures are reduced by 1/3 with the new procedures? (Do not round intermediate calculations.) A) $28,187 decrease B) $33,159 decrease C) $510,000 decrease D) $761,000 decrease Answer: A Explanation: A) Failed units (151,000 × 0.04) 6,040 Cost per unit × $14 Total $84,560 Savings rate × 1/3 Savings $28,187 Diff: 2 Objective: 3 AACSB: Application of knowledge
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7) LaCrosse Products has a budget of $900,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $80,600 in variable costs. The new method will require $40,300 in training costs and $103,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 158,000 units. Appraisal costs for the year are budgeted at $603,000. The new prevention procedures will save appraisal costs of $50,800. Internal failure costs average $18 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $52 per failed unit. The company's average external failures average 4% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories. How much do external failure costs change if all changes are as anticipated with the new prevention procedures? Assume all units produced are sold and there are no ending inventories. A) $164,320 decrease B) $164,320 increase C) $328,640 decrease D) None of these answers is correct. Answer: A Explanation: A) External failure costs (158,000 × 0.04 × $52) = $328,640 Savings rate × 0.50 Savings $164,320 Diff: 3 Objective: 3 AACSB: Application of knowledge
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8) LaCrosse Products has a budget of $902,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $81,000 in variable costs. The new method will require $40,200 in training costs and $100,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 155,000 units. Appraisal costs for the year are budgeted at $604,000. The new prevention procedures will save appraisal costs of $50,200. Internal failure costs average $18 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $52 per failed unit. The company's average external failures average 4% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories. Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? (Note: numbers shown as (negatives) represent net savings and positive numbers represent net cost.) A) $140,200 B) $(37,200) C) $(189,400) D) $(161,200) Answer: C Explanation: C) Training Costs $40,200 Equipment Costs 100,000 140,200 Savings Prevention Appraisal Internal failure costs External failure costs Net Savings
$ (81,000) (50,200) (37,200) (161,200)
(329,600) $(189,400)
Diff: 3 Objective: 3 AACSB: Application of knowledge
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9) Cysco Corp has a budget of $1,206,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $103,000 in variable costs. The new method will require $50,400 in training costs and $145,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 209,000 units. Appraisal costs for the year are budgeted at $503,000. The new prevention procedures will save appraisal costs of $50,200. Internal failure costs average $40 per failed unit of finished goods. The internal failure rate is expected to be 5% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $52 per failed unit. The company's average external failures average 3.9% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories. What is the net change in the budget of prevention costs if the procedures are automated in 2020? Will management agree with the changes? A) $103,000 decrease, yes B) $92,400 decrease, yes C) $103,000 increase, no D) $92,400 increase, yes Answer: D Explanation: D) New costs: Training $50,400 New equipment 145,000 $195,400 Savings (103,000) Net increase in budget $92,400 Diff: 2 Objective: 3 AACSB: Application of knowledge
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10) Cysco Corp has a budget of $1,203,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $109,000 in variable costs. The new method will require $50,500 in training costs and $146,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 208,000 units. Appraisal costs for the year are budgeted at $504,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $40 per failed unit of finished goods. The internal failure rate is expected to be 6% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $60 per failed unit. The company's average external failures average 2.7% of units sold. The new proposal will reduce this rate to 2%. Assume all units produced are sold and there are no ending inventories. How much will appraisal costs change assuming that the new prevention methods reduce material failures by 40% in the appraisal phase? A) $159,500 decrease B) $310,791 decrease C) $50,000 increase D) $50,000 decrease Answer: D Explanation: D) The new prevention procedures will save appraisal costs of $50,000 . Diff: 2 Objective: 3 AACSB: Application of knowledge
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11) Cysco Corp has a budget of $1,210,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $104,000 in variable costs. The new method will require $50,800 in training costs and $149,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 201,000 units. Appraisal costs for the year are budgeted at $505,000. The new prevention procedures will save appraisal costs of $50,500. Internal failure costs average $32 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $56 per failed unit. The company's average external failures average 2.8% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories. How much will internal failure costs change if the internal product failures are reduced by 45% with the new procedures? A) $147,200 decrease B) $124,080 decrease C) $115,776 decrease D) $81,950 increase Answer: C Explanation: C) Internal failure rate (201,000 × 0.04) 8,040 Cost per unit × $32 Total $257,280 Savings rate × 0.45 Savings $115,776 Diff: 3 Objective: 3 AACSB: Application of knowledge
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12) Cysco Corp has a budget of $1,204,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $107,000 in variable costs. The new method will require $51,000 in training costs and $140,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 204,000 units. Appraisal costs for the year are budgeted at $500,000. The new prevention procedures will save appraisal costs of $50,100. Internal failure costs average $38 per failed unit of finished goods. The internal failure rate is expected to be 6% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $60 per failed unit. The company's average external failures average 3.3% of units sold. The new proposal will reduce this rate to 2%. Assume all units produced are sold and there are no ending inventories. How much do external failure costs change if all the changes are as the new prevention procedures anticipated? Assume all units produced are sold and there are no ending inventories. A) $294,272 decrease B) $159,120 decrease C) $244,800 decrease D) $330,480 decrease Answer: B Explanation: B) External failure costs - before (204,000 × 0.033 × $60) $403,920 External failure costs - after (204,000 × 0.02 × $60) ($244,800) Savings $159,120 Diff: 3 Objective: 3 AACSB: Application of knowledge
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13) Cysco Corp has a budget of $1,206,000 in 2020 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $104,000 in variable costs. The new method will require $50,600 in training costs and $145,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 200,000 units. Appraisal costs for the year are budgeted at $505,000. The new prevention procedures will save appraisal costs of $50,300. Internal failure costs average $38 per failed unit of finished goods. The internal failure rate is expected to be 6% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 3.5% of units sold. The new proposal will reduce this rate to 2%. Assume all units produced are sold and there are no ending inventories. Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? Assume that internal product failures are reduced by 35% with the new procedures. A) $259,200 B) $(280,300) C) $(249,000) D) $(252,500) Answer: B Explanation: B) Prevention changes, net $91,600 Appraisal changes, net (50,300) Internal failure changes, net (159,600) External failure changes, net (162,000) Net of all changes $ (280,300) Diff: 3 Objective: 3 AACSB: Application of knowledge
14) Relevant-cost and relevant-revenue analysis uses the allocated costs as the base for calculating the costs of a quality improvement program. Answer: FALSE Explanation: Allocated costs are usually ignored in calculating the costs of a quality improvement program. Diff: 2 Objective: 3 AACSB: Analytical thinking
15) Relevant benefits of increasing quality might include cost savings from less rework, customer support, and repairs. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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16) Premier Corp expects to spend $808,000 in 2020 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,200 in fixed appraisal costs and variable costs of $0.70 per unit of finished product. The new method involves $144,000 in training costs and an additional $150,000 in annual equipment rental. Internal failure costs average $180 per failed unit of finished goods. During 2014, 5% of all completed items had to be reworked. External failure costs average $420 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used. How much will external failure costs change assuming 804,000 units of materials are received and that product failures with customers are cut in half with the new receiving method? A) $28,280 increase B) $1,688,400 decrease C) $1,013,040 decrease D) $3,376,800 decrease Answer: B Explanation: B) External failure (804,000 × 1% × $420) $3,376,800 Failure reduction of 50% × 0.50 Savings $1,688,400 Diff: 3 Objective: 3 AACSB: Application of knowledge
17) In successful quality programs, companies decrease costs of quality and, in particular, internal and external failure costs as a percentage of revenues. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
18) The financial cost of quality measures serves as a common denominator for evaluating trade-offs among prevention costs and failure costs. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
19) Cost of Quality (COQ) reports provide more insight about quality improvements and allow managers to compare trends over time. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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20) Cost of quality financial measures will usually deteriorate when nonfinancial measures of quality are emphasized and improved. Answer: FALSE Explanation: Financial cost of quality measures and nonfinancial measures complement each other. Diff: 2 Objective: 3 AACSB: Analytical thinking
21) Light Green Company's management are evaluating two quality improvement alternatives that will result in increased sales. Alternative A Further inspection and testing will cost $550,000 resulting in higher quality and total savings attributed to rework, customer service, repairs, and warranty claims of $2,000,000 Alternative B Redesign of the product will cost $700,000 resulting in total savings attributed to rework, customer service, repairs, and warranty claims of $2,600,000 The sales projects show the following: Alternative A: total contribution margin from additional sales of $1,400,000 and Alternative B: total contribution margin from additional sales of $1,700,000. Should the decision be in favor or alternative A or B and why? Support your decision with numbers. Answer: The decision should be in favor of alternative B (redesign) as that will have the greatest impact on operating income. The total savings and contribution margin increase from alternative B is projected to be $3,600,000 while the same figure for alternative A is $2,850,000 with a difference in favor of alternative B of $750,000. Diff: 2 Objective: 3 AACSB: Analytical thinking
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Objective 20.4 1) Which of the following is an advantage of COQ measures? A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs. B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are succeeding. C) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run performance. D) They direct attention to financial processes that help managers identify the precise problem areas that need improvement. Answer: A Diff: 3 Objective: 4 AACSB: Analytical thinking
2) Which of the following is an advantage of nonfinancial measures of quality? A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs. B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are succeeding. C) They focus managers' attention on how poor quality affects operating income. D) They direct attention to financial processes that help managers identify the precise problem areas that need improvement. Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
3) Which of the following true of nonfinancial measures of quality? A) They direct attention to financial processes that help managers identify the precise problem areas that need improvement. B) They focus managers' attention on how poor quality affects operating income. C) They assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction. D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding. Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
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4) An advantage of nonfinancial measures of quality include that they: A) focus managers' attention on how poor quality affects operating income B) assist in problem solving by comparing costs and benefits of different quality-improvement programs and by setting priorities for cost reduction C) are useful indicators of future long-run performance D) use certain statistical measures to justify their data Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
5) Which of the following is true of COQ measures? A) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run performance. B) They help managers evaluate costs and benefits of incurring prevention and appraisal costs C) They direct attention to financial processes that help managers identify the precise problem areas that need improvement. D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding. Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
6) Without financial quality measures: A) customer satisfaction and employee satisfaction cannot be measured B) the short-run effectiveness of nonfinancial quality measures is questionable C) cost-benefit analysis is not possible D) quality problems might not be identified until it is too late Answer: C Diff: 3 Objective: 4 AACSB: Analytical thinking
7) Without nonfinancial quality measures: A) the operating income cannot be improved B) the short-run effectiveness of financial quality measures is questionable C) the precise problem areas that need improvement cannot be identified D) quality problems might not be identified until it is too late Answer: D Diff: 3 Objective: 4 AACSB: Analytical thinking
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8) COQ measures include: A) prevention costs B) cores that rate service C) customer service indicators D) nonfinancial metrics Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
9) COQ measures such as measures of customer satisfaction and employee satisfaction are useful indicators of long-run performance. Answer: FALSE Explanation: Nonfinancial measures such as measures of customer satisfaction and employee satisfaction are useful indicators of long-run performance. Diff: 1 Objective: 4 AACSB: Analytical thinking
10) Total costs of quality help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and appraisal costs to eliminate internal and external failure costs. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
11) Distribution of questionnaires to customers regarding product quality and improving the product on certain key areas based on the inferences drawn from the questionnaires is an example of a nonfinancial measure of quality. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
12) A disadvantage of COQ financial measures is that they are inconsistent with the attention-directing role of management accounting. Answer: FALSE Explanation: They are consistent with the attention-directing role of management accounting by focusing attention on the costs of poor quality. Diff: 2 Objective: 4 AACSB: Analytical thinking
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Objective 20.5 1) The amount of time from when a customer places an order for a product to when the product or service is delivered to the customer is referred to as: A) manufacturing lead time B) delivery time C) customer-response time D) a time driver Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
2) Which of the following correctly describes customer-response time? A) the amount of time from when an order is ready to start on the production line to when the product or service is delivered to the customer B) the amount of time it takes to deliver a completed order to a customer C) the amount of time from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer D) the amount of time from when an order is ready to start on the production line to when it becomes a finished good Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
3) The amount of time from when an order is ready to start on the production line to when it becomes a finished good is referred to as: A) manufacturing time B) time driver C) customer-response time D) delivery time Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
4) Which of the following correctly describes manufacturing cycle time? A) the amount of time it takes from when an order is ready to start on the production line to when the product or service is delivered to the customer B) the amount of time it takes to deliver a completed order to a customer plus its waiting time C) the amount of time it takes from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer D) the amount of time it takes from when an order is ready to start on the production line to when it becomes a finished good plus its waiting time Answer: D Diff: 3 Objective: 5 AACSB: Analytical thinking
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5) Which of the following is the mathematical expression for calculating manufacturing cycle efficiency (MCE)? A) MCE = Manufacturing cycle time ÷ Value-added manufacturing time B) MCE = Manufacturing time ÷ Value-added manufacturing time C) MCE = Value-added manufacturing time ÷ Manufacturing cycle time D) MCE = Value-added manufacturing time ÷ Manufacturing time Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
6) Any factor where a change in the factor causes a change in the speed with which an activity is undertaken is referred to as: A) a time driver B) a cost driver C) manufacturing lead time D) customer-response time Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
7) Which of the following is true of a bottleneck? A) It occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it. B) It occurs in an operation when there is excess capacity to complete the work given. C) It is the uncertainty about when customers will order products or services. D) It is the time taken by a manufacturing department to produce a finished product. Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
8) The time it takes the marketing department to specify to the manufacturing department the exact requirements of the customer's order is referred as: A) receipt time B) waiting time C) delivery time D) manufacturing cycle time Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
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9) Customer response time comprises of: A) manufacturing cycle time and delivery time only B) receipt time and manufacturing cycle time only C) receipt time, manufacturing cycle time, and delivery time D) manufacturing time and delivery time only Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
10) The time from which a machine is setup for order till the product becomes a manufactured good is: A) waiting time B) manufacturing time C) manufacturing cycle time D) customer-response time Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
11) The time from which a machine setup begins for an order until the product is delivered to the customer is the: A) delivery time only B) manufacturing time plus the waiting time C) manufacturing time plus the delivery time D) customer-response time minus the receipt time Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
12) Tony placed an order for a customized watch. The customer response time is 36 hours, its receipt time is 5 hours, and manufacturing cycle time is 22 hours. Calculate the delivery time of the product. A) 14 hours B) 9 hours C) 17 hours D) 4.5 hours Answer: B Explanation: B) Delivery time = 36 - 5 - 22 = 9 hours. Diff: 2 Objective: 5 AACSB: Application of knowledge
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13) Zenich Corp manufactures laptops. The waiting time is 60 minutes before the start of production and the manufacturing lead time is 158 minutes per laptop. What is its manufacturing cycle efficiency? (Round to the nearest whole percent.) A) 38% B) 82% C) 62% D) 61% Answer: C Explanation: C) Manufacturing time for value added = 158 - 60 = 98 minutes Manufacturing cycle efficiency = 98 / 158 = 62% Diff: 2 Objective: 5 AACSB: Application of knowledge
14) Ventaz Corp manufactures keyboards. The manufacturing cycle efficiency is 40%. What is its manufacturing time for value added if the manufacturing lead time is 134 minutes per keyboard? A) 42.88 minutes B) 67.00 minutes C) 53.60 minutes D) 60.30 minutes Answer: C Explanation: C) Manufacturing time for value added = 40% × 134 = 53.60 minutes. Diff: 2 Objective: 5 AACSB: Application of knowledge
15) Ventaz Corp manufactures keyboards. The manufacturing cycle efficiency is 65%. What is its waiting time if the manufacturing lead time is 122 minutes per keyboard? A) 31.72 minutes B) 39.65 minutes C) 48.80 minutes D) 42.70 minutes. Answer: D Explanation: D) Manufacturing time for value added = 65% × 122 = 79.30 minutes. Hence, waiting time is 122 - 79.30 = 42.70 minutes. Diff: 2 Objective: 5 AACSB: Application of knowledge
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16) Alex is injured and rushed to Care Hospitals for treatment. He spent 64 minutes at the hospital out of which he filled a form for 18 minutes, stood in the queue for 16 minutes, doctor treated him for 21 minutes, and payment time was 9 minutes. What is the service cycle efficiency for his visit? A) 18.75% B) 14.06% C) 67.19% D) 32.81% Answer: D Explanation: D) Service cycle efficiency = 21 / 64 = 32.81% Diff: 3 Objective: 5 AACSB: Application of knowledge
17) In the formula for calculating the average waiting time, the squared manufacturing time indicates: A) that the shorter the manufacturing time, the greater the chance that the machine will remain idle in the process B) that the shorter the manufacturing time, the greater the chance that the machine will be in use when an order arrives C) the disproportionately large impact the manufacturing time has on the waiting time D) a measure of the unused capacity or cushion Answer: C Diff: 3 Objective: 5 AACSB: Application of knowledge
18) A patient had a 1:00 pm appointment with a doctor and leaves the office to go home at 2:00 pm. The patient spends 5 minutes filling out insurance forms, 25 minutes alone in the examination room, and 18 minutes with the nurse and doctor. What is the service cycle efficiency ratio? A) 0.30 B) 0.67 C) 0.70 D) 1.0 Answer: A Explanation: A) 18 / 60 = 0.30 Diff: 3 Objective: 5 AACSB: Application of knowledge
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19) Ventaz Corp manufactures small windows for back yard sheds. Historically, its demand has ranged from 30 to 50 windows per day with an average of 40. Alex is the one production worker and he works eight hours a day, five days a week. Each order is one window and each window takes 11 minutes. What is the average waiting time in minutes? A) 12.10 B) 121.00 C) 60.50 D) 20.00 Answer: C Explanation: C) Average waiting time = [40 × (112)] / [2 × [480 minutes per day - (40 × 11)] = 60.50 minutes Diff: 3 Objective: 5 AACSB: Application of knowledge
20) Ventaz Corp manufactures small windows for back yard sheds. Historically, its demand has ranged from 30 to 50 windows per day with an average of 43. Alex is one of the production workers and he works eight hours a day, five days a week. Each order is one window and each window takes 6 minutes. What is the cycle time for an order? A) 6 minutes per window B) 21.60 minutes per window C) 9.49 minutes per window D) 300.00 minutes per window Answer: C Explanation: C) Cycle time = waiting time + manufacturing time = 3.49 + 6 = 9.49 Diff: 3 Objective: 5 AACSB: Application of knowledge
21) Ventaz Corp manufactures small windows for back yard sheds. Historically, its demand has ranged from 30 to 50 windows per day with an average of 44. Alex is the one production worker and he works eight hours a day, five days a week. Each order is one window and each window takes 8 minutes. Alex plans to add doors to its product line and anticipates that they will average 2 doors per day. Each door takes 38 minutes. What is the average waiting time, in minutes, if Alex continues to be the only worker? A) 33 minutes B) 28 minutes C) 55 minutes D) 219 minutes Answer: C Explanation: C) WT = [(44 × ( )) + (2 × ( ))] / (2 × (480 - (44 × 8) – (2 * 38))) = (2,816 + 2,888) / 104 = (5,704 / 104) = 55 minutes Diff: 3 Objective: 6 AACSB: Application of knowledge
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22) The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 310 to 560 small tools per day with an average of 435. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 1 minute to retrieve from the bins. What is the average waiting time, in minutes? (Round the final answer to the first decimal place.) A) 1.0 B) 3.8 C) 4.8 D) 5.8 Answer: C Explanation: C) Waiting minutes = [435 × ( )] / [2 × [480 minutes per day - (435 × 1)] = 4.8 minutes Diff: 3 Objective: 5 AACSB: Application of knowledge
23) The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 320 to 500 small tools per day with an average of 410. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 1 minute to retrieve from the bins. What is the cycle time for an order? (Round the final answer to the first decimal place.) A) 1.0 minutes per tool B) 1.9 minutes per tool C) 2.9 minutes per tool D) 3.9 minutes per tool Answer: D Explanation: D) Waiting minutes = [410 × ( )] / [2 × [480 minutes per day - (410 × 1)] = 2.9 minutes Cycle time = waiting time + manufacturing time = 2.9 + 1 = 3.9 minutes Diff: 3 Objective: 5 AACSB: Application of knowledge
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24) The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 290 to 410 small tools per day with an average of 350. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 1 minute to retrieve from the bins. Diane has been asked to consider plans to add the retrieval of larger tooling fixtures to her duties. She anticipates that there would be an average of 14 tooling fixtures per day requested. Each tooling fixture would take Diane 6 minutes to retrieve. What is the average waiting time, in minutes, if Diane continues to be the only worker that would retrieve the small tools as well as the larger tooling fixtures? A) 0.30 minutes B) 4.60 minutes C) 9.28 minutes D) 92.00 minutes Answer: C Explanation: C) WT =
= 854 / 92 = 9.28 minutes
Diff: 3 Objective: 5 AACSB: Application of knowledge
25) Two common operational measures of time are customer-response time and on-time performance. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
26) Customer response time is the time it takes from the time a customer places an order for a product or service to the time the product or service is delivered to the customer. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
27) Manufacturing lead time is the sum of waiting time and manufacturing time for an order. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
28) A time driver is any factor that causes a change in the speed of an activity when the factor changes. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
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29) The average waiting time is the average amount of time an order will wait at the company's shipping office before it is sent to the customer. Answer: FALSE Explanation: The average waiting time is the average amount of time that an order will wait in line before it is set up and processed. Diff: 2 Objective: 5 AACSB: Analytical thinking
30) Manufacturing Cycle Efficiency (MCE) = Value-added Manufacturing Time divided by Manufacturing Cycle Time. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
31) Identifying and minimizing the sources of non-value-added manufacturing time increases a firm's responsiveness to its customers and reduces its costs. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
32) Norton's Convenience store has a variable demand (number of customers purchasing per day.) The daily demand ranges from 270 to 330 customers a day who average purchasing 5 items each. The average daily demand is 300 customers. The convenience store currently operates 12 hours a day. Each order takes approximately 2 minutes. Required: a. What is the average customer waiting time, in minutes? b.
What is the cycle time for an order?
c. Norton has decided that the waiting time is too long and has increased the hours the store is open to 15 hours. What is the waiting time now? Answer: a. Waiting minutes = [300 × (2) 2]/{2 × [720 minutes per day - (300 × 2)]} = 5 minutes b.
Cycle time = waiting time + processing time = 5 + 2 = 7 minutes
c.
Waiting minutes = [300 × (2) 2] / {2 × [900 minutes per day - 300 × 2)]} = 2 minutes
Diff: 3 Objective: 5 AACSB: Application of knowledge
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33) Brown Laundry has a variable demand. The daily demand ranges from 100 to 140 customers a day with an average of 5 items. The average daily demand is 110 customers. The laundry operates 10 hours a day. Each order takes approximately 5 minutes. Required: a. What is the average customer waiting time, in minutes? b.
What is the cycle time for an order?
c. The manager has decided that the waiting time is too long and has increased the workday to 11 hours. What is the waiting time now? Will the customers be any happier? Answer: a. Waiting minutes = [110 × (5) 2]/{2 × [600 minutes per day - (110 × 5)]} = 27.5 minutes b.
Cycle time = waiting time + processing time = 27.5 + 5 = 32.5 minutes
c.
Waiting minutes = [110 × (5) 2] / {2 × [660 minutes per day - (110 × 5)]} = 12.5 minutes
The customers are probably not much happier unless they change the time when they stop by the laundry. If the customers now fill the 11-hour day, the new reduced waiting time will be a definite improvement. Diff: 2 Objective: 5 AACSB: Application of knowledge
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34) Please briefly explain the following time concepts that occur in a manufacturing company and its operations: Receipt time: Waiting time: Manufacturing cycle: Delivery time: Customer response time: Answer: Receipt time: the time between the customer placing the order for a product and the order received by the manufacturer. Waiting time: the time between the order received by the manufacturing area and the start of the machine setup to start the manufacturing process. Manufacturing cycle: the waiting time (see above) plus the manufacturing time. Manufacturing time is the time between the machine setup for the manufacturing process and when the product becomes a finished good. Delivery time: the time between when the product becomes a finished good and when it is delivered to the customer. Customer response time: the amount of time that transpires between when the company receives the customer order (customer places the order) and when the customer receives the product. Diff: 2 Objective: 5 AACSB: Application of knowledge
35) Acme Janitor Service has always taken pride in the fact that it had one of the highest customer response times in the home cleaning service industry. However, as the products manufactured for this industry have become more complex, the company's customer response time has declined. Required: Why do you think that response time declined if all other quality factors have remained the same? Answer: If quality production was one of the other control factors, and the products became more complex, it probably takes more time to inspect and verify the quality of the finished products. Therefore, to maintain the same level of quality, additional time had to be put into the product cycle. Diff: 2 Objective: 5 AACSB: Application of knowledge
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36) Venlaz Corp makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately 1.5 hours. If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take 1 hour to make. To offset approaching production capacity, expanding the assembly line is possible. This will decrease manufacturing time for all products by 20%. However, this will increase the costs of cycles from $400 to $500 and scooters from $200 to $240. The change will also cause increases in prices from $700 to $750 for cycles and from $450 to $500 for scooters. Required: a. What is the average waiting time for cycles if they are the only item manufactured? b. What are the average waiting times if both cycles and scooters are produced and the assembly line is not enlarged? c. What are the average waiting times if both cycles and scooters are produced and the assembly line is enlarged? d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures? e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equal production. f.
What action do you recommend?
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Answer: a.
Waiting time = [92 × (1.5)2] / {[2 × [300 hr. a month - (92 × 1.5)]} = 0.639 hours
b.
WT = (92 × (1.5)2) + (20 × 1) / {2 × [300 - (92 × 1.5) - (20 × 1)]} = 227/284 = 0.799 hours
c.
WT = (92 × (1.2)2) + (20 × (0.8)2) / {2 × [300 - (92 × 1.2) - (20 × 0.8)]} = 145.28/347.2 = 0.418 hours
d. Expected monthly margin without scooters: Motorcycle sales (92 × $700) Manufacturing costs (92 × $400) Expected margin
$64,400 36,800 $27,600
e. Without changing assembly line: Motorcycle sales (92 × $700) Scooter sales (20 × $450) Total expected sales
$64,400 9,000 73,400
Manufacturing costs: Motorcycles (92 × $400) Scooters (20 × $200) Expected margin
$36,800 4,000
40,800 $32,600
With new assembly line: Motorcycle sales (92 × $750) Scooter sales (20 × $500) Total expected sales Manufacturing costs: Motorcycles (92 × $500) Scooters (20 × $240) Expected margin
$69,000 10,000 79,000
$46,000 4,800
50,800 $28,200
f. Unless there are critical customer relation problems with a slower response time, the scooters should be added without changing the assembly line. The expected margin is $4,400 higher without the new assembly line ($32,600 - $28,200). Diff: 3 Objective: 3 AACSB: Application of knowledge
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Objective 20.6 1) Which of the following reduces manufacturing cycle times and delays? A) increasing the capacity of a bottleneck resource B) selling of an existing equipment to save up on depreciation costs C) increasing the time it takes for setups and processing D) outsourcing the job to a third party Answer: A Diff: 2 Objective: 6 AACSB: Application of knowledge
2) Inventory carrying costs equal the: A) opportunity costs of the investment tied up in inventory and the cost of manufacturing of goods B) costs of storage only C) opportunity costs of the investment tied up in inventory and the relevant costs of storage D) historical costs and the relevant costs of storage Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
3) Which of the following is a storage cost? A) labor cost B) materials handling C) direct material D) overhead cost Answer: B Diff: 2 Objective: 6 AACSB: Application of knowledge
4) When manufacturing cycle increases: A) sunk costs will decrease B) opportunity costs will increase C) opportunity costs will decrease D) inventory carrying costs will increase Answer: D Diff: 2 Objective: 6 AACSB: Application of knowledge
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5) Longer manufacturing cycle times can result in: A) lower revenues and higher inventory carrying costs B) higher opportunity costs and low profit margins C) lower opportunity costs and high profit margins D) higher revenues and lower inventory carrying costs Answer: A Diff: 2 Objective: 6 AACSB: Application of knowledge
6) Tran-North American Industries Inc. is looking at a change in its manufacturing process that will cause manufacturing cycle time to increase from 250 hours to 425 hours. The increase in the manufacturing time will result in an estimated loss in revenues of $12,000. Carrying costs are estimated at $1.50 per hour and the controller estimates that 48 orders for raw materials are expected for the year. What is the expected change in revenues as a result of the increase in manufacturing cycle time? (Round the final answer to the nearest whole dollar.) A) $24,600 B) $30,600 C) $12,000 D) $6,000 Answer: A Explanation: A) (425 * 1.50 * 48) - ((72.00 * 250) - 12,000) = $24,600 Diff: 3 Objective: 6 AACSB: Analytical thinking
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7) Speedy Dress Manufacturing has two workstations, cutting and finishing. The cutting station is limited by the speed of operating the cutting machine. Finishing is limited by the speed of the workers. Finishing normally waits for work from cutting. Each department works an eight-hour day. If cutting begins work two hours earlier than finishing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but also it increases finished units produced each day by 270 units. All units produced can be sold even though the change increases inventory stock by 20% from 480 units. The cost of operating the cutting department two more hours each day is $1,450. The contribution margin of the finished products is $12 each. Inventory carrying costs are $0.90 per unit per day. What is the change in the daily contribution margin if the change is made? A) $1,251 B) $1,293 C) $1,704 D) $725 Answer: C Explanation: C) Inventory increase 480 × 20% = 96 Total contribution margin (270 × $12) Carrying cost (96 units × $0.90) Increased costs Net change in contribution margin
$3,240 (86.4) (1,450) $1,704
Diff: 3 Objective: 6 AACSB: Application of knowledge
8) Captain Carl's Seascapes produces sea pictures for sale through catalogs. The company has two workstations, photo production and framing. The photo production station is limited by the speed of operating the photo development machine. Framing is limited by the speed of the employees. Framing normally waits for work from photo production. Each department works an eight-hour day. If Captain Carl's Seascapes adds an earlier half shift so that photo production begins work four hours earlier than framing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but it also increases finished units produced each day by 290 units. All units produced can be sold. The cost of operating the photo production department four more hours each day is $1,310. The contribution margin of the finished products is $16 each. What is the total production per day if the change is made? A) 72.5 units B) 290 units C) 580 units D) 870 units Answer: D Explanation: D) Units per hour = 290 / 4 = 72.5 units per hour Total production = 72.5 × 12 = 870 units per day Diff: 1 Objective: 6 AACSB: Application of knowledge
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9) Captain Carl's Seascapes produces framed sea pictures for sale through catalogs. The company has two workstations, photo production and framing. The photo production station is limited by the speed of operating the photo development machine. Framing is limited by the speed of the employees. Framing normally waits for work from photo production. Each department works an eight-hour day. If Captain Carl's Seascapes adds an earlier half shift so that photo production begins work four hours earlier than framing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but it also increases finished units produced each day by 200 units. All units produced can be sold. The cost of operating the photo production department four more hours each day is $1,340. The contribution margin of the finished products is $26 each. What is the change in the daily contribution margin if the change is made? A) $250 B) $3,860 C) $5,200 D) $200 Answer: B Explanation: B) Additional Units = 200 units per day Additional contribution (200 × $26) $5,200 Increased costs (1,340) Net change in contribution margin $3,860 Diff: 3 Objective: 6 AACSB: Application of knowledge
10) The manufacturing cycle including related delays can be reduced by: A) batching similar jobs together for processing B) decreasing the capacity of a bottleneck resource C) not setting up flexible manufacturing systems D) increasing the time for setups and processing Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
11) Manufacturing cycle times affect both revenues and costs. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
12) In a relevant revenue and cost analysis, the time factor must be considered as the choice of an alternative can impact manufacturing lead times and other time factors which in turn can impact relevant revenues and relevant costs. Answer: TRUE Diff: 2 Objective: 6 AACSB: Application of knowledge
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13) Longer manufacturing cycle times increase the inventory carrying costs and decrease revenues. Answer: TRUE Diff: 2 Objective: 6 AACSB: Application of knowledge
14) Increasing the capacity of a bottleneck resource increases manufacturing cycle times and delays. Answer: FALSE Explanation: Increasing the capacity of a bottleneck resource reduces manufacturing cycle times and delays. Diff: 2 Objective: 6 AACSB: Application of knowledge
15) One way to increase capacity is to reduce the time it takes for setups and processing. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
16) One of the ways to increase capacity is to invest in new equipment, such as flexible manufacturing systems that can be programmed to switch quickly from producing one product to producing another. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
17) Businesses are achieving sustained competitive advantage better management of time. Management are making decisions faster, developing new products faster, and converting customer orders into deliveries sooner than the competition. On the other hand, decisions that will result in a significant increase in average manufacturing cycle time could affect revenues and expenses. Explain the impact an increase in average manufacturing cycle time would have on operating income and do the same for a decrease in manufacturing cycle time. Answer: There is no doubt that customers value faster delivery of both goods and services. An increase in average manufacturing cycle time could hurt revenues (the customer would pressure the company to lower prices because of delays) whereas customers might be willing to pay more if the time to receive the finished good was significantly reduced. Expenses could increase with an increase in average manufacturing cycle time as such costs associated with the costs of inventory storage, space rental cost increases because of the need to store larger buffers of inventory, while the costs associated with spoilage, deterioration, and materials handling also tend to increase the longer the manufacturing process takes. Diff: 2 Objective: 6 AACSB: Analytical thinking
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18) Brix, Inc., prepares frozen food for fast-food restaurants. It has two workstations, cooking and assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased in recent months to 2,800 dozen units, management is considering adding another cooking station or else having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour each day is $2,400. The cost of adding another cooking station would add an average of $10 per hour. The current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either the extra hour or the new cooking station would increase production by 20 dozen a day, with a long-run increase of 80 dozen units in finished goods inventory to 280 dozen. Required: a. What is the total production per month if the change is made? b. What is the increase in the expected monthly product contribution for each of the possible changes? Assume long-run production equals sales. Answer: a. Total dozen per month = 2,800 + (22 × 20) = 3,240 b. Current product contribution margin (2,800 × $8) Carrying costs (200 × $2) Current net contribution
$22,400 (400) $22,000
More hours: Expected product contribution margin (3,240 × $8) Carrying costs (280 × $2) Increased costs Expected net product contribution
$25,920 $ 560 2,400
Increase = $22,960 - $22,000 =
(2,960) $22,960 $ 960
New cooking station: Expected product contribution margin (3,240 × $8) Carrying costs (280 × $2) Increased costs ($10 × 22 × 8) Expected net product contribution
$25,920 $ 560 1,760
Increase = $23,600 - $22,000 =
(2,320) $23,600 $1,600
Diff: 3 Objective: 6 AACSB: Application of knowledge
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Objective 20.7 1) Which of the following is an internal-business-process measure to study the output during bottleneck situations? A) manufacturing cycle efficiency for key processes B) carrying cost of inventories C) number of employees trained to manage bottlenecks D) customer-response time Answer: A Diff: 2 Objective: 7 AACSB: Application of knowledge
2) Which of the following is a learning-and-growth measure to study the output during bottleneck situations? A) manufacturing cycle efficiency for key processes B) carrying cost of inventories C) number of employees trained to manage bottlenecks D) improve customer-response time during bottlenecks Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
3) Which of the following is NOT true regarding balanced scorecard measures? A) both financial and nonfinancial measures help managers manage performance along the time dimension B) nonfinancial measures help managers evaluate goal achievement regarding manufacturing cycle time C) the balanced scorecard does not help highlight linkages across the financial and nonfinancial perspectives of the balance scorecard D) revenue and cost measures help managers evaluate the financial effects of increases and decreases in nonfinancial measures Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
4) Which of the following measures (2 for each choice) would be part of a company's balance scorecard financial perspectives/measures related to time? A) Revenue losses from delays and customer delays reported in hours. B) Average time to produce key products and the period's increase or decrease in carrying costs. C) Price increases from rapid deliveries and the period's reduction in carrying costs. D) Employee satisfaction survey results and carrying cost of inventory for the period. Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
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5) Managers looking to reduce defective units produced at bottleneck operations would most likely be monitoring internal-business-process measures on the balanced scorecard. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
6) Nonfinancial measures are ineffective at helping managers evaluate how well they have done on goals such as improving manufacturing cycle times and customer response times. Answer: FALSE Explanation: Nonfinancial measures such as customer measures and internal-business-process measures help managers evaluate how well they have done on goals such as improving manufacturing cycle times and customer response times. Diff: 1 Objective: 7 AACSB: Analytical thinking
7) The last step of the five-step decision making process is implementing the decision, evaluating performance, and learning. How can a balanced scorecard play a role in helping to assure this final step will be successful? Answer: Using the balanced scorecard and tracking changes in the time-based measures can assess whether or not the financial performance of the company is meeting or exceeding the company's goals. If the goals are not being met, then decisions and plans can be modified as required to meet the goals. The balanced scorecard is used to track the financial, customer, internal business processes, and learning and growth measures of the company. Since there are cause-and-effect linkages and relationships among many of the various measures within the financial and nonfinancial scorecard categories, it is very beneficial for the managers to keep abreast of the measures and how they are changing over time so that a timely response can be made to avert problems as soon as possible. Diff: 3 Objective: 7 AACSB: Analytical thinking
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8) A machine has been identified as a bottleneck and the source of the constraint for a manufacturing company that has multiple products and multiple machines. Discuss ways the company can overcome the bottleneck. Answer: The ways include: a. Eliminating idle time at the bottleneck operation. Extra staffing at the bottleneck would be a possibility, particularly if numerous manual type tasks were involved. b. Concentrate on processing those parts or products that increase throughput contribution, not parts or products that remain in finished goods or spare parts inventories. c. Shift a part of the products produced at the bottleneck machine to other machines or outsource part of the production. d. Solicit the opinions of the factory workers for ideas as to how the design of the manufacturing process can be simplified. e. Improve the quality of the production process. Poor quality is especially costly at a bottleneck operation. Diff: 3 Objective: 7 AACSB: Application of knowledge
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 21 Inventory Management, Just-in-Time, and Simplified Costing Methods Objective 21.1 1) Among different types of costs associated with inventory, the costs of obtaining purchase approvals are: A) purchasing costs B) ordering costs C) stockout costs D) carrying costs Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
2) Among different types of costs associated with inventory, the incoming freight charges of inventories are: A) purchasing costs B) ordering costs C) stockout costs D) carrying costs Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
3) Among different types of costs associated with inventory, the opportunity cost of the investment tied up in inventory is a(n): A) purchasing cost B) ordering cost C) stockout cost
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D) carrying cost Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
4) The costs that result from theft of inventory are: A) shrinkage costs B) external failure costs C) stockout costs D) costs of quality Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
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5) The costs that result when a company runs out of a particular item for which there is a customer demand are: A) shrinkage costs B) shortage costs C) stockout costs D) EOQ estimation costs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Costs incurred by a company to expedite an order from a supplier in an attempt to not miss out of a sale are classified as: A) shrinkage costs B) external failure costs C) stockout costs D) costs of quality Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Which of the following is the best definition of inventory management? A) planning and control of the flow inventory into and through an organization B) planning, coordinating, and controlling activities related to the flow of inventory into, though, and out of an organization C) planning and coordinating activities related to the flow of inventory into and through an organization D) planning, coordinating, and control of inventory into an organization Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Which of the following statements is true of costs associated with goods for sale? A) Appraisal costs is a subcategory of shrinkage costs. B) Special processing costs are always part of purchasing costs. C) Opportunity costs are not recorded in the accounting system. D) Stockout costs are costs that arise when a company runs out of a particular item for which there is no customer demand. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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9) Among different types of costs associated with inventory, four categories of quality costs are: A) control costs, inspection costs, internal failure costs, and external failure costs B) prevention costs, inspection costs, internal failure costs, and external failure costs C) prevention costs, appraisal costs, internal failure costs, and external failure costs D) prevention costs, control costs, internal failure costs, and external failure costs Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
10) Which of the following statements is true of costs associated with goods for sale? A) Information-gathering technology increases the reliability and timeliness of inventory information and increases the costs related to inventory. B) Opportunity costs are not recorded in financial accounting systems because they are not a significant component in several cost categories. C) Purchasing costs include incoming freight costs and are reduced by discounts. D) Opportunity costs are recorded in financial accounting systems but are a not significant component in several cost categories. Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
11) Carrying costs only include those costs that are entered into the financial accounting system and do not include the opportunity cost of the investment tied up in inventory. Answer: FALSE Explanation: Opportunity costs associated with holding inventory are included in the concept of carrying costs. Diff: 2 Objective: 1 AACSB: Analytical thinking
12) Inventory management is the planning, organizing, and controlling activities that focus on the flow of materials into, through, and out of the organization. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
13) Purchasing costs arise in preparing and issuing purchase orders, receiving and inspecting the items included in the orders, and matching invoices received, purchase orders, and delivery records to make payments. Answer: FALSE Explanation: Ordering costs arise in preparing and issuing purchase orders, receiving and inspecting the items included in the orders, and matching invoices received, purchase orders, and delivery records to make payments. Diff: 2 Objective: 1 AACSB: Analytical thinking
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14) The opportunity cost of the stockout is the lost revenue on the sale not made plus any lost revenue on future sales due to customer ill will. Answer: FALSE Explanation: The opportunity cost of the stockout is the lost contribution margin on the sale not made plus any contribution margin lost on future sales due to customer ill will. Diff: 2 Objective: 1 AACSB: Analytical thinking
15) Stockout costs arise when an organization experiences an ability to deliver its goods to its customers. Answer: FALSE Explanation: Stockout costs are costs that arise when a company runs out of a particular item for which there is customer demand. Diff: 1 Objective: 1 AACSB: Application of knowledge
16) Shrinkage is measured by adding (a) the cost of the inventory recorded on the books in the absence of theft and other incidents just mentioned, and (b) the cost of inventory when physically counted. Answer: FALSE Explanation: Shrinkage is measured by the difference between (a) the cost of the inventory recorded on the books in the absence of theft and other incidents just mentioned, and (b) the cost of inventory when physically counted. Diff: 2 Objective: 1 AACSB: Analytical thinking
17) Freight in charges forms part of purchasing costs of inventory. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
18) All inventory costs are available in financial accounting systems. Answer: FALSE Explanation: Opportunity costs are rarely recorded in formal accounting systems and they are often a very significant cost component. Diff: 1 Objective: 1 AACSB: Analytical thinking
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19) Managing inventories to increase net income requires companies to effectively manage costs associated with goods for sale. Required: Classify the below listed items as either Purchasing Costs, Ordering Costs, Carrying Costs, Stockout Costs, Costs of Quality, or Shrinkage Costs. ________
a. costs of obtaining purchase approvals
________
b. costs resulting from embezzlement by employees
________
c. internal failure costs
________
d. opportunity cost of the investment tied up in inventory
________
e. costs associated with storage
________
f. costs of lost sales as a result of not having an item requested by a customer
________
g. freight-in charges
________
h. special processing costs
________
i. costs of wages for work-in-process inspections
________ j. costs that result from misclassifications and clerical errors Answer: a. Ordering Costs b. Shrinkage Costs c. Costs of Quality d. Carrying Costs e. Carrying Costs f. Stockout Costs g. Purchasing Costs h. Ordering Costs i. Costs of Quality j. Shrinkage Costs Diff: 2 Objective: 1 AACSB: Application of knowledge
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Objective 21.2 1) Which of the following statements is true of the economic order quantity decision model? A) The economic order quantity increases with higher demand and higher carrying costs and decreases with higher ordering costs. B) The simplest version of the economic order quantity model assumes there are only ordering costs, carrying costs, stockout costs, and purchasing costs. C) It assumes the purchase order lead time is not known with certainty. D) The larger the order quantity, the lower the annual relevant ordering costs and the higher the annual relevant carrying costs. Answer: D Diff: 3 Objective: 2 AACSB: Analytical thinking
2) Which of the following is the correct mathematical expression to calculate annual relevant ordering costs? A) Demand in units for a specified period / (Relevant ordering cost per purchase order × Size of each order) B) Size of each order × Relevant ordering cost per purchase order / Demand in units for a specified period C) (Demand in units for a specified period / Size of each order) × Relevant ordering cost per purchase order D) (Demand in units for a specified period - Size of each order) × Relevant ordering cost per purchase order Answer: C Explanation: B) Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Under economic-order-quantity decision model, which of the following is an assumption of the model? A) the quantity ordered can vary at each reorder point B) demand, ordering costs, and carrying costs are uncertain C) the purchasing cost per unit is affected by the order quantity D) the same quantity is ordered at each reorder point Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
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4) The following information applies to Krynton Company, which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation. Annual demand (weekly demand = 1/52 of annual demand) Orders per year Lead time in days Cost of placing an order
59,000 units 60 20 days $140
What is the reorder point? (Assume a 365 day year.) A) 3,120 units B) 3,233 units C) 983 units D) 2,950 units Answer: B Explanation: B) Reorder point = Number of units sold per time period × Purchase-order lead time Daily demand = 59,000 / (52 × 7) = 161.64 Therefore, reorder point = 161.64 × 20 = 3,233 Diff: 2 Objective: 2 AACSB: Analytical thinking
5) The economic order quantity model completely ignores: A) carrying costs B) ordering costs C) stockout costs D) the size of a purchase order Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
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6) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $28.00 per DVD; DVDs are shipped in packages of 68. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 320,000 DVDs at a rate of 6,900 DVDs per week. DVD Mart earns 13% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year
$119.50
$5.50
What is the economic order quantity? A) 67.41 packages B) 47.14 packages C) 6.10 packages D) 66.67 packages Answer: D Explanation: D) EOQ = EOQ = 66.67 packages Diff: 2 Objective: 2 AACSB: Application of knowledge
7) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $25.00 per DVD; DVDs are shipped in packages of 60. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 321,000 DVDs at a rate of 6,300 DVDs per week. DVD Mart earns 11% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year
$118.50
$9.50
What are the annual relevant ordering costs? A) $80,961 B) $10,518 C) $7,438 D) $7,232 Answer: C Explanation: C) EOQ = EOQ = 85.24 packages Annual relevant ordering costs = [(321,000 / 60) × $118.50] / 85.24 = $7,438 Diff: 3 Objective: 2 AACSB: Application of knowledge
1440 richard@qwconsultancy.com
8) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $27.00 per DVD; DVDs are shipped in packages of 63. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 315,000 DVDs at a rate of 6,400 DVDs per week. DVD Mart earns 14% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year
$116.50
$7.50
What are the annual relevant carrying costs? A) $8,590 B) $8,459 C) $784 D) $5,981 Answer: B Explanation: B) EOQ = EOQ = 68.87 packages Annual relevant carrying costs =
= $8,459
Diff: 3 Objective: 2 AACSB: Application of knowledge
1441 richard@qwconsultancy.com
9) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $30.00 per DVD; DVDs are shipped in packages of 61. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 320,000 DVDs at a rate of 7,000 DVDs per week. DVD Mart earns 13% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year
$119.50
$7.50
What are the relevant total costs? A) $21,311 B) $96,676 C) $17,541 D) $14,837 Answer: C Explanation: C) EOQ = EOQ = 71.48 packages Annual relevant carrying costs =
= $8,770.60
Annual relevant ordering costs = [(320,000 / 61) × $119.50] / 71.48 = $8,770.08 Relevant total costs = $8,770.60 + $8,770 = $17,541 Diff: 3 Objective: 2 AACSB: Application of knowledge
1442 richard@qwconsultancy.com
10) Globe Inc. is a distributor of DVDs. DVD Mart is a local retail outlet which sells blank and recorded DVDs. DVD Mart purchases DVDs from Globe at $27.00 per DVD; DVDs are shipped in packages of 64. Globe pays all incoming freight, and DVD Mart does not inspect the DVDs due to Globe's reputation for high quality. Annual demand is 319,000 DVDs at a rate of 7,000 DVDs per week. DVD Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year
$118.50
$8.50
How many deliveries will be made during each time period? A) 75.03 deliveries B) 42.06 deliveries C) 106.11 deliveries D) 73.83 deliveries Answer: A Explanation: A) EOQ = EOQ = 66.43 packages Number of deliveries = [(319,000 / 64) / 66.43 = 75.03 Diff: 3 Objective: 2 AACSB: Application of knowledge
1443 richard@qwconsultancy.com
11) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $1.15 per ball; the golf balls are shipped in cartons of 62. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 159,520 golf balls at a rate of 2,991 balls per week. Martin's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per carton per year: Relevant insurance, materials handling, breakage, etc., per year
$129.00
$0.87
If Martin's makes an order (1 / 12 of annual demand) once per month, what are the relevant total costs? (Round costs to the nearest cent and quantities to the nearest whole number.) A) $1,548.00 B) $1,010.51 C) $2,557.01 D) $3,096.00 Answer: C Explanation: C) Order Quantity = Annual Demand / 12 = 13,293 balls / month / 62 golf balls per carton = 214 cartons per month Relevant Total Costs = Ordering Costs + Carrying Costs Carrying Cost per carton = price × invest rate + insurance/handling Carrying Cost per carton = ($1.15 × 62 × 12%) + $0.87 = $9.43 RTC = (12 × $129.00) + ((214 / 2) × $9.43) = $2,557.01 Diff: 2 Objective: 2 AACSB: Application of knowledge
1444 richard@qwconsultancy.com
12) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $1.15 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 159,520 golf balls at a rate of 3,691 balls per week. Martin's Golf Supplies earns 10% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per carton per year: Relevant insurance, materials handling, breakage, etc., per year
$132.00
$0.87
What is the economic order quantity? (Round costs to the nearest cent and quantities to the nearest whole number.) A) 185 cartons B) 253 cartons C) 277 cartons D) 369 cartons Answer: B Explanation: B) Annual Demand / 159,520 / 72 = 2,216 cartons Carrying Cost per carton = ($1.15 × 72 × 10%) + $0.87 = $9.15 EOQ = EOQ = 252.9 cartons - round to 253 Diff: 2 Objective: 2 AACSB: Application of knowledge
1445 richard@qwconsultancy.com
13) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.95 per ball; the golf balls are shipped in cartons of 42. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 156,520 golf balls at a rate of 3,391 balls per week. Martin's Golf Supplies earns 11% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per carton per year: Relevant insurance, materials handling, breakage, etc., per year
$130.00
$0.87
Purchasing at the EOQ recommended level, how many deliveries will be made during each time period? (Round costs to the nearest cent and quantities to the nearest whole number.) A) 2 deliveries B) 3.5 deliveries C) 8.7 deliveries D) 12 deliveries Answer: C Explanation: C) Annual Demand / 156,520 / 42 = 3,727 cartons Carrying Cost per carton = ($0.95 × 42 × 11%) + $0.87 = $5.26 EOQ = EOQ = 429.2 cartons - round to 429 Deliveries = Annual Demand / EOQ = 8.7 Diff: 3 Objective: 2 AACSB: Application of knowledge
1446 richard@qwconsultancy.com
14) Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $0.85 per ball; the golf balls are shipped in cartons of 62. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 158,520 golf balls at a rate of 3,691 balls per week. Martin's Golf Supplies earns 7% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per carton per year: Relevant insurance, materials handling, breakage, etc., per year
$131.00
$0.77
Purchasing at the EOQ recommended level, what are the relevant total costs? (Round costs to the nearest cent and quantities to the nearest whole number. Your answer might be slightly different from the best answer due to rounding.) A) $1,572 B) $1,728 C) $864 D) $3,144 Answer: B Explanation: B) Annual Demand / 158,520 / 62 = 2,557 cartons Carrying Cost per carton = ($0.85 × 62 × 7%) + $0.77 = $4.46 EOQ = EOQ = 387.6 cartons - round to 388 RTC =
+
= $1,728
(Your solution might be slightly different based on rounding.) Diff: 3 Objective: 2 AACSB: Application of knowledge
15) The purchase-order lead time is the: A) time between placing an order and its delivery B) time between receiving a customer order and producing the products C) time between receiving a customer order and delivering the items D) time required to correct errors in the defective products Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
1447 richard@qwconsultancy.com
16) Which of the following statements is true of the economic-order-quantity decision model? A) It assumes purchasing costs are relevant because the cost per unit changes due to the quantity ordered. B) Demand, ordering costs, and carrying costs are all known with certainty. C) It assumes that stockout costs are relevant even if no stockouts occur. D) It assumes that ordering costs and carrying costs are irrelevant. Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
17) Vision Company sells optical equipment. Blitz Company manufactures special glass lenses. Vision orders 11,400 lenses per year, 220 per week, at $44 per lens. Blitz covers all shipping costs. Vision earns 21% on its cash investments. The purchase-order lead time is 2.0 weeks. Vision sells 305 lenses per week. The following data are available: Relevant ordering costs per purchase order Relevant insurance, materials handling, breakage, and so on, per year
$47.25 $5.50
What is the economic order quantity for Vision? A) 443 lenses B) 341 lenses C) 270 lenses D) 191 lenses Answer: C Explanation: C) EOQ = EOQ = 270 lenses Diff: 3 Objective: 2 AACSB: Application of knowledge
1448 richard@qwconsultancy.com
18) Vision Company sells optical equipment. Blitz Company manufactures special glass lenses. Vision orders 12,200 lenses per year, 200 per week, at $42 per lens. Blitz covers all shipping costs. Vision earns 21% on its cash investments. The purchase-order lead time is 2.0 weeks. Vision sells 225 lenses per week. The following data are available: Relevant ordering costs per purchase order Relevant insurance, materials handling, breakage, and so on, per year
$41.25 $8.50
What is the reorder point? A) 400 lenses B) 450.0 lenses C) 869 lenses D) 850.0 lenses Answer: B Explanation: B) Reorder point = 225 lenses × 2.0 weeks = 450.0 lenses Diff: 2 Objective: 2 AACSB: Application of knowledge
19) Beryl Company sells 900 flash drives per week. Purchase-order lead time is 2 weeks and the economic-order quantity is 1,425 units. What is the reorder point? A) 2,850 units B) 1,050 units C) 1,800 units D) 1,425 units Answer: C Explanation: C) Reorder point = 900 × 2= 1,800 units Diff: 2 Objective: 2 AACSB: Application of knowledge
20) Delinz Company sells 115 hams per week. Purchase-order lead time is 3 weeks and the economic-order quantity is 200 hams. What is the reorder point? A) 945 hams B) 345 hams C) 600 hams D) 200 hams Answer: B Explanation: B) Reorder point = 115 × 3= 345 hams Diff: 2 Objective: 2 AACSB: Analytical thinking
1449 richard@qwconsultancy.com
21) Miniature Company sells stuffed tigers. Birtal Inc. manufactures many different stuffed animals. Miniature orders 20,900 tigers per year, 402 per week, at $13 per tiger. The manufacturer covers all shipping costs. Miniature earns 23% on its cash investments. The purchase-order lead time is 2 weeks. Miniature sells 360 tigers per week. The following data are available (based on management's estimates): Estimated ordering costs per purchase order Estimated insurance, materials handling, breakage, and so on, per year Actual ordering costs per order
$23 $7 $34
What is the economic order quantity using the estimated amounts? A) 567.0 stuffed tigers B) 310.2 stuffed tigers C) 219.4 stuffed tigers D) 401.0 stuffed tigers Answer: B Explanation: B) EOQ = EOQ = 310.2 units Diff: 3 Objective: 2 AACSB: Application of knowledge
22) Relevant total costs in the economic order quantity decision model equal relevant ordering costs plus which of the following costs? A) carrying costs B) stockout costs C) quality costs D) purchasing costs Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
1450 richard@qwconsultancy.com
23) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year for each product: Required annual return on investment Required other costs per year
$520 16% $9
Annual demand is 32,000 products per year. The purchase price per product is $51. What is the economic order quantity? A) 2,019.51 units B) 984.73 units C) 1,392.62 units D) 1,922.96 units Answer: C Explanation: C) Unit carrying costs = ($51 × 0.16) + $9 = $17.16 EOQ = = 1,392.62 units Diff: 2 Objective: 2 AACSB: Application of knowledge
24) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year for each product: Required annual return on investment Required other costs per year
$470 16% $4
Annual demand is 33,000 products per year. The purchase price per product is $51. What is the annual relevant ordering cost? A) $5,570 B) $9,711 C) $7,955 D) $10,682 Answer: B Explanation: B) Unit carrying costs = ($51 × 0.16) + $4 = $12.16 EOQ = = 1,597.18 units Annual relevant ordering cost = (33,000 / 1,597.18) × $470 = $9,711 Diff: 3 Objective: 2 AACSB: Application of knowledge
1451 richard@qwconsultancy.com
25) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year for each product: Required annual return on investment Required other costs per year
$510 15% $7
Annual demand is 30,000 products per year. The purchase price per product is $50. What is the annual relevant carrying costs? A) $15,158 B) $14,644 C) $10,532 D) $2,905 Answer: C Explanation: C) Unit carrying costs = ($50 × 0.15) + $7 = $14.5 EOQ = = 1,452.70 units Annual relevant carrying costs = (1,452.70 / 2) × $14.5 = $10,532 Diff: 3 Objective: 2 AACSB: Application of knowledge
26) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year for each product: Required annual return on investment Required other costs per year
$450 13% $4
Annual demand is 30,000 products per year. The purchase price per product is $51. What are the relevant total costs at the economic order quantity? A) $16,941 B) $19,005 C) $9,576 D) $11,658 Answer: A Explanation: A) Unit carrying costs = ($51 × 0.13) + $4 = $10.63 EOQ = = 1,593.73 units Annual relevant carrying costs = (1,593.73 / 2) × $10.63 = $8,471 Annual relevant ordering costs = (30,000 / 1,593.73) × $450 = $8,471 Total costs at the economic order quantity = $8,471 + $8,471 = $16,941 Diff: 3 Objective: 2 AACSB: Application of knowledge
1452 richard@qwconsultancy.com
27) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year for each product: Required annual return on investment Required other costs per year
$520 18% $7
Annual demand is 30,000 products per year. The purchase price per product is $50. Which of the following statements is true of Allianz's EOQ system costs? A) At EOQ, the annual relevant ordering costs is exactly half of annual relevant carrying costs. B) At EOQ, the annual relevant carrying costs is higher than the annual relevant ordering costs. C) At EOQ, the annual relevant carrying costs is exactly half of the annual relevant total costs. D) At EOQ, the annual relevant carrying costs is equal to the annual relevant total costs. Answer: C Diff: 3 Objective: 2 AACSB: Application of knowledge
28) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year for each product: Required annual return on investment Required other costs per year
$520 16% $6
Annual demand is 35,000 products per year. The purchase price per product is $48. What are the total relevant costs, assuming the quantity ordered equals 1,100 units? A) $20,769 B) $20,945 C) $19,845 D) $24,069 Answer: D Explanation: D) Unit carrying costs = ($48 × 0.16) + $6 = $13.68 Total relevant costs =
= $24,069
Diff: 3 Objective: 2 AACSB: Application of knowledge
1453 richard@qwconsultancy.com
29) The Allianz Company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year for each product: Required annual return on investment Required other costs per year
$460 16% $6
Annual demand is 33,000 products per year. The purchase price per product is $51. How many deliveries will be required at the economic order quantity? A) 17.11 deliveries B) 15.00 deliveries C) 22.54 deliveries D) 24.19 deliveries Answer: C Explanation: C) Deliveries at EOQ = 33,000 / 1,464.26 = 22.54 deliveries Diff: 3 Objective: 2 AACSB: Application of knowledge
30) All of the following are reasons why a company might carry a safety stock EXCEPT: A) a buffer against unexpected increases in demand B) a contingency against the uncertainty about lead time C) a strategy to lower the carrying cost of inventory D) a way of softening the impact of sudden unavailability of stock from suppliers Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
31) The following information applies to Krynton Corp. which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation. Annual demand (weekly demand= 1/52 of annual demand) 18,000 units Orders per year as per EOQ model 17 Lead time in days 16 days Annual relevant carrying costs $2,800 What are the annual relevant ordering costs, assuming that relevant total costs are minimal? A) $1,059 B) $2,975 C) $2,800 D) $2,635 Answer: C Explanation: C) In EOQ decision model, annual relevant ordering costs and annual relevant carrying costs are equal when relevant total costs are minimal at the EOQ. Diff: 2 Objective: 2 AACSB: Application of knowledge
1454 richard@qwconsultancy.com
32) The following information applies to Krynton Corp. which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation. Annual demand (weekly demand= 1/52 of annual demand) 14,000 units Orders per year as per EOQ model 14 Lead time in days 20 days Annual relevant carrying costs $3,300 Assuming each order was made at the economic order quantity amount, what is the cost of placing an order? A) $888 per order B) $236 per order C) $165 per order D) $1,269 per order Answer: B Explanation: B) Cost of placing an order = $3,300 / 14 = $236 per order Diff: 3 Objective: 2 AACSB: Application of knowledge
33) The following information applies to Krynton Corp. which supplies microscopes to laboratories throughout the country. Krynton purchases the microscopes from a manufacturer which has a reputation for very high quality in its manufacturing operation. Annual demand (weekly demand= 1/52 of annual demand) 17,000 units Orders per year as per EOQ model 14 Lead time in days 18 days Annual relevant carrying costs $2,800 What is the economic order quantity assuming each order was made at the economic-order-quantity amount? A) 2,029 units B) 1,214 units C) 969 units D) 3,600 units Answer: B Explanation: B) EOQ = 17,000 / 14 = 1,214 Diff: 2 Objective: 2 AACSB: Application of knowledge
1455 richard@qwconsultancy.com
34) If Premium Company has a safety stock of 480 units and the average daily demand is 64 units, how many days can be covered if the shipment from the supplier is delayed by 7 days? A) 8 days B) 7 days C) 15 days D) 1 days Answer: A Explanation: A) Days that can be covered = 480 / 64 = 8 days Diff: 2 Objective: 2 AACSB: Application of knowledge
35) If Kenton Inc. has a safety stock of 205 units and the average weekly demand is 55 units, how many days can be covered if the shipment from the supplier is delayed by 12 days? A) 12 days B) 26 days C) 38 days D) 14 days Answer: B Explanation: B) Days that can be covered = 205 / 55 = 3.73 weeks = 26 days Diff: 2 Objective: 2 AACSB: Application of knowledge
36) The optimal safety stock level is the quantity of safety stock that minimizes the sum of the annual relevant: A) stockout costs and carrying costs B) ordering costs and carrying costs C) ordering costs and stockout costs D) ordering costs and purchasing costs Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
1456 richard@qwconsultancy.com
37) Flowers and Vases Inc. has projected its sales for June and has estimated the following probabilities of sales levels: Probability 9% 12% 14% 39% 16% 6% 4%
Units 2,000 3,000 4,000 5,000 6,000 7,000 8,000
What is the chance of sales of 5,000 units or more? A) 39% B) 55% C) 65% D) 100% Answer: C Explanation: B) Diff: 1 Objective: 2 AACSB: Analytical thinking
38) Companies use safety stock as a buffer against unexpected decreases in demand. Answer: FALSE Explanation: Companies use safety stock as a buffer against unexpected increases in demand. Diff: 1 Objective: 2 AACSB: Analytical thinking
39) The EOQ model factors in the probability of stockouts. Answer: FALSE Explanation: The EOQ model assumes that no stockouts occur. Diff: 2 Objective: 2 AACSB: Analytical thinking
40) The optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and ordering costs. Answer: FALSE Explanation: The optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and carrying costs. Diff: 2 Objective: 2 AACSB: Analytical thinking
1457 richard@qwconsultancy.com
41) The EOQ model is solved using calculus but the key intuition is that relevant total costs are minimized when relevant ordering costs equal relevant carrying costs. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
42) The reorder point is the quantity level of inventory at which a new purchase order is made. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
43) Due to unprecedented growth during the year, Flowers by Kelly decided to use some of its surplus cash to increase the size of several inventory order quantities that had been previously determined using an EOQ model. Required: Identify whether increasing the size of inventory orders will increase, decrease, or have no effect on each of the following items. ________
a. Average inventory
________
b. Cost of goods sold
________
c. Number of orders per year
________
d. Total annual carrying costs
________
e. Total annual carrying and ordering costs
________ f. Total annual ordering costs Answer: a. Increase b. No effect c. Decrease d. Increase e. Depends which costs increase/decrease more f. Decrease Diff: 2 Objective: 2 AACSB: Application of knowledge
1458 richard@qwconsultancy.com
44) The only product of a company has an annual demand of 14,000 units. The cost of placing an order is $70 and the cost of carrying one unit in inventory for one year is $20. Required: Determine the economic order quantity. Answer: = 313.05 units Diff: 2 Objective: 2 AACSB: Application of knowledge
45) Picture Company has one particular product that has an annual demand of 5,000 units. Total manufacturing costs per unit total $50. Ordering costs for the product total $60 per purchase order. Currently, the carrying costs per unit are 25% of manufacturing costs. Required: Determine the economic manufacturing order quantity. Answer: = 219 units Diff: 2 Objective: 2 AACSB: Application of knowledge
46) Ralph was in the process of completing the quarterly planning for the purchasing department when a major computer malfunction lost most of his data. For direct material XXX he was able to recover the following: Average inventory level of XXX Orders per year Average daily demand Working days per year Annual ordering costs Annual carrying costs
200 40 48 250 $4,000 $6,000
Ralph purchases at the EOQ quantity level. Required: Determine the annual demand, the cost of placing an order, the annual carrying cost of one unit, and the economic order quantity. Answer: Annual demand = 48 × 250 = 12,000 Cost of placing an order
= $4,000/40 = $100 per order
Carrying cost of one unit
= $6,000/200 = $30 per unit
EOQ
= The square root of (2 × 12,000 × $100)/30 = 283 units
Diff: 3 Objective: 2 AACSB: Application of knowledge
1459 richard@qwconsultancy.com
47) Clothes, Inc., has an average annual demand for red, medium polo shirts of 25,000 units. The cost of placing an order is $80 and the cost of carrying one unit in inventory for one year is $25. Required: a. Use the economic-order-quantity model to determine the optimal order size. b.
Determine the reorder point assuming a lead time of 10 days and a work year of 250 days.
c. Determine the safety stock required to prevent stockouts assuming the maximum lead time is 20 days and the maximum daily demand is 125 units. Answer: a. The square root of [(2 × 25,000 × $80) / $25] = 400 units b.
Daily demand = 25,000/250 = 100 units Reorder point = 100 units per day × 10 days = 1,000 units
c. Maximum demand per day Maximum lead time Maximum lead time demand Reorder point without safety stocks Safety stock
125 units × 20 days 2,500 units 1,000 units 1,500 units
Diff: 2 Objective: 2 AACSB: Application of knowledge
1460 richard@qwconsultancy.com
48) An inventory item of Avizone Corp. has an average daily demand of 25 units with a maximum daily demand of 30 units. The economic order quantity is 500 units. Without safety stocks, the reorder point is 125 units. Safety stocks are set at 235 units. Required: a. Determine the reorder point with safety stocks. b. Determine the maximum inventory level. c. Determine the average lead time. Answer: a. Reorder point without safety stocks 125 units Safety stock 235 units Reorder point with safety stocks 360 units b. Economic-order quantity Safety stocks Maximum inventory level c.
500 units 235 units 735 units
Average lead time = 125 units at reorder point / 25 units a day = 5 days
Diff: 3 Objective: 2 AACSB: Application of knowledge
1461 richard@qwconsultancy.com
49) For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity method and its supporting decision elements. She has gathered the following information: Annual demand in units Days used per year Lead time, in days Ordering costs Annual unit carrying costs
250 250 10 $100 $20
Required: Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs. Answer: EOQ = The square root of [(2 × 250 × $100) / $20] = 50 Average inventory
= 50/2 = 25
Orders per year
= 250/50 = 5
Average daily demand
= 250/250 = 1 unit
Reorder point
= 10/1 = 10 units
Annual ordering costs
= 5 × $100 = $500
Annual carrying costs
= 25 × $20 = $500
Diff: 3 Objective: 2 AACSB: Application of knowledge
1462 richard@qwconsultancy.com
50) Discuss considerations that should be fully taken into account when developing inventory related relevant costs for use in an economic order quantity (EOQ) model. Answer: It is crucial that the costs be incremental. Consider incremental carrying costs. If they are costs that will change with the quantity of inventory held, then they are relevant. If there are costs that would be unchanged regardless of how much inventory was in the warehouse (such as a clerical salary or material handler who was working at below full capacity), then those costs are not relevant for decision-making purposes. Relevant carrying costs are likely to be costs like shrinkage, breakage, obsolescence, and costs of hiring extra employees (or having existing employees work overtime) if higher levels of inventory will make those costs increase. Consider incremental opportunity cost of capital. If there is a decision to carry more inventory, then there will be money spent to purchase the inventory. The opportunity cost of capital is what would the other most beneficial use of the money be if it wasn't needed to purchase the higher level of inventory. It is calculated by multiplying the company's required rate of return by the per unit costs and then by the number of units purchased for the inventory and incurred at the time the units are received. Stockout costs require an estimate of the lost contribution margin on sales lost because of a stockout. Ordering costs are only those that change with the numbers of orders placed. Diff: 2 Objective: 2 AACSB: Application of knowledge
Objective 21.3 1) Which of the following costs is a relevant inventory carrying cost of carrying inventory? A) The lost contribution margin on future sales forgone as a result of customer dissatisfaction in product quality. B) The lost contribution margin on sales forgone because of the shortage of inventory. C) The costs of storage space owned that cannot be used for other profitable purposes when inventories decrease. D) The costs of shrinkage. Answer: D Diff: 3 Objective: 3 AACSB: Analytical thinking
2) For inventory carrying costs, which of the following statements is true of the relevant opportunity cost of capital of inventory? A) It is the return received by investing capital in inventory rather than elsewhere. B) It is calculated as the per-unit costs of carrying inventory divided by the required rate of return. C) It is the return foregone by investing capital elsewhere rather than in inventory. D) It is calculated as the required rate of return multiplied by the per-unit costs of acquiring inventory including the purchase price, incoming freight, and incoming inspection. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
1463 richard@qwconsultancy.com
3) Which of the following statements is true of relevant inventory costs? A) The salaries paid to clerks, stock keepers, and materials handlers are relevant carrying costs if they are unaffected by changes in inventory levels. B) The costs of expediting an order from a supplier are relevant incremental costs of stockouts. C) Warehouse rent, warehouse workers' salaries and costs of insurance,that change with the quantity of inventory held are irrelevant carrying costs. D) Those ordering costs that change with the number of orders placed are irrelevant ordering costs. Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
4) The annual relevant carrying costs of inventory consists of the sum of the: A) relevant ordering costs and the relevant costs of quality B) relevant ordering costs plus the relevant opportunity costs of capital C) relevant incremental costs plus the relevant opportunity costs of capital D) relevant incremental costs plus the relevant ordering costs Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
5) Which of the following costs is a relevant inventory stockout cost? A) The costs of obsolescence and costs of insurance that change with the quantity of inventory held. B) The return forgone by investing capital in inventory rather than elsewhere. C) The lost contribution margin on sales forgone as a result of customer dissatisfaction due to unavailability of goods. D) The costs of storage space owned that cannot be used for other profitable purposes when inventories decrease. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
6) Increases in the carrying cost and decreases in the ordering cost per purchase order result in: A) smaller EOQ amounts B) larger EOQ amounts C) larger relevant total costs D) smaller relevant total costs Answer: A Diff: 2 Objective: 3 AACSB: Analytical thinking
1464 richard@qwconsultancy.com
7) The costs of storage space owned are always relevant costs of carrying inventory. Answer: FALSE Explanation: The costs of storage space owned that cannot be used for other profitable purposes when inventories decrease are irrelevant costs of carrying inventory. But if the space has other profitable uses or if total rental cost is tied to the amount of space occupied, storage costs are relevant costs of carrying inventory. Diff: 2 Objective: 3 AACSB: Analytical thinking
8) The cost of breakage and obsolescence are relevant incremental costs of carrying inventory. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
9) When managers responsible for inventory control are evaluated on financial accounting results, opportunity costs are often a significant factor. Answer: FALSE Explanation: Managers evaluated on financial accounting numbers, which is often the case, will ignore opportunity costs. Diff: 2 Objective: 3 AACSB: Analytical thinking
1465 richard@qwconsultancy.com
10) The IBP Grocery orders most of its items in lot sizes of 10 units. Average annual demand per side of beef is 720 units per year. Ordering costs are $25 per order with an average purchasing price of $100. Annual inventory carrying costs are estimated to be 40% of the unit cost. Required: a. Determine the economic order quantity. b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity. c. Since the shelf life is limited, the IBP Grocery must keep the inventory moving. Assuming a 360-day year, determine the optimal lot size under each of the following: (1) a 20-day shelf life and (2) a 10-day shelf life. Answer: a. The square root of [(2 × 720 × $25) / $40] = 30 units b. Current 10-unit order: Ordering costs ($25 × 720/10) Carrying costs ($100 × 0.40 × 10/2) EOQ 30-unit order: Ordering costs ($25 × 720/30) Carrying costs ($100 × 0.40 × 30/2) Annual savings c.
$1,800 200 600 600
$2,000
1,200 $ 800
Average daily demand = 720 / 360 = 2 per day Average days' supply in EOQ = 30/2 = 15 days (1) 20-day shelf life allows for up to 40 units (20 × 2), EOQ is acceptable. (2) 10-day shelf life allows for up to 20 units (10 × 2), EOQ is not acceptable.
Diff: 3 Objective: 2, 3 AACSB: Analytical thinking
11) Why do conflicts arise between the EOQ model's optimal order quantity and the order quantity that managers regard as optimal? Answer: The EOQ model considers more costs into account than the costs included in the financial records. For instance, consider opportunity costs. The EOQ model takes into account opportunity costs because these costs are relevant costs when calculating inventory carrying costs. However, when managers are evaluated on financial accounting numbers opportunity costs are ignored as financial accounting only records actual transactions, not the costs of opportunities forgone. This difference in costs results in conflicts between the EOQ model's optimal order quantity and the order quantity that managers regard as optimal. Diff: 2 Objective: 3 AACSB: Analytical thinking
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12) The executive vice president of Robotics, Inc., is concerned because the cost of materials has not been in line with the budget for several periods, even after implementing an EOQ model. The company has the normal direct material variance computations of price and efficiency at the end of each month. The price variance of the direct materials used is usually near expectations. The vice president does not understand how the budget differences are always larger than the material price variances. Required: What explanation can you give for the evaluation problems presented? Answer: An EOQ model does not solve all inventory related problems. The first problem is the timing of material price variance computations. They should be at the time of purchase, not at the time of usage. By changing when the variance is computed, the responsibility is placed where it should be, in purchasing, not in production. Also, the timing of when materials are used could explain the difference between the budget variances and the material price variances. Materials may be purchased in one period and not used until another period. Also, material usage may include items purchased during several previous periods. Diff: 2 Objective: 3 AACSB: Application of knowledge
Objective 21.4 1) Which of the following statements is true of just-in-time (JIT) purchasing? A) In JIT purchasing, the optimal safety-stock level is the quantity of safety stock that minimizes the sum of annual relevant stockout and carrying costs. B) JIT purchasing is guided solely by the EOQ model because that model emphasizes the tradeoff between relevant carrying and ordering costs. C) In JIT purchasing, raw materials (or goods) are purchased so that products are delivered just as needed for production or sales. D) Only disadvantage of JIT purchasing is the higher level carrying and inspection costs. Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
2) Which of the following is NOT a reason why a company would adopt JIT purchasing practices? A) high shrinkage costs B) low ordering costs C) low carrying costs of inventory D) reliable supply chains Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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3) Just-in-time purchasing is the buying of goods or materials for production in a way that they are delivered in small orders directly to the production floor based on: A) economic order quantity B) annual monthly purchasing budgets C) production schedules D) sales forecasts Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
4) Which of the following term is defined as: "the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers"? A) customer list B) enterprise requirements plan (ERP) C) material requirements plan (MRP) D) supply chain Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
5) Sharing sales information throughout the supply chain leads to which of the following? A) larger stockouts B) increased manufacturing of products not immediately needed by retailers C) fewer manufacturing orders that had to be expedited D) higher inventories held by each company in the supply chain Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
6) The flow of services, goods or information from the buying material for product delivery to the customers is known as: A) supply chain B) value chain C) direct material value chain D) manufacturing value chain Answer: A Diff: 1 Objective: 4 AACSB: Analytical thinking
7) A company's inventory levels are dependent on a number of variables including the demand for the product, supplier relationships, and supplier relationships with their manufacturers. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
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8) Companies that implement JIT purchasing will emphasize developing short-term supplier relationships with many suppliers to attain flexibility. Answer: FALSE Explanation: Companies that implement JIT purchasing choose their suppliers carefully and develop long-term supplier relationships. Diff: 2 Objective: 4 AACSB: Analytical thinking
9) Just-in-time purchasing describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations. Answer: FALSE Explanation: Supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations. Diff: 2 Objective: 4 AACSB: Analytical thinking
10) The supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same company or in other companies. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
1469 richard@qwconsultancy.com
11) The manufacturing manager of New Technology Company is concerned about the company's newest plant. When the plant began operations three years ago, it had the best of everything. It had modern equipment, well-trained employees, engineered work and assembly stations, and a controlled environment. During the first two years, the evaluation results were very good with almost all cost variances being favorable. However, recently, things have turned negative. In recent months, everything seems to be operating in a crisis management mode. Although most cost variances remain favorable, the plant's segment contribution is declining and customers are complaining about poor quality and slow delivery. Several customers have suggested that they may take their business elsewhere if things do not improve. The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have difficulty finding jobs that need to be worked on, and scheduling has requested a larger computer to keep track of work in process. The vice president of sales does not know where to begin with solving the customers' problems. It seems that everyone is working very hard and the plant has the best facilities and trained employees in the industry. Required: What is the nature of the plant's problems? What recommendation would you make to help improve the situation? Answer: The basic problem appears to be too much work-in-process inventory and a lack of control over the flow of this inventory. Since the plant had two good years of production, it may be that increased demands are pushing the plant near its capacity and management has lost control of how to manage a near-capacity situation. Although the employees are well trained and skilled in what they do, that is not enough to ensure the production process runs smoothly. All activities must be organized to be efficient. A beginning recommendation is to implement a materials required planning system where each workstation controls what it produces, and pushes it to the next workstation. This can be accomplished by tighter controls over the scheduling of production units by workstation. This would be incorporated with a master production schedule, bill of materials, and timely inventory system. Diff: 3 Objective: 4 AACSB: Application of knowledge
12) What is a supply chain, and what are the benefits of a supply chain analysis? Provide an example of these benefits. Answer: The supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to customers, regardless of whether these activities occur in the same organization or in other organizations. Utilizing supply chain analysis allows companies to coordinate their activities and reduce inventories throughout the supply chain. An example of the benefits of supply chain analysis might be the emergence of supplier or vendor-managed inventories such as the relationship between Procter & Gamble and Walmart. Diff: 2 Objective: 4 AACSB: Analytical thinking
13) What are the benefits of using JIT techniques to reduce uncertainty throughout the supply chain?
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Answer: If activities throughout the supply chain are properly planned, coordinated, and controlled using JIT techniques, uncertainty (risk) can be reduce for all members of the supply chain. can reduce uncertainty because there will be fewer stockouts at the retail level, a reduction in the manufacturing of product not immediately needed by retailers, fewer rushed or expedited manufacturing orders, and lower inventory levels held by each company in the supply chain. Diff: 2 Objective: 4 AACSB: Analytical thinking
Objective 21.5 1) A push-through system that manufactures finished goods for inventory on the basis of demand forecasts and produces a master schedule for quantity and timing of units to be produced. A) just-in-time purchasing B) materials requirements planning C) relevant total costs D) economic order quantity Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
2) A demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line is referred to as: A) just-in-time production B) materials requirements planning C) relevant total costs D) economic order quantity Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
3) Which of the following statements best defines a just-in-time production system? A) a push-through system that manufactures finished goods for inventory on the basis of demand forecasts B) a push-through system in which each component in a production line is produced immediately as needed by the next step in the production line C) a demand-pull system that manufactures finished goods for inventory on the basis of demand forecasts D) a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
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4) Which of the following statements best defines a materials requirements planning system? A) a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line B) a push-through system that manufactures finished goods for inventory on the basis of demand forecasts C) a demand-pull system that manufactures finished goods for inventory on the basis of demand forecasts D) a push-through system in which each component in a production line is produced immediately as needed by the next step in the production line Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
5) A system that emphasizes lean production techniques, low quantities of inventory, and close coordination among production workstations is called: A) economic order quantity production B) just-in-time production C) materials requirements planning production D) push-through system Answer: B Diff: 1 Objective: 5 AACSB: Analytical thinking
6) The management accountant aids in MRP by: A) doing journal entries as requested B) preparing plant appropriation requests C) maintaining accurate records of inventory and its costs D) contacting vendors to make sure they can deliver the materials in time Answer: C Diff: 1 Objective: 5 AACSB: Analytical thinking
7) The demand-pull feature of JIT production systems results in close coordination among workstations and smooths the flow of goods. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
8) JIT purchasing and production systems can be used in service industries as supplies and the labor to manage those supplies can be a significant cost element in some service organizations. Answer: TRUE Explanation: Materials requirements planning system uses a master production schedule. Diff: 2 Objective: 5 AACSB: Analytical thinking
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9) A "push-through" system, often described as a materials requirement planning system, focuses first on the forecasted amount and timing of finished goods and then determines the demand for materials components and subassemblies at each of the prior stages of production. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
10) Just-in-Time (JIT) production systems are also referred to as lean production. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
11) Just-in-time systems are similar to materials requirement planning systems as both systems are demand-pull systems. Answer: FALSE Explanation: Just-in-time systems are not similar to materials requirement planning systems as just-in-time production is a demand-pull system and materials requirements planning is a push-through approach. Diff: 2 Objective: 5 AACSB: Analytical thinking
12) Sales forecasts for final products, bills of materials, and information about a company's inventories of materials, components, and products are inputs into MRP systems. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
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13) Kretzinger Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favorable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing department. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years: Purchase Year 20X1 20X2 20X3 20X4 20X5 20X6
Quantity Used 40,000 60,000 60,000 50,000 54,000 58,000
Average Price Variance Inventory 8,000 $ 1,000 F 15,000 10,000 F 20,000 12,000 F 12,500 20,000 U 18,000 8,000 F 23,200 9,500 F
Required: a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover? b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance. c. What recommendations will improve the evaluation process? Answer: a. Year Quantity used Average inventory Turnover 20X1 40,000 divided by 8,000 5.0 20X2 60,000 divided by 15,000 4.0 20X3 60,000 divided by 20,000 3.0 20X4 50,000 divided by 12,500 4.0 20X5 54,000 divided by 18,000 3.0 20X6 58,000 divided by 23,200 2.5 Favorable purchase prices appear to be associated with decreases in inventory turnover and increases in average inventory levels. Decreases in inventory turnover are a possible signal of the buildup of excess inventory. Excess inventory will reduce return on investment of the company and the above information indicates a need for a just-in-time inventory system. b. To achieve quantity discounts and favorable materials price variances, purchasing may be ordering excess inventory, thereby increasing subsequent storage, obsolescence, and handling costs. To obtain a low price, purchasing may be ordering from a supplier whose goods have inferior quality which may, in turn, lead to increased inspection, rework, and, perhaps, dissatisfied customers. c. It appears that two items may help improve the situation. First, consider the change to a just-in-time inventory system that would greatly improve the inventory turnover and reduce the amount of inventory carried. Second, additional measures should be used in the evaluation of the purchasing department. Either different financial measures should be used or the addition of nonfinancial measures should be implemented. Diff: 3 Objective: 5 AACSB: Application of knowledge
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Objective 21.6 1) A grouping of all the different types of equipment used to make a given product is referred to as: A) total quality management B) materials requirements planning C) manufacturing cells D) economic order quantity Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
2) Which of the following statements best defines manufacturing cells? A) They are manufacturing areas that use a "push-through" approach whereby finished goods are manufactured on the basis of demand forecasts. B) They are manufacturing centers which focuses on production of a single product and in which workers focus on master one skill so as to be efficient and effective in their work. C) They are work areas with different types of equipment grouped together to make related products and to minimize handling costs. D) They are production centers positioned in various areas throughout a production facility, close to the associated talent (direct laborers) in which goods are manufactured only after receiving customer orders. Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
3) Which of the following terms is defined as the time required to get equipment, tools, and materials ready to start production? A) setup time B) delivery time C) manufacturing-cycle time D) product design time Answer: A Diff: 1 Objective: 6 AACSB: Analytical thinking
4) Which of the following statements best defines setup time? A) It is the time required to manufacture an item, including order preparation time, inspection time, and customer delivery time. B) It is the time required to get equipment, tools, and materials ready to start the production of a component or product. C) It is a time or period ranging from the time when a customer orders goods to the time when they are delivered to the customer. D) It is the time required to create a new product to be sold by a business to its customers. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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5) An order is received by a company and then spends 1 day in assembly and 3 days in finishing before being stored in the warehouse. On average, the units are stored for 3 days before being shipped to a customer. Which of the following measures would be true? A) work-in-process time of 7 days B) manufacturing cycle time of 4 days C) pass-through time of 6 days D) manufacturing cycle time of 7 days Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
6) Which of the following statements best defines manufacturing cycle time in a JIT production system? A) the time from when raw materials are received until it becomes a finished good B) the time from when an order is received until it becomes a finished good C) the time from when raw materials are received until it is delivered to the customers D) the time from when an order is received until it is delivered to the customers Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
7) Which of the following statements is true of just-in-time production systems? A) In a just-in-time production system, a master production schedule specifies the quantity and timing of each item to be produced. B) Sales budget triggers each step of the production process in a just in time production system. C) Defects arising at one workstation affect other workstations in the line quickly because of the tight links between workstations. D) Production is organized in manufacturing cells in a just in time production system, which are production centers that use a "push-through" approach whereby finished goods are manufactured on the basis of demand forecasts. Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
8) JIT production systems usually require: A) workers that are multi-skilled and capable of performing a variety of operations and tasks B) workers that are highly specialized and trained in one specific area of manufacturing so as to be highly efficient C) suppliers that deliver products to strategically located but highly efficient warehouses for further distribution D) additional cost commitments by management in the setup activities of the production area in preparation of highly efficient manufacturing Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
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9) A system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities is known as a(n): A) economic order quantity (EOQ) system B) enterprise resource planning (ERP) system C) just-in-time (JIT) system D) material requirements planning (MRP) system Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
10) Which of the following statements best defines an enterprise resource planning (ERP) system? A) a demand-pull system in which each component in a production line is produced immediately as needed by the next step in the production line as planned by enterprise resource management B) a system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities C) a planning system that omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods D) a system that is made up of work areas with different types of equipment grouped together to make related products Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
11) Which of the following is a disadvantage of an enterprise resource planning (ERP) system? A) The use of standard costing systems is not allowed in an ERP system. B) Shifting manufacturing and distribution plans rapidly in response to changes in supply and demand is not possible in an ERP system. C) The ERP systems must often be customized to fit the strategic needs of the user. D) The ERP system increases lead times when purchasing material from a different supplier. Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
12) Which of the following statements is true of the financial and nonfinancial measures in just-in-time production systems? A) The inventory turnover ratio is expected to decrease. B) Units produced per hour are expected to increase. C) Manufacturing cycle time is expected to increase. D) Total setup time for machines with respect to total manufacturing time is expected to increase. Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
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13) A successful implementation of a JIT production system should result in a lowering of the inventory turnover ratio. Answer: FALSE Explanation: The inventory turnover ratio: (cost of goods sold/average inventory) should increase as a result of a JIT system implementation as the average inventory should fall, relatively speaking, as less inventory is on hand as a result of JIT practices. Diff: 1 Objective: 6 AACSB: Analytical thinking
14) In a just-in-time system, suppliers are selected primarily on the basis of their ability to provide materials and products at the lowest possible price. Answer: FALSE Explanation: In a just-in-time system, suppliers are selected on the basis of their ability to deliver quality materials in a timely manner. Diff: 2 Objective: 6 AACSB: Analytical thinking
15) Successful implementation of a JIT production system and effective accomplishments of its goals should result in a decrease in the inventory turnover ratio and a decrease in the number of days of inventory on hand. Answer: FALSE Explanation: It should result in an increase in the inventory turn over ratio and a decrease in the average number of days of inventory on hand. Diff: 2 Objective: 6 AACSB: Analytical thinking
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16) The Jarvis Corporation produces bucket loader assemblies for the tractor industry. The product has a long-term life expectancy. Jarvis has a traditional manufacturing and inventory system. Jarvis is considering the installation of a just-in-time inventory system to improve its cost structure. In doing a full study using its manufacturing engineering team as well as consulting with industry JIT experts and the main vendors and suppliers of the components Jarvis uses to manufacture the bucket loader assemblies, the following incremental cost-benefit relevant information is available for analysis: The Jarvis cost of investment capital hurdle rate is 15%. One-time cost to rearrange the shop floor to create the manufacturing cell workstations is $275,000. One-time cost to retrain the existing workforce for the JIT required skills is $60,000. Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year. The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are $225,000 per year. Jarvis will expect to save $200,000 per year in carrying costs as a result of having a lower inventory. The suppliers will require a 15% premium over the current level of prices in order to position themselves to supply the material on a smaller and more frequent schedule. Currently the materials purchases are $1,500,000 per year. Required: Determine whether it is in the best interest of Jarvis Corporation to install a JIT system. Answer: 1. Initial Investment = $275,000 + 60,000 = $335,000 2. Annual Savings: Defect Cost Reduction = 40% of $150,000 = $60,000 Setup Cost Reduction = 67% of $225,000 = $150,750 Carrying Cost reduction = $200,000 Total Savings = (60,000 + 150,750 + 200,000) = $410,750 3. Annual Increased Costs: Vendor Premium = 15% of $1,500,000 = $225,000 4. Net Annual Savings = (410,750 - 225,000) = $185,750 5. Savings/Initial Investment = (185,750 / 335,000) = 55 % Since the net savings is returning 55% per year on the initial investment (which is far in excess of the companies hurdle rate of 15%), the JIT project should be implemented. Diff: 3 Objective: 6 AACSB: Analytical thinking
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17) What are five features of a just-in-time manufacturing system? Answer: A just-in-time (JIT) system has many positive features. It organizes production in manufacturing cell groups which allow for all equipment used for a given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multiskilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of meeting delivery demands in a timely fashion. This also causes an increase in the quality of the goods being received by the firm. Diff: 2 Objective: 6 AACSB: Analytical thinking
18) In evaluating the successful implementation of a JIT production system, check the column of results that you would expect to see. Expected to Increase Decrease Inventory turnover ratio Number of days of inventory on hand Units produced per hour Number of units scrapped or requiring rework/Total number of units started and completed Manufacturing cycle time Total setup time for machines/Total manufacturing time Answer: Inventory turnover ratio Number of days of inventory on hand Units produced per hour Number of units scrapped or requiring rework/Total number of units started and completed Manufacturing cycle time Total setup time for machines/Total manufacturing time
Expected to Increase Decrease X X X X
X X
Diff: 2 Objective: 6 AACSB: Application of knowledge
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19) The Controller of Nip-it-in-the-Bud Inc. has studied the possibility of implementing a JIT production system. The annual incremental retooling costs of the JIT system is projected to be about $67,000 however, the new system will lower insurance costs by $10,000 and storage costs will drop by $20,000 a year as the company will be able to reuse warehouse space for other strategic purposes. In addition, material handling costs will drop by $10,000 a year and because of a resulting increase in quality and faster delivery, the company's contribution margin on the product will increase by $2.00 on annual sales of 20,000 units. Required: Calculate the net incremental benefit of the JIT system implementation. Answer: Incremental savings in insurance and storage costs $30,000 Incremental savings in material handling costs 10,000 Additional contribution margin ($2.00 × 20,000) 40,000 Total incremental operating income $80,000 Less: Incremental annual retooling costs (67,000) Net Incremental benefit $13,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
Objective 21.7 1) Traditional normal and standard costing systems usually use 4 trigger points to record the flow of costs through the production system. Such costing is called: A) backflush costing B) delayed costing C) variable tracking D) sequential tracking Answer: D Diff: 1 Objective: 7 AACSB: Analytical thinking
2) A costing system that omits recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods is called: A) dependent costing B) synchronous costing C) sequential costing D) backflush costing Answer: D Diff: 1 Objective: 7 AACSB: Analytical thinking
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3) Which of the following statements best defines backflush costing system? A) an integrated costing system covering a company's accounting, distribution, manufacturing, purchasing, human resources, and other functions B) a costing system that omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods C) a push-through system in which each component in a production line is produced immediately as needed by the next step in the production line D) a costing system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
4) Backflush costing is a system that: A) requires additional journal entries related to the rapid conversion of direct materials to a finished good B) simplifies cost accounting by eliminating some of the journal entries related to the value-added process from purchase of materials to sale of finished goods C) requires four trigger points of journal entries in strict sequence from purchasing to the sale of products D) eliminates all journal entries except for those that record the sales of the product and the related cost of goods sold Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
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5) Games R Us manufactures various games. For March, there were no beginning inventories of direct materials and no beginning or ending work in process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing. Conversion costs — March Direct materials purchased — March Units produced — March Units sold — March
$400,000 $1,160,000 59,800 45,800
Which of the following journal entries properly records the purchase of direct materials? A) Accounts Payable Control 400,000 Inventory: Raw and In-Process Control 400,000 B) Inventory: Materials and In-Process Control 1,160,000 Accounts Payable Control 1,160,000 C) Inventory: Raw and In-Process Control 1,160,000 Conversion Costs 1,160,000 D) Conversion Costs 1,160,000 Inventory: Raw and In-Process Control 1,160,000 Answer: B Diff: 3 Objective: 7 AACSB: Application of knowledge
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6) Games R Us manufactures various games. For March, there were no beginning inventories of direct materials and no beginning or ending work in process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing. Conversion costs — March Direct materials purchased — March Units produced — March Units sold — March
$460,000 $1,110,000 62,800 44,800
Which of the journal entries properly records conversion costs? A) Conversion Costs 460,000 Various Accounts (such as wages payable) B) Various Accounts (such as wages payable) 460,000 Conversion Costs C) Conversion Costs 460,000 Inventory: Direct Materials D) Inventory: Direct Materials 460,000 Conversion Costs Answer: A
460,000
460,000
460,000
460,000
Diff: 2 Objective: 7 AACSB: Application of knowledge
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7) Games R Us manufactures various games. For March, there were no beginning inventories of direct materials and no beginning or ending work in process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when conversion costs are allocated under backflush costing. Conversion costs — March Direct materials purchased — March Units produced — March Units sold — March
$430,000 $1,090,000 60,800 42,800
Which of the following entries properly records the cost of goods sold for the month? A) Finished Goods 1,070,000 Work in Process 1,070,000 B) Cost of Goods Sold 1,070,000 Finished Goods 1,070,000 C) Finished Goods 1,070,000 Cost of Goods Sold 1,070,000 D) Cost of Goods Sold 1,070,000 Work in Process 1,070,000 Answer: B Explanation: B) (Conversion costs of $430,000 + Direct Materials Purchased of $1,090,000)/60,800 units produced × 42,800 units sold = $1,070,000. Diff: 3 Objective: 7 AACSB: Application of knowledge
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8) Vision Company manufactures digital cameras. For May, there were no beginning inventories of direct materials and no beginning or ending work-in -process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when units are sold. Conversion costs - May Direct materials purchased - May Units produced - May Units sold - May Selling price
$103,625 $254,575 89,500 units 87,500 units $20 each
Which of the following journal entries properly reflects the purchase of materials under backflush costing? A) Inventory Control $254,575 Accounts Payable Control $254,575 B) Accounts Payable Control $254,575 Allocated Costs: Direct Materials $254,575 C) Accounts Payable Control $254,575 Materials Inventory $254,575 D) Allocated Costs: Direct Materials $254,575 Inventory: Raw and Material $254,575 Answer: A Diff: 2 Objective: 7 AACSB: Application of knowledge
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9) Vision Company manufactures digital cameras. For May, there were no beginning inventories of direct materials and no beginning or ending work-in -process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when units are sold. Conversion costs - May Direct materials purchased - May Units produced - May Units sold - May Selling price
$109,625 $255,575 87,500 units 77,500 units $28 each
Which of the following journal entries would be recorded when units are sold for the month under backflush costing? Please round intermediate calculations to two decimal places (i.e., unit costs) A) Cost of Goods Sold Inventory: Raw and In-Process B) Cost of Goods Sold Inventory Control Conversion Costs Allocated C) Inventory Control Conversion Costs Allocated Cost of Goods Sold D) Cost of Goods Sold Inventory: Raw and In-Process Conversion Costs Allocated Answer: B Explanation: B) Direct materials ($255,575 / 87,500) Conversion costs ($109,625 / 87,500) Total
$323,175 $323,175 $323,175 $226,300 $96,875 $226,300 $96,875 $323,175 $352,450 $255,575 $96,875
$2.92 1.25 $4.17
Cost of Goods Sold = 77,500 × $4.17 = $323,175 Inventory Control = 77,500 × $2.92 = $226,300 Conversion Costs Allocated = 77,500 × $1.25 = $96,875 C) Diff: 3 Objective: 7 AACSB: Application of knowledge
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10) Vision Company manufactures digital cameras. For May, there were no beginning inventories of direct materials and no beginning or ending work-in -process. Conversion costs is the only indirect manufacturing cost category currently used. Journal entries are recorded when materials are purchased and when units are sold. Conversion costs - May Direct materials purchased - May Units produced - May Units sold - May Selling price
$103,625 $258,575 84,500 units 79,500 units $21 each
If the two trigger points are completion of good finished units of product and sale of finished goods, which of the following entries would be used to record cost of finished units completed under backflush costing? (Round intermediate calculations to the nearest cent and final calculations to the nearest dollar.) A) Finished Goods $341,055 Inventory Control $243,270 Conversion Costs Allocated $97,785 B) Finished Goods $362,200 Inventory: Raw Materials $258,575 Conversion Costs Allocated $103,625 C) Finished Goods $362,200 Accounts Payable Control $258,575 Conversion Costs Allocated $103,625 D) Inventory Control $243,270 Conversion Costs Allocated $97,785 Finished Goods $341,055 Answer: C Explanation: C) Finished Goods = 84,500 × $4.29 = $362,200 Accounts Payable Control = 84,500 × $3.06 = $258,575 Conversion Costs Allocated = 84,500 × $1.23 = $103,625 Diff: 3 Objective: 7 AACSB: Application of knowledge
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11) Under backflush costing approach where three trigger points are used (stage A, stage C, and stage D), the purchase of materials is: A) credited to the Materials and In-Process Inventory Control account B) debited to the Materials and In-Process Inventory Control account C) debited to the Materials Inventory Control account D) ignored because the manufacturing process moves so quickly from acquisition of materials to the sale of the finished good Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
12) Which of the following statements is true of a backflush costing system? A) All costs are tracked sequentially as products pass through each stage of production. B) When inventories are minimal, as in JIT production systems, backflush costing complicates costing systems. C) Usage of a backflush costing system does not satisfy the absorption costing rules of GAAP. D) Backflush costing increases the ability of the accounting system to pinpoint the uses of resources at each step in the production process. Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
13) Which of the following statements best defines a trigger point in a sequential-tracking costing system? A) the inventory level at which a new purchase order is generated B) the point at which the sum of annual relevant stockout and ordering costs is minimal C) the production level at which the costing system becomes incapable of tracking the production costs D) a stage in the production cycle at which journal entries are made in the accounting system Answer: D Diff: 2 Objective: 7 AACSB: Analytical thinking
14) In a backflush-costing system, no record of work in process appears in the accounting records. Answer: TRUE Diff: 1 Objective: 7 AACSB: Analytical thinking
15) Companies that utilize backflush costing typically prorate underallocated or overallocated conversion costs between work-in-process, finished goods, and cost of goods sold. Answer: FALSE Explanation: Companies that use backflush costing typically have low inventories so that prorating underallocated or overallocated conversion costs between work in process, finished goods, and cost of goods sold is seldom necessary. Diff: 2 Objective: 7 AACSB: Analytical thinking
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16) A firm using a backflush costing system will always use actual costs rather than standard costs. Answer: FALSE Explanation: A firm using a backflush costing system can use standard costs as well as actual costs. Diff: 2 Objective: 7 AACSB: Analytical thinking
17) Companies that have low manufacturing lead time usually find that a version of backflush costing will report cost numbers totally different to what a sequential costing approach would report. Answer: FALSE Explanation: Companies that have low manufacturing lead time usually find that a version of backflush costing will report cost numbers similar to what a sequential costing approach would report. Diff: 3 Objective: 7 AACSB: Analytical thinking
18) The journal entry to dispose of the difference between actual conversion costs incurred and standard conversion costs allocated is different under backflush costing and sequential tracking. Answer: FALSE Explanation: The journal entry to dispose of the difference between actual conversion costs incurred and standard conversion costs allocated is exactly the same under backflush costing and sequential tracking. Diff: 2 Objective: 7 AACSB: Analytical thinking
19) A positive aspect of backflush costing is the presence of the visible audit trail. Answer: FALSE Explanation: In backflush costing, the visible audit trail diminishes. Diff: 1 Objective: 7 AACSB: Analytical thinking
20) To comply with GAAP, backflush cost numbers can be adjusted by recording a journal entry. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
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21) Vision Enterprises manufactures converter boxes for high definition TVs. All processing is initiated when an order is received. For March there were no beginning inventories. Conversion Costs and Direct Materials are the only manufacturing cost accounts. Direct Materials are purchased under a just-in-time system. Backflush costing is used with a finished goods trigger point. Additional information is as follows: Actual conversion costs Standard materials costs per unit Standard conversion cost per unit Units produced Units sold
$435,000 115 85 7,900 7,600
Required: Record all journal entries for the monthly activities related to the above transactions if backflush costing is used. Answer: To record actual conversion costs: Conversion Costs Various Accounts
435,000 435,000
To record finished goods: Finished Goods (7,900 × $200) Inventory - Materials and In Process Control (7,900 × 115) Conversion Costs Allocated (7,900 × 85)
1,580,000 908,500 671,500
To record sale of 7,600 units: Cost of Finished Goods Sold (7,600 × 200) Finished Goods
1,520,000 1,520,000
Diff: 3 Objective: 7 AACSB: Application of knowledge
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22) Tornado Electronics manufactures stereos. All processing is initiated when an order is received. For April there were no beginning inventories. Conversion Costs and Direct Materials are the only manufacturing cost accounts. Direct Materials are purchased under a just-in-time system. Backflush costing is used with a finished goods trigger point. Additional information is as follows: Actual conversion costs Standard materials costs per unit Standard conversion cost per unit Units produced Units sold
$232,000 60 140 3,200 2,800
Required: Record all journal entries for the monthly activities related to the above transactions if backflush costing is used. Answer: To record actual conversion costs: Conversion Costs Various Accounts
232,000 232,000
To record finished goods: Finished Goods (3,200 × $200) Accounts Payable Control (3,200 × 60) Conversion Costs Allocated (3,200 × 140)
640,000 192,000 448,000
To record sale of 2,800 units: Cost of Finished Goods Sold (2,800 × 200) Finished Goods
560,000 560,000
Diff: 3 Objective: 7 AACSB: Application of knowledge
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23) Corry Corporation manufactures filters for cars, vans, and trucks. A backflush costing system is used and standard costs for a filter are as follows: Direct materials Conversion costs Total
$2.60 4.20 $6.80
Filters are scheduled for production only after orders are received, and are shipped immediately upon completion. This results in product costs being charged directly to cost of goods sold. In December, 3,000 filters were produced and shipped. Materials were purchased at a cost of $8,450 and actual conversion costs of $13,650 were recorded. Required: Prepare journal entries to record December's costs for the production of the filters. Answer: Materials Inventory 8,450 Accounts Payable 8,450 Conversion Costs 13,650 Various Credits 13,650 Cost of Goods Sold 22,100 Materials Inventory 8,450 Conversion Costs 13,650 Diff: 2 Objective: 7 AACSB: Application of knowledge
24) What are the implications of JIT and backflush costing systems for activity-based costing (ABC) systems? Answer: Simplifying the production process, as a JIT system does, makes more of the costs direct and reduces the extent of overhead cost allocations. Simple ABC systems are often adequate for companies implementing JIT. These simple ABC systems work well with backflush costing. Costs from ABC systems yield a more accurate budgeted conversion cost per unit for different products in the backflush costing system. The activity-based cost information is also useful for product costing, decision making, and cost management. Diff: 2 Objective: 7 AACSB: Analytical thinking
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25) Backflush costing does not strictly adhere to generally accepted accounting principles. Explain why. Also, describe the types of businesses that might use backflush costing. Answer: The principal reason why backflush costing does not strictly adhere to GAAP is that the work-in-process accounts are not recognized in the accounting records. Work in process consists of unfinished goods. Substantial business resources were dedicated to their production, and should be recognized in the accounts as an asset. This approach to costing is usually used by companies that adopt JIT production methods. While not totally devoid of inventories, such companies seek to minimize inventories thus minimizing the problems associated with no work-in-process accounts. The type of business which would use backflush costing would be firms that use JIT production, have fast manufacturing lead times, or have very stable inventory levels from period to period. For these companies, backflush costing will report cost numbers similar to what a sequential costing approach would report. Diff: 3 Objective: 7 AACSB: Analytical thinking
Objective 21.8 1) Which of the following statements is true of lean accounting? A) It is much complex than traditional product costing but produces more accurate product unit costs. B) It does not always compute costs for individual products but does emphasize product costs by value stream. C) It omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods. D) It is acceptable under GAAP. Answer: B Diff: 2 Objective: 8 AACSB: Analytical thinking
2) Which of the following statements best defines lean accounting? A) an accounting system that comprises a single database that collects data and feeds it into software applications supporting all of a company's business activities B) a costing method that supports creating value for the customer by costing the entire value stream thereby eliminating waste in the accounting process C) an accounting system that omits recording some of the journal entries relating to the stages from the purchase of direct materials to the sale of finished goods D) an integrated costing system covering a company's accounting, distribution, manufacturing, purchasing, human resources, and other functions Answer: B Diff: 2 Objective: 8 AACSB: Analytical thinking
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3) Lean accounting is much simpler than traditional product costing because: A) it compares value stream costs against costs that include costs of all purchased materials B) it computes the cost of individual products C) calculating actual product costs by value streams requires less overhead allocation D) adding a larger markup on value stream costs to compensate for some of the excluded costs is easier than tracing all non value added costs Answer: C Diff: 2 Objective: 8 AACSB: Analytical thinking
4) Lean accounting focuses on the: A) purchasing and the sales process B) purchasing, production, and shipping C) financial and operational reporting around the whole value stream D) efficiency of individual departments, processes, and products Answer: C Diff: 2 Objective: 8 AACSB: Analytical thinking
5) Proponents of lean accounting argue that the lack of individual product cost information is irrelevant because most decisions about products are made at the product line level making value stream costs more relevant than product costs. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
6) In lean accounting environments, it is critical that work-in-process and finished goods accounting be accurate for accurate financial accounting and pricing decisions. Answer: FALSE Explanation: In lean accounting environments, WIP and finished goods are immaterial from an accounting perspective and pricing is more related to competitive forces than cost plus strategies. Diff: 2 Objective: 8 AACSB: Analytical thinking
7) Lean accounting takes in to consideration all costs associated with inventories. Answer: FALSE Explanation: Lean accounting excludes certain support costs and unused capacity costs. Diff: 1 Objective: 8 AACSB: Analytical thinking
8) Lean accounting is much simpler than traditional product costing. Why? Answer: Lean accounting is much simpler than traditional product costing because calculating actual product costs by value streams requires less overhead allocation. Diff: 1 Objective: 8 AACSB: Analytical thinking
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9) What are the principles of lean accounting? Are there any limitations? Discuss. Answer: Lean accounting is a costing method that supports creating value for the customer by costing the entire value stream, not individual products or departments, thereby eliminating waste in the accounting process. If there are multiple, related products made in a single value stream, then product costs for the individual products are not even computed. It is a simpler means by which to calculate values and costs consistent with the emphasis of JIT and remaining focused on the supply chain concept. Regarding limitations of the lean accounting: (1) it does not compute costs for individual products this may restrict its value for certain types of decisions; (2) it excludes many of the support costs and unused capacity costs; (3) it does not account for inventories under generally accepted accounting principles. Proponents of lean accounting argue that by focusing on the specific value stream and allocating all other costs that do not directly contribute to the value stream, those other costs will be highlighted in a way that will cause managers to reduce those costs and/or find other alternative uses for the excess capacity that may contribute to them. Diff: 2 Objective: 8 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 22 Capital Budgeting and Cost Analysis Objective 22.1 1) Which of the following involves the process of making decisions for significant financial investments in projects to develop new products, expand production capacity, or remodel current production facilities? A) capital budgeting B) working capital management C) master budgeting D) capitalization Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Which of the following is a stage of the capital budgeting process that indicates potential capital investments that agree with an organization's strategy? A) identify projects stage B) make predictions stage C) obtain information stage D) implement the decision, evaluate performance, and learn stage Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
3) Which of the following is a stage of the capital budgeting process during which a plant manager is
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queried for assembly time? A) make decisions by choosing among alternatives stage B) obtain information stage C) make predictions stage D) implement the decision, evaluate performance, and learn stage Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
4) Which of the following is a stage of the capital budgeting process that forecasts all potential cash flows attributable to the alternative projects? A) identify projects stage B) make decisions by choosing among alternatives stage C) implement the decision, evaluate performance, and learn stage D) make predictions stage Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
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5) Which of the following is a stage of the capital budgeting process that determines which investment yields the greatest benefit and the least cost to an organization? A) make decisions by choosing among alternatives stage B) make predictions stage C) identify projects stage D) implement the decision, evaluate performance, and learn stage Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
6) Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and compares those against estimated numbers? A) implement the decision, evaluate performance, and learn stage B) make predictions stage C) identify projects stage D) make decisions by choosing among alternatives stage Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
7) Which of the following is the first stage to the capital budgeting process? A) forecast all potential cash flows attributable to the alternative projects B) determine which investment yields the greatest benefit and the least cost to the organization C) obtain funding and make the investments selected D) identify potential capital investments that agree with the organization's strategy Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
8) Which of the following is a stage of the capital budgeting process in which a firm obtains funding for the project? A) make decisions by choosing among alternatives stage B) identify projects stage C) obtain information stage D) implement the decision, evaluate performance, and learn stage Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
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9) Capital budgeting is both a decision making and control tool. Which of the following is an example of capital budgeting as a control tool? A) A company uses capital budgeting techniques to evaluate a group of prospective alternative projects. B) A large manufacturer sets up a "capital relief" fund to help supplement sustainability projects that would not meet targeted rates of returns without the capital relief fund assistance. C) When considering capital expenditures, a company looks at a minimum of six potential (alternative) projects. D) A company's capital project is not meeting the level of profitability expected, will not meet the targeted NPV, and is abandoned. Answer: D Diff: 1 Objective: 1 AACSB: Analytical thinking
10) Capital budgeting is the process of making long-run planning decisions for investments in projects. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
11) A capital budget spans only a one-year period. Answer: FALSE Explanation: A capital budget normally is for a period of time greater than one year. Diff: 2 Objective: 1 AACSB: Analytical thinking
12) In the "Identify projects" stage of capital budgeting, companies gather information from all parts of the value chain to evaluate alternative projects. Answer: FALSE Explanation: In "Identify projects" stage of capital budgeting, companies identify potential capital investments that agree with organizations' strategies. In the second stage, companies obtain information. Diff: 1 Objective: 1 AACSB: Analytical thinking
13) In the "obtain information" stage of capital budgeting, a company gathers information from all parts of the value chain to evaluate alternative projects. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
14) In the "make decisions by choosing among alternatives" stage of the capital budgeting process, a company determines which investment yields the greatest benefit and the least cost to the organization. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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15) In the "make predictions" stage of the capital budgeting process, a company forecasts all potential net income additions those are attributable to the alternative projects. Answer: FALSE Explanation: In the "make predictions" stage of the capital budgeting process, company forecasts all potential cash flows attributable to the alternative projects. Diff: 1 Objective: 1 AACSB: Analytical thinking
16) The accrual accounting rate-of-return method is a discounted cash flow approach to analyzing possible capital budget expenditures. Answer: FALSE Explanation: The IRR and the NPV are the two discounted cash flow methods while the accrual accounting rate-of-return and the payback period approaches do not take into account the time value of money. Diff: 1 Objective: 1 AACSB: Analytical thinking
17) Capital budgeting is a decision-making and a control tool. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
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18) Match each one of the examples below with one of the stages of the capital budgeting decision model. Stages: 1. Identify Projects 2. Obtain Information 3. Make Predictions 4. Make Decisions by Choosing Among Alternatives 5. Implement the Decision, Evaluate Performance, and Learn ________ ________ ________ ________ ________ ________ ________
a. Issuing corporate stock for the funds to purchase new equipment b. Learning how to effectively operate Machine #8 only takes 15 minutes c. The need to reduce the costs to process the vegetables used in producing goulash d. Monitoring the costs to operate a new machine e. Percentage of defective merchandise considered too high f. Will introducing the new product substantially upgrade our image as a producer of quality products? g. Estimating yearly cash flows and setting investment budgets accordingly using a 12-year planning horizon. h. Use of the internal rate of return for each alternative i. Tracking realized cash flows and comparing against estimated numbers.
________ ________ Answer: a. 5. Implement the Decision, Evaluate Performance, and Learn b. 2. Obtain Information c. 1. Identify Projects d. 5. Implement the Decision, Evaluate Performance, and Learn e. 1. Identify Projects f. 2. Obtain Information g. 3. Make Predictions h. 4. Make Decisions by Choosing Among Alternatives i. 5. Implement the Decision, Evaluate Performance, and Learn Diff: 2 Objective: 1 AACSB: Analytical thinking
19) List the capital budgeting methods used to analyze financial information. Answer: Capital budgeting is long-run planning for investment projects that usually have a life that is greater than one year. Capital budgeting methods include (1) net present value (NPV), (2) internal rate-of-return (IRR), (3) payback, and (4) accrual accounting rate-of-return (AARR). Both the net present value (NPV) and internal rate-of-return (IRR) methods use discounted cash flows. Diff: 1 Objective: 1 AACSB: Analytical thinking
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20) Explain capital budgeting and then briefly discuss each of the five stages of a capital budgeting project? Answer: Capital budgeting is long-run planning for investment projects that usually have a life that is greater than one year. Stage 1 of a capital budgeting project is the identify projects stage in which a firm determines which types of capital investments are necessary to accomplish organization objectives and strategies. Stage 2 is the obtain information stage in which a firm gathers information from all parts of the value chain to analyze alternative projects. Stage 3 is the make predictions stage in which the firm forecasts all potential cash flows attributable to the alternative projects. Stage 4 is the make decisions by choosing among alternatives stage in which the firm determines which investment yields the greatest benefit and the least cost to the organization. Stage 5 is the implement the decision, evaluate performance, and learn stage that is further separated into two sub stages: (1) obtain funding and make the investments selected in the stage 4 process, and (2) track the realized cash flows, compare against the forecast numbers, and revise plans if necessary. Diff: 2 Objective: 1 AACSB: Analytical thinking
21) Use the 5 stages of a capital budgeting project to explain how capital budgeting is a tool that serves both decision making and control. Answer: In stages one through four, capital budgeting techniques ate used to identify potential capital investments that agree with the organization's strategy, to obtain information, to make predictions, forecasting all potential cash flows attributable to the projects identified in stage 1, and to choose an alternative (stage 4). In stage 5, the decision is implemented and the control part begins with evaluating performance, and closing the control loop by learning. Learning happens as actual cash flows from the project are tracked and compared against estimated numbers. Plans can be revised if necessary. Diff: 2 Objective: 1 AACSB: Analytical thinking
22) Cast Iron Stove Company wants to buy a molding machine that can be integrated into its computerized manufacturing process. It has received three bids for the machine and related manufacturer's specifications. The bids range from $3,500,000 to $3,550,000. The estimated annual savings of the machines range from $260,000 to $270,000. The payback periods are almost identical and the net present values are all within $8,000 of each other. The president just doesn't know what to do about which vendor to choose since all of the selection criteria are so close together. Required: What suggestions do you have for the president? Answer: The president needs to consider nonfinancial and qualitative factors between the three vendors. Quality of output units, manufacturing flexibility, and cycle time are all additional factors that can be considered about the machines. Other items might include worker safety, ease of learning and using, and ease of maintenance. Diff: 2 Objective: 1 AACSB: Analytical thinking
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Objective 22.2 1) Upon which of the following items does discounted cash flow methods for capital budgeting focus? A) cash inflows and required rate of return B) operating income and required rate of return C) operating income and cost of capital D) working capital and cost of capital Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Which of the following methods utilizes discounted cash flows when analyzing potential capital expenditures? Methods: 1. Accrual accounting rate-of-return 2. Internal Rate of Return (IRR) 3. Payback Period 4. Net Present Value (NPV) A) 1 only B) 1 and 2 C) 1 and 3 D) 2 and 4 Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Net present value is calculated using which of the following? A) internal rate of return B) required rate of return as a discount rate C) risk-free rate D) predetermined overhead cost rate Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
4) Which of the following capital budgeting methods uses discounted cash flows? A) accrual accounting rate-of-return method B) net present value method C) projected income method D) payback method Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
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5) Which of the following methods is described as follows: "It calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return"? A) payback method B) accrual accounting rate-of-return method C) internal rate of return D) net present value method Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Assume your goal in life is to retire with $2,500,000. How much would you need to save at the end of each year if interest rates average 8% and you have a 15-year work life? (Round the final answer to the nearest whole dollar.) A) $13,333 B) $92,074 C) $333,333 D) $788,104 Answer: B Explanation: B) Savings × (27.152) = $2,500,000 Savings = $92,074.25 Diff: 2 Objective: 2 AACSB: Application of knowledge
7) Assume your goal in life is to retire with one million dollars. How much would you need to save at the end of each year if interest rates average 8% and you have a 10-year work life? A) $8,000 B) $463,193 C) $69,027 D) $200,000 Answer: C Explanation: C) Look up annuity factor in the table or use function on a calculator or computer. Savings × (14.487) = $1,000,000 Savings = $69,027.40 Diff: 3 Objective: 2 AACSB: Application of knowledge
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8) Assume your goal in life is to retire with 2 million dollars. How much would you need to save at the end of each year if investment rates average 6% and you have a 19-year work life? A) $6,316 B) $59,242 C) $661,026 D) $210,526 Answer: B Explanation: B) Look up annuity factor in the table or use function on a calculator or computer. Savings × (33.760,0) = $2,000,000 Savings = $59,241.71 Diff: 3 Objective: 2 AACSB: Application of knowledge
9) Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $120,000. The new machine will cost $400,000 and an additional cash investment in working capital of $180,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $200,000 in additional cash inflows during the first year of acquisition and $280,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 10%? Would the company want to purchase the new machine? A) $163,360; yes B) $210,368; yes C) $($210,368); no D) $($163,360); no Answer: A Explanation: A) Yr. 0 ($120,000 - $400,000 - $180,000) × 1.000 = $(-460,000) Yr. 1 $200,000 × 0.909 = 181,800 Yr. 2 $280,000 × 0.826 = 231,280 Yr. 3 $280,000 × 0.751 = 210,280 Net present value at 10% $163,360 Diff: 3 Objective: 2 AACSB: Application of knowledge
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10) Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $200,000. The new machine will cost $380,000 and an additional cash investment in working capital of $140,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $190,000 in additional cash inflows during the first year of acquisition and $350,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 10%? Would the company want to purchase the new machine? A) $(262,850); yes B) $(404,660); no C) $404,660; yes D) $262,850; no Answer: C Explanation: C) Yr. 0 ($200,000 - $380,000 - $140,000) × 1.000 = -$320,000 Yr. 1 $190,000 × 0.909 = 172,710 Yr. 2 $350,000 × 0.826 = 289,100 Yr. 3 $350,000 × 0.751 = 262,850 Net present value at 10% $404,660 Diff: 3 Objective: 2 AACSB: Application of knowledge
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11) Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $180,000. The new machine will cost $620,000 and an additional cash investment in working capital of $75,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $130,000 in additional cash inflows during the year of acquisition and $190,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 10%? Would the hospital want to purchase the new machine? A) $(150,560); no B) ($117,990); no C) $150,560; yes D) $117,990; yes Answer: C Explanation: C) Yr. 0 ($180,000 - $620,000 - $75,000) × 1.000 = -$515,000 Yr. 1 $130,000 × 0.909 = 118,170 Yr. 2 $190,000 × 0.826 = 156,940 Yr. 3 $190,000 × 0.751 = 142,690 Yr. 4 $190,000 × 0.683 = 129,770 Yr. 5 $190,000 × 0.621 = 117,990 Net present value at 10% $150,560 Diff: 3 Objective: 2 AACSB: Application of knowledge
1507 richard@qwconsultancy.com
12) Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $150,000. The new machine will cost $640,000 and an additional cash investment in working capital of $75,000 will be required. The new machine will reduce the average amount of time required to take the x-rays and will allow an additional amount of business to be done at the hospital. The investment is expected to net $50,000 in additional cash inflows during the year of acquisition and $160,000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of return is 18%? Would the hospital want to purchase the new machine? A) $42,350, yes B) ($157,850); no C) $157,850; yes D) $69,920; yes Answer: B Explanation: B) Yr. 0 ($150,000 - $640,000 - $75,000) × 1.000 = -$565,000 Yr. 1 $50,000 × 0.847 = 42,350 Yr. 2 $160,000 × 0.718 = 114,880 Yr. 3 $160,000 × 0.609 = 97,440 Yr. 4 $160,000 × 0.516 = 82,560 Yr. 5 $160,000 × 0.437 = 69,920 Net present value at 18% ($157,850) Diff: 3 Objective: 2 AACSB: Application of knowledge
13) In using the net present value method, only projects with a zero or positive net present value are acceptable because: A) the return from these projects equals or exceeds the cost of capital B) a positive net present value on a particular project guarantees company profitability C) the company will be able to pay the necessary payments on any loans secured to finance the project D) it results in high payback period Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
1508 richard@qwconsultancy.com
14) Which of the following is another term for required rate of return? A) hurdle rate B) total cost rate C) variance rate D) predetermined overhead rate Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
15) Which of the following projects is rejected on the basis of net present value method? A) Project A with an NPV of $7,000 B) Project B with an NPV of $(15,000) C) Project C with an NPV of $15,000 D) Project D with an NPV of $1,200 Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
16) An annuity is: A) a noncash expense B) a series of equal cash flows at equal time intervals C) an investment product whose funds are invested in the stock market D) a rate at which an investment's present value of all expected cash inflows equals the present value of project's expected cash outflows Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
17) The net present value method focuses on: A) cash flows and required rate of return B) inventory cost and cost of capital C) working capital and cost of capital D) operating income and required rate of return Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
18) If the net present value for a project is positive, which of the following is true? A) the project should be accepted because its expected rate of return is greater than the cost of capital B) its internal rate of return equals its cost of capital C) its expected rate of return is below the required rate of return D) its internal rate of return is less than its cost of capital Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
1509 richard@qwconsultancy.com
19) Concose Park Department is considering a new capital investment. The cost of the machine is $250,000. The annual cost savings if the new machine is acquired will be $95,000. The machine will have a 6-year life and the terminal disposal value is expected to be $40,000. There are no tax consequences related to this decision. If Concose Park Department has a required rate of return of 10%, which of the following is closest to the present value of the project? A) $194,745 B) $31,020 C) $186,285 D) $163,725 Answer: C Explanation: C) ($95,000 × 4.355) + ($40,000 × 0.564) - $250,000 = $186,285 Diff: 3 Objective: 2 AACSB: Application of knowledge
20) Forge Company wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual cash inflows of $210,000. The required rate of return is 12% and the current machine is expected to last for four years. Of the following choices, which is the dollar amount the company would be willing to spend for the machine, assuming its life is also four years? Income taxes are not considered. A) $1,003,590 B) $739,200 C) $745,080 D) $637,770 Answer: D Explanation: D) X = $210,000 × PV Ann 4 (12%) = $210,000 × 3.037 X= $637,770 Diff: 3 Objective: 2 AACSB: Application of knowledge
1510 richard@qwconsultancy.com
21) The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $410,000. The investment is expected to generate $175,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $20,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered. A) $119,775; yes B) $24,500; no C) $390,000; yes D) $183,520; no Answer: A Explanation: A) Year 0 = ($20,000 - $410,000) = -$390,000 Year 1 = $175,000 × 0.877 = 153,475 Year 2 = $175,000 × 0.769 = 134,575 Year 3 = $175,000 × 0.675 = 118,125 Year 4 = $175,000 × 0.592 = 103,600 Net present value at 14% $119,775 Diff: 3 Objective: 2 AACSB: Application of knowledge
1511 richard@qwconsultancy.com
22) Forise Water Company drills small commercial water wells. The company is in the process of analyzing the purchase of a new drill. Information on the proposal is provided below. Initial investment: Asset Working capital Operations (per year for four years): Cash receipts Cash expenditures Disinvestment: Salvage value of drill (existing) Discount rate
$690,000 $168,000 $450,000 $210,000 $140,000 12%
What is the net present value of the investment? Assume there is no recovery of working capital. A) ($168,000) B) $11,120 C) $240,000 D) $179,120 Answer: B Explanation: B) Year 0 = (-$168,000 - $690,000 + $140,000) = -$718,000 Year 1 = $240,000 × 0.893 = 214,320 Year 2 = $240,000 × 0.797 = 191,280 Year 3 = $240,000 × 0.712 = 170,880 Year 4 = $240,000 × 0.636 = 152,640 Net present value at 12% $11,120 Diff: 3 Objective: 2 AACSB: Application of knowledge
23) The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the: A) net present value method B) accrual accounting rate-of-return method C) payback method D) internal rate of return method Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
1512 richard@qwconsultancy.com
24) Which of the following best describes the internal rate-of-return (IRR) method? A) It calculates the discount rate at which an investment's present value of the total of all expected cash inflows equals the future value of its expected cash outflows. B) It calculates the discount rate at which an investment's future value of all expected cash inflows equals the present value of its expected cash outflows. C) It calculates the discount rate at which an investment's total of all expected cash inflows equals the present value of its expected cash outflows. D) It calculates the discount rate at which sum of an investment's present value of all expected cash inflows equals the present value of its expected cash outflows. Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
25) A general rule in capital budgeting is that a project is accepted only if the internal rate of return equals or: A) exceeds the required rate of return B) exceeds the inflation rate C) exceeds the risk-free rate D) exceeds the accrual accounting rate of return Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
26) The Comil Corporation recently purchased a new machine for its factory operations at a cost of $550,530. The investment is expected to generate $135,000 in annual cash flows for a period of eight years. The required rate of return is 14%. The old machine has a remaining life of eight years. The new machine is expected to have zero value at the end of the eight-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return? A) 14% B) 16% C) 20% D) 18% Answer: D Explanation: D) $550,530 = $135,000F F = 4.078 Chart criteria for eight years is 4.078 = 18% Diff: 3 Objective: 2 AACSB: Application of knowledge
1513 richard@qwconsultancy.com
27) Locil Corporation recently purchased a new machine for $306,425 with a(n) seven-year life. The old equipment has a remaining life of seven years and no disposal value at the time of replacement. Net cash flows will be $85,000 per year. What is the internal rate of return? A) 20% B) 24% C) 22% D) 26% Answer: A Explanation: A) $306,425 = $85,000F F = 3.605 Chart criteria for 7 years is 3.605 = 20% Diff: 2 Objective: 2 AACSB: Application of knowledge
28) Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of six years and the new equipment will cost $117,585 with a six-year life. The expected additional cash inflows are $27,000 per year. What is the internal rate of return? A) 10% B) 14% C) 8% D) 6% Answer: A Explanation: A) $117,585 = $27,000F F = 4.355 Chart criteria for 6 years is 4.355 = 10% Diff: 2 Objective: 2 AACSB: Application of knowledge
29) Diamond Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of five years and the new equipment will cost $94,775 with a(n) five-year life. The expected additional cash inflows are $25,000 per year. What is the internal rate of return? A) 4% B) 6% C) 10% D) 12% Answer: C Explanation: C) $94,775 = $25,000F F = 3.791 Chart criteria for 5 years is 3.791 = 10% Diff: 2 Objective: 2 AACSB: Application of knowledge
1514 richard@qwconsultancy.com
30) Midize Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van will cost $61,392 with a(n) eight-year life. The expected additional cash inflows are $16,000 per year. What is the internal rate of return? A) 18% B) 20% C) 22% D) 24% Answer: B Explanation: B) $61,392 = $16,000F F = 3.837 Chart criteria for 8 years is 3.837 = 20% Diff: 2 Objective: 2 AACSB: Application of knowledge
31) Which of the following best explains why the net present value method of capital budgeting is preferred over the internal rate-of-return method? A) the net present value method is expressed as a percentage of initial investment B) the net present values of individual projects can be added to determine the effects of accepting a combination of projects C) the percentage return computed under the net present value method is very easy to compare D) the calculation under the net present value method is easy as it does not use time value of money Answer: B Diff: 2 Objective: 2 AACSB: Application of knowledge
32) In situations where the required rate of return is not constant for each year of the project, it is advantageous to use: A) the nominal rate-of-return method B) the internal rate-of-return method C) the net present value method D) the projected income method Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
33) A "what-if" technique that examines how a result will change if the original predicted data are NOT achieved or if an underlying assumption changes is called: A) sensitivity analysis B) net present value analysis C) internal rate-of-return analysis D) adjusted rate-of-return analysis Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
1515 richard@qwconsultancy.com
34) Investment A requires a net investment of $1,400,000 The required rate of return is 10% for the five-year annuity. What are the annual cash inflows if the net present value equals 0? (rounded) A) $5,600,000 B) $369,296 C) $1,399,995 D) $4,200,000 Answer: B Explanation: B) 3.791 × annual cash inflows - $1,400,000 = $0 = $369,296 Diff: 3 Objective: 2 AACSB: Application of knowledge
35) The minimum annual acceptable rate of return on an investment is the: A) accrual accounting rate of return B) hurdle rate C) internal rate of return D) net present value Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
36) Hypore Darby Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $264,220. The annual cost savings if the new machine is acquired will be $110,000. The machine will have a 3-year life, at which time the terminal disposal value is expected to be zero. Hypore Park Department is assuming no tax consequences. What is the internal rate of return for Hypore Park Department? A) 8% B) 12% C) 10% D) 14% Answer: B Explanation: B) PV Factor is $264,220 / $110,000 = 2.402. This corresponds to a 12% IRR using the annuity table for a 3-year annuity. Diff: 3 Objective: 2 AACSB: Application of knowledge
37) Which of the following is an advantage of internal rate of return method? A) Sum of IRRs of individual projects gives an IRR of a combination or portfolio of projects. B) The percentage returns computed under the IRR method are easy to understand and compare. C) It can be expressed as a unique number. D) It can be used when the required rate of return varies over the life of a project. Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
1516 richard@qwconsultancy.com
38) The net present value method assumes that project cash flows can be reinvested at the company's: A) internal rate of return B) required rate of return C) growth rate D) accounting rate of return Answer: B Diff: 3 Objective: 2 AACSB: Analytical thinking
39) The internal rate of return method assumes that project cash flows can be reinvested at the project's: A) internal rate of return B) required rate of return C) growth rate D) accounting rate of return Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
40) The NPV method is the preferred method over IRR for selecting projects because: A) its result is expressed in dollars and management can make an assessment as to its financial impact on the value of the business B) it accounts for the time value of money better than IRR C) it assumes that cash flows are reinvested at the internal rate of return for each and every year of the useful life D) it gives a project ranking consistent with that of IRR Answer: A Diff: 3 Objective: 2 AACSB: Analytical thinking
41) The Required Rate of Return (RRR) is set externally by creditors as the interest rate on long term liabilities. Answer: FALSE Explanation: The RRR is internally set, usually by upper management, and typically takes into account the cost of the company's capital and the return that an organization could expect to receive elsewhere for an investment of comparable risk. Diff: 2 Objective: 2 AACSB: Analytical thinking
42) Discounted cash flow methods do not consider the present value of the cash flows after the recovery of the initial investment. Answer: FALSE Explanation: Discounted cash flow methods focus on all cash inflows and cash outflows for the entire expected useful life of the proposed project. Diff: 2 Objective: 2 AACSB: Analytical thinking
1517 richard@qwconsultancy.com
43) The three common discounted cash flow methods are net present value, internal rate of return, and payback. Answer: FALSE Explanation: The two common discounted cash flow methods are net present value and internal rate of return. The traditional payback method is not a discounted cash flow method. Diff: 2 Objective: 2 AACSB: Analytical thinking
44) The net present value (NPV) method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows back to the present point in time using the required rate of return. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
45) The discount rate used to calculate the NPV should be the interest rate that the company could borrow at to finance the proposed capital project. Answer: FALSE Explanation: The discount rate is the required rate of return on the project and is a type of hurdle rate that management has set as a goal. It can be derived from the company's cost of capital - which would include borrowings but also the cost of equity. It is also a function of the opportunity cost of capital. Diff: 2 Objective: 2 AACSB: Analytical thinking
46) Discounted cash flow methods of evaluating capital expenditures focuses on the operating income as calculated under accrual accounting rules. Answer: FALSE Explanation: DCF methods do not include depreciation in the operating cash flows and should account for the income tax effect of operating cash flows and depreciation. Diff: 2 Objective: 2 AACSB: Analytical thinking
47) The net present value method can be used in situations where the required rate of return varies over the life of the project. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
48) The net present value method accurately assumes that project cash flows can only be reinvested at the company's required rate of return. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
1518 richard@qwconsultancy.com
49) If internal rate of return is less than required rate of return, the net present value is positive. Answer: FALSE Explanation: If internal rate of return is less than required rate of return, the net present value is negative. Diff: 2 Objective: 2 AACSB: Analytical thinking
50) Managers prefer projects with higher IRRs to projects with lower IRRs, if all other things are equal. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
51) The IRR method assumes that cash flows are reinvested at the company's required rate of return. Answer: FALSE Explanation: The IRR method assumes that project cash flows can be reinvested at the project's IRR. It is the NPV method that assumes the project's cash flows can be reinvested at the company's required rate of return. Diff: 2 Objective: 2 AACSB: Analytical thinking
52) The Enor Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $99,360 and has predicted cash inflows of $20,000 per year for 8 years. It will have no salvage value. Required: a. Using a required rate of return of 10%, determine the net present value of the investment proposal. b. Determine the proposal's internal rate of return. Answer: a. Predicted PV of Cash Cash Flows Year(s) PV Factor Flows Initial investment $(99,360) 0 1.000 $(99,360) Annual cash inflows 20,000 8 5.335 106,700 Net present value $ 7,340 b.
Present value factor of an annuity of $1.00 = $99,360/$20,000 = 4.968
From the annuity table, the 4.968 factor is closest to the 8-year row at the 12% column. Therefore, the IRR is 12%. Diff: 2 Objective: 2 AACSB: Application of knowledge
1519 richard@qwconsultancy.com
53) Network Service Center is considering purchasing a new computer network for $82,000. It will require additional working capital of $13,000. Its anticipated eight-year life will generate additional client revenue of $33,000 annually with operating costs, excluding depreciation, of $15,000. At the end of eight years, it will have a salvage value of $9,500 and return $5,000 in working capital. Taxes are not considered. Required: a. If the company has a required rate of return of 14%, what is the net present value of the proposed investment? b. What is the internal rate of return? Answer: a. Predicted PV Factor @ Cash Flows Year(s) 14% Initial investment $(95,000) 0 1.000 Annual revenue operations, net of operating costs 18,000 1-8 4.639 Salvage value, work capital recovered 14,500 8 0.351 Net present value
PV of Cash Flows $(95,000)
83,502 5,090 $(6,408)
b. Trial and error is necessary. You know it is below 14% because the answer to Part A was negative and, therefore, less than the discount rate. Therefore, let's try 12%.
Initial investment Annual revenue operations, net of operating costs Salvage value, work capital recovered Net present value
Predicted PV Factor @ Cash Flows Year(s) 12% $(95,000) 0 1.000
PV of Cash Flows $(95,000)
18,000
1-8
4.968
89,424
14,500
8
0.404
5,858 $282
The (almost) zero net present value indicates an internal rate of return of approximately 12%. Diff: 3 Objective: 2 AACSB: Application of knowledge
1520 richard@qwconsultancy.com
54) EIF Manufacturing Company needs to overhaul its drill press or buy a new one. The facts have been gathered, and they are as follows: Current Machine New Machine $88,000 $110,000 33,000 44,000 77,000 44,000 22,000 5,500 22,000
Purchase Price, New Current book value Overhaul needed now Annual cash operating costs Current salvage value Salvage value in five years
Required: Which alternative is the most desirable with a current required rate of return of 20%? Show computations, and assume no taxes. Answer: Present value of keeping current system:
Overhaul Annual operations costs Salvage value at end Net present value
Predicted PV Factor @ Cash Flows Year(s) 20% $(44,000) 0 1.000 (77,000) 1-5 2.991 5,500 5 0.402
PV of Cash Flows $(44,000) (230,307) 2,211 $(272,096)
Predicted PV Factor @ Cash Flows Year(s) 20% $(110,000) 0 1.000 22,000 0 1.000 (44,000) 1-5 2.991 22,000 5 0.402
PV of Cash Flows $(110,000) 22,000 (131,604) 8,844 $(210,760)
Present value of new system:
Investment Salvage value, old Annual operation costs Salvage value at end Net present value
Buying the new equipment is the most desirable by $61,336 ($272,096 - $210,760). Diff: 3 Objective: 2 AACSB: Application of knowledge
1521 richard@qwconsultancy.com
55) Flilane Tire Company needs to overhaul its auto lift system or buy a new one. The facts have been gathered, and they are as follows: Current Machine New Machine $123,750 $162,800 36,850 30,250 69,300 52,800 44,000 8,800 38,500
Purchase Price, New Current book value Overhaul needed now Annual cash operating costs Current salvage value Salvage value in five years
Required: Which alternative is the most desirable with a current required rate of return of 15%? Show computations, and assume no taxes. Answer: Present value of keeping current system:
Overhaul Annual operation costs Salvage value at end Net present value
Predicted PV Factor @ Cash Flows Year(s) 15% $(30,250) 0 1.000 (69,300) 1-5 3.352 8,800 5 0.497
PV of Cash Flows $(30,250) (232,294) 4,374 $(258,170)
Predicted PV Factor @ Cash Flows Year(s) 15% ($162,800) 0 1 44,000 0 1 -52,800 1-5 3.352 38,500 5 0.497
PV of Cash Flows ($162,800) $44,000 ($176,986) $19,135 ($276,651)
Present value of new system:
Investment Salvage value, old Annual operation costs Salvage value at end Net present value
Overhauling the existing system is the most desirable by $18,481 [$(258,170) - $(276,651)]. Diff: 3 Objective: 2 AACSB: Application of knowledge
1522 richard@qwconsultancy.com
56) ABC Boat Company is interested in replacing a molding machine with a new improved model. The old machine has a salvage value of $10,000 now and a predicted salvage value of $4,000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $20,000. The new machine costs $80,000 and has a predicted salvage value of $12,000 at the end of six years. If purchased, the new machine will allow cash savings of $20,000 for each of the first three years, and $10,000 for each year of its remaining six-year life. Required: What is the net present value of purchasing the new machine if the company has a required rate of return of 14%? Answer: Predicted PV of Cash Cash Flows Year(s) PV Factor Flows Initial investment $(80,000) 0 1.000 $(80,000) Salvage of old 10,000 0 1.000 10,000 Annual operations 20,000 1-3 2.322 46,440 Annual operations 10,000 4-6 (3.889-2.322) 15,670 Save by not rebuilding 20,000 1 0.877 17,540 Salvage of new 12,000 6 0.456 5,472 Net present value $15,122 Diff: 3 Objective: 2 AACSB: Application of knowledge
1523 richard@qwconsultancy.com
57) Retail Outlet is looking for a new location near a shopping mall. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available but each has its own advantages and disadvantages. The owner of the company has completed an analysis of each location that includes considerations for the time value of money. The information is as follows:
Internal rate of return Net present value
Location A 13% $25,000
Location B 17% $40,000
Location C 20% $20,000
The owner does not understand how the location with the highest percentage return has the lowest net present value. Required: Explain to the owner what is (are) the probable cause(s) of the comparable differences. Answer: The highest probability is that location C has a much lower initial investment than the other two. Therefore, it can show a higher rate of return with fewer dollars of inflow. Unfortunately, this may cause it to have the lowest net present value since this model is presented in dollar terms. Location C could also have a shorter life which could give it a higher percentage return during its life but fewer dollars overall. Diff: 2 Objective: 2 AACSB: Analytical thinking
Objective 22.3 1) Which of the following methods is described as the method that measures the time it will take to recoup, in the form of future cash inflows, the total dollars invested in a project? A) the accrued accounting rate-of-return method B) the payback method C) the internal rate-of-return method D) the book-value method Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
2) The net initial investment for a piece of construction equipment is $2,500,000. Annual cash inflows are expected to increase by $600,000 per year. The equipment has a(n) 8-year useful life. What is the payback period? A) 8.00 years B) 5.58 years C) 4.17 years D) 3.17 years Answer: C Explanation: D) $2,500,000 / $600,000 = 4.17 years Diff: 2 Objective: 3 AACSB: Application of knowledge
1524 richard@qwconsultancy.com
3) The payback method of capital budgeting approach to an investment decision: A) considers cash flows over the life of the investment B) assumes that cash flows occur uniformly throughout the year C) considers time value of money D) ignores the initial investment Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
4) The payback method of capital budgeting approach to an investment decision: A) assigns greater weights to cash flows in the early years B) does not consider cash flows that occur after the payback period C) considers time value of money D) ignores the initial investment Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
5) Malive Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $219,000. The annual cost savings if the new machine is acquired will be $35,000. The machine will have a 5-year life, at which time the terminal disposal value is expected to be zero. Malive Park is assuming no tax consequences. Malive Park has a 12% required rate of return. What is the payback period for the investment? A) 5.3 years B) 6.3 years C) 5.0 years D) 12.5 years Answer: B Explanation: D) PB = $219,000 / $35,000 = 6.3 years. Diff: 2 Objective: 3 AACSB: Application of knowledge
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6) Pearl Manufacturing Company provides glassware machines for major department store retailers. The company has been investigating a new piece of machinery for its production department. The old equipment has a remaining life of seven years and the new equipment has a value of $249,400 with a seven-year life. The expected additional cash inflows are $63,000 per year. What is the payback period for this investment? A) 3.0 years B) 5.0 years C) 4.0 years D) 7 years Answer: C Explanation: B) C) PB = $249,400 / $63,000 = 4.0 years. Diff: 2 Objective: 3 AACSB: Application of knowledge
7) Ambinu Flower Company provides flowers and other nursery products for decorative purposes in medium to large sized restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $153,750 with a nine-year life. The expected additional cash inflows are $72,500 per year. What is the payback period for this investment? A) 1.1 years B) 2.1 years C) 9 years D) 3.1 years Answer: B Explanation: B) PB = $153,750 / $72,500 = 2.1 years. Diff: 2 Objective: 3 AACSB: Analytical thinking
8) If there are non-uniform cash flows (cash flows that differ from year-to-year), payback period is calculated by dividing net initial investment by uniform increase in annual future cash flows. Answer: FALSE Explanation: If there are varying cash flows, cumulative cash flows must be tracked to determine the payback period. Diff: 3 Objective: 3 AACSB: Analytical thinking
9) A weaknesses of the payback method is that it does not consider a project's cash flows after the payback period. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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10) Supply the missing data for each of the following proposals:
Initial investment Annual net cash inflow Life, in years Salvage value Payback period in years Internal rate of return
Proposal A (a) $60,000 10 $0 (b) 12%
Answer: a. Annual cash inflow Present value factor for 10 years, 12% Initial investment
Proposal B $62,900 (c) 6 $10,000 (d) 24%
Proposal C $226,000 (e) 10 $0 5.65 (f)
$ 60,000 × 5.650 $339,000
b. Payback period = $339,000/$60,000 = 5.65 years c. Initial investment PV of salvage value ($10,000 × 0.275) Net PV of annual net cash inflow
$62,900 (2,750) $60,150
Annual cash inflow = $60,150/3.020 = $19,917.22 d. Payback = $62,900/$19,917.22 = 3.158 e. Annual net cash inflow = $226,000/5.650 = $40,000 f.
PV factor for 10 years = $226,000/$40,000 = 5.650
Look up value 5.650 in PV of annuity table under 10 years in Table 4 and the internal rate of return is 12%. Diff: 3 Objective: 3 AACSB: Application of knowledge
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11) Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000. Required: a. Compute the net present value at a 14% required rate of return. b. Compute the internal rate of return. c. Determine the payback period of the investment. Answer: a. Predicted PV Factor @ PV of Cash Cash Flows Year(s) 14% Flows Investment $(36,586) 0 1.000 $(36,586) Working capital needed (4,000) 0 1.000 (4,000) Annual operations 10,000 1-5 3.433 34,330 Working capital returned 4,000 5 0.519 2,076 Salvage value 4,000 5 0.519 2,076 Net present value $(2,104) b. Trial and error is required. Because net present value is negative in part a, the internal rate of return is less than 14%. Start by trying 12%.
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value
Predicted PV Factor @ Cash Flows Year(s) 12% $(36,586) 0 1.000 (4,000) 0 1.000 10,000 1-5 3.605 4,000 5 0.567 4,000 5 0.567
With a zero net present value, the internal rate of return is 12%. c.
Payback period = ($36,586 + $4,000)/$10,000 = 4.06 years.
Diff: 3 Objective: 2, 3 AACSB: Application of knowledge
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PV of Cash Flows $(36,586) (4,000) 36,050 2,268 2,268 $-0-
12) Sam's Structures desires to buy a new crane and accessories to help move and install modular buildings. The machine sells for $75,000 and requires working capital of $10,000. Its estimated useful life is six years and it will have a salvage value of $17,560. Recovery of working capital will be $10,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $20,000. Required: a. Compute the net present value at a 12% required rate of return. b. Compute the internal rate of return. c. Determine the payback period of the investment. Answer: a. Predicted PV Factor @ PV of Cash Cash Flows Year(s) 12% Flows Investment $(75,000) 0 1.000 $(75,000) Working capital needed (10,000) 0 1.000 (10,000) Annual operations 20,000 1-6 4.111 82,220 Working capital returned 10,000 6 0.507 5,070 Salvage value 17,560 6 0.507 8,903 Net present value $11,193 b. Trial and error is required. Because net present value is negative in part a, the internal rate of return is greater than 12%. Start by trying any % above 12% and the solution is listed below:
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value
Predicted Cash Flows Year(s) $(75,000) 0 (10,000) 0 20,000 1-6 10,000 6 17,560 6
PV Factor 1.000 1.000 3.685 0.410 0.410
With a zero net present value, the internal rate of return is 16%. c.
Payback period = ($75,000 + $10,000)/$20,000 = 4.25 years.
Diff: 3 Objective: 2, 3 AACSB: Application of knowledge
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PV of Cash Flows $(75,000) (10,000) 73,700 4,100 7,200 $-0-
13) Griffith Vehicle has received three proposals for its new vehicle-painting machine. Information on each proposal is as follows:
Initial investment in equipment Working capital needed Annual cash saved by operations: Year 1 Year 2 Year 3 Year 4 Salvage value end of year: Year 1 Year 2 Year 3 Year 4 Working capital returned
Proposal X Proposal Y Proposal Z $240,000 $150,000 $190,000 0 0 10,000 80,000
50,000
80,000
80,000 80,000 80,000
42,000 46,000 24,000
80,000 80,000 80,000
100,000 80,000 40,000 10,000 0
80,000 60,000 40,000 20,000 0
60,000 50,000 30,000 15,000 10,000
Required: Determine each proposal's payback. Answer: Proposal X payback = $240,000/$80,000 = 3 years Proposal Y Year 0 Year 1 Year 2 Year 3 Year 4
Cash Savings Savings Accumulated $50,000 42,000 46,000 24,000
To Be Recovered $150,000 $ 50,000 100,000 98,000 58,000 142,000 12,000 186,000 0
Proposal Y payback = 3 years plus $12,000/$24,000 or 3.5 years. Proposal Z payback = ($190,000 + $10,000)/$80,000 = 2.5 years Diff: 3 Objective: 3 AACSB: Application of knowledge
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14) Cedile Trailer Supply has received three proposals for its new trailer assembly line. Information on each proposal is as follows:
Initial investment in equipment Working capital needed Annual cash saved by operations: Year 1 Year 2 Year 3 Year 4 Salvage value end of year: Year 1 Year 2 Year 3 Year 4 Working capital returned:
Proposal X Proposal Y Proposal Z $180,000 $140,000 $145,000 0 0 15,000 60,000 60,000 60,000 60,000
60,000 50,000 35,000 10,000
60,000 60,000 60,000 60,000
30,000 25,000 20,000 15,000 0
25,000 20,000 15,000 10,000 0
45,000 40,000 35,000 25,000 15,000
Required: Determine each proposal's payback. Answer: Proposal X payback = $180,000/$60,000 = 3.00 years Proposal Y Year 0 Year 1 Year 2 Year 3
Cash Savings Savings Accumulated $60,000 50,000 35,000
To Be Recovered $140,000 $ 60,000 80,000 110,000 30,000 145,000 0
Proposal Y payback = 2 years plus $30,000/$35,000 or 2.86 years. Proposal Z payback = ($145,000 + $15,000)/$60,000 = 2.67 years Diff: 3 Objective: 3 AACSB: Application of knowledge
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15) A company financial analyst estimates that a project that will cost $150,000 will return the following cash flows: Year 1 $45,000 Year 2 $55,000 Year 3 $60,000 year 4 $85,000 Year 5 $90,000 Calculate the discounted payback period if required rate of return is 10% Answer: The discounted cash flow values are as follows (assuming a 10% discount rate): Year 1 Year 2 Year 3 Year 4 Year 5
.909 × $45,000 = $40,950 .826 × $55,000 = $45,430 .751 × $60,000 = $45,060 .683 × $85,000 = $58,055 .621 × $90,000 = $55,890
By the end of year 3, the cumulative discounted cash flows equal $131,395 which means that $18,605 needs to be recovered in year 4. $18,605/$58,055 = .32 + 3 years = 3.32 years discounted cash flow payback period Diff: 2 Objective: 3 AACSB: Analytical thinking
Objective 22.4 1) Which of the following methods of capital budgeting divides the average annual accrual accounting income of a project by a measure of the investment in it? A) net present value B) internal rate of return C) payback method D) accrual accounting rate of return Answer: D Diff: 1 Objective: 4 AACSB: Analytical thinking
2) Accrual accounting rate of return is calculated by dividing: A) net initial investment by an increase in expected average annual after-tax operating income B) an increase in expected average annual after-tax operating income by the net initial investment C) an increase in expected average annual cash flow by the net initial investment D) net initial investment by an increase in expected average annual cash flow Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
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3) Which of the following is the numerator in the mathematical expression for accrual accounting rate-of-return (AARR)? A) increase in expected average investment B) increase in expected average annual after-tax operating income C) increase in expected average cash flow D) increase in expected net initial investment Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
4) AARR indicates the average rate at which: A) a dollar of investment generates after-tax operating income B) a dollar of after-tax cash flow generates net income C) a dollar of investment generates a positive cash flow D) a dollar of after-tax non-operating income generates net income Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
5) Which of the following statements is true of accrual accounting rate of return (AARR) method and internal rate of return (IRR) method? A) AARR method calculates the return in absolute terms, whereas IRR method calculates the result in terms of percentage. B) The AARR method calculates the return using operating-income numbers after considering accruals and taxes, whereas the IRR method calculates the return using after-tax cash flows and the time value of money. C) The AARR method calculates the return considering the time value of money, whereas the IRR method calculates the return ignoring the time value of money. D) The AARR method considers cash flows, whereas the IRR method considers operating income. Answer: B Diff: 3 Objective: 4 AACSB: Analytical thinking
6) The AARR method is similar to the IRR method as: A) both calculate the return using after-tax cash flows B) both calculate the return using operating-income numbers after considering accruals and taxes C) both calculate the result in terms of percentage D) both consider the time value of money Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
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7) Which of the following is a limitation of AARR method? A) It is difficult to compare projects as its result is expressed in dollars and not in percentage terms. B) It does not consider income earned throughout a project's expected useful life. C) It does not track initial investment. D) It does not consider time value of money. Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
8) Relevant annual earned income from a project is divided by capital invested in that project to calculate: A) accrual accounting rate of return B) returned working capital C) IRR increase in expected average annual D) discounted payback period Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
9) Accrual accounting rate of return is calculated by dividing increase in expected average annual after-tax operating income by the net initial investment. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
10) Accrual accounting rate of return is calculated by dividing an increase in expected average annual after-tax operating income by the net initial or average investment. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
11) The accrual accounting rate-of-return method has a significant weakness for use in making capital budgeting decisions because it does NOT track cash flows and it ignores the time value of money. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
12) As cash flows and time value of money are central to capital budgeting decisions, the AARR method is regarded as better than the IRR method. Answer: FALSE Explanation: As cash flows and time value of money are central to capital budgeting decisions, the IRR method is regarded as better than the AARR method. AARR does not take into account cash flow but rather, focuses on accrual accounting income which rarely equals cash flow. Diff: 2 Objective: 4 AACSB: Analytical thinking
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13) Unlike the payback method, which ignores cash flows after the payback period, the AARR method considers income earned throughout a project's expected useful life. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
14) Gavin and Alex, baseball consultants, are in need of a microcomputer network for their staff. They have received three proposals, with related facts as follows:
Initial investment in equipment Annual cash increase in operations: Year 1 Year 2 Year 3 Salvage value Estimated life
Proposal A $90,000
Proposal B $90,000
Proposal C $90,000
80,000 10,000 45,000 0 3 yrs
45,000 45,000 45,000 0 3 yrs
90,000 0 0 0 1 yr
The company uses straight-line depreciation for all capital assets. Required: a. Compute the payback period, net present value, and accrual accounting rate of return with initial investment, for each proposal. Use a required rate of return of 14%. b.
Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?
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Answer: a. Payback Method Payback for Proposal A:
Year 1 Year 2
$80,000 10,000 $90,000
Year 1 Year 2
$45,000 45,000 $90,000
Year 1
$90,000
Payback is 2 years Payback for Proposal B: Payback is 2 years Payback for proposal C: Payback is 1 year Net Present Value: Proposal A:
Investment Annual operations Year 1 Year 2 Year 3 Net present value Proposal B:
Investment Annual operations Year 1 Year 2 Year 3 Net present value Proposal C:
Investment Annual operations Year 1 Net present value
Predicted Cash Flows
Year(s)
PV Factor
PV of Cash Flows
$(90,000)
0
1.000
$(90,000)
80,000 10,000 45,000
1 2 3
0.877 0.769 0.675
70,160 7,690 30,375 $18,225
Predicted Cash Flows
Year(s)
PV Factor
PV of Cash Flows
$(90,000)
0
1.000
$(90,000)
45,000 45,000 45,000
1 2 3
0.877 0.769 0.675
39,465 34,605 30,375 $14,445
Predicted Cash Flows
Year(s)
PV Factor
PV of Cash Flows
$(90,000)
0
1.000
$(90,000)
90,000
1
0.877
78,930 $11,070
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Accrual Accounting Rate of Return: Proposal A:
= 0.167
Proposal B: ($45,000 - $30,000)/$90,000 = 0.167 Proposal C: ($90,000 - $90,000)/$90,000 = 0.0 b.
Summary:
Method Payback method ranks Net present value AARR
Proposal A 2.5 1.0 1.5
Proposal B 2.5 2.0 1.5
Proposal C 1.0 3.0 3.0
Even though Proposal C is Number 1 for payback, it comes in last with the other two methods. Because the net present value method takes into account the time value of money and the other proposals are less comprehensive, Proposal A would be the best alternative. Diff: 3 Objective: 4 AACSB: Analytical thinking
15) Gibson Manufacturing is considering buying an automated machine that costs $600,000. It requires working capital of $60,000. Annual cash savings are anticipated to be $280,200 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $24,000. The working capital will be recovered at the end of the machine's life. Required: Compute the accrual accounting rate of return based on the initial investment. Answer: Accrual accounting income = $280,200 - (($600,000 - $24,000)/5) = $280,200 - $115,200 = $165,000 AARR with initial investment
= $165,000 / ($600,000 + $60,000) = $165,000 / $660,000 = 0.25
Diff: 2 Objective: 4 AACSB: Application of knowledge
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16) What are the four alternative methods for evaluating capital budgeting projects? What is an advantage and disadvantage of each method? Answer: The four methods are: 1. Net Present Value (NPV); 2. Internal Rate of Return (IRR); 3. Payback; and 4. Accrual Accounting Rate of Return (AARR). NPV has advantages in that it uses discounted cash flows, and can deal with uneven cash flows, considers the inflows and outflows of the project. A disadvantage of NPV is that the results indicate if it achieves a particular cost of capital or not, but it does not indicate what the rate of return actually is. The IRR method generates an expected rate of return for the investment given the time of the project and the discounting of cash flows. A disadvantage of the IRR is that the results are expressed in the form of a percentage rather than in dollars and it is difficult to use when the project has uneven cash flows. The payback is simple to use, and adapts to both even and uneven cash flows. It also highlights the liquidity of a project. A disadvantage to the payback is that it does not consider either the time value of money, or the cash flows that occur after the payback time period. The AARR method uses the information that is most often found in financial statements — including net income and depreciation. A drawback is that the method does not take into account the time value of money or the cash flows of the project. Diff: 2 Objective: 4 AACSB: Analytical thinking
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17) Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment. After careful analysis, the company's accountant has developed the following information about the four proposals:
Payback period Net present value Internal rate of return Accrual accounting rate of return
Proposal 1 4 years $80,000 12%
Proposal 2 4.5 years $178,000 14%
Proposal 3 6 years $166,000 11%
Proposal 4 7 years $308,000 13%
8%
6%
4%
7%
Required: How can this information be used in the decision-making process for the new loading facilities? Does it cause any confusion? Answer: The managers can use the information to determine which proposal is best under the various alternatives. This may be accomplished by ranking each alternative. Also, the managers must determine the factors that are the most important to the company. For example, if short-run risk is high, a short payback period may be highly desirable. In this case, Proposal 1 is best. However, if total cash returned is critical to the company's operations, then Proposal 4 is probably best. Any time that multiple measures are used there may be confusion because very seldom will one proposal appear to be the best with all models. In this case, payback ranks Proposal 1 the best, NPV ranks Proposal 4 the best, IRR ranks Proposal 2 the best, and AARR ranks Proposal 1 the best. The importance of each ranking will depend upon the circumstances of the organization and the managers must be attuned as to what is most favorable. The net present value and the internal rate-of-return methods are superior because they consider the time value of money. Diff: 2 Objective: 4 AACSB: Analytical thinking
18) What are the strengths and weaknesses of the accrual accounting rate-of-return (AARR) method for evaluating long-term projects? Answer: The accrual accounting rate of return (AARR) divides an accrual accounting measure of average annual income from a project by an accrual accounting measure of its investment. AARR gives managers an idea of how accepting a project will affect a firm's future reported accounting profitability. However, AARR uses accrual accounting income numbers, does not track cash flows, and ignores the time value of money. Diff: 2 Objective: 4 AACSB: Analytical thinking
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Objective 22.5 1) Which of the following is a component of net-initial-investment cash flows? A) original cost of an old equipment B) initial working capital investment C) depreciation cost D) after-tax cash flow from operations Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
2) The galaxy Corporation disposes a capital asset with an original cost of $220,000 and accumulated depreciation of $111,000 for $50,000. The company's tax rate is 40%. Calculate the after-tax cash inflow from the disposal of the capital asset. A) $23,600 B) ($23,600) C) $73,600 D) $109,000 Answer: C Explanation: C) ($220,000 - $111,000) = $109,000; $109,000 - $50,000 = $59,000 loss; $59,000 × 0.4 = $23,600 tax savings from loss plus $50,000 proceeds = $73,600 Diff: 3 Objective: 5 AACSB: Application of knowledge
3) The Golden Shades Corporation disposes a capital asset with an original cost of $300,000 and accumulated depreciation of $130,000 for a salvage price of $45,000. Golden Shades's tax rate is 30%. Calculate the after-tax cash inflow from the disposal of the capital asset. A) $37,500 B) $125,000 C) $45,000 D) $82,500 Answer: D Explanation: D) ($300,000 - $130,000) = $170,000; $170,000 - $45,000 = $125,000 loss; $125,000 × 0.3 = $37,500 tax savings from loss plus $45,000 proceeds = $82,500 Diff: 3 Objective: 5 AACSB: Application of knowledge
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4) The Ambitz Corporation has an annual cash inflow from operations from its investment in a capital asset of $38,000 (excluding the deprecation) each year for seven years. The corporation's income tax rate is 40%. Calculate the total after-tax cash inflow from operations for seven years. A) $266,000 B) $266,003 C) $159,600 D) $38,000 Answer: C Explanation: C) $38,000 × 7 = $266,000; $266,000 × (1 - 0.4) = $159,600 net cash flow Diff: 3 Objective: 5 AACSB: Application of knowledge
5) The Venoid Corporation has an annual cash inflow from operations from its investment in a capital asset of $18,000 (excluding depreciation) each year for eight years. The corporation's income tax rate is 40%. Calculate the total after-tax cash inflow from operations for eight years. A) $144,000 B) $86,400 C) $57,600 D) $18,000 Answer: B Explanation: B) $18,000 × 8 = $144,000; $144,000 × (1 - 0.4) = $86,400 net cash flow C) Diff: 3 Objective: 5 AACSB: Application of knowledge
6) A company is looking to purchase and replace a fixed asset for $220,000. It will sell the asset that will be replaced for $41,000 but will incur a $10,000 gain upon that sale. It must also commit $30,000 of working-capital to the investment. The firm's tax rate is 30%. What is the amount of the relevant initial investment? A) $220,000 B) $212,000 C) $179,000 D) $182,000 Answer: B Explanation: B) ($220,000) purchase price + $41,000 sale of old asset - $(10,000 * 30%) tax on gain on sale of old asset - $30,000 working-capital investment = $212,000 Diff: 2 Objective: 5 AACSB: Analytical thinking
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7) The focus in capital budgeting should be on: A) favorable and unfavorable variance B) expenses under accrual accounting C) expected future cash flows that differ between alternatives D) allocation of overheads Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
8) An example of a sunk cost in a capital budgeting decision for new equipment is: A) the initial investment in working capital B) the original price of an old equipment C) the necessary transportation costs on a new equipment D) the initial investment in a new equipment Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
9) Depreciation is usually NOT considered an operating cash flow in capital budgeting because: A) depreciation is usually a constant amount each year over the life of the capital investment B) deducting depreciation from operating cash flows would be counting the lump-sum amount twice C) depreciation usually does not result in an increase in working capital D) depreciation usually has no effect on the disposal price of the machine Answer: B Diff: 2 Objective: 5 AACSB: Analytical thinking
10) The relevant terminal disposal price of a machine equals the: A) difference between the salvage value of the old machine and the ultimate salvage value of the new machine B) total of the salvage values of the old machine and the new machine C) salvage value of the old machine D) salvage value of the new machine Answer: A Diff: 3 Objective: 5 AACSB: Analytical thinking
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11) Net initial investment includes: A) depreciation on new equipment, cash outflow for working capital, and after-tax cash inflow from disposal of the old equipment B) cash outflow to purchase new equipment, depreciation on new equipment, and after-tax cash inflow from disposal of the old equipment C) cash outflow to purchase new equipment, cash outflow for working capital, and after-tax cash inflow from disposal of the old equipment D) cash outflow to purchase new equipment, cash outflow for working capital, and depreciation on new equipment Answer: C Diff: 3 Objective: 5 AACSB: Analytical thinking
12) The income taxes saved as a result of depreciation deductions are irrelevant because they decrease cash outflows. Answer: FALSE Explanation: The income taxes saved as a result of depreciation deductions are relevant because they decrease cash outflows. Diff: 2 Objective: 5 AACSB: Analytical thinking
13) Depreciation has no impact on a capital project's cash flows because depreciation is a noncash expense. Answer: FALSE Explanation: The depreciation effect must of a capital project must considered. Depreciation is a noncash item, however its treatment as an expense reduces taxable income, and therefore results in lower income taxes. The tax savings from depreciation us a relevant cash flow that must be considered in the analysis of cash flows, in the discounting of cash flows, payback calculations, and IRR. Diff: 2 Objective: 5 AACSB: Analytical thinking
14) The use of an accelerated method of depreciation for tax purposes would usually decrease the present value of the investment. Answer: FALSE Explanation: The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment. Diff: 3 Objective: 5 AACSB: Analytical thinking
15) Net initial investment in the project includes the acquisition of assets and any associated additions to working capital, minus the after-tax cash flow from the disposal of existing assets. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
16) Relevant cash flows are expected future cash flows that differ among the alternative uses of investment
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funds. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
17) Cash flows from the terminal disposal of the investment include the pre-tax cash flow from terminal disposal of assets and the pre-tax cash flow from terminal recovery of working-capital investment. Answer: FALSE Explanation: The cash flow from the terminal disposal of the investment should include the after-tax cash flow from terminal disposal of machines. The tax effect of any gain or loss on disposal must be considered in addition to the expected salvage value of the equipment. Also, the after-tax cash flow from terminal recovery of working-capital investment. When the project is completed, the additional cash flow required at the start of the project will be released and as such, are a relevant cash flow. Diff: 2 Objective: 5 AACSB: Analytical thinking
18) In determining whether to keep a machine or replace it, the original cost of the machine is a sunk cost and is NOT a relevant factor. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
19) In the net present value (NPV) method, pre-tax cash flows should be used instead of after-tax cash flows. Answer: FALSE Explanation: In the net present value (NPV) method, after-tax cash flows should be used instead of pre-tax cash flows. Diff: 2 Objective: 5 AACSB: Analytical thinking
20) In calculating the net initial investment cash flows, any increase in working capital required for the project should be included. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
21) A loss on the disposal of a replacement asset is an irrelevant fact when estimating relevant cash flows of a capital asset decision. Answer: FALSE Explanation: A loss would result in tax savings equal to the loss × the firm's income tax rate which would be a relevant tax savings (cash inflow) as a result of the capital asset investment decision Diff: 2 Objective: 5 AACSB: Analytical thinking
22) A commitment to a new capital project will always result in an increase in net working capital.
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Answer: FALSE Explanation: Some projects will reduce the need for working capital. Diff: 2 Objective: 5 AACSB: Analytical thinking
23) While calculating terminal recovery of working capital there are no tax consequences as there is no gain or loss on working capital. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
24) Depreciation results in income tax cash savings that are equal to the depreciation expense multiplied by the company's income tax rate. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
25) Explain why the term tax shield is used in conjunction with depreciation. Answer: Depreciation tax deductions result in tax savings which offset the cost of acquiring the capital equipment. The more rapid for tax purposes an asset's costs can be written off for tax purposes, the earlier the reductions in taxes can be realized. The term tax shield refers to the reduction in the tax payments owed. Thus the faster the depreciation, the earlier the reductions in taxes and the greater the net present value of the tax shield. Diff: 2 Objective: 5 AACSB: Analytical thinking
26) What are the relevant cash inflows and outflows for capital budgeting decisions? Answer: Relevant cash inflows and outflows in a DCF analysis are the differences in expected future cash flows as a result of making the investment. Only cash inflows and outflows matter; accrual accounting concepts are irrelevant for DCF methods. For example, the income taxes saved as a result of depreciation deductions are relevant because they decrease cash outflows, but the depreciation itself is a noncash item. Diff: 2 Objective: 5 AACSB: Analytical thinking
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Objective 22.6 1) Which of the following statements is true of a post-investment audit? A) It encourages managers to overstate the expected cash inflows from projects and accept projects they should reject. B) It helps managers avoid optimistic estimate errors. C) It does not help senior management to recognize problems in the implementation of the project. D) It provides managers with feedback about the performance of a project to determine if any variance from expectations were the result of the overly optimistic estimates of because of implementation issues. Answer: D Diff: 3 Objective: 6 AACSB: Analytical thinking
2) Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is referred to as: A) the audit trail B) management control C) a post-investment audit D) a cost-benefit analysis Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
3) Post-investment audits: A) result in managers to overstate the expected cash inflows from projects and accept projects they should reject B) provide management with feedback about the performance of a project C) include obtaining appropriation requests so that the funding will be authorized to purchase the equipment D) are usually not feasible in a large project because the cost accounting system does not collect actual costs at the same level of detail as the initial plans had Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
4) The reason to have a post-investment audit is: A) they encourage mid-level managers to make overly optimistic estimates during the early stages of the capital budgeting process B) they help alert senior management to problems in the implementation of projects C) they analyze by calculating contribution-margin D) they help in calculating present value Answer: B Diff: 3 Objective: 6 AACSB: Analytical thinking
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5) As a discounted cash flow method does not report good operating income results in the project's early years, managers are tempted to not use discounted cash flow methods even though the decisions based on them would be in the best interests of the company as a whole over the long run. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
6) Post-investment audits prevent managers from overstating the expected cash inflows from projects and accepting projects they should reject. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
7) What conflicts can arise between using discounted cash flow methods for capital budgeting decisions and accrual accounting for performance evaluation? How can these conflicts be reduced? Answer: Using accrual accounting to evaluate the performance of a manager may create conflicts with using discounted cash flow (DCF) methods for capital budgeting because frequently a project using a DCF method will not report strong operating income results in the early years of the project under accrual accounting. If this is the case, a manager might be tempted not to use DCF methods even though the decisions based on them might be in the best interests of the company over the long run. The conflict can be reduced by evaluating managers on a project-by-project basis and by looking at their ability to achieve the amounts and timing of forecasted cash flows. Diff: 3 Objective: 6 AACSB: Analytical thinking
Objective 22.7 1) Decisions are made with regard to capital budgeting should always: A) result in an actual annual rate of return exceed the cost of capital for common equity B) advance the strategic goals of the company C) increase the working capital of the business D) accomplish the marketing plan Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
2) NPV methods can be used to estimate the present value of a customer to a business so that strategic decisions can be made to retain customers and lower churn rates. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
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3) The higher the probability of customer churn, the higher the NPV of a customer. Answer: FALSE Explanation: The higher the probability that a customer will switch to a different provider , the lower the NPV for that customer. Diff: 2 Objective: 7 AACSB: Application of knowledge
4) Strategic capital investment decisions require consideration of a broad range of factors that must be precisely estimated. Answer: FALSE Explanation: Strategic capital investment decisions require consideration of a broad range of factors that may be difficult to estimate. Diff: 2 Objective: 7 AACSB: Application of knowledge
5) Discuss a range of factors that managers may have to consider when making capital budgeting decisions that are strategic in nature. Answer: The introduction of new technology into the product line offerings of a company will likely contain many elements of uncertainty. Will the customers value it? What will the price structure be? Also, when managers introduce automation into the workplace, it may be difficult to assess the impact it will have on the existing workforce. The managers must develop and insert a great deal of judgement and sometimes intuition when trying to incorporate and quantify their effects as part of the capital budgeting process. Diff: 2 Objective: 7 AACSB: Analytical thinking
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Objective 22.A 1) The real approach to incorporating inflation into the net present value method predicts: A) cash inflows and outflows in real monetary units and uses a real rate as the required rate of return B) cash inflows and outflows in real monetary units and uses a nominal rate as the required rate of return C) cash inflows and outflows in nominal monetary units and uses a real rate as the required rate of return D) cash inflows and outflows in monetary units that are adjusted for inflation and uses a real rate as the required rate of return Answer: D Diff: 2 Objective: A AACSB: Analytical thinking
2) Real rate of return is the rate of return that: A) is demanded to cover investment risk if there is no inflation B) equals a risk-free rate of return such as the current interest rate on U.S. treasury bills C) is equal to the pure rate of return on risk-free long-term government bonds D) is demanded by invested as a risk premium for bearing risk Answer: A Diff: 2 Objective: A AACSB: Analytical thinking
3) The nominal approach to incorporating inflation into the net present value method predicts cash inflows in real monetary units and uses a real rate as the required rate of return. Answer: FALSE Explanation: This is the definition of the real approach. Diff: 2 Objective: A AACSB: Analytical thinking
4) In nominal rate of return, the inflation element is the premium above the real rate. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
5) The nominal rate of return is made up of a risk-free element when there is no expected inflation, a business-risk element, and an inflation element. Answer: TRUE Diff: 2 Objective: A AACSB: Analytical thinking
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6) What is the difference between nominal approach and real approach to incorporating inflation into the net present value method? Answer: Nominal approach predicts cash inflows and outflows in nominal monetary units and uses a nominal rate as the required rate of return. Real approach predicts cash inflows and outflows in real monetary units and uses a real rate as the required rate of return. Diff: 3 Objective: A AACSB: Analytical thinking
7) How is inflation related to capital budgeting? Discuss. Answer: When using the net present value method (the definitive method for evaluating alternative options in capital budgeting), it is important to understand what elements are included in the rate of return percentage. In general, it is expected that there will always be a decline in the general purchasing power of whatever monetary units are in use (dollar, etc.). The real rate of return consists of a risk free element as well as a business risk element but excludes the inflation element. The nominal rate of return includes all three components: the risk free element, business risk element, and inflation element. It is acceptable to use either the real rate of return or the nominal rate of return when performing capital budgeting analysis using the net present value concepts. The main caveat is to understand which one is being used and to make sure that there is internal consistency within the analysis such that all cash flows (in and out) are using the same approach Diff: 2 Objective: A AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 23 Management Control Systems, Transfer Pricing, and Multinational Considerations Objective 23.1 1) Which of the following is a characteristic of a management control system? A) It gathers key information that aids in the process of making decisions. B) It encourages short-term profit planning. C) Helps managers to act rapidly and with autonomy. D) It deals with coordinating planning across the organization and is not concerned with behavioral aspects of managing. Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
2) Which of the following is a part of the formal management control system? A) mutual commitments among the members of the organization B) the accounting information system provides metrics about costs, revenues, and contribution margins C) shared values and loyalties among the members of the organization D) general understanding about acceptable behavior for managers Answer: B Diff: 2
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Objective: 1 AACSB: Analytical thinking
3) Which of the following is a part of the informal management control system? A) explicit rules and procedures B) mutual commitments among members of the company C) performance measures and methods D) incentive plans that guide behavior of employees Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
4) Which of the following is true of goal congruence? A) It exists when the management's strategy is in line with the shareholders' requirements. B) It exists when individuals and groups work toward achieving the organization's goals. C) It exists when both internal and external stakeholders of an organization have similar goals. D) It exists when an organization's goals are in line with the social acceptability of organizational goals. Answer: B Diff: 3 Objective: 1 AACSB: Analytical thinking
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5) A well-designed management control system uses information from: A) internal sources only as they are the most reliable sources of information B) external sources only as they are more dynamic and future oriented C) both internal and external sources as a wide range of information is required D) external sources only as they are the most reliable sources of information Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Which of the following would be considered an example of an element of an informal control system? A) procedures developed by first level managers to help guide staff in their daily work B) a policy that requires all employees to take at least two weeks of vacation each year C) shared values within an organization's culture D) the master budget Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
7) If a computer manufacturer used its common stock price as a Balanced Scorecard control measure, it would be utilizing which of the following? A) an external measure B) customer related measure C) internal business process measure D) learning and growth measure Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Line managers supervising individual refineries are concerned with: A) obtaining information about the firm's opportunity costs B) obtaining information about the firm's sunk costs C) obtaining information about the firm's equipment downtime and product quality D) obtaining information about customer satisfaction and market share Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
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9) In a management control system, which of the following is described as the extent to which managers strive or endeavor in order to achieve a goal? A) efficiency B) effectiveness C) effort D) variance Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
10) ________ is the extent to which managers strive to achieve goals. A) Effort B) Congruence C) Motivation D) Procedure Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
11) The formal management control system includes the shared values, loyalties, and mutual commitments among members of the organization. Answer: FALSE Explanation: The informal management control system includes the shared values, loyalties, and mutual commitments among members of the organization. Diff: 2 Objective: 1 AACSB: Analytical thinking
12) Management control systems is designed only for top level managers and is not applicable to line managers. Answer: FALSE Explanation: Management control systems is applicable throughout an organization and is applicable to line managers also. Diff: 3 Objective: 1 AACSB: Analytical thinking
13) Management control systems utilize information gathered within a company and from external sources so as to aid management with their planning and control decision making. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
14) The human resources systems is a part of the formal management control systems of an organization. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
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15) The management accounting system is an informal management control system which provide information about the firm's costs, revenues, and income. Answer: FALSE Explanation: The management accounting systems is a formal management control system which provide information about the firm's costs, revenues, and income. Diff: 2 Objective: 1 AACSB: Analytical thinking
16) The formal management control system includes shared values, loyalties, and mutual commitments among members of the company, company culture, and norms about acceptable behavior for managers and other employees. Answer: FALSE Explanation: The informal management control system includes shared values, loyalties, and mutual commitments among members of the company, company culture, and norms about acceptable behavior for managers and other employees. Diff: 2 Objective: 1 AACSB: Analytical thinking
17) Effort refers to physical exertion, such as a worker producing at a faster rate, but excludes non-physical aspects like acumen and diligence of a worker. Answer: FALSE Explanation: Effort is the extent to which managers strive or endeavor in order to achieve a goal. Effort goes beyond physical exertion, such as a worker producing at a faster rate, to include mental actions as well. Diff: 2 Objective: 1 AACSB: Analytical thinking
18) An organization should design its management control system independently of its strategies, so that the system is not affected by change of strategies in future. Answer: FALSE Explanation: To be effective, management control systems should be closely aligned with the organization's strategies and goals. Diff: 2 Objective: 1 AACSB: Analytical thinking
19) Goal congruence exists when individuals work toward achieving one goal, and groups work toward achieving a different goal. Answer: FALSE Explanation: Goal congruence exists when individuals and groups work toward achieving the same goal. Diff: 2 Objective: 1 AACSB: Analytical thinking
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20) Management control systems should be designed to support the organizational responsibilities of individual managers. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
21) Effort in terms of management control systems is defined in terms of physical exertion such as a worker producing at a faster rate. Answer: FALSE Explanation: Effort goes beyond physical exertion and includes both physical and mental actions. Diff: 2 Objective: 1 AACSB: Analytical thinking
22) Effective management control systems should also motivate managers and other employees. Answer: TRUE Diff: 2 Objective: 1 AACSB: Analytical thinking
23) For each of the following Balanced Scorecard measures, identify which of the four perspectives (Financial, Customer, Internal Business Process, or Learning and Growth) the measure best represents. ________ a. On-time delivery of gasoline from refineries to retail stations ________ b. Customer satisfaction ________ c. Common stock price ________ d. Return on investment ________ e. Market share ________ f. Number of days lost to accidents ________ g. Employee satisfaction ________ h. Friendliness of employees ________ i. Repeat purchases ________ j. Cash flow from operations Answer: a. Internal business process b. Customer c. Financial d. Financial e. Customer f. Internal business process g. Learning and growth h. Internal business process i. Customer j. Financial Diff: 3 Objective: 1 AACSB: Analytical thinking
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24) What is goal congruence? Answer: Goal congruence exists when individuals and groups work toward achieving an organization's goals—that is, managers working in their own best interest take actions that align with the overall goals of top management. Diff: 2 Objective: 1 AACSB: Analytical thinking
25) "Management control systems consist of formal and informal control systems." Briefly explain the formal and informal management systems and enlist their components. Answer: The formal management control system of a company includes explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees. The formal control system is composed of several systems, such as: 1) The management accounting systems, which provide information about the firm's costs, revenues, and income. 2) The human resources systems, which provide information about the recruiting and training of employees, absenteeism, and accidents. 3) The quality system, which provides information about yields, defective products, and late deliveries to customers. The informal management control system includes the shared values, loyalties, and mutual commitments among members of the organization, the company's culture, and the unwritten norms about acceptable behavior for managers and other employees. Diff: 2 Objective: 1 AACSB: Analytical thinking
Objective 23.2 1) Which of the following is NOT a benefit of decentralization? A) Duplication of effort among subunit managers. B) Sharpens the focus of subunit managers. C) Assists in development and learning. D) Creates greater responsiveness to the needs of customers and suppliers. Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
2) Which of the following is an advantage of decentralization? A) leads to gains from rapid decision making by subunit managers B) focuses manager's attention on the organization as a whole C) does not result in a duplication of activities D) reduces the cost of gathering information Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
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3) Which of the following is an advantage of decentralization? A) It assists management development and learning. B) It focuses managers' attention on the organization as a whole. C) It does not result in a duplication of activities. D) It encourages suboptimal decision making. Answer: A Diff: 1 Objective: 2 AACSB: Analytical thinking
4) Which of the following is a benefit of decentralization? A) It creates greater responsiveness to local needs. B) It helps in raising capital at a local level. C) It relieves top managers of accountability. D) It sharpens the focus of subunits and broadens the reach of top management. Answer: D Diff: 2 Objective: 2 AACSB: Analytical thinking
5) ________ occurs when a decision's benefits for one subunit is more than offset by the costs to the organization as a whole. A) Suboptimal decision making B) Independent decision making C) Congruent decision making D) Departmental decision making Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
6) Which of the following statements is true of decentralization? A) A decentralized structure does not empower employees to handle customer complaints directly. B) A decentralized structure forces top management to lose some control over the organization. C) Decentralization slows responsiveness to local needs for decision making. D) A decentralized structure only delegates recurring and structured decisions to lower levels. Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
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7) In decentralized organizations, a manager might look to further the success of their subunit to the detriment of other subunits. Such behavior would be from which of the following results of decentralization? A) duplication of output B) gains from raid decision making C) unhealthy competition D) broadening the reach of top management Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
8) Which of the following is a drawback of decentralizing a multinational company? A) It may lead to increased exchange rate risk. B) It may result in lack of control and results in increasing risk. C) It creates less responsiveness to the needs of a subunit's customers, suppliers, and employees. D) It may lead to an increase in bureaucracy. Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
9) Which of the following is a responsibility center to measure the revenues and costs of subunits in centralized or decentralized companies? A) investment center B) environmental center C) exchange policy center D) taxation rebate center Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
10) Decentralization in multinational companies may lead to lack of control. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
11) An investment center is always a decentralized subunit. Answer: FALSE Explanation: This is not always true. Profit centers can be coupled with a highly centralized organization. Diff: 2 Objective: 2 AACSB: Analytical thinking
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12) In a profit center, the manager is accountable for investments, revenues, and costs. Answer: FALSE Explanation: In an investment center, the manager is accountable for investments, revenues, and costs. Diff: 2 Objective: 2 AACSB: Analytical thinking
13) Decisions regarding sources of long-term financing are best made at subunit level as the subunit has local knowledge and can leverage it in negotiations. Answer: FALSE Explanation: Such decisions are best made at a centralized level as corporate managers have better information about financing terms in different markets and can obtain the best terms. Diff: 2 Objective: 2 AACSB: Analytical thinking
14) Surveys indicate that decisions made most frequently at the corporate level are related to sources of supplies and products to manufacture. Answer: FALSE Explanation: These decisions are made at a decentralized level. Diff: 2 Objective: 2 AACSB: Analytical thinking
15) The labels profit center and cost center are dependent on the degree of centralization or decentralization in a company. Answer: FALSE Explanation: The labels profit center and cost center are independent on the degree of centralization or decentralization in a company. Diff: 1 Objective: 2 AACSB: Analytical thinking
16) Incongruent decision making occurs when individuals and groups work toward achieving the organization's goals even if departmental performance is adversely affected. Answer: FALSE Explanation: Incongruent decision making occurs when a decision's benefit to one subunit is more than offset by the costs to the organization as a whole. Diff: 2 Objective: 2 AACSB: Analytical thinking
17) Executing decentralization in multinational companies presents less challenges than decentralization of domestic based operations. Answer: FALSE Explanation: Decentralization in multinational companies presents a special challenge. Centralized control may be physically impractical due to languages, customs, cultures, business practices, rules, laws, and regulations that vary from country to country. Diff: 2 Objective: 2 AACSB: Analytical thinking
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18) For each of the following activities, characteristics, and applications, identify whether they can be found in a centralized organization, a decentralized organization, or both types of organizations. ________ a. Freedom for managers at lower organizational levels to make decisions ________ b. Gathering information may be very expensive ________ c. Greater responsiveness to user needs ________ d. Have few interdependencies among divisions ________ e. Maximum constraints and minimum freedom for managers at lowest levels ________ f. Maximization of benefits over costs ________ g. Minimization of duplicate functions ________ h. Minimum of suboptimization ________ i. Multiple responsibility centers with various reporting units ________ j. Profit centers Answer: a. Decentralization b. Decentralization c. Decentralization d. Decentralization e. Centralization f. Both g. Centralization h. Centralization i. Both j. Both Diff: 2 Objective: 2 AACSB: Analytical thinking
19) The president of Silicon Company has just returned from a week of professional development courses and is very excited that she will not have to change the organization from a centralized structure to a decentralized structure just to have responsibility centers. However, she is somewhat confused about how responsibility centers relate to centralized organizations where a few managers have most of the authority. Required: Explain how a centralized organization might allow for responsibility centers. Answer: It does not make any difference what type of organizational structure exists when it comes to defining responsibility centers. If a centralized organization desires to hold its managers responsible for their actions, it can design a reporting system that assigns all costs and revenues to their controllable managers. It's just that, in a centralized organization, each manager may have more items to control than are reasonably possible. Diff: 2 Objective: 2 AACSB: Analytical thinking
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20) What is decentralization and what are its benefits? Answer: Decentralization is an organizational structure that gives managers at lower levels the freedom to make decisions. Benefits of decentralization: 1. It creates greater responsiveness to the needs of a subunit's customers, suppliers, and employees. Good decisions cannot be made without good information. Compared with top managers, subunit managers are better informed about their competitors, suppliers, and employees, as well as about local factors that affect performance, such as ways to decrease costs, improve quality, and better respond to customers. 2. It leads to gains from faster decision making by subunit managers. Decentralization speeds decision making, creating a competitive advantage over centralized organizations. Centralization slows down decision making because the decisions must be pushed upward through layer after layer of management before they are finalized. 3. It assists management development and learning. Subunit managers are more motivated and committed when they can exercise initiative. 4. It sharpens the focus of subunit managers and broadens the reach of top management. In a decentralized setting, the manager of a subunit has a concentrated focus. Diff: 3 Objective: 2 AACSB: Analytical thinking
21) Why is decentralization costly? Answer: Decentralizing is costly because of the following reasons. 1. Leads to suboptimal decision making. If the subunit managers do not have the necessary expertise or talent to make major decisions, the company, as a whole, is worse off because its top managers have relinquished their responsibility for doing so. Even if subunit managers are sufficiently skilled, suboptimal decision making—also called incongruent decision making or dysfunctional decision making—occurs when a decision's benefit to one subunit is more than offset by the costs to the organization as a whole. 2. Leads to unhealthy competition. In a decentralized setting, subunit managers may regard themselves as competing with managers of other subunits in the same company as if they were external rivals. 3. Results in duplication of output. If subunits provide similar products or services, their internal competition could lead to failure in the external markets. The reason is that divisions may find it easier to steal market share from one another, by mimicking each other's successful products, rather than those of competing firms. Eventually, this leads to confusion in the minds of customers and the loss of each division's distinctive strengths.
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4. Results in duplication of activities. Even if the subunits operate in distinct markets, several individual subunits of the company may undertake the same activity separately. Diff: 3 Objective: 2 AACSB: Analytical thinking
Objective 23.3 1) A product may be passed from one subunit to another subunit in the same organization. The product is known as a(n): A) interdepartmental product B) intermediate product C) subunit product D) transfer product Answer: B Diff: 1 Objective: 3 AACSB: Analytical thinking
2) Which of the following best describes a transfer price? A) It is the price charged by an organization when it transfer goods to another organization in lieu of services provided by it. B) It is the price that is to be used while calculating revenue from sales to customers for tax purposes. C) It is the price that is charged by a department of an organization when it sells its goods to its competitors. D) It is the price one subunit charges for a product or service supplied to another subunit of the same organization. Answer: D Diff: 2 Objective: 3 AACSB: Analytical thinking
3) A transfer-pricing method leads to goal congruence when: A) there is a price difference in different markets due to market inefficiencies B) managers do no act for their own best interest and work for the long-term best interest of the manager's subunit C) managers act in their own best interest and the decision is in the long-term best interest of the company D) there is a low degree of centralization Answer: C Diff: 3 Objective: 3 AACSB: Analytical thinking
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4) Which of the following is true of transfer pricing? A) It creates costs for the selling subunit. B) It creates revenues for the buying subunit. C) It helps top managers evaluate the performance of individual subunits. D) It makes managers' information-processing and decision-making tasks difficult. Answer: C Diff: 2 Objective: 3 AACSB: Analytical thinking
5) Transfer-pricing systems enable managers to focus on maximizing the performance of their subunits. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
6) The product or service transferred between subunits of an organization is called an intermediate product. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
7) The transfer price creates revenues for the selling subunit and costs for the buying subunit affecting each subunit's operating income. Answer: TRUE Diff: 1 Objective: 3 AACSB: Analytical thinking
8) What are transfer prices and what are its criteria? Answer: Transfer prices are the prices that one subunit of the firm charges another subunit of the firm for a good or service. The four criteria of transfer prices are: 1. Promote goal congruence, so that division managers acting in their own interest will take actions that are aligned with the objectives of top management. 2. Induce managers to exert a high level of effort. Subunits selling a product or service should be motivated to hold down their costs; subunits buying the product or service should be motivated to acquire and use inputs efficiently. 3. Help top managers evaluate the performance of individual subunits. 4. Preserve autonomy of subunits if top managers favor a high degree of decentralization. Diff: 3 Objective: 3 AACSB: Analytical thinking
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Objective 23.4 1) Negotiated transfer prices are often employed when: A) market prices are stable B) market prices are volatile C) market prices change by a regular percentage each year D) goal congruence is not a major objective Answer: B Diff: 2 Objective: 4 AACSB: Analytical thinking
2) The costs used in cost-based transfer prices: A) are actual costs B) are budgeted costs C) can either be actual or budgeted costs D) are lower than the market-based transfer prices Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
3) Which of the following is true of hybrid transfer prices? A) The cost used in hybrid transfer prices is always the actual cost. B) The cost used in hybrid transfer prices is always the budgeted cost. C) They take into account both cost and market information. D) They are less popular in manufacturing industry. Answer: C Diff: 2 Objective: 4 AACSB: Analytical thinking
4) To reduce the excessive focus of subunit managers on their own subunits, many companies compensate subunit managers on the basis of: A) both the operating income earned by their respective subunits and the company as a whole B) both the investing income earned by their respective subunits and the company as a whole C) only the investing income earned by their respective subunits D) both the net income and earned by their respective subunits and the company as a whole Answer: A Diff: 2 Objective: 4 AACSB: Analytical thinking
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5) Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below: Extraction: Refining:
Variable costs per barrel of oil Fixed costs per barrel of oil Variable costs per barrel of oil Fixed costs per barrel of oil
$10 $7 $26 $37
The Refining Division has been operating at a capacity of 40,000 barrels a day and usually purchases 26,000 barrels of oil from the Extraction Division and 15,300 barrels from other suppliers at $63 per barrel. What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 175% of variable costs? A) $17.50 B) $29.75 C) $80.00 D) $140.00 Answer: A Explanation: A) Transfer price = 1.75 × $10 = $17.50 Diff: 2 Objective: 4 AACSB: Application of knowledge
6) Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below: Extraction: Refining:
Variable costs per barrel of oil Fixed costs per barrel of oil Variable costs per barrel of oil Fixed costs per barrel of oil
$13 $6 $26 $36
The Refining Division has been operating at a capacity of 40,800 barrels a day and usually purchases 25,600 barrels of oil from the Extraction Division and 15,100 barrels from other suppliers at $62 per barrel. What is the transfer price per barrel from the Extraction Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs? A) $19.00 B) $20.90 C) $55.00 D) $99.00 Answer: B Explanation: B) Transfer price = 1.1 × $19 = $20.90 Diff: 2 Objective: 4 AACSB: Application of knowledge
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7) Axelia Corporation has two divisions, Refining and Extraction. The company's primary product is Luboil Oil. Each division's costs are provided below: Extraction: Refining:
Variable costs per barrel of oil Fixed costs per barrel of oil Variable costs per barrel of oil Fixed costs per barrel of oil
$15 $12 $26 $40
The Refining Division has been operating at a capacity of 40,900 barrels a day and usually purchases 25,300 barrels of oil from the Extraction Division and 15,300 barrels from other suppliers at $66 per barrel. Assume 300 barrels are transferred from the Extraction Division to the Refining Division for a transfer price of $18 per barrel. The Refining Division sells the 300 barrels at a price of $180 each to customers. What is the operating income of both divisions together? A) $10,800 B) $26,100 C) $20,100 D) $48,600 Answer: B Explanation: B) Revenues ($180 × 300) $54,000 Cost ($15 + $12 + $26 + $40) × 300) (27,900) Operating income $26,100 Diff: 3 Objective: 4 AACSB: Application of knowledge
1566 richard@qwconsultancy.com
8) Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below: Manufacturing: Distribution:
Variable costs per unit Fixed costs per unit Variable costs per unit Fixed costs per unit
$1.95 $8.17 $1.10 $1.00
The Distribution Division has been operating at a capacity of 4,007,000 units a week and usually purchases 2,003,500 units from the Manufacturing Division and 2,003,500 units from other suppliers at $16.00 per unit. What is the transfer price per watch from the Manufacturing Division to the Distribution Division, assuming the method used to place a value on each watch is 160% of variable costs? (Round the answer to the nearest cent.) A) $1.95 B) $3.12 C) $3.89 D) $14.05 Answer: B Explanation: B) Transfer price = 1.6 × $1.95 = $3.12 Diff: 2 Objective: 4 AACSB: Application of knowledge
1567 richard@qwconsultancy.com
9) Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below: Manufacturing: Distribution:
Variable costs per unit Fixed costs per unit Variable costs per unit Fixed costs per unit
$3.81 $10.45 $0.70 $1.20
The Distribution Division has been operating at a capacity of 4,008,000 units a week and usually purchases 2,004,000 units from the Manufacturing Division and 2,004,000 units from other suppliers at $13.50 per unit. What is the transfer price per watch from the Manufacturing Division to the Distribution Division, assuming the method used to place a value on each transfer is 120% of full costs? (Round the answer to the nearest cent.) A) $14.26 B) $17.11 C) $13.50 D) $19.21 Answer: B Explanation: B) Transfer price = 1.2 × $14.26 = $17.11 Diff: 2 Objective: 4 AACSB: Application of knowledge
1568 richard@qwconsultancy.com
10) Timekeeper Corporation has two divisions, Distribution and Manufacturing. The company's primary product is high-end watches. Each division's costs are provided below: Manufacturing: Distribution:
Variable costs per unit Fixed costs per unit Variable costs per unit Fixed costs per unit
$1.81 $9.52 $1.20 $1.00
The Distribution Division has been operating at a capacity of 4,003,000 units a week and usually purchases 2,001,500 units from the Manufacturing Division and 2,001,500 units from other suppliers at $13.50 per unit. Assume 100,000 units are transferred from the Manufacturing Division to the Distribution Division for a transfer price of $10.00 per unit. The Distribution Division sells the 100,000 units at a price of $17 each to customers. What is the operating income of both divisions together? A) $401,000 B) $566,500 C) $347,000 D) $952,000 Answer: C Explanation: C) Revenues ($17 × 100,000) $1,700,000 Cost ($1.81 + $9.52 + $1.20 + $1.00) × 100,000 (1,353,000) Operating income $347,000 Diff: 3 Objective: 4 AACSB: Application of knowledge
1569 richard@qwconsultancy.com
11) Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $50. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-103,000 units. The fixed costs for the Polishing Division are assumed to be $24 per pair at 103,000 units. Stitching's costs per pair of shoes are: Direct materials $11 Direct labor $9 Variable overhead $7 Division fixed costs $5 Polishing's costs per completed pair of shoes are: Direct materials $15 Direct labor $8 Variable overhead $10 Division fixed costs $22 What is the market-based transfer price per pair of shoes from the Stitching Division to the Polishing Division? A) $23 B) $40 C) $50 D) $61 Answer: C Explanation: C) $50 as given in the problem. Diff: 2 Objective: 4 AACSB: Application of knowledge
1570 richard@qwconsultancy.com
12) Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $44. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-103,000 units. The fixed costs for the Polishing Division are assumed to be $22 per pair at 103,000 units. Stitching's costs per pair of shoes are: Direct materials $20 Direct labor $18 Variable overhead $16 Division fixed costs $14 Polishing's costs per completed pair of shoes are: Direct materials $15 Direct labor $11 Variable overhead $5 Division fixed costs $19 What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the method used to place a value on each pair of shoes is 175% of variable costs? A) $36.75 B) $66.50 C) $94.50 D) $3.50 Answer: C Explanation: C) Transfer price = 1.75 × $54 = $94.50 Diff: 2 Objective: 4 AACSB: Application of knowledge
1571 richard@qwconsultancy.com
13) Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $52. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-101,000 units. The fixed costs for the Polishing Division are assumed to be $22 per pair at 101,000 units. Stitching's costs per pair of shoes are: Direct materials $18 Direct labor $16 Variable overhead $14 Division fixed costs $12 Polishing's costs per completed pair of shoes are: Direct materials $14 Direct labor $7 Variable overhead $8 Division fixed costs $16 What is the transfer price per pair of shoes from the Stitching Division to the Polishing Division if the transfer price per pair of shoes is 120% of full costs? A) $21.60 B) $40.80 C) $57.60 D) $72.00 Answer: D Explanation: D) Transfer price = 1.2 × $60 = $72.00 Diff: 2 Objective: 4 AACSB: Application of knowledge
1572 richard@qwconsultancy.com
14) Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $43. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-102,000 units. The fixed costs for the Polishing Division are assumed to be $23 per pair at 102,000 units. Stitching's costs per pair of shoes are: Direct materials $17 Direct labor $15 Variable overhead $13 Division fixed costs $11 Polishing's costs per completed pair of shoes are: Direct materials $20 Direct labor $7 Variable overhead $7 Division fixed costs $17 Calculate and compare the difference in overall corporate net income of Branded Shoe Company between Scenario A and Scenario B if the Assembly Division sells 102,000 pairs of shoes for $122 per pair to customers. Scenario A: Negotiated transfer price of $37 per pair of shoes Scenario B: Market-based transfer price A) $612,000 more net income under Scenario A B) $612,000 less net income using Scenario B C) $2,142,000 less net income using Scenario A. D) The net income would be the same under both scenarios. Answer: D Diff: 3 Objective: 4 AACSB: Application of knowledge
1573 richard@qwconsultancy.com
15) Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $52. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-110,000 units. The fixed costs for the Polishing Division are assumed to be $23 per pair at 110,000 units. Stitching's costs per pair of shoes are: Direct materials $10 Direct labor $8 Variable overhead $6 Division fixed costs $4 Polishing's costs per completed pair of shoes are: Direct materials $15 Direct labor $11 Variable overhead $8 Division fixed costs $19 Assume the transfer price for a pair of shoes is 185% of total costs of the Stitching Division and 40,000 of shoes are produced and transferred to the Polishing Division. The Stitching Division's operating income is: A) $952,000 B) $720,000 C) $800,000 D) $1,240,000 Answer: A Explanation: A) Revenue ((1.85 × $28) × 40,000) = $2,072,000 Costs ($28 × 40,000) = (1,120,000) Operating income $952,000 Diff: 3 Objective: 4 AACSB: Analytical thinking
1574 richard@qwconsultancy.com
16) Branded Shoe Company manufactures only one type of shoe and has two divisions, the Stitching Division and the Polishing Division. The Stitching Division manufactures shoes for the Polishing Division, which completes the shoes and sells them to retailers. The Stitching Division "sells" shoes to the Polishing Division. The market price for the Polishing Division to purchase a pair of shoes is $42. (Ignore changes in inventory.) The fixed costs for the Stitching Division are assumed to be the same over the range of 40,000-110,000 units. The fixed costs for the Polishing Division are assumed to be $22 per pair at 110,000 units. Stitching's costs per pair of shoes are: Direct materials $14 Direct labor $12 Variable overhead $10 Division fixed costs $8 Polishing's costs per completed pair of shoes are: Direct materials $18 Direct labor $7 Variable overhead $7 Division fixed costs $16 If the Polishing Division sells 110,000 pairs of shoes at a price of $135 a pair to customers, what is the operating income of both divisions together? A) $9,570,000 B) $9,240,000 C) $7,920,000 D) $4,730,000 Answer: D Explanation: D) Revenues = ($135 × 110,000) = $14,850,000 Cost = ($92 × 110,000) = (10,120,000) Operating income = $4,730,000 Diff: 3 Objective: 4 AACSB: Analytical thinking
1575 richard@qwconsultancy.com
17) Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $40.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 8,000-13,000 units. The fixed costs for the Fabrication Division are assumed to be $8.00 per unit at 13,000 units. Compressor's costs per compressor are: Direct materials $24 Direct labor $14.00 Variable overhead $5.00 Division fixed costs $11.50 Fabrication's costs per completed air conditioner are: Direct materials $154.00 Direct labor $65.50 Variable overhead $20.00 Division fixed costs $11.50 What is the market-based transfer price per compressor from the Compressor Division to the Fabrication Division? A) $15.00 B) $34.00 C) $42.00 D) $40.00 Answer: D Explanation: D) $40.00 as given in the problem Diff: 2 Objective: 4 AACSB: Application of knowledge
1576 richard@qwconsultancy.com
18) Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $40.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 9,000-14,000 units. The fixed costs for the Fabrication Division are assumed to be $7.50 per unit at 14,000 units. Compressor's costs per compressor are: Direct materials $21 Direct labor $19.00 Variable overhead $8.00 Division fixed costs $11.50 Fabrication's costs per completed air conditioner are: Direct materials $162.00 Direct labor $65.00 Variable overhead $29.00 Division fixed costs $11.50 What is the transfer price per compressor from the Compressor Division to the Fabrication Division if the method used to place a value on each compressor is 115% of variable costs? A) $28.50 B) $55.20 C) $54.35 D) $52.00 Answer: B Explanation: B) Transfer price = 1.15 × $48 = $55.20 Diff: 2 Objective: 4 AACSB: Application of knowledge
1577 richard@qwconsultancy.com
19) Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $54.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 9,000-14,000 units. The fixed costs for the Fabrication Division are assumed to be $12.50 per unit at 14,000 units. Compressor's costs per compressor are: Direct materials $15 Direct labor $14.50 Variable overhead $4.00 Division fixed costs $10.00 Fabrication's costs per completed air conditioner are: Direct materials $158.00 Direct labor $67.00 Variable overhead $25.00 Division fixed costs $10.00 What is the transfer price per compressor from the Compressor Division to the Fabrication Division if the transfer price per compressor is 120% of full costs? A) $18.00 B) $33.00 C) $49.20 D) $52.20 Answer: D Explanation: D) Transfer price = 1.2 × $43.5 = $52.20 Diff: 2 Objective: 4 AACSB: Application of knowledge
1578 richard@qwconsultancy.com
20) Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $42.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 8,000-13,000 units. The fixed costs for the Fabrication Division are assumed to be $9.50 per unit at 13,000 units. Compressor's costs per compressor are: Direct materials $17 Direct labor $22.50 Variable overhead $6.00 Division fixed costs $10.50 Fabrication's costs per completed air conditioner are: Direct materials $170.00 Direct labor $67.00 Variable overhead $22.00 Division fixed costs $10.50 Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1,600 of the compressors are produced and transferred to the Fabrication Division. The Compressor Division's operating income is: A) $134,400 B) $44,800 C) $47,600 D) $38,000 Answer: B Explanation: B) Revenue ((1.5 × ($17 + $22.50 + $6.00 + $10.50) × 1,600) = $134,400 Costs ($56 × 1,600) = (89,600) Operating income $44,800 Diff: 3 Objective: 4 AACSB: Application of knowledge
1579 richard@qwconsultancy.com
21) Plish Company manufactures only one type of washing machine and has two divisions, the Compressor Division, and the Fabrication Division. The Compressor Division manufactures compressors for the Fabrication Division, which completes the washing machine and sells it to retailers. The Compressor Division "sells" compressors to the Fabrication Division. The market price for the Fabrication Division to purchase a compressor is $56.00. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 6,000-11,000 units. The fixed costs for the Fabrication Division are assumed to be $7.50 per unit at 11,000 units. Compressor's costs per compressor are: Direct materials $21 Direct labor $19.00 Variable overhead $7.00 Division fixed costs $8.00 Fabrication's costs per completed air conditioner are: Direct materials $154.00 Direct labor $64.50 Variable overhead $22.00 Division fixed costs $8.00 If the Fabrication Division sells 1,900 air conditioners at a price of $415.00 per washing machine to customers, what is the operating income of both divisions together? A) $224,200 B) $211,850 C) $176,700 D) $171,950 Answer: B Explanation: B) Revenues = ($415.00 × 1,900) = $788,500 Cost = ($55 + $248.5) × 1,900) = (576,650) Operating income = $211,850 Diff: 3 Objective: 4 AACSB: Application of knowledge
1580 richard@qwconsultancy.com
22) Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell for $15 per pound. Division A incurs costs of $3.75 per pound while Division B incurs additional costs of $7.00 per pound. What is Division A's operating income per burger, assuming the transfer price of the ground veal is set at $5.50 per burger? A) $1.75 B) $0.75 C) $6.50 D) $1.50 Answer: A Explanation: A) Operating income per burger = $5.50 - $3.75 = $1.75 Diff: 2 Objective: 4 AACSB: Analytical thinking
23) Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell for $20 per pound. Division A incurs costs of $7.25 per pound while Division B incurs additional costs of $6.00 per pound. Which of the following formulas correctly reflects the company's operating income per pound? A) $20 - ($7.25 + $6.00) = $6.75 B) $20 - ($3.00 + $6.00) = $11.00 C) $20 - ($7.25 + $9) = $3.75 D) $20 - ($1.50 + $3.00 + $3.00) = $3.50 Answer: A Explanation: A) $20 - ($7.25 + $6.00) = $6.75 Diff: 2 Objective: 4 AACSB: Analytical thinking
24) The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating income among divisions. Answer: FALSE Explanation: The choice of a transfer-pricing method has a large effect. Diff: 2 Objective: 4 AACSB: Analytical thinking
25) Transfer prices do not affect managers whose compensation is directly dependent on an organization's operating income because transfer prices affect only divisional profits and not the organization's profit. Answer: FALSE Explanation: Transfer prices affect both divisional and organizational profits. Diff: 3 Objective: 4 AACSB: Analytical thinking
1581 richard@qwconsultancy.com
26) Hybrid transfer prices take into account both cost and market information. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
27) Hybrid transfer prices can be arrived at through negotiations. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
28) Negotiated transfer prices are often employed when market prices are stable. Answer: FALSE Explanation: Negotiated transfer prices are often employed when market prices are volatile. Diff: 2 Objective: 4 AACSB: Analytical thinking
29) The cost used in cost-based transfer prices can be actual cost or budgeted cost. Answer: TRUE Diff: 2 Objective: 4 AACSB: Analytical thinking
30) For each of the following, identify whether it BEST relates to market-based, cost-based, negotiated, or all types of transfer pricing. ________ ________ ________ ________ ________
a. Bargaining between selling and buying units b. Budgeted costs c. 145% of full costs d. Internal product transfers are required if goods are available internally e. Manufacturing costs plus marketing costs plus distribution costs plus customer service costs f. Prices listed in a trade journal g. Selling price less normal sales commissions h. Variable manufacturing cost plus a markup
________ ________ ________ Answer: a. Negotiated b. Cost-based c. Cost-based d. Any method e. Cost-based f. Market-based g. Market-based h. Cost-based
Diff: 2 Objective: 4 AACSB: Analytical thinking
1582 richard@qwconsultancy.com
31) For each of the following statements regarding the satisfaction of transfer pricing criteria, identify whether you would expect the transfer pricing method to meet the criteria. Provide a yes, no, or sometimes for each situation. ________ a. Market-Based transfer pricing achieves goal congruence. ________ b. Cost-Based transfer pricing achieves goal congruence. ________ c. Negotiated transfer pricing achieves goal congruence. ________ d. Market-Based transfer pricing motivates management effort. ________ e. Cost-Based transfer pricing motivates management effort. ________ f. Negotiated transfer pricing motivates management effort. ________ g. Market-Based transfer pricing is useful for evaluating subunit performance. ________ h. Cost-Based transfer pricing is useful for evaluating subunit performance. ________ i. Negotiated transfer pricing is useful for evaluating subunit performance. ________ j. Market-Based transfer pricing preserves subunit autonomy. ________ k. Cost-Based transfer pricing preserves subunit autonomy. ________ l. Negotiated transfer pricing preserves subunit autonomy. Answer: a. Yes b. Sometimes c. Yes d. Yes e. Yes f. Yes g. Yes h. Sometimes i. Yes j. Yes k. No l. Yes Diff: 2 Objective: 4 AACSB: Analytical thinking
1583 richard@qwconsultancy.com
32) The River Falls Company has two divisions. The Cutting Division prepares timber at its sawmills. The Coating Division prepares the cut lumber into finished wood for the furniture industry. No inventories exist in either division at the beginning of 20X5. During the year, the Cutting Division prepared 60,000 cords of wood at a cost of $720,000. All the lumber was transferred to the Coating Division, where additional operating costs of $5 per cord were incurred. The 600,000 boardfeet of finished wood were sold for $2,500,000. Required: a. Determine the operating income for each division if the transfer price from Cutting to Coating is at cost - $12 a cord. b.
Determine the operating income for each division if the transfer price is $9 per cord.
c. Since the Cutting Division sells all of its wood internally to the Coating Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost center or a profit center under the circumstances? Answer: a. Cutting Coating Revenue $720,000* $2,500,000 Cost of services: Incurred $ 720,000 $ 300,000 Transferred-in 0 720,000 Total $ 720,000 $1,020,000 Operating income
$0
$1,480,000
Cutting $540,000*
Coating $2,500,000
$ 720,000 0 $ 720,000
$ 300,000 540,000 $840,000
$(180,000)
$1,660,000
* 60,000 cords × $12 = $720,000 b. Revenue Cost of services: Incurred Transferred-in Total Operating income * 60,000 cords × $9 = $540,000 c. The manager of Cutting cares about the transfer price if the division is a profit center but not if it is a cost center. Under the circumstances, the division probably should be a cost center and not worry about the profit it pretends to make by selling to another division. Diff: 2 Objective: 4 AACSB: Application of knowledge
1584 richard@qwconsultancy.com
33) Sandra's Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehouse facility. The Finishing Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 20X8. During the year, the Raw Material Division prepared 450,000 square feet of sheet metal at a cost of $1,800,000. All the sheet metal was transferred to the Finishing Division, where additional operating costs of $1.50 per square foot were incurred. The 450,000 square feet of finished fabricated sheet metal products were sold for $3,875,000. Required: a. Determine the operating income for each division if the transfer price from Raw Material to Finishing is at a cost of $4 per square foot. b.
Determine the operating income for each division if the transfer price is $6 per square foot.
c. Since the Raw Materials Division sells all of its sheet metal internally to the Finishing Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost center or a profit center under the circumstances? Answer: a. Raw Material Finishing Revenue $1,800,000* $3,875,000 Cost of services: Incurred $1,800,000 $ 675,000 Transferred-in 0 1,800,000 Total $ 1,800,000 $2,475,000 Operating income
$0
$1,400,000
Cutting $2,700,000*
Finishing $3,875,000
$1,800,000 0 $1,800,000
$ 675,000 2,700,000 $2,375,000
$900,000
$500,000
* 450,000 square feet × $4 = $1,800,000 b. Revenue Cost of services: Incurred Transferred-in Total Operating income * 450,000 square feet × $6 = $2,700,000 c. The manager of Raw materials cares about the transfer price if the division is a profit center but not if it is a cost center. Under the circumstances, the division probably should be a cost center and should not worry about the profit it pretends to make by selling to another division. Diff: 2 Objective: 4 AACSB: Application of knowledge
1585 richard@qwconsultancy.com
34) Bedtime Bedding Company manufactures pillows. The Cover Division makes covers and the Assembly Division makes the finished products. The covers can be sold separately for $5.00. The pillows sell for $6.00. The information related to manufacturing for the most recent year is as follows: Cover Division manufacturing costs Sales of covers by Cover Division Market value of covers transferred to Assembly Sales of pillows by Assembly Division Additional manufacturing costs of Assembly Division
$6,000,000 4,000,000 6,000,000 7,200,000 1,500,000
Required: Compute the operating income for each division and the company as a whole. Use market value as the transfer price. Are all managers happy with this concept? Explain. Answer: Cover Assembly Company Revenue: External $ 4,000,000 $7,200,000 $11,200,000 Internal 6,000,000 0 0 Total $10,000,000 $7,200,000 $11,200,000 Cost of goods: Incurred $ 6,000,000 $1,500,000 $ 7,500,000 Transferred-in 0 6,000,000 0 Total $ 6,000,000 $7,500,000 $ 7,500,000 Operating income
$ 4,000,000
$ (300,000)
$ 3,700,000
The Assembly manager is probably not happy because the division is showing a loss. The manager would probably argue for a transfer price at something less than market price. However, since the market is open and competitive, the market price can be justified. The division needs to either increase its price or reduce its costs if it expects to show a profit. Diff: 3 Objective: 4 AACSB: Analytical thinking
1586 richard@qwconsultancy.com
35) DesMoines Valley Company has two divisions, Computer Services and Consultancy Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 20X5 were $200,000 for Computer Services and $350,000 for Consultancy Services. Computer Services worked 3,000 hours for Consultancy Services, who, in turn, worked 1,200 hours for Computer Services. The total costs of external services performed by Computer Services were $110,000 and $240,000 by Consultancy Services. Required: a. Determine the operating income for each division and for the company as a whole if the transfer price from Computer Services to Consultancy Services is $15 per hour and the transfer price from Consultancy Services to Computer Services is $12.50 per hour. b. Determine the operating income for each division and for the company as a whole if the transfer price between divisions is $17 per hour. c. What are the operating income results for each division and for the company as a whole if the two divisions net the hours worked for each other and charge $12.50 per hour for the one with the excess? Which division manager prefers this arrangement?
1587 richard@qwconsultancy.com
Answer: a. Revenue: External Internal Total Cost of services: Incurred Transferred-in Total Operating income
Computer
Consultancy
Company
$ 200,000 45,000 $245,000
$350,000 15,000 $365,000
$550,000 0 $550,000
$110,000 15,000 $125,000
$240,000 45,000 $285,000
$350,000 0 $350,000
$120,000
$80,000
$200,000
* Computer Services = 3,000 hours × $15 = $45,000 Consultancy Services = 1,200 hours × $12.50 = $15,000 Revenue for one is an expense of the other. b. Revenue: External Internal Total Cost of services: Incurred Transferred-in Total Operating income
Computer
Consultancy
Company
$ 200,000 51,000 $251,000
$350,000 20,400 $370,400
$550,000 0 $550,000
$110,000 20,400 $130,400
$240,000 51,000 $291,000
$350,000 0 $350,000
$120,600
$79,400
$200,000
* Computer Services = 3,000 hours × $17 = $51,000 Consultancy Services = 1,200 hours × $17 = $20,400 Revenue for one is an expense of the other.
1588 richard@qwconsultancy.com
c. Revenue: External Internal Total Cost of services: Incurred Transferred-in Total Operating income
Computer
Consultancy
Company
$ 200,000 22,500 $222,500
$350,000 0 $350,000
$550,000 0 $550,000
$110,000 0 $110,000
$240,000 22,500 $262,500
$350,000 0 $350,000
$112,500
$87,500
$200,000
* Computer Services net = (3,000 - 1,200) × $12.50 = $22,500 Revenue for one is an expense of the other. The manager of Computer Services favors this procedure for the current year. If the hours are always in favor of Computer Services, the manager of Computer Services will favor this procedure. Diff: 2 Objective: 4 AACSB: Application of knowledge
1589 richard@qwconsultancy.com
36) Olive Branch Company recently acquired an olive oil processing company that has an annual capacity of 2,000,000 liters and that processed and sold 1,400,000 liters last year at a market price of $4 per liter. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800,000 liters of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows: Direct materials per liter Direct processing labor Variable processing overhead Fixed processing overhead Total
$1.00 0.50 0.30 0.40 $2.20
Management is trying to decide what transfer price to use for sales from the newly acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, since fixed overhead cost should be recomputed with the larger volume. Any output of the Olive Oil Division not sold to the Cooking Division can be sold to outsiders for $4 per liter. Required: a. Compute the operating income for the Olive Oil Division using a transfer price of $4. b. Compute the operating income for the Olive Oil Division using a transfer price of $2.20. c. What transfer price(s) do you recommend? Compute the operating income for the Olive Oil Division using your recommendation.
1590 richard@qwconsultancy.com
Answer: a. Sales: External (1,200,000 × $4.50) Internal (800,000 × $4) Cost of goods sold: Variable (2,000,000 × $1.80) Fixed (2,000,000 × $0.40) Operating income b. Sales: External (1,200,000 × $4) Internal (800,000 × $2.20) Cost of goods sold: Variable (2,000,000 × $1.80) Fixed (2,000,000 × $0.40) Operating income
$5,400,000 3,200,000 $3,600,000 800,000
$4,800,000 1,760,000 $3,600,000 800,000
$8,600,000
4,400,000 $4,200,000
$6,560,000
4,400,000 $2,160,000
c. Due to current demand in excess of the capacity, the Olive Oil Division should not be penalized by having to sell inside. All sales equivalent to the current external demand of 1,400,000 liters should be at the market price. Current external demand Current internal demand Total demand Capacity Excess demand Internal demand Noncompetitive internal demand
1,400,000 800,000 2,200,000 2,000,000 200,000 800,000 600,000
Sales: External (1,200,000 × $4) Internal (200,000 × $4) Internal (600,000 × $2.14)
$4,800,000 800,000 1,320,000
Cost of goods sold: Variable (2,000,000 × $1.80) Fixed (2,000,000 × $0.40) Operating income
$3,600,000 800,000
$6,920,000
4,400,000 $2,520,000
Diff: 3 Objective: 4 AACSB: Application of knowledge
1591 richard@qwconsultancy.com
37) Briefly explain each of the three methods used to determine a transfer price. Answer: Transfer prices can be calculated using an external market price. They could be calculated using a cost basis, and perhaps including a markup. They could also be calculated using a negotiated price between the buying and selling divisions. Diff: 2 Objective: 4 AACSB: Analytical thinking
38) How does cost-based transfer price method help managers to determine transfer prices? Answer: Managers may choose a transfer price based on the cost of producing the product being transferred. The full cost of the product includes all production costs plus costs from other business functions (R&D, design, marketing, distribution, and customer service). The cost used in cost-based transfer prices can be actual cost or budgeted cost. Sometimes, the cost-based transfer price includes a markup or profit margin that represents a return on subunit investment. Diff: 2 Objective: 4 AACSB: Analytical thinking
Objective 23.5 1) Transferring products internally at a market price leads to optimal decisions when all of the following conditions are prevalent EXCEPT: A) the market for the transferred product (intermediate product) is perfectly competitive B) there are no additional costs to the company from buying in the external market instead of transacting internally C) the interdependence of subunits is minimal D) there are additional benefits to the company by selling in the external markets instead of transferring internally Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
2) A perfectly competitive market exists when which of the following conditions are present? A) individual buyers or sellers can affect prices by their own actions B) market prices reach well above their historical averages due to demand outstripping supply C) market prices drop well below their historical averages due to supply outstripping demand D) there is a homogeneous product with buying prices equal to selling prices Answer: D Diff: 2 Objective: 5 AACSB: Analytical thinking
1592 richard@qwconsultancy.com
3) A benefit of using a market-based transfer price is that the: A) profits of the transferring division are sacrificed for the overall good of the corporation B) profits of the division receiving the products are sacrificed for the overall good of the corporation C) economic viability and profitability of each division can be evaluated individually D) transferring division can be assured of recovering its full costs in all scenarios Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
4) When an industry has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called: A) distress prices B) dropped prices C) low-average prices D) substitute prices Answer: A Diff: 1 Objective: 5 AACSB: Analytical thinking
5) Market-based transfer prices are helpful when: A) the product is specialized B) the internal product is different from the products available externally in terms of its quality C) the interdependencies of subunits are minimal D) the markets are not perfectly competitive Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
6) If the distress price is used as the transfer price: A) the selling division will show a loss because the distress price will not exceed the full cost of the division B) the buying division will show a loss because the distress price will not exceed the full cost of the division C) the selling division will show a loss because the distress price will exceed the full cost of the division D) the buying division will show a loss because the distress price will exceed the full cost of the division Answer: A Diff: 3 Objective: 5 AACSB: Analytical thinking
1593 richard@qwconsultancy.com
7) Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organization. Answer: The conditions for which market-based transfer pricing is likely to lead to optimal decision making are: (1) the market for the intermediate product is perfectly competitive, (2) interdependencies of the subunits are minimal, and (3) there are no additional costs or benefits to the company as a whole from buying or selling in the external market instead of transacting internally. In a perfectly competitive market, the market-based transfer prices promote goal congruence, motivate the management to take the same actions as if they were transacting externally, evaluate subunit performance, and preserve subunit autonomy. Diff: 2 Objective: 5 AACSB: Analytical thinking
8) What are distress prices and which transfer prices should be used for judging performance if distress prices prevail? Answer: When supply outstrips demand, market prices may drop well below their historical averages. If the drop in prices is expected to be temporary, these low market prices are called "distress prices." Some companies use the distress prices themselves, but others use long-run average prices, or "normal" market prices. Diff: 2 Objective: 5 AACSB: Analytical thinking
1594 richard@qwconsultancy.com
Objective 23.6 1) When companies do not want to use market prices or find it too costly, they typically use ________ prices, even though suboptimal decisions may occur. A) average-cost B) full-cost C) long-run cost D) short-run average cost Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
2) Aerated Water Company makes internal transfers at 175% of full cost. The Soda Refining Division purchases 30,000 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $33 per container via an external shipper. To reduce costs, the company located an independent supplier in Missouri who is willing to sell 30,000 containers at $29 each, delivered to Aerated Water Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 30,000 containers at a variable cost of $6.00 per container. What is the total cost to Aerated Water Company if the carbonated water is purchased from the local supplier? A) $990,000 B) $982,500 C) $2,295,000 D) $1,732,500 Answer: A Explanation: A) Total cost to the company = $33 × 30,000 = $990,000 Diff: 2 Objective: 6 AACSB: Application of knowledge
3) Crush Company makes internal transfers at 155% of full cost. The Soda Refining Division purchases 40,300 containers of carbonated water per day, on average, from a local supplier, who delivers the water for $58 per container via an external shipper. To reduce costs, the company located an independent supplier in Illinois who is willing to sell 40,300 containers at $50 each, delivered to Crush Company's Shipping Division in Missouri. The company's Shipping Division in Missouri has excess capacity and can ship the 40,300 containers at a variable cost of $5.00 per container. What is the total cost of purchasing the water from the Illinois supplier and shipping it to the Soda Division? A) $2,015,000 B) $2,216,500 C) $2,337,400 D) $201,500 Answer: B Explanation: B) Total cost to the company = 40,300 containers × ($5.00 + $50) = $2,216,500 Diff: 2 Objective: 6 AACSB: Application of knowledge
1595 richard@qwconsultancy.com
4) An advantage of using budgeted costs for transfer pricing among divisions is that: A) overall corporate profitability is usually higher B) it usually provides a basis for optimal decision making C) the divisions know the transfer price in advance D) it promotes subunit autonomy Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
5) A company should use cost-based transfer prices: A) when a company's product is specialized B) the market for the intermediate product is perfectly competitive C) the interdependencies of subunits are minimal D) there is no benefit from market-based transfer price Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
6) A transfer price based on the full cost plus a markup may lead to suboptimal decisions because: A) it leads the buying division to regard the fixed costs and the markup of the selling division as a variable cost B) it leads the buying division to regard the variable costs and the markup of the selling division as a fixed cost C) it leads the buying division to regard the fixed costs and the markup of the selling division as total costs D) it leads the buying division to regard the variable costs and the markup of the selling division as total costs Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
7) Cost-based transfer prices are often used when markets for the product are not competitive or when the quality of the internal product is different from the externally available products. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
8) A major advantage of using actual costs for transfer prices is that often inefficiencies are NOT passed along to the receiving division. Answer: FALSE Explanation: When actual costs are used inefficiencies are passed along to the receiving division. Diff: 2 Objective: 6 AACSB: Analytical thinking
1596 richard@qwconsultancy.com
9) The full cost plus a markup transfer-pricing method can sometimes lead to goal incongruence. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
10) Cost-based transfer prices are helpful when markets are not perfectly competitive. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
11) When using transfer prices based on costs rather than market prices, management can better determine profitability of the investment made in the intermediate producing division. Answer: FALSE Explanation: A market based price is a better approach for determining the profitability of a product providing division 's investment. Diff: 2 Objective: 6 AACSB: Analytical thinking
12) Super Shoes Company manufactures sneakers. The Athletic Division sells its socks for $18 a pair to outsiders. Sneakers have manufacturing costs of $6.00 each for variable and $6.00 for fixed. The division's total fixed manufacturing costs are $315,000 at the normal volume of 70,000 units. The European Division has offered to buy 15,000 Sneakers at the full cost of $12. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division's relevant operating range. Explain whether the Athletic Division should accept the offer. Answer: Sales $12.00 Variable costs 6.00 Contribution margin $6.00 The proposal should be accepted because it makes a contribution to fixed costs and profits of $6.00 per unit. This would increase the division's operating income by $90,000 = ($6.00 × 15,000 units). Diff: 2 Objective: 6 AACSB: Analytical thinking
1597 richard@qwconsultancy.com
13) Nig Car Company manufactures automobiles. The Fastback Car Division sells its cars for $50,000 each to the general public. The fastback cars have manufacturing costs of $30,000 each for variable and $15,000 each for fixed costs. The division's total fixed manufacturing costs are $75,000,000 at the normal volume of 5,000 units. The Coupe Car Division has been unable to meet the demand for its cars this year. It has offered to buy 1,000 cars from the Fastback Car Division at the full cost of $40,000. The Fastback Car Division has excess capacity and the 1,000 units can be produced without interfering with the current outside sales of 5,000. The 6,000 volume is within the division's relevant operating range. Explain whether the Fastback Car Division should accept the offer. Answer: Unit Sales $40,000 Variable costs 30,000 Contribution margin $10,000 The proposal should be accepted because it makes a contribution to fixed costs and profits of $10,000 per unit. This would increase the division's operating income by $10,000,000 = ($10,000 × 1,000 units). Diff: 2 Objective: 6 AACSB: Analytical thinking
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14) Cornerstone Company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 20X5 sales were 140,000 to outsiders at $5 per unit and 40,000 units to the Mixing Division at 140% of variable costs. Under a dual transfer-pricing system, the Mixing Division pays only the variable cost per unit. The fixed costs of the Bottle Division are $125,000 per year. Mixing sells its finished products to outside customers for $11.50 per unit. Mixing has variable costs of $2.50 per unit in addition to the costs from the Bottle Division. The annual fixed costs of Mixing were $85,000. There were no beginning or ending inventories during the year. Required: What are the operating incomes of the two divisions and the company as a whole for the year? Explain why the company's operating income is less than the sum of the two divisions' total income. Answer: Bottle Mixing Company Revenue: External $700,000 $460,000 $1,160,000 Internal 168,000 0 0 Total $868,000 $460,000 $1,160,000 Variable costs: Incurred $540,000 $100,000 $640,000 Transferred-in 0 120,000 0 Total 540,000 220,000 640,000 Contribution margin 328,000 240,000 520,000 Fixed Costs 125,000 85,000 210,000 Operating income $203,000 $155,000 $310,000 * 40,000 × $3 × 1.40 = $168,000 The internal sales are not included in the company's statement because the company cannot sell to itself. Therefore, it has to exclude $48,000 of dual pricing. Diff: 2 Objective: 6 AACSB: Analytical thinking
1599 richard@qwconsultancy.com
15) When cost-based transfer pricing is used between subunits of a large organization, describe how to avoid making suboptimal decisions. Answer: When market prices are unavailable or too costly to obtain, it is often appropriate to use cost-based transfer prices. In some cases, the supplying division will charge full cost (or full cost plus a markup) to the receiving division. This is not optimal, because it causes the receiving division to treat the transferred in full cost per unit as if it were a variable cost. Since the full cost includes an allocation for overhead, it is not all variable cost. As a result, the organization as a whole will make suboptimal decisions using this as a basis. A more appropriate method would be to use a variable cost or incremental cost for the units being transferred between subunits within an organization. In the event that the supplying organization is a profit center and has other external customers for its products, then there may be some accommodation made for prorating the difference between variable cost and full cost. This method would be superior to allowing a full cost (or full cost plus markup) method to be used. The objective is to have the organization as a whole act in a manner that will approximate competitive marketplace conditions as much as possible to promote cost efficiency in the long run. Diff: 2 Objective: 6 AACSB: Analytical thinking
Objective 23.7 1) An advantage of a negotiated transfer price of a product to be transferred between divisions is the: A) close relationship between the negotiated price and the market price B) negotiated transfer price preserves divisional autonomy C) negotiations usually do not require much time and energy D) simplicity of its computations and close approximation to market price Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
2) The range over which two divisions will negotiate a transfer price is: A) between the supplying division's variable cost and the market price of the product B) between the supplying division's variable cost and its full cost of the product C) it could be anywhere above the supplying division's full cost of the product D) between the supplying division's full cost and 180% above its full cost Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
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3) The transfer-pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is the: A) dual pricing B) market pricing C) single pricing D) distress pricing Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
4) Which of the following is a disadvantage of using negotiated transfer price? A) It requires each division manager to put forth effort to increase division operating income. B) Negotiated transfer prices take away the divisional autonomy as prices depend on bargaining strength. C) Negotiations usually require much time and energy thereby consuming precious managerial time. D) It may lead to divisional enmity because negotiation process may cause frictions among departments. Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
5) Which of the following is true about transfer pricing? A) The maximum price that the buying division is willing to pay is the higher of the eventual contribution generated from an internal transaction and the price of purchasing from an external party. B) The selling division must always set a transfer price above the market price of the product to make the transaction economically feasible for the buying division. C) There is generally a minimum transfer price the selling division will not go below based on its own cost structure. D) The transfer-price range lies between the its fixed cost per unit and the higher of its contribution or price at which the product is available from external suppliers. Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
6) Which of the following is a disadvantage of dual pricing? A) It strongly preserves the autonomy of divisions, and the division managers are motivated to put forth effort to increase the operating income of their respective divisions, causing inefficiencies. B) The price arrived by using dual pricing has no specific relationship to either costs or the market price. C) It insulates managers from the realities of the marketplace because costs, not market prices, affect the revenues of the supplying division. D) It assumes that the minimum transfer price equals the incremental cost per unit incurred up to the point of transfer minus the opportunity cost per unit to the selling division. Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
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7) One advantage of prorating the difference between a maximum and minimum transfer price of a product to be moved between divisions is that it saves the cost of objective audits of transfer pricing. Answer: FALSE Explanation: Just the opposite is true. Proration methods require a high degree of trust and an exchange of information among divisions or objective audits of cost information to have long-run success. Diff: 2 Objective: 7 AACSB: Analytical thinking
8) Dual pricing uses two separate transfer-pricing methods to price each transfer from one subunit to another. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
9) One concern with dual pricing is that it leads to disputes about which price should be used when computing the taxable income of subunits located in different tax jurisdictions. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
10) Dual pricing insulates managers from the realities of the marketplace because costs, not market prices, affect the revenues of the supplying division. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
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11) TrueValue Company makes all types of office desks. The General Desk Division is currently producing 10,000 desks per year with a capacity of 15,000. The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900,000. The General desk sells for $400. The Executive Division wants to buy 5,000 desks at $250 for its custom office design business. The General Desk manager refused the order because the price is below variable cost. The executive manager argues that the order should be accepted because it will lower the fixed cost per desk from $90 to $60 and will take the division to its capacity, thereby causing operations to be at their most efficient level. Required: a. Should the order from the Executive Division be accepted by the General Desk Division? Why? b. From the perspective of the General Desk Division and the company, should the order be accepted if the Executive Division plans on selling the desks in the outside market for $420 after incurring additional costs of $100 per desk? c. What action should the company president take? Answer: a. Sales $250 Variable costs 300 Contribution margin $(50) The manager should not accept the order because it is below variable costs. It will generate a loss of $250,000 [5,000 units × $(50)]. This is a losing proposition in both the short run and long run. b. What the Executive Division does with the desks after receiving them is of no consequence to the General Desk Division. However, the division will still object to the transfer price of $250. The company, on the other hand, will encourage the offer because it increases total company operating income by $100,000 = 5,000 × [$420 - ($300 + $100)]. c. If the company president wants the Executive Division to have the new business, it should arrange a dual-pricing system or else have negotiated prices between divisions. Dual pricing would allow the selling division to get a market value for the transfer and the buying division to get some type of cost-plus transfer price. The negotiated price would allow the buying and selling divisions to feel like they had a part in the final pricing decision. Diff: 3 Objective: 7 AACSB: Application of knowledge
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12) The Microchip Division of Silicon Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Microchip Division for 20X5 are as follows: Internal Sales Sales: 300,000 chips at $10 200,000 chips at $12 Variable expenses at $4 Contribution margin Fixed cost (allocated in units) Operating income
External Sales
$3,000,000 1,200,000 $1,800,000 1,500,000 $ 300,000
$2,400,000 800,000 $1,600,000 1,000,000 $ 600,000
The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.90 each. The manager of Microchip Division is not willing to meet the $8.90 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200,000 chips. Required: a. Verify the Microchip Division's $9.00 unit cost figure. b. Should the Microchip Division meet the outside price of $8.90? Explain. c. Could the $8.60 price be met and still show a profit for the Microchip Division sales to the Personal Computer Division? Show computations. Answer: a. Variable costs $4.00 Fixed costs 5.00 [($1,500,000 + $1,000,000)/500,000 units] Total unit costs $9.00 b. Yes, because the contribution margin is positive ($8.90 - $4.00 = $4.90). If it loses the internal business, the other sales would have to absorb the fixed costs, which would force even higher external prices. The Microchip Division manager does not have much bargaining power since the external sales are already at a maximum. c. Sales (300,000 × $8.90) Variable costs (300,000 × $4) Contribution margin Fixed costs (300,000 × $5.00) Operating income
$2,670,000 1,200,000 $1,470,000 1,500,000 $ (30,000)
Internal sales will not show a profit. This assumes the fixed costs are still allocated at $5.00 per unit. Diff: 2 Objective: 7 AACSB: Application of knowledge
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13) Dual pricing is not widely used. Explain its disadvantages. Answer: One concern with dual pricing is that it leads to disputes about which price should be used when computing the taxable income of subunits located in different tax jurisdictions. A second concern is that dual pricing insulates managers from the realities of the marketplace because costs, not market prices, affect the revenues of the supplying division. Diff: 2 Objective: 7 AACSB: Analytical thinking
Objective 23.8 1) Which of the following transfer-pricing methods always achieves goal congruence? A) a market-based transfer price B) a cost-based transfer price C) a negotiated transfer price D) full-cost plus a standard profit margin Answer: C Diff: 2 Objective: 8 AACSB: Analytical thinking
2) In comparing the three basic approaches to transfer pricing, which of the following statements would be true? A) A cost-based approach preserves subunit autonomy while negotiated transfer prices do not. B) Market-based transfer pricing motivates managers but negotiated prices do not. C) Cost-based transfer pricing systems are more difficult to implement and often make more time to implement than negotiated transfer pricing. D) Market-based transfer pricing achieves goal congruence when markets are competitive while cost-based can achieve goal congruence, but not always. Answer: D Diff: 2 Objective: 8 AACSB: Analytical thinking
3) Which of the following denotes minimum transfer price? A) Minimum transfer price = Incremental cost per unit incurred up to the point of transfer + Opportunity cost per unit to the selling subunit B) Minimum transfer price = Total cost per unit incurred up to the point of transfer + Sunk cost per unit to the selling subunit C) Minimum transfer price = Current cost per unit incurred up to the point of transfer + Historical cost per unit to the selling subunit D) Minimum transfer price = Variable cost per unit incurred up to the point of transfer + Fixed cost per unit to the selling subunit Answer: A Diff: 2 Objective: 8 AACSB: Analytical thinking
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4) The minimum transfer price equals: A) opportunity costs less the additional outlay costs B) opportunity costs times 125% plus the additional outlay costs C) opportunity costs divided by the additional outlay costs D) incremental costs plus opportunity costs Answer: D Diff: 1 Objective: 8 AACSB: Analytical thinking
5) The seller of Product A has no idle capacity and can sell all it can produce at $53 per unit. Outlay cost is $18. What is the opportunity cost, assuming the seller sells internally? A) $18 B) $35 C) $53 D) $71 Answer: B Explanation: B) The total opportunity cost is $35 ($53 - $18). Diff: 2 Objective: 8 AACSB: Application of knowledge
6) The seller of a product has no idle capacity and can sell all it can produce at $39 per unit. Outlay cost is $12. What is the opportunity cost, assuming the seller sells internally? A) $12 B) $27 C) $39 D) $51 Answer: B Explanation: B) The total opportunity cost is $27 ($39 - $12). Diff: 2 Objective: 8 AACSB: Application of knowledge
7) In markets that are not perfectly competitive: A) the selling division will not have any unused capacity B) companies can increase their capacity utilization only by decreasing their prices C) minimum transfer price will equal the incremental cost per unit incurred up to the point of transfer D) the opportunity cost will equal the minimum contribution margin Answer: B Diff: 2 Objective: 8 AACSB: Application of knowledge
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8) In analyzing transfer prices, the: A) buyer will not willingly purchase a product for less than the incremental costs incurred to manufacture the product internally B) seller will not willingly sell a product for less than the incremental costs incurred to make the product C) buyer will willingly pay more than the ceiling transfer price D) buyer will not pay less than the ceiling transfer price Answer: B Diff: 3 Objective: 8 AACSB: Analytical thinking
9) Minimum transfer price can be arrived at by adding incremental cost per unit incurred up to the point of transfer with the markup required. Answer: FALSE Explanation: Minimum transfer price can be arrived at by adding incremental cost per unit incurred up to the point of transfer with the opportunity cost per unit to the selling subunit. Diff: 2 Objective: 8 AACSB: Analytical thinking
10) Both the market-based transfer pricing approach and cost-based methods are useful for evaluating subunit performance. Answer: FALSE Explanation: When competitive markets exist for the intermediate product, then market-based transfer pricing is useful for subunit performance but with cost-based transfer pricing, subunit evaluation is more difficult unless the transfer price exceeds the full cost and even then, it is somewhat arbitrary. Diff: 2 Objective: 8 AACSB: Analytical thinking
11) The additional cost of producing and transferring the product or service is called variable manufacturing cost. Answer: FALSE Explanation: The additional cost of producing and transferring the product or service is called incremental cost. Incremental costs include any fixed cost component also. Diff: 2 Objective: 8 AACSB: Analytical thinking
12) If the selling subunit is operating at capacity, the opportunity cost of transferring a unit internally rather than selling it externally is equal to the market price minus the variable cost. Answer: TRUE Diff: 2 Objective: 8 AACSB: Analytical thinking
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13) The Fabrication Division of American Car Company has offered to purchase 90,000 batteries from the Electrical Division for $104 per unit. At a normal volume of 250,000 batteries per year, production costs per battery are as follows: Direct materials Direct manufacturing labor Variable factory overhead Fixed factory overhead Total
$ 40 30 12 40 $112
The Electrical Division has been selling 250,000 batteries per year to outside buyers at $136 each; capacity is 350,000 batteries per year. The Fabrication Division has been buying batteries from outside sources for $130 each. Required: a. Should the Electrical Division manager accept the offer? Explain. b. From the company's perspective, will the internal sales be of any benefit? Explain. Answer: a. Variable cost per battery = $40 + $30 + $12 = $82 Sales to Assembly Variable costs Contribution margin
$104 82 $22
Because the Electrical Division is not at capacity, it should sell to the Fabrication Division up to 100,000 units at $104. This will add $1,980,000 (90,000 × $22) at the current level to its operating income without reducing its outside sales. b. The internal sales would be beneficial to the company because the internal variable manufacturing costs of $82 per battery are less than the external price of $130 currently being paid by the Fabrication Division. The company would be saving $4,320,000 [90,000 × ($130 - $82)] per year. Diff: 3 Objective: 8 AACSB: Application of knowledge
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14) Soft Cushion Company is highly decentralized. Each division is empowered to make its own sales decisions. The Assembly Division can purchase stuffing, a key component, from the Production Division or from external suppliers. The Production Division has been the major supplier of stuffing in recent years. The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $36 per pound for the next year. The Production Division recently increased its unit price to $52. The manager of the Production Division presented the following information — variable cost $34 and fixed cost $22 —to top management in order to attempt to force the Assembly Division to purchase the stuffing internally. The Assembly Division purchases 20,600 pounds of stuffing per month. What would be the monthly operating advantage (disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to $80 per pound and the Production Division is able to utilize the facilities for other operations, resulting in a monthly cash-operating savings of $32 per pound? A) $1,648,000 B) $947,600 C) $(288,400) D) $(82,400) Answer: C Explanation: C) Purchase cost: (20,600 lbs. × $80) $1,648,000 Outlay cost: (20,600 lbs. × $34) (700,400) Opportunity cost: (20,600 lbs. × $32) (659,200) Advantage/(Disadvantage) $(288,400) Diff: 2 Objective: 8 AACSB: Analytical thinking
Objective 23.9 1) One of the problems in using one set of accounting records for tax reporting and another set of records for internal management reporting is that: A) it is illegal as well as unethical to do so B) the tax authorities may suspect manipulation of records C) it is almost impossible to keep the records straight and hard to reconcile the books D) the shareholders do not approve of such methods and the market prices will decline Answer: B Diff: 1 Objective: 9 AACSB: Analytical thinking
2) Which of the following helps in avoiding costly transfer-pricing disputes between taxpayers and tax authorities? A) transfer price redressal panel B) grievance redressal forum C) transfer price agreements D) advanced pricing agreements Answer: D Diff: 1 Objective: 9 AACSB: Analytical thinking
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3) Which of the following taxes does transfer pricing affect? A) customs duties B) taxes on dividends received C) corporate income taxes D) foreign property taxes Answer: A Diff: 2 Objective: 9 AACSB: Application of knowledge
4) Which of the following best describes an Advanced Pricing Agreement (APA)? A) An agreement between a corporation and a foreign subsidiary as to what method, cost or market-based, will be used to set a transfer price for products. B) A binding agreement between a foreign government's taxing authority, the IRS and a U.S. based corporation to help avoid disputes related to transfer pricing. C) An agreement under IRS code Section 482 that requires a company to utilize market based transfer prices and to document them for tax return purposes. D) A binding agreement between the IRS and a corporation to help avoid disputes related to transfer pricing. Answer: D Diff: 2 Objective: 9 AACSB: Analytical thinking
5) Global Giant, a multinational corporation, has a producing subsidiary in a low tax rate country and a marketing subsidiary in a high tax country. If Global Giant wants to minimize its worldwide tax liability, we would expect Global Giant to: A) stop producing in the low tax rate country B) stop marketing in the high tax rate country C) establish a low transfer price when the producing unit sells to the marketing unit D) establish a high transfer price when the producing unit sells to the marketing unit Answer: D Diff: 2 Objective: 9 AACSB: Application of knowledge
6) The tariffs and customs duties governments levy on imports of products into a country also affect the transfer pricing practices of multinationals. Answer: TRUE Diff: 2 Objective: 9 AACSB: Analytical thinking
7) A company may choose to keep one set of accounting records for tax reporting and a second set for internal management reporting. Answer: TRUE Diff: 2 Objective: 9 AACSB: Analytical thinking
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8) Companies have an incentive to lower the transfer prices of products they are exporting into a country to reduce the tariffs and customs duties charged on those products. Answer: TRUE Diff: 2 Objective: 9 AACSB: Analytical thinking
9) A company has a plant in a high tax jurisdiction that produces products for a facility in a low tax jurisdiction. Suggest a strategy, including transfer prices, which will result in the lowest tax for the overall corporation. Answer: The overall corporate objective would be to report high costs and low revenue in the high tax jurisdiction, and low costs and high revenue in the low tax jurisdiction. In this situation, a low transfer price from the high tax jurisdiction facility will allocate more profit to the low tax jurisdiction. This will decrease total taxes paid by the corporation. Diff: 2 Objective: 9 AACSB: Analytical thinking
10) What is the role of unused capacity within the selling division in the determination of a negotiated transfer price to another division? Answer: Unused capacity within the selling division affects the opportunity cost of an internal transfer. If there is unused capacity within a selling division, there are no opportunity costs involved in an internal transfer price situation. In this situation, the transfer price is likely to be in the lower range, covering only the outlay costs involved in the production of the product. Diff: 2 Objective: 9 AACSB: Analytical thinking
11) What does Section 482 of the U.S. Internal Revenue Code govern? Answer: Section 482 of the U.S. Internal Revenue Code governs how multinationals can set transfer prices for tax purposes. Section 482 requires that transfer prices between a company and its foreign division or subsidiary, for both tangible and intangible property, equal the price that would be charged by an unrelated third party in a comparable transaction. Regulations related to Section 482 recognize that transfer prices can be market based or cost-plus-based, where the plus represents margins on comparable transactions. Diff: 3 Objective: 9 AACSB: Analytical thinking
Horngren's Cost Accounting: A Managerial Emphasis, 17e by Datar/Rajan Chapter 24 Performance Measurement, Compensation, and Multinational Considerations Objective 24.1 1) A report that measures financial and nonfinancial performance measures for various organization units in a single report is called a(n): A) balanced scorecard B) financial report scorecard
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C) goal-congruence report D) investment success report Answer: A Diff: 1 Objective: 1 AACSB: Analytical thinking
2) Customer-satisfaction measures are an example of the: A) goal-congruence approach B) balanced scorecard approach C) financial report scorecard approach D) investment success approach Answer: B Diff: 1 Objective: 1 AACSB: Analytical thinking
3) An example of a performance measure with a long-time horizon is: A) direct materials efficiency variances B) overhead spending variances C) number of new patents developed D) quality of room service Answer: C Diff: 2 Objective: 1 AACSB: Application of knowledge
4) Average number of repeat visits in a spa unit is a ________ measure on a balanced scorecard. A) customer perspective B) financial perspective C) learning-and-growth perspective D) internal-business-process perspective Answer: A Diff: 2 Objective: 1 AACSB: Application of knowledge
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5) Which of the following steps in designing an accounting-based performance measure includes decisions such as defining assets as total assets or net assets in the calculation of return on assets? A) choosing performance measures that align with top management's financial goals B) choosing the time horizon of each performance measure C) choosing the details for each performance measure D) choosing a target level of performance Answer: C Diff: 2 Objective: 1 AACSB: Analytical thinking
6) Which of the following steps in designing an accounting-based performance measure includes decisions of selecting net income as a measure of financial performance? A) choosing performance measures that align with the firm's financial goals B) choosing the time horizon of each performance measure C) choosing the details for each performance measure D) choosing a target level of performance Answer: A Diff: 2 Objective: 1 AACSB: Analytical thinking
7) Which of the following is true about designing an accounting-based performance measure? A) The decisions made in steps are followed in a hierarchical order. B) The issues considered in each step are independent. C) Management's beliefs are not required during the analyses. D) Behavioral criteria are important when evaluating the steps. Answer: D Diff: 2 Objective: 1 AACSB: Analytical thinking
8) Which of the following activities would relate most closely to how often to report balance scorecard results to top management? A) developing the details of each performance measure B) developing a feedback mechanism C) aligning performance measures with financial goals D) discovering appropriate internal business process perspectives Answer: B Diff: 2 Objective: 1 AACSB: Analytical thinking
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9) Many common performance measures, such as customer satisfaction, rely on internal financial accounting information. Answer: FALSE Explanation: Customer satisfaction would be obtained by surveys that are not in the financial accounting records. Diff: 1 Objective: 1 AACSB: Analytical thinking
10) Some companies present financial and nonfinancial performance measures for various organization units in a single report called the balanced scorecard. Answer: TRUE Diff: 1 Objective: 1 AACSB: Analytical thinking
11) The balanced scorecard in most organizations is broken down into the following categories: commercial perspective, supplier perspective, external business-process perspective, and productivity perspective. Answer: FALSE Explanation: The balanced scorecard in most organizations is broken down into the following categories: financial perspective, customer perspective, internal business-process perspective, and learning-and-growth perspective. Diff: 1 Objective: 1 AACSB: Analytical thinking
12) The first step in designing accounting based performance measures is to choose a target level of performance and feedback mechanism. Answer: FALSE Explanation: The first step in designing accounting based performance measures is to choose performance measures that align with top management's financial goals. Diff: 1 Objective: 1 AACSB: Analytical thinking
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13) Assume you are evaluating a manufacturing company. Match the various organizational activities and concepts with the performance measures listed. Some items may have more than one match. Activities: 1. Change in revenues 2. Cycle time 3. Economic order quantity 4. Manufacturing defects 5. Market share 6. New products 7. On-time delivery 8. Operating income 9. Product reliability 10. Time-to-market Performance measure: ________
a. Profitability
________
b. Customer satisfaction
________
c. Innovation
________ Answer: 1, 8
d. Efficiency, quality, and time a.
Profitability
5, 7, 9
b.
Customer satisfaction
6, 10
c.
Innovation
2, 3, 4, 7, 9, 10
d. Efficiency, quality, and time
Diff: 2 Objective: 1 AACSB: Application of knowledge
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14) Make a list of steps of designing an accounting based performance measure. Give an example of decisions taken under each step. Answer: 1. Choose performance measures that align with top management's goals. Does operating income, return on assets, or revenues best measure a subunit's financial goals? 2. Choose the Details of Each Performance Measure. Once a firm has chosen a specific performance measure, it must make a variety of decisions about the precise way in which various components of the measure are to be calculated. For example, if the chosen performance measure is return on assets, should it be calculated for one year or for a multiyear period? Should assets be defined as total assets or net assets (total assets minus total liabilities)? Should assets be measured at historical cost or current cost? 3. Choose a Target Level of Performance and Feedback Mechanism for Each Performance Measure For example, should all subunits have identical targets, such as the same required rate of return on assets? Should performance reports be sent to top managers daily, weekly, or monthly? Diff: 2 Objective: 1 AACSB: Analytical thinking
15) Companies are increasingly using nonfinancial measures to evaluate performance. Why? Since these numbers do not come from the company's financial records, why are they used? Answer: The correct answer will revolve around the objective of providing quality goods to the corporation's customers. Quality goods bring repeat business and satisfied customers are a business' best advertisement. The idea is that these nonfinancial measures concentrate on areas and questions that indicate the quality of a particular corporation's products. While some of these items do not come from a companies' financial records, such as defect rates, they are quantifiable and can be verified. Diff: 3 Objective: 1 AACSB: Application of knowledge
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Objective 24.2 1) All of the following are ways to calculate different versions of ROI EXCEPT: A) Revenues/Total Assets B) Return on sales × investment turnover C) Income/Investments D) Operating Income/Revenues × Revenues/Total Assets Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
2) The return on investment is usually considered the most popular approach to measure performance because: A) it blends all the ingredients of profitability into a single percentage B) once determined, there is no need to use it with other measures of performance C) it throws light on the company's working capital D) it measures the cash balance of the company in the most efficient manner Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
3) Return on investment can be increased by: A) increasing current assets B) increasing return on sales C) decreasing revenues D) increasing the debt portion of the capital Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
4) The ________ method of profitability analysis recognizes the two basic ingredients in profit-making: increasing income per dollar of revenues and using assets to generate more revenues. A) Balanced Scorecard B) Residual-Income C) DuPont D) Economic Value Added Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
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5) Aaron Corp's net income is $30,000. What is the amount of the investment if the return on investment is 30%? A) $60,000 B) $70,000 C) $100,000 D) $130,000 Answer: C Explanation: C) Return on investment = 0.3 = $30,000 / Investment; Investment = $100,000. Diff: 2 Objective: 2 AACSB: Application of knowledge
6) Zenith Corporation's net income is $82,000. What is the return on investment if the amount of the investment is $510,000? A) 19.16% B) 13.85% C) 16.08% D) 27.70% Answer: C Explanation: C) Return on investment = $82,000 / $510,000 = 16.08% Diff: 1 Objective: 2 AACSB: Application of knowledge
7) Bouvous Corporation had the following information for 2020: Revenue $420,000 Operating expenses 340,000 Total assets 500,000 What is the return on investment? A) 16.0% B) 84.0% C) 13.8% D) 19.0% Answer: A Explanation: A) Return on investment = (420,000 - $340,000) / 500,000 = 16.0% Diff: 2 Objective: 2 AACSB: Application of knowledge
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8) Aeralia Inc., has two regional offices. The data for each are as follows:
Revenues Operating assets Net operating income
Maryland $291,000 2,800,000 1,000,000
New Jersey $301,000 4,700,000 1,300,000
What is the Maryland Division's return on investment? A) 35.7% B) 10.4% C) 27.7% D) 29.1% Answer: A Explanation: A) ROI = $1,000,000 / $2,800,000 = 35.7% Diff: 2 Objective: 2 AACSB: Application of knowledge
9) Bouvous Corp has two regional offices. The data for each are as follows:
Revenues Operating assets Net operating income
Maryland $291,000 2,700,000 1,000,000
New Jersey $303,000 4,700,000 1,500,000
What is the return on investment for the New Jersey Division? A) 6.4% B) 31.9% C) 37.0% D) 25.5% Answer: B Explanation: B) ROI = $1,500,000 / $4,700,000 = 31.9% Diff: 2 Objective: 2 AACSB: Application of knowledge
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10) The Cybertronics Corporation reported the following information for its Cyclotron Division: Revenues Operating costs Operating assets
$2,500,000 1,200,000 1,300,000
Income is defined as operating income. What is the Cyclotron Division's investment turnover ratio? A) 1.92 B) 2.08 C) 1.08 D) 0.92 Answer: A Explanation: A) Investment turnover ratio = $2,500,000 / $1,300,000 = 1.92 Diff: 2 Objective: 2 AACSB: Application of knowledge
11) The Cybertronics Corporation reported the following information for its Cyclotron Division: Revenues Operating costs Operating assets
$2,500,000 1,500,000 1,300,000
Income is defined as operating income. What is the Cyclotron Division's return on sales? A) 76.9% B) 40.0% C) 52.0% D) 80.0% Answer: B Explanation: B) Operating income = $2,500,000 - $1,500,000 = $1,000,000 Return on sales = $1,000,000 / $2,500,000 = 40.0% Diff: 2 Objective: 2 AACSB: Application of knowledge
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12) The Cybertronics Corporation reported the following information for its Cyclotron Division: Revenues Operating costs Operating assets
$2,200,000 1,300,000 1,100,000
Income is defined as operating income. What is the Cyclotron Division's return on investment? A) 69.2% B) 84.6% C) 40.9% D) 81.8% Answer: D Explanation: D) ROI = $900,000 / $1,100,000 = 81.8% Diff: 2 Objective: 2 AACSB: Application of knowledge
13) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Alpha Division Beta Division $5,500,000 (a) $3,500,000 $1,400,000 (b) (c) 0.25 0.16 (e) 0.12 (f) (g)
What were the sales for the Beta Division (a)? A) $8,750,000 B) $168,000 C) $11,666,667 D) $224,000 Answer: C Explanation: C) Return on sales = 0.12 = $1,400,000 / x; Sales = x = $11,666,667 Diff: 2 Objective: 2 AACSB: Application of knowledge
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Gamma Division $2,500,000 $1,200,000 $1,600,000 (d) 0.5 1.5
14) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Alpha Division Beta Division $7,500,000 (a) $5,000,000 $1,100,000 (b) (c) 0.25 .15 (e) .1 (f) (g)
Gamma Division $2,500,000 $1,200,000 $1,600,000 (d) 0.5 1.5
What is the value of the operating assets belonging to the Alpha Division (b)? A) $12,500,000 B) $20,000,000 C) $30,000,000 D) $1,875,000 Answer: B Explanation: B) Operating assets = $5,000,000 / 0.25 = $20,000,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
15) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Alpha Division Beta Division $5,500,000 (a) $3,500,000 $1,200,000 (b) (c) 0.25 0.16 (e) 0.1 (f) (g)
Gamma Division $2,500,000 $1,200,000 $1,600,000 (d) 0.5 1.5
What is the value of the operating assets belonging to the Beta Division (c)? A) $7,500,000 B) $12,000,000 C) $192,000 D) $120,000 Answer: A Explanation: A) Return on investment = 0.16 = $1,200,000 / x; Operating assets = x = $7,500,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
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16) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Alpha Division Beta Division $5,500,000 (a) $3,500,000 $1,100,000 (b) (c) 0.25 .15 (e) .1 (f) (g)
Gamma Division $3,000,000 $1,400,000 $2,000,000 (d) (h) (i)
What is the Gamma Division's return on investment (d)? A) 0.67 B) 2.14 C) 0.47 D) 0.70 Answer: D Explanation: D) $1,400,000 / 2,000,000 = 0.70 Diff: 2 Objective: 2 AACSB: Application of knowledge
17) The top management at Amore Corp, a manufacturer of computer games, is attempting to recover from a flood that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Alpha Division Beta Division $5,800,000 (a) $3,800,000 $1,100,000 (b) (c) 0.25 .15 (e) .1 (f) (g)
What is the Alpha Division's return on sales (e)? A) 39.6% B) 152.6% C) 65.5% D) 34.5% Answer: C Explanation: C) Return on sales = $3,800,000 / $5,800,000 = 65.5% Diff: 2 Objective: 2 AACSB: Application of knowledge
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Gamma Division $2,500,000 $1,200,000 $1,600,000 (d) 0.5 1.5
18) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Tractor Division $10,000,000 $1,000,000 (b) 0.20 (e) (f)
Tiller Division (a) $1,800,000 (c) 0.13 0.09 (g)
Digger Division $2,400,000 $600,000 $2,000,000 (d) 0.25 1.2
What were the sales for the Tiller Division? (Round the final answer to the nearest whole dollar.) A) $13,846,154 B) $20,000,000 C) $2,600,000 D) $1,246,154 Answer: B Explanation: B) Return on Sales = Net Income / Sales 0.09 = $1,800,000 / S S = $1,800,000 / 0.09 = $20,000,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
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19) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Tractor Division $11,000,000 $1,200,000 (b) 0.24 (e) (f)
Tiller Division (a) $1,440,000 (c) .1 .12 (g)
Digger Division $2,400,000 $600,000 $2,000,000 (d) 0.25 1.2
What is the value of the operating assets belonging to the Tractor Division? A) $11,000,000 B) $1,578,947 C) $9,800,000 D) $5,000,000 Answer: D Explanation: D) ROI = Net Income / Assets Assets = Net Income / ROI Assets = $1,200,000 / 0.24 = $5,000,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
20) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Tractor Division $10,000,000 $1,000,000 (b) 0.20 (e) (f)
Tiller Division (a) $1,500,000 (c) 0.1 0.14 (g)
What is the value of the operating assets belonging to the Tiller Division? A) $7,500,000 B) $10,714,286 C) $15,000,000 D) $210,000 Answer: C Explanation: C) ROI = Net Income / Assets Assets = Net Income / ROI Assets = $1,500,000 / 0.1 = $15,000,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
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Digger Division $2,400,000 $600,000 $2,000,000 (d) 0.25 1.2
21) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Tractor Division $10,000,000 $1,000,000 (b) .2 (e) (f)
Tiller Division (a) $1,440,000 (c) .1 .12 (g)
What is the Digger Division's return on investment? A) 0.23 B) 0.29 C) 0.31 D) 0.41 Answer: B Explanation: B) Net Income / Assets = $610,000 / $2,100,000 = 0.29 D) Diff: 2 Objective: 2 AACSB: Application of knowledge
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Digger Division $2,600,000 $610,000 $2,100,000 (d) (h) (i)
22) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Tractor Division $1,600,000 $120,000 (b) 0.21 (e) (f)
Tiller Division (a) $1,440,000 (c) .1 .12 (g)
What is the Tractor Division's return on sales? A) 0.08 B) 2.80 C) 0.29 D) 0.21 Answer: A Explanation: A) $120,000 / $1,600,000 = 0.08 Diff: 2 Objective: 2 AACSB: Application of knowledge
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Digger Division $2,400,000 $600,000 $2,000,000 (d) 0.25 1.2
23) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Tractor Division $14,000,000 $1,100,000 (b) 0.25 (e) (f)
Tiller Division (a) $1,440,000 (c) .1 .12 (g)
What is the Tractor Division's investment turnover? A) 4.0 B) 12.7 C) 3.2 D) 1.0 Answer: C Explanation: C) Investment Turnover = Sales / Assets Step 1 is to calculate the Assets ROI = Net Income / Assets Assets = Net Income / ROI Assets = $1,100,000 / 0.25 = $4,400,000 Then Investment Turnover = $14,000,000 / $4,400,000 = 3.2 Diff: 2 Objective: 2 AACSB: Application of knowledge
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Digger Division $2,400,000 $600,000 $2,000,000 (d) 0.25 1.2
24) The top management at Groundsource Company, a manufacturer of lawn and garden equipment, is attempting to recover from a fire that destroyed some of their accounting records. The main computer system was also severely damaged. The following information was salvaged:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Tractor Division $10,000,000 $1,000,000 (b) .2 (e) (f)
Tiller Division (a) $1,440,000 (c) 0.11 0.13 (g)
Digger Division $2,400,000 $600,000 $2,000,000 (d) 0.25 1.2
What is the Tiller Division's investment turnover? A) 1.18 B) 0.85 C) 0.01 D) 0.24 Answer: B Explanation: B) Return on Investment = Return on Sales × Investment Turnover Investment Turnover = Return on Investment / Return on Sales = 0.11 / 0.13 = 0.85 Diff: 2 Objective: 2 AACSB: Application of knowledge
25) The weighted-average cost of capital (WACC) equals: A) the after-tax average cost of all the long-term and short-term sources of funds B) the after-tax average cost of all the long-term source of funds C) the pre-tax average cost of all the short-term sources of funds D) the pre-tax average cost of all the long-term and short-term sources of funds Answer: B Diff: 2 Objective: 2 AACSB: Analytical thinking
26) The required rate of return multiplied by the investment is the: A) sunk cost of the investment B) historical cost of the investment C) imputed cost of the investment D) return on sales Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
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27) The required rate of return used in the residual income calculation to evaluate a potential investment in a subunit, should be the: A) weighted cost of capital for the firm's competition B) maximum return target for the firm's investments C) minimum acceptable return the company seeks on its investment in the subunit D) accounting (under GAAP) cost of capital related to the project as recorded in the general ledger Answer: C Diff: 2 Objective: 2 AACSB: Application of knowledge
28) A company which favors the residual income approach to financial performance evaluation wants managers to: A) concentrate on maximizing an absolute amount of dollars of residual income as opposed to a percentage yield as is the case with ROI B) concentrate on maximizing a percentage return in excess of the cost of capital C) maximize the investment turnover ratio D) maximize return on sales Answer: A Diff: 2 Objective: 2 AACSB: Analytical thinking
29) Using residual income as a measure of performance rather than return on investment promotes goal congruence because residual income: A) places importance on the reduction of underperforming assets B) calculates a percentage return rather than an absolute return C) concentrates on maximizing an absolute amount of dollars D) concentrates on maximizing the return on sales Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
30) Which of the following is a performance measure? A) retained earnings B) market value C) present value of cash flows D) economic value added Answer: D Diff: 1 Objective: 2 AACSB: Analytical thinking
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31) Which of the following is the required rate of return used in the economic value added (EVA) calculation? A) the ROI of the division or company being evaluated B) after-tax weighted-average cost of capital C) the residual income/total assets D) the after-tax operating income/(Total assets - current liabilities) Answer: B Diff: 1 Objective: 2 AACSB: Analytical thinking
32) Care Inc., has two divisions that operate independently of one another. The financial data for the year 2020 reported the following results:
Sales Operating income Taxable income Investment
North $6,000,000 1,500,000 1,800,000 18,000,000
South $5,000,000 1,400,000 700,000 14,000,000
The company's desired rate of return is 10%. Income is defined as operating income. What are the respective return-on-investment ratios for the North and South Divisions? A) 10.00% and 8.33% B) 10.00% and 5.00% C) 8.33% and 10.00% D) 5.00% and 10.00% Answer: C Explanation: C) North Division = $1,500,000 / $18,000,000 = 8.33% South Division = $1,400,000 / $14,000,000 = 10.00% Diff: 2 Objective: 2 AACSB: Application of knowledge
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33) Care Inc., has two divisions that operate independently of one another. The financial data for the year 2020 reported the following results: North South Sales $6,000,000 $5,000,000 Operating income 1,900,000 1,500,000 Taxable income 1,300,000 850,000 Investment 16,000,000 14,000,000 The company's desired rate of return is 10%. Income is defined as operating income. What are the respective residual incomes for the North and South Divisions? A) $60,000 and $100,000 B) $300,000 and $60,000 C) $300,000 and $100,000 D) $300,000 and $100,000 Answer: D Explanation: D) North Division = $1,900,000 - (0.1 × $16,000,000) = $300,000 South Division = $1,500,000 - (0.1 × $14,000,000) = $100,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
34) Care Inc., has two divisions that operate independently of one another. The financial data for the year 2020 reported the following results:
Sales Operating income Taxable income Investment
North $6,000,000 1,600,000 1,400,000 15,000,000
South $5,000,000 1,500,000 700,000 12,000,000
The company's desired rate of return is 10%. Income is defined as operating income. Which division has the best return on investment and which division has the best residual income figure, respectively? A) North, North B) South, South C) North, South D) South, North Answer: B Explanation: B) North Division = $1,600,000 / $15,000,000 = 10.67% South Division = $1,500,000 / $12,000,000 = 12.50% North Division = $1,600,000 - (0.1 × $15,000,000) = $100,000 South Division = $1,500,000 - (0.1 × $12,000,000) = $300,000 Diff: 2 Objective: 2 AACSB: Application of knowledge
1632 richard@qwconsultancy.com
35) Economic value added is equal to: A) After-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)] B) Pre-tax operating income - [Weighted-average cost of capital + (Total assets - Current liabilities)] C) After-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)] D) Pre-tax operating income - [Weighted-average cost of capital × (Total assets - Current liabilities)] Answer: C Diff: 1 Objective: 2 AACSB: Analytical thinking
36) A company has operating income of $300,000, revenues of $1,500,000, total assets of $2,000,000 and an ROI of 15%. To improve the ROI, to increase ROI to 20%, which of the following investment turnovers would need to be achieved? A) .75 B) 1.5 C) 1 D) 2 Answer: C Explanation: C) The Dupont model can be used to analyze this scenario. The current situation is $300,000/$1,500,000 × $1,500,000/$2,000,000 = .15 = 15%. The income over revenue is .2 and the investment turnover is .75. .2 × .75 = .15 = ROI 15%. Therefore, too boost the ROI to 20%, the investment turnover would need to be 1. Diff: 1 Objective: 2 AACSB: Analytical thinking
37) Which of the following is the expression of the DuPont method of profitability analysis? A) Income / Investment = Income / Total costs + Revenues / Equity B) Income / Investment = Income / Revenues + Revenues / Investment C) Income / Investment = Income / Revenues × Revenues / Investment D) Income / Investment = Income / Total costs × Revenues / Equity Answer: C Diff: 2 Objective: 2 AACSB: Analytical thinking
38) Springfield Corporation, whose tax rate is 34%, has two sources of funds: long-term debt with a market value of $6,000,000 and an interest rate of 8%, and equity capital with a market value of $15,000,000 and a cost of equity of 12%. What is Springfield's weighted average cost of capital (WACC)? A) 12.00% B) 8.64% C) 10.08% D) 10.86% Answer: C Explanation: C) Weighted average cost of capital (WACC) = [($6,000,000 × (1 - 0.34) × (0.08)) + ($15,000,000 × 0.12)] / ($6,000,000 + $15,000,000) = 10.08% Diff: 2 Objective: 2 AACSB: Application of knowledge
1633 richard@qwconsultancy.com
39) Springfield Corporation, whose tax rate is 35%, has two sources of funds: long-term debt with a market value of $8,100,000 and an interest rate of 9%, and equity capital with a market value of $14,000,000 and a cost of equity of 12%. Springfield has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:
Blue Div. Gold Div.
Total Assets $9,700,000 $11,000,000
Current Liabilities $3,000,000 $2,200,000
Operating Income $1,058,000 $1,200,000
What is Economic Value Added (EVA®) for the Blue Division? (Round intermediary calculations to four decimal places.) A) ($34,450) B) $34,450 C) $404,750 D) ($258,050) Answer: B Explanation: B) WACC = [($8,100,000 × (1 - 0.35) × (0.09)) + ($14,000,000 × 0.12)] / ($8,100,000 + $14,000,000) = 0.0975 EVA = ($1,058,000 × (1 - 0.35)) - (($9,700,000 - $3,000,000) × 0.0975) = $34,450 Diff: 3 Objective: 2 AACSB: Application of knowledge
40) Times Corporation, whose tax rate is 35%, has two sources of funds: long-term debt with a market value of $6,400,000 and an interest rate of 9%, and equity capital with a market value of $18,000,000 and a cost of equity of 11%. Times Corporation's after-tax cost of debt is: A) 9.65% B) 5.85% C) 9.00% D) 11.00% Answer: B Explanation: B) After-tax cost of debt = 0.09 × (1 - 0.35) = 5.85% Diff: 2 Objective: 2 AACSB: Application of knowledge
1634 richard@qwconsultancy.com
41) Stonex Corp, whose tax rate is 38%, has two sources of funds: long-term debt with a market value of $6,500,000 and an interest rate of 8%, and equity capital with a market value of $14,000,000 and a cost of equity of 12%. Stonex has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:
Blue Div. Gold Div.
Total Assets $9,500,000 $10,000,000
Current Liabilities $2,500,000 $2,800,000
Operating Income $1,155,000 $1,400,000
Calculate EVA for the Gold Division. (Round intermediary calculations to four decimal places.) A) ($164,560) B) $164,560 C) $868,000 D) $703,440 Answer: B Explanation: B) WACC = [($6,500,000 × (1 - 0.38) × (0.08)) + ($14,000,000 × 0.12)] / ($6,500,000 + $14,000,000) = 0.0977 EVA = ($1,400,000 × (1 - 0.38)) - (($10,000,000 - $2,800,000) × 0.0977) = $164,560 Diff: 3 Objective: 2 AACSB: Application of knowledge
42) Waldorf Company has two sources of funds: long-term debt with a market and book value of $5,300,000 issued at an interest rate of 12%, and equity capital that has a market value of $4,000,000 (book value of $2,200,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 35%.
St. Louis Cedar Rapids Wichita
Operating Income $480,000 $600,000 $1,020,000
Assets $2,100,000 $4,000,000 $6,000,000
Current Liabilities $130,000 $300,000 $600,000
What is the EVA® for St. Louis? (Round intermediary calculations to four decimal places.) A) $134,109 B) $122,683 C) $312,000 D) $189,317 Answer: B Explanation: B) WACC = [(0.12 × (1 - 0.35) × $5,300,000) + (0.12 × $4,000,000)] / $9,300,000 = 0.096,1 St. Louis ( ) = ($480,000 × (1 - 0.35)) - [0.096,1 × ($2,100,000 - $130,000)] = $312,000 - $189,317 = $122,683 Diff: 3 Objective: 2 AACSB: Application of knowledge
1635 richard@qwconsultancy.com
43) Waldorf Company has two sources of funds: long-term debt with a market and book value of $5,300,000 issued at an interest rate of 12%, and equity capital that has a market value of $4,100,000 (book value of $2,100,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 35%.
St. Louis Cedar Rapids Wichita
Operating Income $480,000 $620,000 $1,020,000
Assets $2,000,000 $2,000,000 $6,000,000
Current Liabilities $100,000 $340,000 $600,000
What is the EVA® for Cedar Rapids? (Round intermediary calculations to four decimal places.) A) $243,142 B) $403,000 C) $460,142 D) $210,400 Answer: A Explanation: A) Cedar Rapids ( ) = ($620,000 × (1 - 0.35)) - [0.096,3 × ($2,000,000 - $340,000)] = $243,142 Diff: 3 Objective: 2 AACSB: Application of knowledge
44) Waldorf Company has two sources of funds: long-term debt with a market and book value of $5,300,000 issued at an interest rate of 12%, and equity capital that has a market value of $4,400,000 (book value of $2,000,000). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 35%.
St. Louis Cedar Rapids Wichita
Operating Income $480,000 $600,000 $1,400,000
Assets $2,000,000 $4,000,000 $6,300,000
Current Liabilities $100,000 $300,000 $900,000
What is the EVA® for Wichita? (Round intermediary calculations to four decimal places.) A) $910,000 B) $875,660 C) $385,660 D) $298,270 Answer: C Explanation: C) Wichita ( ) = ($1,400,000 × 0.65) - [(0.097,1 × ($6,300,000 - $900,000)] = $385,660 Diff: 3 Objective: 2 AACSB: Application of knowledge
1636 richard@qwconsultancy.com
45) Coldbrook Company has two sources of funds: long-term debt with a market and book value of $16,000,000 issued at an interest rate of 11%, and equity capital that has a market value of $5,000,000 (book value of $4,000,000). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 17%, while the tax rate is 35%.
Bish Bash Falls Brooksville Stonybrook
Operating Income $815,000 $1,100,000 $2,450,000
Assets $3,750,000 $5,000,000 $9,250,000
Current Liabilities $820,000 $1,200,000 $3,180,000
What is the EVA® for Bish Bash Falls? (Round intermediary calculations to four decimal places.) A) $529,750 B) $278,350 C) $251,400 D) $138,800 Answer: C Explanation: C) WACC = [(0.11 × (1 - 0.35) × $16,000,000) + (0.17 × $5,000,000)] / $21,000,000 = 0.095,0 Bish Bash Falls ( ) = ($815,000 × (1 - 0.17)) - [0.095,0 × ($3,750,000 - $820,000)] = $251,400 Diff: 3 Objective: 2 AACSB: Application of knowledge
46) Coldbrook Company has two sources of funds: long-term debt with a market and book value of $16,000,000 issued at an interest rate of 10%, and equity capital that has a market value of $9,000,000 (book value of $6,000,000). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 16%, while the tax rate is 35%.
Bish Bash Falls Brooksville Stonybrook
Operating Income $815,000 $1,200,000 $2,450,000
Assets $3,750,000 $5,000,000 $9,250,000
Current Liabilities $800,000 $1,300,000 $3,180,000
What is the EVA® for Brooksville? (Round intermediary calculations to four decimal places.) A) $780,000 B) $367,040 C) $206,546 D) $412,960 Answer: D Explanation: D) WACC = [(0.1 × (1 - 0.35) × $16,000,000) + (0.16 × $9,000,000)] / $25,000,000 = 0.099,2 Brooksville ( ) = ($1,200,000 × (1 - 0.35)) - [0.099,2 × ($5,000,000 - $1,300,000)] = $412,960 Diff: 3 Objective: 2 AACSB: Application of knowledge
1637 richard@qwconsultancy.com
47) Coldbrook Company has two sources of funds: long-term debt with a market and book value of $19,000,000 issued at an interest rate of 11%, and equity capital that has a market value of $9,000,000 (book value of $6,500,000). Coldbrook Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 17%, while the tax rate is 35%.
Bish Bash Falls Brooksville Stonybrook
Operating Income $ 815,000 $1,100,000 $2,450,000
Assets $3,750,000 $5,000,000 $9,250,000
Current Liabilities $ 800,000 $1,200,000 $3,180,000
What is the EVA® for Stonybrook? (Round intermediary calculations to four decimal places.) A) $966,076 B) $1,592,500 C) $626,424 D) $475,298 Answer: A Explanation: A) WACC = [(0.11 × (1 - 0.35) × $19,000,000) + (0.17 × $9,000,000)] / $28,000,000 = 0.103,2 Stonybrook ( ) = ($2,450,000 × (1 - 0.35)) - [0.103,2 × ($9,250,000 - $3,180,000)] = $966,076 Diff: 3 Objective: 2 AACSB: Application of knowledge
48) A major weakness of comparing two companies using only operating incomes as the basis of comparison is that it ignores the differences in the size of the investment and therefore any concept of yield or return on investment. Answer: TRUE Diff: 2 Objective: 2 AACSB: Application of knowledge
49) Reducing the investment base to improve ROI involves decreasing idle cash, paying down debt, determining proper inventory levels, and spending carefully on long-term assets. Answer: FALSE Explanation: Reducing the investment base involves decreasing idle cash, determining proper inventory levels, and spending carefully on long-term assets. Paying down debt doesn't affect the investment part (denominator) of the ROI calculation. Diff: 2 Objective: 2 AACSB: Application of knowledge
50) Return on sales can provide how effectively costs are managed and is part of the DuPont method of profitability analysis. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
1638 richard@qwconsultancy.com
51) Return on investment can be calculated by multiplying return on assets by investment turnover. Answer: FALSE Explanation: return on investment can be calculated by multiplying return on sales × investment turnover Diff: 1 Objective: 2 AACSB: Analytical thinking
52) All other things held constant, increase in assets such as receivables or decrease in operating income results in an increase in return on investment. Answer: FALSE Explanation: All other things held constant, decrease in assets such as receivables or increase in operating income results in an increase in return on investment. Diff: 2 Objective: 2 AACSB: Analytical thinking
53) The DuPont method recognizes the two basic ingredients in profit making: increasing the income per dollar of revenues and using assets to generate more revenues. Answer: TRUE Diff: 1 Objective: 2 AACSB: Analytical thinking
54) To evaluate overall performance, return on investment and residual income measures are more appropriate than return on sales. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
55) Required rate of return multiplied by the investment is the weighted average cost of the investment. Answer: FALSE Explanation: Required rate of return multiplied by the investment is the opportunity cost of the investment. Diff: 1 Objective: 2 AACSB: Application of knowledge
56) Historical costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures. Answer: FALSE Explanation: Imputed costs are costs recognized in particular situations that are not usually recognized by accrual accounting procedures. Diff: 2 Objective: 2 AACSB: Analytical thinking
1639 richard@qwconsultancy.com
57) The objective of maximizing return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the overall organization should be accepted. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
58) Return on investment, Residual income, or Economic value added (EVA) measures are more appropriate than return on sales because they consider only the investment to measure the performance. Answer: FALSE Explanation: Return on investment, Residual income, or Economic value added (EVA) measures are more appropriate than return on sales because they consider both income and investment to measure the performance. Diff: 2 Objective: 2 AACSB: Analytical thinking
59) Residual income is income less interest expense. Answer: FALSE Explanation: Residual income is calculated by subtracting imputed cost of the investment which is most likely not interest expense but a required rate of return on the investment. Diff: 2 Objective: 2 AACSB: Analytical thinking
60) Economic value added, unlike residual income, charges managers for the costs of their investments in long-term assets and working capital. Answer: FALSE Explanation: Both economic value added and residual income charge managers for the costs of their investments in long-term assets and long-term capital. Diff: 2 Objective: 2 AACSB: Analytical thinking
61) Companies that adopt the EVA concept define investment as total assets employed minus current liabilities. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
62) In an EVA calculation, the corporate charge for a division's investment is based on a weighted average of the after-tax interest rate on the firm's debt and the cost of the firm's equity. Answer: TRUE Diff: 2 Objective: 2 AACSB: Analytical thinking
1640 richard@qwconsultancy.com
63) In an EVA calculation, the measure of the invested capital for a division would be that division's assets minus that division's long-term liabilities. Answer: FALSE Explanation: In an Economic Value Added calculation, the measure of the invested capital for a division would be that division's assets minus that division's current liabilities. Diff: 2 Objective: 2 AACSB: Analytical thinking
64) In an EVA calculation, the appropriate measure of a division's profit would be that division's pre-tax operating income. Answer: FALSE Explanation: In an EVA calculation, the appropriate measure of a division's profit would be that division's after tax operating income. Diff: 2 Objective: 2 AACSB: Analytical thinking
65) Antique Corp uses the investment center concept for the museums that it manages. Selected operating data for three of its museums for 2020 are as follows:
Revenue Operating assets Net operating income
Ohio $1,200,000 700,000 105,000
Dallas $1,500,000 500,000 115,000
Texas $1,800,000 600,000 120,000
Required: a. Compute the return on investment for each division. b. Which museum manager is doing best based only on ROI? Why? c. What other factors should be included when evaluating the managers? Answer: a. Ohio = $105,000 / $700,000 = 0.15 Dallas = $115,000 / $500,000 = 0.23 Texas = $120,000 / $600,000 = 0.20 b. Dallas is doing the best because the ROI is the highest, and compared to Texas, is doing better with lesser assets. c. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets. Diff: 3 Objective: 2 AACSB: Application of knowledge
1641 richard@qwconsultancy.com
66) Gas Supply Corporation uses the investment center concept for the gasoline stations that it manages in the city. Consolidated has a 15% required rate of return on investment in order for a branch station to be viable. Select operating data for three of its stations for 2020 are as follows:
Revenue Operating assets Net operating income
Maple Street $17,000,000 7,000,000 900,000
Oak Street $13,500,000 7,000,000 1,200,000
High Street $15,000,000 6,000,000 980,000
Required: a. Compute the return on investment for each station. b. Which station manager is doing best based only on ROI? Why? c. Are any of the stations in danger of being closed due to lack of performance? d. What other factors should be included when evaluating the managers? Answer: a. Maple = $900,000 / $7,000,000 = 12.86% Oak = $1,200,000 / $7,000,000 = 17.14% High = $980,000 / $6,000,000 = 16.33% b.
Oak Street is doing the best because the ROI is the highest.
c. Maple Street is in danger of being shut down because it is only making a return on its investment base of 12.86%. This is less than the required rate of return of 15%. d. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets. Diff: 3 Objective: 2 AACSB: Application of knowledge
1642 richard@qwconsultancy.com
67) Moto Corp allows its divisions to operate as autonomous units. The operating data for 2020 follow:
Revenues Accounts receivable Operating assets Net operating income Taxable income
Plows $2,250,000 800,000 1,000,000 220,000 165,000
Tractors $500,000 152,500 400,000 60,000 90,000
Combines $4,800,000 1,435,000 1,750,000 480,000 385,000
Required: a. Compute the investment turnover for each division. b. Compute the return on sales for each division. c. Compute the return on investment for each division. d. Which division manager is doing best? Why? e. What other factors should be included when evaluating the managers? For parts (b) and (c) income is defined as operating income. Answer: a. Investment turnover: Plows = $2,250,000/$1,000,000 = 2.25 Tractors = $500,000/$400,000 = 1.25 Combines = $4,800,000/$1,750,000 = 2.74 b.
c.
Return on Sales: Plows = $220,000/$2,250,000 Tractors = $60,000/$500,000 Combines = $480,000/$4,800,000
= 0.10 = 0.12 = 0.10
ROI: Plows = 2.25 × 0.10 Tractors = 1.25 × 0.12 Combines = 2.74 × 0.10
= 0.225 = 0.150 = 0.274
d. Combines' manager had the best performance because he had the highest investment turnover, which offset his second-best return on sales. e.
Residual income should be considered and noncontrollable factors such as the age of the assets.
Diff: 3 Objective: 2 AACSB: Application of knowledge
1643 richard@qwconsultancy.com
68) Provide the missing data for the following situations:
Sales Net operating income Operating assets Return on investment Return on sales Investment turnover
Red Division White Division Blue Division $? $10,000,000 $? $200,000 $400,000 $288,000 $? $? $1,600,000 0.16 0.10 ? 0.04 ? 0.12 ? ? 1.5
Answer: Red Division: ROI = ROS × IT 0.16 = 0.04 × IT IT = 4.0 ROS = Income/Sales 0.04 = $200,000/Sales Sales = $5,000,000 IT 4 OA
= Sales/OA = $5,000,000/OA = $1,250,000
White Division: ROS = $400,000/$10,000,000 IT
= ROI/ROS = 0.10/0.04
OA
= S/IT
Blue Division: Sales = IT × OA
= 0.04 = 2.5
= $10,000,000/2.5 = $4,000,000
= 1.5 × $1,600,000 = $2,400,000
ROI = 0.12 × 1.5 = 0.18 Diff: 3 Objective: 2 AACSB: Application of knowledge
1644 richard@qwconsultancy.com
69) Craylon Corp has three divisions, which operate autonomously. Their results for 2020 were as follows:
Sales Cost of goods sold Operating income Investment base
East $30,000,000 15,000,000 4,500,000 30,000,000
West International $40,000,000 $50,000,000 25,000,000 37,000,000 5,000,000 5,500,000 32,000,000 34,000,000
The company's desired rate of return is 15%. Required: a. Compute each division's ROI. Round to three decimal places. b. Compute each division's residual income. Answer: a. East ROI = $4,500,000 / $30,000,000 = 15.000% West ROI = $5,000,000 / $32,000,000 = 15.625% International = $5,500,000 / $34,000,000 = 16.176% b. Investment base Minimum rate Minimum return
East $30,000,000 × 0.15 $ 4,500,000
West International $32,000,000 $34,000,000 × 0.15 × 0.15 $ 4,800,000 $ 5,100,000
Operating Income Minimum return Residual income
$4,500,000 4,500,000 $0
$5,000,000 4,800,000 $ 200,000
$5,500,000 5,100,000 $ 400,000
Diff: 2 Objective: 2 AACSB: Application of knowledge
1645 richard@qwconsultancy.com
70) Batman Abstract Company has three divisions that operate autonomously. Their results for 2020 are as follows:
Sales Contribution margin Operating income Investment base
Riddler $5,000,000 1,440,000 1,000,000 9,000,000
Joker $7,000,000 1,700,000 1,750,000 10,000,000
Penguin $10,000,000 3,500,000 2,520,000 14,000,000
The company's desired rate of return is 20%. Required: a. Compute each division's ROI. b. Compute each division's residual income. c. Rank each division by both ROI and residual income. d. Which division had the best performance in 2020? Why? Answer: a. Riddler ROI = $1,000,000/$9,000,000 = 0.111 Joker ROI = $1,750,000/$10,000,000 = 0.175 Penguin ROI = $2,520,000/$14,000,000 = 0.180 b. Riddler Joker Penguin Investment base $9,000,000 $10,000,000 $14,000,000 Minimum rate × 0.20 × 0.20 × 0.20 Minimum return $1,800,000 $2,000,000 $2,800,000 Income Minimum return Residual income c.
$1,000,000 1,800,000 $(800,000)
$1,750,000 2,000,000 $(250,000)
$2,520,000 2,800,000 $(280,000)
ROI Rank: Penguin # 1 Joker # 2 Riddler # 3 RI Rank: Joker #1 Penguin #2 Riddler #3
d. As to which division was the best, it is difficult to determine without knowing what the results are being used to evaluate. If management is measuring only the return of capital, the Penguin Division has the highest ranking, although not much ahead of Joker. However, Penguin does have a substantially higher income level. As to meeting management's expectations of residual income, all divisions fall short of the goal with Joker being slightly ahead of Penguin. Diff: 3 Objective: 2 AACSB: Application of knowledge
1646 richard@qwconsultancy.com
71) Coptermagic Company supplies helicopters to corporate clients. Coptermagic has two sources of funds: long term debt with a market and book value of $32 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million (book value of $8 million). The cost of equity capital for Coptermagic is 15%, and its tax rate is 30%. Coptermagic has profit centers in four divisions that operate autonomously. The company's results for 2020 are as follows:
New York Chicago Dallas Los Angeles
Operating Income $1,750,000 2,400,000 4,675,000 4,200,000
Assets $11,500,000 9,000,000 27,500,000 25,000,000
Current Liabilities $2,500,000 3,500,000 9,500,000 8,000,000
Required: a. Compute Coptermagic's weighted average cost of capital. b. Compute each division's Economic Value Added. c. Rank the divisions by EVA. Answer: a. WACC = [(.10 × (1 - .30) × $32,000,000) + (.15 × $18,000,000)] / $50,000,000 = 9.88 % b.
New York (EVA) = [($1,750,000 × (1 - .30)] - [0.0988 × ($11,500,000 - $2,500,000)] = $1,225,000 - $889,200 = $335,800 Chicago (EVA) = [($2,400,000 × (1 - .30)] - [0.0988 × ($9,000,000 - $3,500,000)] = $1,680,000 - $543,400 = $1,136,600 Dallas (EVA) = [($4,675,000 × (1 - .30)] - [0.0988 × ($27,500,000 - $9,500,000)] = $3,272,500 - $1,788,400 = $1,494,100 Los Angeles (EVA) = [($4,2000,000 × (1 - .30)] - [0.0988 × ($25,000,000 - $8,000,000)] = $2,940,00 - $1,679,600 = $1,260,400
c.
Rank: Dallas # 1 Los Angeles # 2 Chicago # 3 New York #4
Diff: 3 Objective: 2 AACSB: Application of knowledge
1647 richard@qwconsultancy.com
72) Bob's Cellular Phone Company uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. The Dupont method is generally used. The company's Phone Accessories Division had the following results for the last two years: 2019 ROI = ($2,000,000/$20,000,000) × ($20,000,000/$10,000,000) = 0.20 2020 ROI = ($2,400,000/$25,000,000) × ($25,000,000/$15,000,000) = 0.16 Corporate management was disappointed in the performance of the division for 2020, since it had made an additional investment in the division that was budgeted for a 23% ROI. Required: a. Discuss some factors that may have contributed to the decrease in ROI for 2020. b. Would there have been any substantial difference if average capital had been used? Answer: a. While sales increased by 25%, net income only increased by 20%. This may indicate that expenses increased more than they should have. Apparently, the expected marginal net income from the new investment was $1,150,000 ($5,000,000 × 0.23), and either sales were too low or expenses too high for the new products. But this calculation is somewhat hypothetical since we do not know expected sales. Start-up costs may have also contributed to the increased expenses of the first year's operations. An increase in investment also contributed to the decline in return on investment. b.
Using average capital: = ($10,000,000 + $15,000,000) / 2 = $12,500,000 ROI = $2,400,000 / $12,500,000 = 0.192
Using average capital would have improved the ROI from 16% to over 19%. This would still have been a disappointment to management because the total ROI fell below expectations. Perhaps it is unreasonable to expect a new investment to achieve its target ROI in the first year of operations. Diff: 3 Objective: 2 AACSB: Application of knowledge
73) ROI, RI, or EVA measures are more appropriate than ROS to measure the performance of a company. Why? Answer: ROI, RI, or EVA measures are more appropriate than ROS because they consider both income and investment. ROI indicates which investment yields the highest return. RI and EVA overcome some of the goal-congruence problems of ROI. Some managers favor EVA because of the accounting adjustments related to the capitalization of investments in intangibles. Other managers favor RI because it is easier to calculate and because, in most cases, it leads to the same conclusions as EVA does. Diff: 2 Objective: 2 AACSB: Application of knowledge
1648 richard@qwconsultancy.com
74) Explain how the calculation of residual income is different from the EVA calculation by contrasting the elements of income and cost in the formulas and briefly explain how EVA might be more effective as a measure. Answer: The residual income calculation is income less an amount that estimates the required return on the investment. Economic value added is a specific type of residual income calculation that utilizes after-tax operating income minus a "cost" factor that is calculated as follows: weighted-average cost of capital multiplied by total assets minus current liabilities. Therefore, EVA takes into account the long-term cost of capital (which includes debt and equity) and gives you a residual income amount after covering a yield on assets. Therefore EVA can make managers focus on ways to improve EVA by earning more after-tax income on the same amount of capital or the same amount of after-tax income while using less capital or to seek out and invest in only those projects expected to earn a high return on capital. Diff: 2 Objective: 2 AACSB: Application of knowledge
1649 richard@qwconsultancy.com
Objective 24.3 1) Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:
Bleach Cleanser
ASSETS Book Value Current value $325,000 $315,000 $410,000 $370,000
INCOME Book value Current value $135,000 $155,000 $125,000 $125,000
The company is currently using a 15% required rate of return. What are Bleach's and Cleanser's return on investment based on book values, respectively? A) 30%; 42 % B) 49%; 34 % C) 34%; 49% D) 42%; 30% Answer: D Explanation: D) Book value ROI: Bleach: $135,000 / $325,000 = 42% Cleanser: $125,000 / $410,000 = 30% Diff: 2 Objective: 3 AACSB: Application of knowledge
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2) Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:
Bleach Cleanser
ASSETS Book Value Current value $325,000 $315,000 $420,000 $360,000
INCOME Book value Current value $140,000 $170,000 $100,000 $115,000
The company is currently using a 15% required rate of return. What are Bleach's and Cleanser's return on investment based on current values, respectively? A) 43%; 24% B) 24%; 43% C) 54%; 32% D) 32%; 54% Answer: C Explanation: C) Current ROI: Bleach: $170,000 / $315,000 = 54% Cleanser: $115,000 / $360,000 = 32% Diff: 2 Objective: 3 AACSB: Application of knowledge
3) Home Decor Inc., manufactures home cleaning products. The company has two divisions, Bleach and Cleanser. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:
Bleach Cleanser
ASSETS Book Value Current value $300,000 $320,000 $415,000 $365,000
INCOME Book value Current value $130,000 $160,000 $110,000 $130,000
The company is currently using a 14% required rate of return. What are Bleach's and Cleanser's residual incomes based on book values, respectively? A) $88,000; $51,900 B) $115,200; $78,900 C) $51,900; $88,000 D) $78,900; $115,200 Answer: A Explanation: A) Book value RI: Bleach: $130,000 - ($300,000 × 0.14) = $88,000 Cleanser: $110,000 - ($415,000 × 0.14) = $51,900 Diff: 2 Objective: 3 AACSB: Application of knowledge
1651 richard@qwconsultancy.com
4) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:
Wheels Assembly
ASSETS Book Value Current value $505,000 $560,000 $780,000 $1,600,000
INCOME Book value Current value $120,000 $150,000 $165,000 $190,000
The company is currently using a 13% required rate of return. What are Wheels' and Assembly's return on investment based on book values, respectively? A) 27%; 12% B) 24%; 21% C) 12%; 27% D) 21%; 24% Answer: B Explanation: B) Book value ROI: Wheels: $120,000 / $505,000 = 24% Assembly: $165,000 / $780,000 = 21% Diff: 2 Objective: 3 AACSB: Application of knowledge
1652 richard@qwconsultancy.com
5) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:
Wheels Assembly
ASSETS Book Value Current value $500,000 $580,000 $800,000 $1,300,000
INCOME Book value Current value $150,000 $150,000 $170,000 $190,000
The company is currently using a 14% required rate of return. What are Wheels' and Assembly's return on investment based on current values, respectively? A) 15%; 26% B) 30%; 21% C) 21%; 30% D) 26%; 15% Answer: D Explanation: D) Book value ROI: Wheels: $150,000 / $580,000 = 26% Assembly: $190,000 / $1,300,000 = 15% Diff: 2 Objective: 3 AACSB: Application of knowledge
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6) Carriage Incorporated manufactures horse carriages. The company has two divisions, Wheels and Assembly. Because of different accounting methods and inflation rates, the company is considering multiple evaluation measures. The following information is provided for 2020:
Wheels Assembly
ASSETS Book Value Current value $500,000 $560,000 $770,000 $1,400,000
INCOME Book value Current value $120,000 $150,000 $160,000 $172,000
The company is currently using a 12% required rate of return.
What are Wheels' and Assembly's residual incomes based on book values, respectively? A) $67,600; $60,000 B) $60,000; $67,600 C) $82,800; $4,000 D) $4,000; $82,800 Answer: B Explanation: B) Book value RI: Wheels: $120,000 - ($500,000 × 0.12)) = $60,000 Assembly: $160,000 - ($770,000 × 0.12) = $67,600 Diff: 2 Objective: 3 AACSB: Application of knowledge
7) Which of the following is the formula for investment assuming that total assets employed is the measure? A) total assets available minus the sum of idle assets B) total assets available minus the sum of idle assets and assets purchased for future expansion C) total assets available minus assets purchased for future expansion D) total assets minus current liabilities Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
8) A caution for managers when choosing time horizons for performance measures is: A) ROI, RI, and EVA calculations and interpretations of such need to focus on 1-year time horizons B) causes of short-run increases in key measures may be in conflict with the long-run interest of the firm C) R&D and plant maintenance should be the immediate focus when improving performance measures to maximize profits D) evaluation of performance via measures such as ROI, RI, EVA, and ROS should impact behaviors during short-run as well as long-run time horizons Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
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9) For ROI or RI, companies frequently choose to define investment as total assets available. EVA® users would normally use total assets employed minus: A) long-term debt B) current liabilities C) stockholders' equity D) retained earnings Answer: B Diff: 2 Objective: 3 AACSB: Analytical thinking
10) Consider the following historical costs for long-term assets of Adapter Inc. , a company with operations in three regions of the U.S.
New England Southeast West
Gross Book Value at historical cost $1,400,000 $2,350,000 $2,730,000
Year built 2012 2016 2018
At the end of 2020, what is the gross book value of the assets in Southeast region based on current costs based on the following construction cost index by year?
Construction cost index Construction cost index
2012 100 2016 125
2013 105 2017 132
2014 110 2018 141
2015 115 2019 150
2020 165
A) $2,937,500 B) $3,877,500 C) $3,102,000 D) $2,585,000 Answer: C Explanation: C) Southeast gross book value $2,350,000 × (165/125) = $3,102,000 Diff: 2 Objective: 3 AACSB: Analytical thinking
11) The proponents of using net book value as an investment base maintain that it is less confusing because it is consistent with the amount of total assets shown in the conventional balance sheet. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
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12) When current cost is used to evaluate the performance of an asset, "current cost" is synonymous with historical cost. Answer: FALSE Explanation: Current cost is the cost of purchasing an asset today identical to the one currently held or the cost of purchasing an asset that provides services similar to the one being held if an identical asset cannot be purchased. Historical cost can include original cost or net book value. Diff: 2 Objective: 3 AACSB: Analytical thinking
13) Current cost return on investment is a better measure of the current economic returns from an investment than historical cost return on investment. Answer: TRUE Diff: 2 Objective: 3 AACSB: Analytical thinking
14) The net present value of all cash flows over the life of an investment equals the net present value of the operating incomes. Answer: FALSE Explanation: The net present value of all cash flows over the life of an investment equals the net present value of the residual incomes. Diff: 2 Objective: 3 AACSB: Application of knowledge
15) Total assets employed includes all assets, regardless of their intended purpose. Answer: FALSE Explanation: Total assets employed are the total assets available minus the sum of idle assets and assets purchased for future expansion. Diff: 1 Objective: 3 AACSB: Analytical thinking
16) Using net book value as an investment base will result in a lower ROI than using gross book value as an investment base. Answer: FALSE Explanation: Using gross book value as an investment base will result in a lower ROI than using net book value as an investment base. Diff: 2 Objective: 3 AACSB: Application of knowledge
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17) An important element in designing accounting-based performance measures is choosing the time horizon of the performance measures. Discuss. Answer: The ROI, RI, EVA, and ROS calculations represent the results for a single period, one year in our example. Managers could take actions that cause short-run increases in these measures but that conflict with the long-run interest of the company. For this reason, many companies evaluate subunits on the basis of ROI, RI, EVA, and ROS over multiple years. Another reason to evaluate subunits over multiple years is that the benefits of actions taken in the current period may not show up in short-run performance measures, such as the current year's ROI or RI. Diff: 3 Objective: 3 AACSB: Application of knowledge
Objective 24.4 1) When managers set and measure target levels of performance and feedback: A) the historical-cost-based accounting measures are usually adequate for evaluating economic returns on new investments B) the historical-cost ROIs cannot be used to evaluate current performance C) the timing of feedback is not dependent on the sophistication of the organization's information technology D) how critical the information is for success of the organization and the management level receiving the feedback Answer: D Diff: 2 Objective: 4 AACSB: Analytical thinking
2) Historical-cost-based accounting measures are usually inadequate for evaluating economic returns on new investments and, in some cases, create disincentives for expansion. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
3) Managers must negotiate and tailor a budget to the particular subunit, accounting system, and performance measures to obtain useful results. Answer: TRUE Diff: 1 Objective: 4 AACSB: Analytical thinking
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4) Evaluating performance on the basis of continuous improvements in EVA makes the initial method of calculating the measure critically important. Answer: FALSE Explanation: A popular way to establish targets is to set continuous improvement targets. If a company is using EVA as a performance measure, the firm can evaluate operations on the year-to-year changes in EVA, rather than on absolute measures of EVA. Evaluating performance on the basis of improvements in EVA makes the initial method of calculating the measure less important. Diff: 3 Objective: 4 AACSB: Analytical thinking
5) What are the factors involved in choosing the timing of the feedback in designing accounting-based performance measures? Answer: A final step in designing accounting-based performance measures is the timing of performance feedback, which depends largely on (1) how critical the information is for the success of the organization, (2) the management level receiving the feedback, and (3) the sophistication of the organization's information technology. Diff: 2 Objective: 4 AACSB: Analytical thinking
6) What targets should companies use, and when should they give feedback to managers regarding their performance relative to the targets? Answer: Companies should tailor a budget to a particular subunit, a particular accounting system, and a particular performance measure. In general, asset valuation and income measurement problems can be overcome by emphasizing budgets and targets that stress continuous improvement. Timely feedback enables managers to implement actions that correct deviations from the target performance. Diff: 2 Objective: 4 AACSB: Analytical thinking
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Objective 24.5 1) Inflation clouds the real economic returns on an asset and: A) makes variable-cost-based ROI higher B) makes historical-cost-based ROI lower. C) makes historical-cost-based ROI higher D) makes variable-cost-based ROI lower Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
2) Which of the following statements is true? A) The economic, legal, political, social, and cultural environments differ across countries. B) The import quotas and tariffs remain the same across all countries according to the standards set by United Nations. C) The advances in telecommunications and transportation, the availability of materials and skilled labor does not differ significantly across countries. D) The fixed rate policy is followed across all countries to avoid price fluctuations and inflation. Answer: A Diff: 2 Objective: 5 AACSB: Analytical thinking
3) ________ would be an uncontrollable factor that a firm would need to consider when evaluating the return on investment of an international division. A) Manager's experience B) Manager's compensation C) Pricing decisions D) Custom duties Answer: D Diff: 2 Objective: 5 AACSB: Application of knowledge
4) In performance evaluations: A) managers should use the swap exchange rate prevailing at the end of a financial period B) managers should use the average exchange rate prevailing at the end of a financial period C) managers should use the exchange rate prevailing on the date the assets were acquired D) managers should use the exchange rate prevailing at the end of a financial period Answer: C Diff: 2 Objective: 5 AACSB: Analytical thinking
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5) Ventaz Corp. purchased assets for its overseas branch for $16,000. The rate of conversion at the time of purchase of asset was $1.400 / Euro. If the company evaluates a project's ROI based on its initial costs and its operating income and does that in the foreign currency, what value of assets in Euros to be used to calculate the ROI if the rate current conversion rate is $1.513 / Euro and the average rate being $1.409 / Euro? A) 11,429 Euros B) 10,575 Euros C) 11,356 Euros D) 22,400 Euros Answer: A Explanation: A) Value of assets = $16,000 / 1.400 = 11,429 Euros. Diff: 2 Objective: 5 AACSB: Application of knowledge
6) Megatron Corp. earned net income of 16,000 Euros in its overseas branch at France. Its headquarters is located in the U.S. The rate of conversion during set up was $1.307 / Euro. What is the value of its income in its home currency if the rate is $1.508 / Euro at the end of a financial year and the average rate being $1.408 / Euro? A) $12,242 B) $22,528 C) $24,128 D) $20,912 Answer: B Explanation: B) Value of income in home currency = 16,000 × 1.408 = $22,528 Diff: 2 Objective: 5 AACSB: Application of knowledge
7) Inflation and fluctuations in foreign-currency exchange rates affect performance measurement. Answer: TRUE Diff: 1 Objective: 5 AACSB: Analytical thinking
8) Higher inflation will lead to higher prices for goods or services, which will increase a company's operating income and lead to a higher ROI. Answer: TRUE Diff: 2 Objective: 5 AACSB: Application of knowledge
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9) When one currency declines against the dollar, it may correspond to lower inflation in the foreign country and as a result, historical operating income and ROI's will be higher. Answer: FALSE Explanation: When one currency declines against the dollar, it may correspond to high inflation in the foreign country. As a result, historical operating income and ROI's will be higher. Inflation clouds the real return on assets and makes direct comparisons difficult. Diff: 2 Objective: 5 AACSB: Analytical thinking
10) To convert the operating income for an overseas branch into US dollars, the historical rate of exchange is used for its conversion into US dollars. Answer: FALSE Explanation: To convert the operating income for an overseas branch into US dollars, the average rate of exchange is used for its conversion. Diff: 2 Objective: 5 AACSB: Analytical thinking
11) To calculate the value of fixed assets for an overseas branch, the historical rate of exchange is used for its conversion. Answer: TRUE Diff: 2 Objective: 5 AACSB: Analytical thinking
12) Discuss the issues and complications that may arise when multinational corporations conduct performance measurement and comparisons among divisions located in different countries. Answer: There are wide differences in legal, political, social, and cultural environments among countries. Import quotas and tariffs range widely from country to country, and it's not unusual for countries to impose tariffs and custom duties to restrict the imports of certain goods. Availability of materials and skilled labor as well as power, transportation, and communication grids are likely to create significant issues. Divisions operating in different countries account for their performance in different currencies. The exchange rates will fluctuate and there will be differences and effects as a result of levels of inflation, which will need to be reconciled with adjustments to the measurement criteria established. Diff: 3 Objective: 5 AACSB: Analytical thinking
1661 richard@qwconsultancy.com
Objective 24.6 1) Which of the following is true of rewarding managers on the basis of residual income? A) Managers are paid a fixed amount for his services regardless of the risk involved. B) Managers' efforts are easily measured. C) Managers taking less risk should be rewarded more since more risk can lead to huge losses. D) Managers' rewards are dependent on their own efforts and other local economic factors. Answer: D Diff: 2 Objective: 6 AACSB: Analytical thinking
2) Which of the following describes a situation in which an employee prefers to exert less effort than the effort the owner desires because the employee's effort cannot be accurately monitored and enforced? A) goal incongruence B) moral hazard C) performance report variance D) incentive report variance Answer: B Diff: 1 Objective: 6 AACSB: Analytical thinking
3) An important reality to be aware of when designing performance measurement and award systems is that: A) managers can influence performance that is impacted by economic factors B) there are tradeoffs between creating incentives and imposing risk on a manager C) managers can exert significant influence over matters related to regulatory restrictions and limitations D) there is really no distinction between a subunit's performance and the performance of that subunit's manager Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
4) Sensitive performance measures: A) the salary component of the managers B) are not affected by managers' performance and fail to induce them to improve C) motivate the manager as well as limit the manager's exposure to risk, reducing the cost of providing incentives. D) increases the exposure of credit Answer: C Diff: 1 Objective: 6 AACSB: Analytical thinking
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5) Which of the following is true of performance measurement? A) Preferred performance measures do not change much with changes in factors that are beyond manager's control. B) Sensitive performance measures increases the cost of providing incentives. C) Less-sensitive performance measures induce managers to improve. D) Managers' performances should be evaluated based on the financial measures such as residual income and economic value added. Answer: A Diff: 2 Objective: 6 AACSB: Analytical thinking
6) Relative performance evaluation: A) determines the effective intensity of incentives placed on each measure of performance B) filters out the effect of common uncontrollable factors C) results in managers helping each other who run similar operations D) leads to goal congruence Answer: B Diff: 2 Objective: 6 AACSB: Analytical thinking
7) Team incentives encourage cooperation by: A) identifying an efficient and a nonefficient employee B) enhancing the incentives of individual employees leading to overall positive performance C) letting individuals help one another as they strive toward a common goal D) rewarding all teams by the same margin Answer: C Diff: 2 Objective: 6 AACSB: Analytical thinking
8) Many manufacturing, marketing, and design problems require employees with multiple skills; therefore, teams are used, and the members have the added encouragement of: A) individual incentives B) management incentives C) morale incentives D) team incentives Answer: D Diff: 1 Objective: 6 AACSB: Analytical thinking
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9) Which of the following is true of an executive compensation plan? A) The compensation paid to the executives should be linked only to the financial performance of the company. B) Most compensation plans are two parts: salary and health plan. C) It does not help balancing risk with short-run and long-run incentives. D) It includes salary, annual incentive compensation, and benefits such as medical benefits, pension plans, and life insurance. Answer: D Diff: 2 Objective: 6 AACSB: Application of knowledge
10) Which of the following is true of benchmarking two managers against each other if they carry out similar operations? A) It would lead to better cooperation among the managers. B) It would reduce the managers' incentives to help one another. C) It would enhance the accomplishment of organization goals. D) It would help reduce costs common to both the departments. Answer: B Diff: 2 Objective: 6 AACSB: Application of knowledge
11) An important consideration in designing compensation arrangements is the tradeoff between creating incentives and imposing risks. Answer: TRUE Diff: 1 Objective: 6 AACSB: Analytical thinking
12) There should be strict congruence between the performance evaluation of a subunit and the performance evaluation of that subunit's manager. Answer: FALSE Explanation: A company should distinguish between the performance evaluation of a manager and the performance evaluation of that manager's subunit. Diff: 2 Objective: 6 AACSB: Analytical thinking
13) A manager's job entails gathering information, interpreting that information and making judgments on that information and thus is less susceptible to moral hazards than jobs that require repetitive tasks and less subjective decision making. Answer: FALSE Explanation: Repetitive task-based jobs are relatively easy to monitor and are less subject to moral hazard than manager's jobs which are more difficult to monitor and therefore higher in moral hazard risk. Diff: 1 Objective: 6 AACSB: Analytical thinking
14) The more owners have access to sensitive performance measures, the more they can rely on incentive
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compensation for their managers. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
15) The credit rating agencies require detailed disclosures of the compensation arrangements of top-level executives. Answer: FALSE Explanation: The SEC requires detailed disclosures of the compensation arrangements of top-level executives. Diff: 2 Objective: 6 AACSB: Analytical thinking
16) The salary component of compensation dominates when performance measures that are sensitive to managers' actions are not available. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
17) An additional criticism of team-based compensation is that there can be problems managing team members who are not productive contributors to a team's success but who, nevertheless, share in the team's rewards. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
18) Stock options give executives the right to buy company stock at a specified price, called the exercise price, within a specified period. Answer: TRUE Diff: 2 Objective: 6 AACSB: Analytical thinking
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19) Craylon Corp. is planning the 2020 operating budget. Average operating assets of $1,800,000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the division are budgeted at $500,000, while fixed costs are set at $300,000. The company's required rate of return is 18%. Required: a. Compute the sales volume necessary to achieve a 20% ROI. b. The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for 2020, assuming he achieves the 20% ROI from part (a)? Answer: a. Target operating income = 0.20 × $1,800,000 = $360,000 Operating income Variable costs Fixed costs Target revenues
$360,000 500,000 300,000 $1,160,000
Sales volume = $1,160,000 / $100 = 11,600 units b. Asset base Minimum rate Required return
$1,800,000 × 0.18 $ 324,000
Target operating income Required return Residual income
$ 360,000 324,000 $ 36,000
Bonus = $36,000 × 0.50 = $18,000 Diff: 3 Objective: 6 AACSB: Application of knowledge
1666 richard@qwconsultancy.com
20) LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for 2020 are budgeted as follows: Sales Less variable costs Contribution margin Less fixed expenses Net operating income
$5,000,000 2,500,000 2,500,000 1,800,000 $ 700,000
Operating assets for the division are currently $3,600,000. For 2020, the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling price. Required: a. What is the effect on ROI of accepting the new product line? b. If the company's required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations. Answer: a. New investment: Sales $1,600,000 Variable costs $960,000 Fixed costs 600,000 1,560,000 Operating income $ 40,000 Current ROI = $700,000/$3,600,000 = 0.194 New investment ROI = $40,000/$600,000 = 0.067 Combined ROI = $740,000/$4,200,000 = 0.176 Accepting the new product line will reduce the division's ROI. This would make the manager reluctant to make the investment. b. Investment Minimum return Required amount
$600,000 × 0.06 $ 36,000
Income Required amount Residual income
$ 40,000 36,000 $ 4,000
The manager would accept the investment because income is increased by $4,000. Diff: 2 Objective: 6 AACSB: Application of knowledge
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21) Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results for 2020 are as follows: Division A B C
Operating income $15,000,000 $25,000,000 $11,000,000
Investment $100,000,000 $125,000,000 $ 50,000,000
The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000. Required: a. Compute the current ROI for each division. b.
Compute the current residual income for each division.
c.
Rank the divisions according to their current ROIs and residual incomes.
d. Determine the effects after adding the new project to each division's ROI and residual income. e. Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased with the expansion and which ones are unhappy?
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Answer: a. A ROI = $15,000,000 / $100,000,000 B ROI = $25,000,000 / $125,000,000 C ROI = $11,000,000 / $50,000,000 b.
A RI B RI C RI
c.
ROI Rank:
= $15,000,000 - ($100,000,000 × 0.15) =$0 = $25,000,000 - ($125,000,000 × 0.15) = $6,250,000 = $11,000,000 - ($50,000,000 × 0.15) = $3,500,000 1. C 2. B 3. A
RI Rank:
d. A ROI = $19,500,000 / $125,000,000 B ROI = $29,500,000 / $150,000,000 C ROI = $15,500,000 / $75,000,000 A RI B RI C RI
= 0.15 = 15% = 0.20 = 20% = 0.22 = 22%
1. B 2. C 3. A = 0.156 = 15.6% = 0.197 = 19.7% = 0.207 = 20.7%
= $19,500,000 - ($125,000,000 × 0.15) = $ 750,000 = $29,500,000 - ($150,000,000 × 0.15) = $7,000,000 = $15,500,000 - ($75,000,000 × 0.15) = $4,250,000
e. Everyone would be pleased if residual income was used because residual incomes increase with the expansion. However, it would be difficult to evaluate each division on a comparative basis because each division's investment base is different. Only the manager of Division A is pleased with the new investment if ROI is used because that is the only division with an increased ROI. In the case of additional investments that are required by corporate management, residual income may be the best to use for evaluating each manager individually, but not collectively. Diff: 3 Objective: 6 AACSB: Application of knowledge
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22) Vega Corp's corporate income has declined to unacceptable levels. To change the direction of the company, the board of directors hired a new chief executive officer. She is currently considering three alternative ways to reward division managers for performance. They are: 1.
Give each manager a competitive salary with no bonus for performance.
2. Give each manager a base salary with the largest portion being a bonus based on performance, ROI being the yardstick. 3. Give each manager a base salary with a bonus based on comparative performance with the other divisions. Required: Evaluate each of the ideas, giving strengths and weaknesses. Answer: 1. Opportunities for salary increases might be decided via other means such as improvements in employee motivation, cost savings ideas, or improved management skills. This method will fit some types of situations better than the bonus methods, but should not be used in situations where a high degree of motivation is desired. This method might not be the ideal one as the manager would expect an additional incentive to improve the company's financial status. 2. The second idea is good for motivating a manager to improve the performance of each given division. A weakness in this method occurs when managers make decisions that maximize return on investment in the short run because they have no intent to stay with the company over a long period of time. 3. The third method is great for motivating managers to compete with each other. However, some reward should be available for the lowest rated manager if that manager's performance is, in fact, above the company's standard for performance. Suboptimization is a potential problem with this approach if the winning manager's bonus is substantially above everyone else's bonus. Diff: 3 Objective: 6 AACSB: Application of knowledge
23) Executive compensation plans are based on both financial and nonfinancial performance measures. Discuss Answer: These plans are based on both financial and nonfinancial performance measures and consist of a mix of (1) base salary; (2) annual incentives, such as a cash bonus based on achieving a target annual RI; (3) long-run incentives, such as stock options based on a stock's performance over, say, a five-year period; and (4) other benefits, such as medical benefits, pensions plans, and life insurance. Well-designed plans use a compensation mix that balances risk (the effect of uncontrollable factors on the performance measure and hence compensation) with short-run and long-run incentives. Diff: 2 Objective: 6 AACSB: Analytical thinking
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24) The Wooden Box Company rewards managers who are part of a team based on the performance of the team. Briefly explain the problem that such an incentive plan can create. Answer: Companies that reward individual managers based on team performance can create a long-term motivation problem as incentives for individual employees to excel are diminished. Some team members may not be as productive as some of the other managers who are members of the team and yet the rewards will be the same. This raises an issue of fairness in the minds of the highly productive and effective team members. Any student who has participated in group learning where only one or a few members of the group pull their weight can relate to the feeling of everyone in the group getting the same grade without any real correlation to effort or effectiveness. Diff: 2 Objective: 6 AACSB: Analytical thinking
Objective 24.7 1) Which of the following is a difference between a diagnostic control system and an interactive control system? A) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on standards of ethical behavior. B) A diagnostic control system focuses on standards of ethical behavior while an interactive control system focuses on meeting expectations. C) A diagnostic control system focuses on meeting expectations, while an interactive control system focuses on organizational attention and learning on key strategic issues. D) A diagnostic control system focuses on organizational attention and learning on key strategic issues, while an interactive control system focuses on meeting expectations. Answer: C Diff: 2 Objective: 7 AACSB: Application of knowledge
2) Which of the following describes boundary control systems? A) set limits by instituting and communicating standards of behavior and codes of conduct expected of all employees B) articulate the mission, purpose, and core values of a company C) are formal information systems managers use to focus the company's attention and learning on key strategic issues D) describe the geographic limits of a company and help organize its layout Answer: A Diff: 2 Objective: 7 AACSB: Analytical thinking
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3) Which of the following best describes interactive control systems? A) it articulates the mission, purpose, and core values of a company B) it articulates standards of behavior and codes of conduct expected of all employees and help in achieving the maximum benefit C) they are formal information systems managers use to focus the company's attention and learning on key strategic issues D) it describes the geographic limits of a company and help organize its layout Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
4) Which of the following best describes a belief control system? A) it describes standards of behavior and codes of conduct expected of all executives and board of directors B) it articulates the mission, purpose, and core values of a company C) they are formal information systems managers use to focus the company's attention and learning on key strategic issues D) it describes standards of behavior and codes of conduct expected of all employees Answer: B Diff: 2 Objective: 7 AACSB: Analytical thinking
5) Which of the following best describes an interactive control system? A) ensures adherence to legal or ethical accounting policies and procedures B) ensures prompt and severe reprimand of unethical conduct, regardless of the benefits that might accrue to the company from unethical action C) ensures that employees' intrinsic motivation, the desire to achieve self-satisfaction for performing well regardless of external rewards such as bonuses or promotion D) ensures frequent face-to-face communications among managers and employees regarding the critical uncertainties Answer: D Diff: 2 Objective: 7 AACSB: Application of knowledge
6) Managers use ________ to ensure employees' intrinsic motivation, the desire to achieve self-satisfaction for performing well regardless of external rewards such as bonuses or promotion. A) diagnostic control systems B) boundary systems C) belief systems D) interactive control systems Answer: C Diff: 2 Objective: 7 AACSB: Analytical thinking
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7) "Levers of control," in addition to a diagnostic control system, are needed in an organization because: A) diagnostic controls have been found to lead to poor financial performance B) diagnostic controls have no place in a balanced scorecard system C) pressure to perform on diagnostic controls may lead to unethical behavior D) they are mandated by the Financial Accounting Standards Board Answer: C Diff: 3 Objective: 7 AACSB: Application of knowledge
8) "Cooking the books" means reporting of understated assets and overstated liabilities. Answer: FALSE Explanation: Cooking the books is overstating assets and understating liabilities. Diff: 1 Objective: 7 AACSB: Application of knowledge
9) Intrinsic motivation comes from being given greater responsibility, doing interesting and creative work, and having pride in doing that work. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
10) An excessive focus on diagnostic control systems and critical performance variables can cause an organization to ignore emerging threats and opportunities. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
11) Some companies make environmental performance a line item on every employee's salary appraisal report. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
12) Interactive control systems are informal information systems managers use to focus the company's attention and learning on key strategic issues. Answer: FALSE Explanation: Interactive control systems are formal information systems managers use to focus the company's attention and learning on key strategic issues. Diff: 2 Objective: 7 AACSB: Analytical thinking
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13) Measures which monitor critical performance variables that help managers track progress toward achieving a company's strategic goals are collectively called diagnostic control systems. Answer: TRUE Diff: 2 Objective: 7 AACSB: Analytical thinking
14) Briefly explain each of the four levels of control. Why does a company need to implement more than a diagnostic control system? Answer: The four levers of control are diagnostic control systems, boundary systems, belief systems, and interactive control systems. Companies must strive for performance, behave ethically, inspire employees, and respond to strategic threats and opportunities in the environment. Diagnostic control systems involve measures that help a company to diagnose whether or not a company is performing according to expectations. Boundary systems describe standards of behavior and codes of conduct expected of all employees, especially actions that are off-limits. Belief systems articulate the mission, purpose, and core values of a company. Interactive control systems are formal information systems that managers use to focus organization attention and learning on key strategic issues. The "levers of control," in addition to diagnostic control systems, are needed since the pressure to perform on diagnostic goals can be so strong that management might take steps to cut corners and make their performance look better than it really is. In addition, diagnostic systems might focus management too much on meeting short term goals that organization learning and attention to key strategic issues might be inadequate for the future. Diff: 2 Objective: 7 AACSB: Analytical thinking
15) Explain how the Institute of Management Accounting's Standards of Ethical Practice is a type of boundary system and how specifically the standard of Credibility addresses the danger of "cooking the books". Answer: A boundary system set standards of behavior and codes of conduct for all employees to follow. Members of IMA have an additional or more specific set of standards/boundaries to follow. All IMA members, including those who are CMA, shall behave ethically and need to make a commitment to ethical professional practice of accounting as set out by a published code of conduct called the Standards of Ethical Practice. These standards include overarching principles that express values and standards that guide member conduct including Honesty, Fairness, Objectivity, and Responsibility. A specific standard is credibility addresses the concept of "cooking the books" by stating that it is the duty of the accountant to communicate information fairly and objectively and to provide all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, analyses, or recommendations. Adhering to that standard would mean that an accountant would find it "off limits" to create reports that overstated assets, understated liabilities, showed fictitious revenues or understated costs to help the company, subunits or managers achieve performance goals. Diff: 2 Objective: 7 AACSB: Analytical thinking
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