Chapter 1 Management accounting in context Choose the one alternative that best completes the statement or answers the question. 1) Management accounting: A) focuses on estimating future revenues, costs, and other measures to forecast activities and their results. B) reports information in accordance with relevant accounting standards. C) provides information to external parties. D) provides information that is generally available only on a quarterly or annual basis. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 2) Financial accounting: A) reports include detailed information on the various operating segments of the business such as product lines or departments. B) focuses on the future and includes activities such as preparing next year’s operating budget. C) is prepared for the use of department heads and other employees. D) must comply with GAAP (generally accepted accounting principles). Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 3) Which of the following is MOST likely to use ONLY financial accounting information? A) Vice CEO of operations B) Department manager C) Current shareholder
D) Factory shift supervisor Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 4) The person MOST likely to use management accounting information is a(n): A) governmental taxing authority. B) banker evaluating a credit application. C) assembly department supervisor. D) shareholder evaluating a share investment. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 5) Which of the following descriptors refers best to management accounting information? A) It is verifiable and reliable. B) It is prepared for shareholders. C) It is driven by rules. D) It provides reasonable and timely estimates. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 6) Which statement refers best to management accounting information? A) It primarily measures and records business transactions. B) The audience tends to be shareholders, creditors, and tax authorities. C) There are no regulations governing the reports. D) The reports are generally delayed and historical. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role.
7) Management accounting information includes: A) the cost of producing a product. B) tabulated results of customer satisfaction surveys. C) the percentage of units produced that are defective. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 8) Management accountants evaluate the costs and revenue benefits of A) strategic B) tactical C) operational D) TQM Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 9) Which of these types of information are used in management accounting? A) Financial information B) Information focused on the long term C) Non-financial information D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 10) Modern cost accounting plays a role in: A) planning new products. B) controlling costs. C) evaluating operational processes. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
initiatives.
Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 11) A data warehouse or infobarn: A) is primarily used for financial reporting purposes. B) stores information used by different managers for multiple purposes. C) gathers only non-financial information. D) is reserved for exclusive use by the CFO. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 12) Cost accounting provides all of the following EXCEPT: A) pricing information from marketing studies. B) information for management accounting and financial accounting. C) financial information regarding the cost of acquiring resources. D) non-financial information regarding the cost of operational efficiencies. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 13) Financial accounting is concerned PRIMARILY with: A) cost planning and cost controls. B) providing information for strategic and tactical decisions. C) external reporting to investors, creditors, and government authorities. D) profitability analysis. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 14) While financial accounting provides a historical perspective, what does management accounting emphasise? A) past transactions
B) the future C) reports to shareholders D) a current perspective Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 15) Which of the following best describes an Enterprise Resource Planning System? A) A database that is primarily used by a purchasing department to determine the correct amount of a particular supply item to purchase B) A sophisticated means of linking two or more companies to facilitate their planning processes C) A single database that collects data and feeds it into applications that support each of the company’s business activities, such as purchases, production, distribution, and sales D) A collection of programs that use a variety of unconnected databases Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 16) 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) enterprise resource planning. B) customer value management. C) value chain management. D) cost management. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 17) Companies report on their approach to maintaining sustainability in: A) the report on social responsibility. B) the income statement. C) the balance sheet. D) None of the above. Answer: A
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 18) In most organisations, there are also relationships that managers must understand when they attempt to implement their decisions. A) informal B) strategic C) interpersonal D) tactical Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 19) What is the PRIMARY criterion when faced with a resource allocation decision? A) Cost minimisation B) How well the alternative options help achieve organisational goals in relation to the costs incurred for these systems C) Reduction in the amount of time required to perform a particular job D) Achievement of organisational goals Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 20) Which of the following statements about the cost-benefit approach is TRUE? A) Resources should be spent if the costs of a decision outweigh the benefits of the decision. B) In a cost-benefit analysis, both costs and benefits are easy to obtain. C) Resources should be spent if they are expected to better attain company goals in relation to the expected costs of these resources. D) A cost-benefit approach would not be appropriate for a decision to install a budget system or not. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role.
21) The person(s) directly responsible for attaining organisational objectives is/are: A) line management. B) the chief financial officer. C) the controller. D) the treasurer. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 22) Where an organisation is large enough to employ both a chief financial officer (CFO) and a management accountant, the management accountant reports to the . A) president B) board of directors C) CEO D) CFO Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 23) What has happened to the differences between staff and line management as teamwork has become more prominent in the last few years? A) Have increased. B) Have only been evident in the employee reward system. C) Have become more important relative to promotions. D) Have diminished. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 24) The Chartered Institute of Management Accountants (CIMA): A) issues standards for financial accounting. B) has its headquarters in the USA. C) is a professional organisation of management accountants.
D) is a professional organisation of financial accountants. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 25) What does line management include? A) Information-technology managers B) Management-accounting managers C) Human resource managers D) Manufacturing managers Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 26) What does staff management include? A) Human resource managers B) Distribution managers C) Purchasing managers D) Manufacturing managers Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 27) Responsibilities of a Chief Financial Officer (CFO ) include all of the following EXCEPT: A) chairing the board of directors. B) supervising the preparation of tax returns. C) managing short-term and long-term financing. D) providing financial reports to shareholders. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role.
28) Who is primarily responsible for management accounting and financial accounting? A) CIO (Chief Information Officer) B) COO (Chief Operating Officer) C) Treasurer D) Chief Management Accounting officer or controller Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 29) All of the following report to the Chief Financial Officer (CFO) EXCEPT the: A) Production Manager. B) Company Secretary. C) Chief Management Accountant. D) Tax Department Manager. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 30) Examples of the Chief Management Accountant’s functions include all EXCEPT: A) planning. B) investor relations. C) operations administration. D) budgeting. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 31) Management accounting is an integral part of the A) taxation B) treasury C) internal audit D) None of the above. Answer: D AACSB: Able to analyse and frame problems
function in an organisation.
Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 32) Management accounting information focuses on external reporting. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 33) Cost management is narrowly focused on a continuous reduction of costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 34) Managers always require the information in an accounting system to be presented in the same format. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 35) The balance sheet, income statement, and cash flow statement are used for financial accounting, but not for management accounting. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 36) Cost management provides information that helps increase value for customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role.
37) Management accounting has to strictly follow the rules of generally accepted accounting principles for the purposes of measurement and reporting. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 38) An ideal database should consist of data that could be used for a single purpose only. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 39) Cost accounting systems provide information only for management accounting purposes. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 40) Financial accounting reports financial and non-financial information that helps managers implement company strategies. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 41) The use of teams to achieve corporate objectives is increasing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 42) The chief financial officer (CFO) is usually responsible for banking, short- and long-term financing, investments, and cash management.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 43) CPA Australia and the Institute of Chartered Accountants in Australia (ICAA) established the Accounting Professional and Ethical Standards Board. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. Write your answer in the space provided or on a separate sheet of paper. 44) For each report listed below, identify whether the major purpose of the report is for (1) routine internal reporting, (2) non-routine 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) non-routine internal reporting b. (1) routine internal reporting c. (3) external reporting to investors and other outside parties d. (1) routine internal reporting AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 45) 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 are usually broken down into smaller reporting divisions such as department or product line. There are no rules to be complied with since these reports are for internal use only. Management accounting embraces more extensively such topics as the development and implementation of strategies and policies, budgeting, special studies and forecasts, influence on employee behaviour, and non-financial 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). An accountant audits, or verifies, that the GAAP are being followed. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 46) Is financial accounting or management accounting more useful to an operations manager? Why?
Answer: Management accounting is more useful to an operations manager because management accounting reports operating results by department or unit rather than for the company as a whole, it includes financial as well as non-financial data such as on-time deliveries and cycle times, and it includes quantitative as well as qualitative data such as the type of rework that was needed on defective units. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 47) Is it possible to have an active cost management program without an Enterprise Resource Planning (ERP) System?
Answer: Yes, an active cost management program can occur without an Enterprise Resource Planning (ERP) System. Cost management is a philosophy that guides management in their short-run and long-run planning and control decisions that increase value for customers and lower costs of products and services. Cost management is not dependent on any particular system or database, but it is rather an overall
philosophy of operation. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 48) What competitive advantage could a company obtain from a successful cost management program?
Answer: There are three broad outcomes from a successful cost management program: 1) costs are reduced with no loss in customer value. In this scenario, a company might gain a competitive advantage by lowering its price with no loss in profit, or maintain the same price and increase profit; 2) customer value is increased with no change in costs. This scenario might increase customer satisfaction resulting in increased customer loyalty and perhaps increase the overall demand for the product; 3) customer value might be increased while costs are reduced simultaneously. This scenario would result in the benefits described in both 1) and 2). AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 49) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 50) Discuss the potential behaviour implications of performance evaluation.
Answer:
As measurements are made on operations and, especially, on individuals and groups, the behaviour of the individuals and groups are affected. People react to the measurements being made. They will focus on those variables or the behaviour being measured and spend less attention on variables and behaviour that are not measured. In addition, if managers attempt to introduce or redesign cost and performance measurement systems, people familiar with the previous system will resist. Management accountants must understand and anticipate the reactions of individuals to information and measurements. The design and introduction of new measurements and systems must be accompanied with an analysis of the likely reactions to the innovations. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 51) What areas of responsibility does a Chief Financial Officer (CFO) have in a typical organisation?
Answer: The responsibilities vary among organisations, but generally include the following areas: controllership, treasury, risk management, taxation, investor relations, and internal audit. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. 52) How does a controller help ‘control’ a company?
Answer: By reporting and interpreting relevant data, the controller exerts a force or influence that impels management toward making better-informed decisions. The controller of Caterpillar described the job as ‘a business advisor to...help the team develop strategy and focus the team all the way through recommendations and implementation’. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Management accounting and its role Learning Objective: 1.1 Describe management accounting and explain its role. Choose the one alternative that best completes the statement or answers the question. 53) are those functions, activities or business practices, defined by the market not the company, and as viewed by the customer, that are critical to the vendor/customer relationship.
A) Operations B) Cycles C) Tactics D) Key success factors Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 54) Key success factors can exist in both the areas and the condition or circumstances of the company. A) cultural B) structural C) functional D) logistical Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 55) Management accountants calculate a cost for a product by subtracting the operating profit per unit of product that the company thinks it can earn from the ‘target price’. A) reasonable B) target C) systematic D) estimated Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 56) New product development time is the time it takes for market. A) old
products to be created and brought to
B) obsolete C) all D) new Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 57) Place the four business functions in the order they appear along the value chain: A = Customer service B = Design C = Distribution D = Production A) B A D C B) A B D C C) A C D B D) B D C A Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 58) What are R&D, production, and customer service as business functions included as part of? A) Marketing B) Benchmarking C) The supply chain D) The value chain Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 59) The value chain is the sequence of business functions in which: A) value is deducted from the products or services of an organisation.
B) products and services are evaluated with respect to their value to the supply chain. C) usefulness is added to the products or services of an organisation. D) value is proportionately added to the products or services of an organisation. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 60) Which of the following involves the generation of, and experimentation with, ideas related to new products, services, or processes? A) Design of products, services, or processes B) Marketing C) Research and development D) Production Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 61) Companies use the term to describe a strategy that integrates people and technology in all business functions to enhance relationships with customers, partners and distributors. A) cost leadership B) product differentiation C) market penetration D) customer relationship management Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 62) is the acquisition, coordination, and assembly of resources to produce a product or deliver a service. A) Production B) Research and development
C) Marketing D) Customer service Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 63) is the manner by which companies promote and sell their products or services to customers or prospective customers. A) Customer service B) Distribution C) Research and development D) Marketing Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 64) is the delivery of products or services to customers. A) Distribution B) Production C) Customer service D) Design of products, services, or processes Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 65) is the after-sale support provided to customers. A) Marketing B) Production C) Customer service D) Distribution Answer: C
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 66) The function in the value chain concerned with promoting and selling products or services to customers is: A) marketing. B) customer service. C) production. D) distribution. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 67) Customer relationship management initiatives use technology to coordinate all: A) inventory management activities. B) production activities. C) customer-facing activities. D) research activities. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 68) Companies gain (in terms of cost, quality and the speed with which new products are developed) if of the individual business functions of the value chain work concurrently as a team. A) two or more B) one or more C) three or more D) four or more Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 69) focus on internal activities, practices and functions. A) Core competencies B) Key success factors C) Strategies D) Values Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 70) When are aligned with key success factors, the value of the business relationship blossoms and grows for the benefit of both the company and the customer. A) strategies B) values C) cores competencies D) ethics Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 71) Key success factors can exist in both the areas and the condition or circumstances of the company. A) dynamic B) functional C) static D) organisational Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the
supply chain, and the dimensions of performance that customers expect. 72) Strategy should focus PRIMARILY on the organisation’s: A) customers. B) products. C) employees. D) shareholders. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 73) Whose perceptions of the company’s products or services are most important to the manager? A) chairman of the boards’ perception B) board of directors’ perception C) shareholders’ perception D) customers’ perception Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 74) A company needs to be to be successful. A) ‘driven’ by the board of directors B) management-driven C) employee-driven D) customer-driven Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 75) Customers generally demand improved performance related to: A) both reduced costs and increased quality.
B) reduced costs. C) lower costs, improved quality, and improved customer service. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 76) Customer response time involves: A) the time it takes an organisation to develop a Total Quality Management (TQM) program. B) the time it takes to develop a new product. C) the speed at which an organisation responds to customer requests. D) the time it takes a customer to respond to an advertisement and place an order. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 77) Which of the following is NOT a way for a company to improve customer response time? A) Produce the product more quickly. B) Purchase material in larger quantities. C) Increase capacity of bottleneck operations. D) Use faster delivery procedures. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 78) is a philosophy in which management improves operations throughout the value chain to deliver products and services that exceed customer expectations. A) Total quality management B) Customer focus C) Customer relationship management D) Cost-benefit approach
Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 79) By analysing activities, managers are able to integrate and coordinate them across suppliers and customers in the supply chain, as well as across business functions in an individual company’s value chain, with a view to reducing costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 80) Companies make a strategic decision to create and add value by operating across the entire supply chain for the industry or to select a segment of it. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 81) Beyond the value chain, managers can work with other parties in the supply chain to add value and reduce costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 82) Companies gain (in terms of cost, quality and the speed with which new products are developed) if two or more of the individual business functions of the value chain work concurrently as a team. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 83) The supply chain refers to the sequence of business functions in which customer usefulness is added to products or services. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 84) The value chain refers to the sequence of business functions in which customer usefulness is added to products or services. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 85) An effective way to cut costs is to eliminate activities that do not improve the product attributes that customers value. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 86) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect.
87) For best results, cost management emphasises independently coordinating supply chain activities within your company and not interfering with other companies. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 88) Customers demand increased levels of performance in all aspects of the value chain and the supply chain. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 89) The value 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: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 90) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 91) The supply chain always occurs within a single organisation. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 92) Distribution refers to promoting and selling products or services to customers or prospective customers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 93) The production component of the value chain refers to acquiring, coordinating, and assembling resources to produce a product or deliver a service. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 94) Management accountants might provide information for use in decisions on whether to buy a product from outside or manufacture it in-house. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 95) Value chain refers to value to the employee. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect.
96) Companies have to follow strict guidelines when designing a management accounting system. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 97) Tracking what is happening in other companies is illegal. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 98) Increased global competition is placing pressure on companies to reduce costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 99) Total quality management is a philosophy in which management improves operations throughout the value chain. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 100) Technological innovation has led to longer product life cycles and hence a need to bring new products to market more rapidly. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the
supply chain, and the dimensions of performance that customers expect. 101) Key success factors include cost, quality, timeliness, and innovation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 102) Key success factors are geared to improving customer satisfaction. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 103) The increasing pace of technological innovation has resulted in longer product life cycles. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 104) Companies around the world are cutting costs by outsourcing some of their business functions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 105) The management accountant helps managers evaluate investment and R&D decisions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the
supply chain, and the dimensions of performance that customers expect. 106) Management accountants help managers track performance on the chosen key success factors relative to the performance of itself in previous years. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 107) Successful strategy implementation requires more than value-chain and supply-chain analysis and execution of key success factors. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. Write your answer in the space provided or on a separate sheet of paper. 108) Classify each of the following cost items 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. labour 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 AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The supply chain, the value chain and key success factors
Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 109) Classify each of the following cost items of Ripon Printers 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 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 defining the book size so that a standard-sized box is filled to capacity
Answer: a. (4) marketing b. (3) production c. (5) distribution d. (4) marketing e. (5) distribution f. (3) production g. (1) R&D h. (2) design AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 110) Describe the value chain and how it can help organisations 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 organisation can become more effective by focusing on whether each link in the chain adds value from the customer’s perspective and furthers the organisation’s objectives. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. 111) In most organisations, customer satisfaction is one of the top priorities. As such, attention to customers is necessary for success. Briefly describe the four types of demands customers are currently placing on organisational performance.
Answer: Cost: Organisations are under continuous pressure to reduce the cost of the products or services they sell to their customers. Quality: Customers are expecting higher levels of quality and are less tolerant of low quality than in the past. Time: Time has many components: the time taken to develop and bring new products to market; the speed at which an organisation responds to customer requests; and the reliability with which promised delivery dates are met. Organisations are under pressure to complete activities faster and to meet promised delivery dates more reliably than in the past in order to increase customer satisfaction. Innovation: There is now heightened recognition that a continuing flow of innovative products or services is a prerequisite for the ongoing success of most organisations. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The supply chain, the value chain and key success factors Learning Objective: 1.2 Describe the constituents of the value chain, how the value chain relates to the supply chain, and the dimensions of performance that customers expect. Choose the one alternative that best completes the statement or answers the question. 112) An organisation’s identifies the organisation’s purpose objective, its output/market scope and the way it conducts its operations; the output/market scope includes customer groups served, customer functions and technologies used. A) strategy B) code of ethics C) mission statement D) structure Answer: C
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 113) What is the most important planning tool? A) Budget B) Goal C) Performance evaluation report D) Balanced scorecard Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 114) The process of preparing a budget: A) forces coordination and communication across business functions. B) reduces overcapacity. C) promotes production automation. D) increases accounting efficiencies. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 115) What doe control include? A) Implementing planning decisions B) Providing feedback to help with future decision making C) Evaluating performance D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 116) A budget: A) aids in the coordination and communication among various business functions.
B) is a quantitative expression of a proposed management plan. C) helps translate strategy into actions. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 117) Although there is a difference between management control and operational control, we simplify to two levels: and operational. A) strategic B) structural C) mission D) customer service Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 118) Which statement underpins the way in which the organisation conducts business? A) Mission B) Ethics C) Values D) Strategy Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 119) Linking rewards to performance: A) should only be based on financial information. B) helps to motivate managers. C) allows companies to charge premium prices. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 120) A , which is a one-sentence statement of the organisation’s long-term goal or objective, usually accompanies the mission statement. A) vision statement B) code of ethics C) statement of values D) strategic plan Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 121) Which statement concerning performance reports is NOT correct? A) The performance report contains no actual results due to confidentiality. B) The performance report shows actual performance as compared to the budget. C) The performance report often leads to more investigations and action. D) The performance report is a feedback tool. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 122) Although a budget is an important planning tool, it is arguably more powerful as a A) strategic B) tactical C) operational D) control Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions.
tool.
123) Which item is a guideline used by management accountants to assist in strategic and operational decision making? A) All are guidelines
B) Cost-benefit approach C) Different costs for different purposes D) Behavioural and technical considerations Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 124) The act of simply measuring and reporting information: A) has no effect on employee behaviour. B) focuses the attention of employees on those processes. C) disproves the saying ‘What gets measured gets managed’. D) diverts employee’s attention to other activities. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 125) Which statement is FALSE? A) If I can’t measure it, I can’t manage it. B) Employees spend more attention on those variables that are not getting measured. C) What gets measured gets managed. D) People react to measurements. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 126) Sustainability is ‘the ability to continue a defined behaviour indefinitely’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 127) The emergence of products and services that offer sustainable solutions is another manifestation of
the centrality of sustainability. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 128) To take advantage of changing market opportunities, the annual budget should be strictly enforced. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 129) Linking rewards to performance is a major deterrent to good management performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 130) Feedback and learning hinders the future decision-making process. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 131) Control includes deciding what feedback to provide to facilitate future decision making. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 132) When a particular aspect of employee performance is measured, employees pay more attention to it. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions
Learning Objective: 1.3 Describe planning, control and decisions. 133) Management accounting is playing an increasingly important role by helping managers develop and implement strategy. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 134) Employees pay little attention to how their performance is measured. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 135) A budget may be used as a planning tool, but not as a control tool. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 136) The purpose of a budget is strictly technical. It does NOT influence behaviour. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. Write your answer in the space provided or on a separate sheet of paper. 137) 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 Harvey Norman 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 nearby 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 138) What are externalities?
Answer: Externalities are costs that are not paid for by the organisation, but which are caused by its actions e.g., air pollution and water pollution costs. It also includes benefits, other than to customers, which are incidental to the product or service, for which the organisation does not receive revenue. Internalisation of these costs would force managers to consider them along with normal internal costs when making decisions. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 139) Briefly explain the planning and control activities in management accounting, and how these two activities are 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 140) How can a budget 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 organisation. The budget also helps with coordination. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 141) How can customer focus result in increased profits for a company?
Answer: If customers who provide a company with the most profits are attracted, satisfied, and retained, profits will increase as a result. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. 142) Complete a performance report for the month of May 2017, for the Bathurst Bulletin, 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: Advertising pages sold Budgeted advertising pages Advertising revenue Budgeted advertising revenue
900 910 $4 368 000 $4 410 000
Does the report indicate any cause for managerial investigation?
Answer: The performance report should look something like the following:
Advertising pages sold Average rate per page (Advertising Revenues)/ (Advertising pages sold) Advertising revenues
Actual Result (1)
Budgeted Amount (2)
910 pages $4800
900 pages $4900
Difference (Actual Difference as a Result - Budgeted Percentage of Amount) Budgeted Amount (4) (3) = (1) - (2) = (3) / (2) 10 pages favourable 1.1% favourable $100 Unfavourable 2.0% Unfavourable
$4 368 000
$4 410 000
$42 000 favourable
1.0% favourable
The overall 1% favourable difference in advertising revenue is caused by offsetting differences in advertising pages sold (favourable) and the average rate per page (unfavourable). The performance report highlights the unfavourable drop in the advertising rate per page. While the percentage drop in advertising revenue per page is not dramatic, management might want to investigate the reasons behind such a drop. Some possibilities include: aggressive price reductions to obtain revenue, a general drop in newspaper media spending, some aggressive competition, or an unrealistic budget. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Planning, control and making decisions Learning Objective: 1.3 Describe planning, control and decisions. Choose the one alternative that best completes the statement or answers the question. 143) Which statement concerning an organisation’s strategy is NOT true? A) Strategy specifies how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. B) A good strategy will always overcome poor implementation. C) Management accountants provide input to help managers formulate strategy. D) Businesses usually 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. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment
Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 144) There are several approaches that assist in forming strategy, one of which is a(n) analysis. A) internal B) external C) SWOT D) organisational Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 145) SWOT analysis entails: A) an analysis of strengths, weaknesses, opportunities and threats. B) how an organisation chooses to compete and highlights the opportunities its managers should evaluate and pursue if advantageous. C) showing how management accounting connects with sustainability. D) bringing relevant costs and benefits of sustainability to the attention of decision makers in the public arena, such as city councillors or government ministers. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 146) Many managements of businesses follow one of two generic strategies: cost leadership or . A) product differentiation B) growth C) marketing D) pricing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions.
147) is an organisation’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. A) Product differentiating B) Cost leadership C) Market growth D) Product pricing Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 148) In designing strategy, what must a company match the opportunities and threats in the marketplace with? A) Branding opportunities B) Capabilities of current suppliers C) Those of the CFO (Chief Financial Officer) D) Its resources and capabilities Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 149) is an organisation’s ability to offer products or services that its customers perceive to be superior and unique relative to the products or services of its competitors, and to earn a premium based on that differentiation. A) Cost leadership B) Market growth C) Product pricing D) Product differentiation Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions.
150) External stakeholders include: A) managers. B) shareholders. C) employees. D) board of directors. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 151) Strategy does NOT specify how an organisation matches its capabilities with the opportunities in the market place. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 152) In forming strategy, senior management must first thoroughly understand the organisation and its environment. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 153) The best-designed strategies are valuable whether or not they are effectively implemented. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions.
154) Managers and employees are internal stakeholders, while external stakeholders include shareholders, lenders, creditors, suppliers, customers, the government and the community at large. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 155) The key to a company’s success is always to be the low cost producer in a particular industry. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 156) Managers can assess the potential of a strategy and their ability to achieve their goal by identifying and analysing the strengths and weaknesses inherent in the organisation’s capacity and capabilities (internal analysis) and the opportunities and threats prevailing in its environment (external analysis). Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 157) Management accountants should have little or no role in deciding on a company’s strategy. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 158) Companies can decide on an appropriate strategy based strictly on internally available information. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment
Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 159) When competition is intense, there are strong potential entrants, there are many similar products in the market, there are few available suppliers, and customers are demanding. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 160) Identifying a company’s most important customers does not help formulate strategy. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 161) Globalisation has accelerated as countries enter into trade agreements that reduce barriers and encourage the provision of products and services across national boundaries. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 162) In forming strategy, senior management must first thoroughly understand the organisation and its environment. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 163) Globalisation has accelerated as countries enter into trade agreements that reduce barriers and encourage the provision of products and services across national boundaries.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 164) Cost leadership is an organisation’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 165) Product differentiation is an organisation’s ability to offer products or services that its customers perceive to be superior and unique relative to the products or services of its competitors, and to earn a premium based on that differentiation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 166) Strategic management accounting focuses specifically on strategic issues. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 167) The best-designed strategies and the best-developed capabilities are useless unless they are executed effectively. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy, the organisation and its environment
Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. Write your answer in the space provided or on a separate sheet of paper. 168) Which questions do management accountants help answer in the strategy formulation process?
Answer: 1. Who are our most important customers, and how do we deliver value to them? 2. What substitute products exist in the marketplace, and how do they differ from our product in terms of price and quality? 3. What is our most critical capability? 4. Will adequate cash be available to fund the strategy, or will additional funds need to be raised? AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 169) What is strategy? Briefly describe the two broad types of strategies that companies may choose to pursue.
Answer: Strategy specifies how an organisation 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 to 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 170) Briefly describe how managers make use of management accounting information.
Answer: ONE: To choose STRATEGY, to communicate it, and to determine how best to implement it.
TWO: To PLAN business operations related 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. THREE: To CONTROL business operations that includes comparing actual results to the budgeted results and taking corrective action when needed. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 171) 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 Differential Strategy Target customers Target customers might be Target customers might be more wealthy students, students on a tight budget. faculty, or perhaps neighbours who live nearby. Products offered Few products, heavy emphasis on High quality products, probably a reasonable tight cost control, probably set up choice, restaurant might have a lot of ambience. as a high volume operation.
Product pricing
Priced at or lower than the competition in the area. Convenient to the target customers.
Higher priced products.
Not as convenient, perhaps in 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 emphasise the Advertising would emphasise quality or ambience. content low price of the products offered. Advertising media Media that would be looked at by Media that would be looked at by the target the target customers, such as customer, local magazines and newspapers. student newspapers. Location choice
AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions. 172) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategy, the organisation and its environment Learning Objective: 1.4 Explain the meaning of strategy and the way in which management accounting might influence strategic decisions.
Choose the one alternative that best completes the statement or answers the question. 173) Place the five steps in the decision-making process in the correct order: A = Gather relevant information B = Make and implement a decision C = Identify the problem D = Evaluate performance and learn E = Identify and evaluate potential courses of action A) C A E B D B) D B E A C C) E D A B C D) A E B D C Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The five-step guide to decisions Learning Objective: 1.5 Describe and apply the five-step guide to decisions. 174) A well-conceived plan allows managers the ability to: A) keep lower-level managers from implementing change. B) take advantage of unforeseen opportunities. C) not make decisions again until the next planning session. D) underestimate costs so that actual operating results will be favourable when comparisons are made. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The five-step guide to decisions Learning Objective: 1.5 Describe and apply the five-step guide to decisions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 175) Most managers are likely to find that an established approach or framework is useful in guiding their decision making. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The five-step guide to decisions Learning Objective: 1.5 Describe and apply the five-step guide to decisions. 176) The first step in the five-step decision-making process is ‘gather relevant information’. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: The five-step guide to decisions Learning Objective: 1.5 Describe and apply the five-step guide to decisions. 177) One of the steps in planning is identifying and evaluating potential courses of action. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The five-step guide to decisions Learning Objective: 1.5 Describe and apply the five-step guide to decisions. 178) The last step in the five-step decision-making framework is “make and implement a decision.” Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The five-step guide to decisions Learning Objective: 1.5 Describe and apply the five-step guide to decisions. Write your answer in the space provided or on a separate sheet of paper. 179) In order, list the five steps in the decision-making process.
Answer: 1. Identify the problem 2. Gather relevant information 3. Identify and evaluate potential courses of action 4. Make and implement a decision 5. Evaluate performance and learn AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The five-step guide to decisions Learning Objective: 1.5 Describe and apply the five-step guide to decisions. Choose the one alternative that best completes the statement or answers the question. 180) Which of the following issues is NOT addressed by the Sarbanes-Oxley legislation? A) Improving internal control B) Disclosure practices of private companies C) Corporate governance D) Disclosure practices of public corporations Answer: B
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 181) The CIMA Code of Ethics for management accountants includes concepts related to: A) experience, integrity, reporting, and objectivity. B) competence, performance, integrity, and reporting. C) competence, confidentiality, integrity, and professional behaviour. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 182) Which item is NOT an indication of competence under the CIMA Code of Ethics? A) Maintain an appropriate level of professional expertise by continually developing knowledge and skills. B) Perform professional duties in accordance with relevant laws, regulations, and technical standards. C) Keep information confidential except when disclosure is authorised or legally required. D) Provide decision support information and recommendations that are accurate, clear, concise, and timely. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 183) Ethical challenges for management accountants include: A) whether to report unfavourable department information that may result in unfavourable consequences for a friend. B) whether to accept gifts from suppliers, knowing it is an effort to indirectly influence decisions. C) whether to file a tax return this year. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 184) Which of the following actions should a management accountant take first in confronting a potential ethical conflict concerning their direct supervisor? A) Confront their supervisor directly. B) Discuss the situation with their supervisor’s direct supervisor. C) Review their organisation’s procedures concerning resolution of such a conflict. D) Inform the Board of Directors of the existence of a potential conflict. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 185) If there is an ethical conflict concerning your direct supervisor, it may be appropriate to contact all of the following groups EXCEPT: A) local media. B) audit committee. C) board of directors. D) executive committee. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 186) If there is an ethical conflict concerning your direct supervisor, when is it appropriate to contact authorities or individuals not employed by the organisation? A) When your supervisor is about to receive a bonus B) When you are about to be terminated C) When there is a clear violation of the law D) When there is a personal conflict Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 187) CPA Australia and the Institute of Chartered Accountants in Australia (ICAA) established the Accounting Professional and Ethical Standards Board (APESB) in 2006 as an independent body to produce the code of ethics and professional standards, and were joined by the Institute of Public Accountants in the following year. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 188) The impact of the Sarbanes–Oxley legislation extends beyond the boundaries of the USA to Australian companies that trade with US companies. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 189) Accountants have special ethical obligations, given that they are responsible for the integrity of the financial information provided to internal and external parties. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 190) The Sarbanes-Oxley legislation in the USA was passed in response to a series of corporate scandals. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management
accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 191) The Sarbanes-Oxley legislation does NOT provide a process for employees to report violations of illegal and unethical acts. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 192) Management accountants have important ethical responsibilities that are related to competence, confidentiality, integrity, and credibility. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 193) A managerial accountant should not disclose confidential information to an outside party (such as a newspaper) unless legally obligated to do so. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 194) If a management accountant were not keeping up with current developments in management accounting, that behaviour might violate the requirement for competence in standards for professional ethical behaviour. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics.
195) If a management accountant suspected his or her immediate superior of wrongdoing, the management accountant should request an immediate meeting with the Board of Directors. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 196) When faced with a potential ethical conflict, the management accountant should first consult any internal procedures of their organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 197) When confronted with a potential ethical conflict, a management accountant should not contact his or her personal lawyer concerning rights and obligations. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 198) Most professional accounting organisations around the world do NOT issue statements about professional ethics. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. Write your answer in the space provided or on a separate sheet of paper. 199) List four principles of ethical conduct for management accountants. For each principle, give an example that demonstrates compliance with that principle.
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. Objectivity: Do not allow bias, conflict of interest of undue influence of others to override professional judgement AASSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics. 200) You have been employed as an entry-level management accountant for nine months. You suspect that your immediate supervisor is involved in a significant fraud involving the diversion of company assets for personal use. Briefly describe the steps you could 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. At the same time, the management accountant should make sure that the facts are accurate, and are not based on rumours or inaccurate information. If these policies do not resolve the situation, present the facts to the next higher management level. Clarify the relevant ethical issues with an objective advisor (e.g., CPA Australia or The Institute of Chartered Accountants in Australia). Consult your own lawyer to be aware of your own rights and responsibilities. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The influence of professional accounting organisations on management accounting Learning Objective: 1.6 Explain the way in which accounting organisations influence management accountants’ conduct and effectiveness and, given the context, apply the code of ethics.
Chapter 2 Different costs for different purposes Choose the one alternative that best completes the statement or answers the question. 1) Any item for which a separate measurement of cost is desired is known as: A) a cost object. B) an indirect cost. C) cost allocation. D) a direct cost. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 2) What do managers use their knowledge of to guide decisions, for example about product innovation, quality and customer service? A) Prices B) Markets C) Competitors D) Costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 3) Cost accumulation is the collection of cost data in some organised way by means of an: A) accounting system. B) strategy. C) information system. D) cost driver. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object.
4) is the collection of cost data in some organised way by means of an accounting system. A) Benchmarking B) Market research C) Cost accumulation D) Budgeting Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 5) The collection of accounting data in some organised way is: A) cost tracing. B) conversion costing. C) cost accumulation. D) cost assignment. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 6) A(n) cost is the cost incurred. A) actual B) budgeted C) estimated D) sunk Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 7) Budgeted costs are: A) the costs incurred this year. B) competitor’s costs. C) the costs incurred last year. D) planned or forecasted costs. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 8) Products, services, departments, and customers may be cost objects. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 9) Costs are accounted for in two basic stages: assignment followed by accumulation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 10) Actual costs and budgeted costs are two different terms referring to the same thing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 11) Accountants define a resource sacrificed or forgone to achieve a specific objective. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 12) A cost object is always either a product or a service. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object.
13) Raw materials that can be traced to a cost object are an example of an indirect cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 14) Cost accumulation is the collection of cost data in some organised way by means of an accounting system. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 15) Quality control costs may be a direct cost of the Manufacturing Department, but an indirect cost of an individual job. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 16) Cost objects may be jobs, products, or customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 17) An actual cost is the cost incurred (a historical or past cost), as distinguished from a budgeted cost, which is a predicted or forecasted cost (a future cost). Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 18) A cost object is anything for which a measurement of costs is desired. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 19) In absorption costing, all nonmanufacturing costs are subtracted from gross margin. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. Write your answer in the space provided or on a separate sheet of paper. 20) Phillip’s Island Furniture Company manufactures office furniture. Recently, the company decided to develop a formal cost accounting system and classify all costs into three categories. Categorise 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.
Item Carpenter wages Depreciation - office building Glue for assembly Lathe department supervisor Lathe depreciation Lathe maintenance Lathe operator wages Timber Samples for trade shows Metal brackets for drawers Factory washroom supplies
Cost Tracing
Cost Allocation
Non-manufacturing
Answer: Item Carpenter wages
Cost Tracing
Cost Allocation
X X
Depreciation - office building Glue for assembly
X
Lathe department supervisor
X
Lathe depreciation
X
Lathe maintenance
X
Lathe operator wages
X
Timber
X X
Samples for trade shows Metal brackets for drawers
Non-manufacturing
X
X Factory washroom supplies AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. 21) What is the meaning of the term ‘cost object?’ Give an example of a cost object that would be used in a manufacturing company, a merchandising company, and a service sector company?
Answer: A cost object is anything for which a measurement of costs is desired. An example of a cost object for a manufacturing company might be the cost of manufacturing a particular product. An example of a cost object for a merchandising company might be a particular department of a retail store. An example of a cost object for a service sector company might be the cost to serve or supply a particular customer. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Costs and cost terminology Learning Objective: 2.1 Define and illustrate a cost object. Choose the one alternative that best completes the statement or answers the question. 22) Costs which are not economically feasible to trace but which are related to a cost object are known as:
A) variable costs. B) indirect costs. C) direct costs. D) fixed costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 23) of a cost object are related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) way. A) Direct costs B) Accumulated costs C) Indirect costs D) Projected costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 24) Which of the following is the general term used to identify both the tracing and the allocation of accumulated costs to a cost object? A) Cost accumulation B) Cost tracing C) Cost assignment D) Conversion costing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 25) The the amount of a cost—that is, the more immaterial the cost is—the less likely it is to be economically feasible to trace that cost to a particular cost object. A) smaller B) larger C) more precise D) less precise
Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 26) A cost system determines the cost of a cost object by: A) assigning and then accumulating costs. B) assigning costs. C) accumulating costs. D) accumulating and then assigning costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 27) Which of the following does NOT affect the direct/indirect classification of a cost? A) the level of budgeted profit for the next year B) available technology to gather information about the cost C) the design of the operation D) the materiality of the cost in question Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 28) Improvements in information-gathering technology make it possible to consider more and more costs as costs. A) direct B) indirect C) estimated D)fixed Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs.
29) What is cost tracing? A) The assignment of direct costs to the chosen cost object B) The process of determining the actual cost of the cost object C) The process of tracking both direct and indirect costs associated with a cost object D) A function of cost allocation Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 30) What is cost allocation? A) A function of cost tracing B) The process of determining the actual cost of the cost object C) The assignment of indirect costs to the chosen cost object D) The process of tracking both direct and indirect costs associated with a cost object Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 31) Classifying a cost as 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. A) direct B) indirect C) variable D) fixed Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 32) What does classifying a cost as either direct or indirect depend upon? A) Whether an expenditure is avoidable or not in the future B) Whether the cost can be easily identified with the cost object C) Whether the cost is expensed in the period in which it is incurred D) The behaviour of the cost in response to volume changes Answer: B
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 33) A manufacturing plant produces two product lines: football equipment and cricket equipment. Direct costs for the football equipment line are the: A) salaries of the clerical staff that work in the company administrative offices. B) utilities paid for the manufacturing plant. C) beverages provided daily in the plant break room. D) monthly lease payments for a specialised piece of equipment needed to manufacture the football helmet. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 34) Generally, managers are more confident about the accuracy of costs of cost objects. A) variable B) fixed C) direct D) indirect Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 35) Improvements in information-gathering technology make it possible to consider more and more costs as: A) direct costs. B) fixed costs. C) indirect costs. D) variable costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs.
36) Classifying a cost as 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. A) direct B) indirect C) allocated D) accumulated Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 37) What term is used to describe the assignment of direct costs to a particular cost object? A) Assignment B) Allocation C) Accumulation D) Tracing Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 38) Which statement is TRUE? A) All fixed costs are indirect costs. B) All direct costs are variable costs. C) All variable costs are direct costs. D) Because of a cost-benefit trade-off, some direct costs may be treated as indirect costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 39) Which statement is TRUE? A) All fixed costs are direct costs. B) A direct cost of one cost object can be an indirect cost of another cost object. C) A direct cost of one cost object cannot be an indirect cost of another cost object. D) All variable costs are direct costs.
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 40) Which of the following are all manufacturing costs that are related to the cost object but cannot be traced to that cost object? A) Direct material costs B) Indirect manufacturing costs C) Direct manufacturing labour costs D) Period costs Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 41) Direct costs of a cost object are related to the particular cost object and can be traced to it in an economically feasible (cost-effective) way. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 42) Direct costs of a cost object are related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) way. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 43) Indirect costs of a cost object are related to the particular cost object but cannot be traced to it in an economically feasible (cost-effective) way. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 44) Misallocated indirect costs may lead to promoting products that are not profitable. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 45) The term ‘cost allocation’ is used to describe the assignment of indirect costs to a particular cost object. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 46) The cost of a customised machine only used in the production of a single product would be classified as a direct cost. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 47) Inaccurate product costs will mislead managers about the profitability of different products. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 48) Indirect costs of a cost object are related to the particular cost object and can be traced to it in an economically feasible (cost-effective) way. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs.
Write your answer in the space provided or on a separate sheet of paper. 49) Waugh Products Company has three cost objects that it uses to accumulate costs for its manufacturing plants. They are: Cost object #1: The physical buildings and equipment Cost object #2: The use of buildings and equipment Cost object #3: The availability and use of manufacturing labour 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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 50) Harvey Industries produces electronic storage devices, and uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labour, and indirect manufacturing costs. Total indirect manufacturing costs for January were $300 million, and were allocated to each product on the basis of direct manufacturing labour costs of each line. Summary data (in millions) for January for the most popular electronic storage device, the Big Bertha, was:
Direct manufacturing costs Direct manufacturing labour costs Indirect manufacturing costs Units produced
Big Bertha $10 000 000 $4 000 000 $8 500 000 50 000
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: ($10 000 000 + $4 000 000 + $8 500 000) /50 000 = $450.00 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. Difficulty: Complex AACSB: Able to translate knowledge of business and management into practice Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 51) Bendigo Hospital wants to estimate the cost for each patient stay. It is a general health care facility offering only basic services and not specialised 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 Electronic monitoring Meals for patients Nurses’ salaries Parking maintenance Security
Indirect
Fixed
Variable
Answer: Direct
Indirect
Fixed
Variable
Electronic monitoring
X
X
Meals for patients
X
X
Nurses’ salaries
X
X
Parking maintenance
X
X
Security
X
X
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 52) Why is it possible that a raw material such as glue will be considered as an indirect material for one furniture manufacturer and as a direct material for another furniture manufacturer?
Answer: Overall, the direct/indirect classification is decided on a cost/benefit basis. It is possible for a raw material such as glue to be considered as an indirect material by one furniture manufacturer and as a direct material by another furniture manufacturer. The decision is largely a choice by the manufacturer and depends on a number of factors including the materiality of the cost in question, the cost of gathering the information, and the design of the manufacturing process. If the product in question has an insignificant cost, it might not be worth the trouble to trace the cost of the glue to each piece of furniture, and the glue would be considered indirect. If the cost of tracing the cost of the glue is high in relation to the benefits received from tracing it, the glue would likely be considered as indirect material. If the design of the manufacturing process easily permits all the glue to be traced to a single type of furniture, then it would be easy for a company to consider that material to be direct. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. 53) 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 labour 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Direct costs and indirect costs Learning Objective: 2.2 Distinguish between direct costs and indirect costs. Choose the one alternative that best completes the statement or answers the question. 54) A ‘mixed cost’ is: A) a variable cost. B) always an indirect cost. C) a fixed cost. D) a cost with fixed and variable elements. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 55) Which of the following is a ‘mixed cost’? A) Direct materials B) Manager’s salary C) Monthly rent payment D) Monthly telephone bill Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 56) Some costs have both fixed and variable elements and are called mixed or A) allocated B) estimated C) accumulated D) semi-variable Answer: D
costs.
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 57) What is a variable, such as the level of activity or volume, called that causally affects costs over a given time span? A) Cost accumulator B) Cost allocation C) Cost driver D) Cost manager Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 58) At a plant where a union agreement sets annual salaries and conditions, annual labour costs usually: A) depend on the scheduling of floor workers. B) are considered a variable cost. C) are considered a fixed cost. D) depend on the scheduling of production runs. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 59) Variable costs: A) include most personnel costs and depreciation on machinery. B) are always indirect costs. C) increase in total when the actual level of activity increases. D) can always be traced directly to the cost object. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 60) Fixed costs:
A) may include either direct or indirect costs. B) vary with production or sales volumes. C) can be adjusted in the short run to meet actual demands. D) include parts and materials used to manufacture a product. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 61) The cost driver of a variable cost is the level of activity or volume for which change causes proportionate changes in the cost. A) variable B) fixed C) mixed D) allocated Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 62) Which of the following is a variable cost for an insurance company? A) CEO’s salary B) Property taxes C) Rent D) Sales commissions Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 63) Which of the following is a fixed cost for a motor car manufacturing plant? A) Windows for each car produced B) Administrative salaries C) Sales commissions D) Electricity used by assembly-line machines Answer: B AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 64) If each furnace requires a hose that costs $30 and 3000 furnaces are produced for the month, the total cost for hoses is: A) considered to be an indirect fixed cost. B) considered to be a direct variable cost. C) considered to be an indirect variable cost. D) considered to be a direct fixed cost. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 65) The MOST likely cost driver of distribution costs is the: A) number of parts within the product. B) number of production hours. C) number of products manufactured. D) number of miles driven. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 66) The MOST likely cost driver of direct material costs is the: A) number of products manufactured. B) number of production hours. C) number of parts within the product. D) number of miles driven. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 67) Costs that are fixed in the short run have no cost driver in the short run but may have a cost driver in the run.
A) short B) long C) indefinite D) cost driver Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 68) What term is used to refer to a band of normal activity or volume in which specific cost-volume relationships are maintained? A) Relevant range B) Cost-allocation range C) Cost driver range D) Average range Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 69) Within the relevant range, if there is a change in the level of the cost driver, then: A) total fixed costs will change and total variable costs will remain the same B) total fixed costs and total variable costs will remain the same C) total fixed costs and total variable costs will change D) total fixed costs will remain the same and total variable costs will change Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 70) What are costing systems that identify the cost of each activity, such as testing, design, or set-up called? A) Activity-based costing systems B) Periodic systems C) Product systems D) Hybrid systems Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 71) is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. A) Cost behaviour B) Relevant range C) Cost allocation D) Performance evaluation Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 72) Fixed costs have no cost driver in the short run, but may have a cost driver in the long run. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 73) Costing systems record the cost of resources acquired, such as materials, labour and equipment, and track how those resources are used to produce and sell products or services. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 74) A decision maker cannot adjust capacity over the short run. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 75) Fixed costs vary with the level of production or sales volume.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 76) Costs are defined as variable or fixed with respect to a specific activity and for a given time period. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 77) A variable cost changes per unit in proportion to changes in the related level of total activity or volume. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 78) Surveys of practice repeatedly show that identifying a cost as variable or fixed provides valuable information for making management decisions and is an important input when evaluating performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 79) Unlike variable costs, fixed costs of resources (such as for line supervision) cannot be quickly and easily changed to match the resources needed or used. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. Write your answer in the space provided or on a separate sheet of paper. 80) Match the list of representative cost drivers in the right column to the list of functions in the left column.
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
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 81) Combs, Inc., reports the following information for September sales:
Sales Variable costs Fixed costs Operating profit
$25 000 6000 8000 $11 000
Required: If sales double in October, what is the projected operating profit? Answer: ($25 000 × 2) - ($6000 × 2) - $8000 = $30 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 82) Whitecliffs Manufacturers wants to estimate costs for each product it produces at its Geelong plant. The Geelong plant produces three products, and runs two flexible assembly lines. Each assembly line can produce all three products. Required: a. Classify each of the following costs as either direct or indirect for each product. b. Classify each of the following costs as either fixed or variable with respect to the number of units produced of each product. Direct Assembly line labour wages Plant manager’s wages Depreciation on the assembly line equipment Component parts for the product Wages of security personnel for the factory
Answer:
Indirect
Fixed
Variable
Direct Assembly line labour wages
Indirect
Fixed
X
X
Plant manager’s wages
X
X
Depreciation on the assembly line equipment
X
X
Component parts for the product Wages of security personnel for the factory
Variable
X
X X
X
X
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. 83) Describe a variable cost. Describe a fixed cost. Explain why the distinction between variable and fixed costs is important in cost accounting.
Answer: TOTAL VARIABLE costs are affected by fluctuations in production or sales volume. FIXED costs are not influenced by fluctuations in production or sales volumes. Without the knowledge of cost behaviours, 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Cost behaviour patterns: variable costs and fixed costs Learning Objective: 2.3 Explain variable costs and fixed costs. Choose the one alternative that best completes the statement or answers the question. 84) In making product mix and pricing decisions, managers should focus on: A) variable costs. B) total costs. C) unit costs. D) fixed costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Total costs and unit costs
Learning Objective: 2.4 Interpret unit costs with caution. 85) How is a unit cost computed? A) Dividing total cost by the number of units B) Adding variable cost to fixed cost C) Multiplying total cost by the number of units D) Dividing variable cost by the number of units Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 86) When 10 000 units are produced, fixed costs are $15 per unit. Therefore, when 30 000 units are produced, fixed costs will: A) total $450 000. B) decrease to $5 per unit. C) remain at $15 per unit. D) increase to $45 per unit. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 87) When 10 000 units are produced, variable costs are $6 per unit. Therefore, when 20 000 units are produced: A) variable unit costs will increase to $12 per unit. B) variable unit costs will decrease to $3 per unit. C) variable costs will total $120 000. D) variable costs will total $60 000. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 88) O’Reilly Manufacturing provided the following information for last month: Sales
$20 000
Variable costs Fixed costs Operating profit
6000 5000 $9000
If sales double next month, what is the projected operating profit? A) $14 000 B) $12 000 C) $23 000 D) $18 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 89) Chapple Manufacturing provided the following information for last month: Sales Variable costs Fixed costs Operating profit
$12 000 4000 1000 $7000
If sales double next month, what is the projected operating profit? A) $19 000 B) $15 000 C) $18 000 D) $14 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 90) Dandenong Tyre Company currently produces 1000 tyres per month. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead
$20 3 6 10
Total manufacturing costs
$39
The plant has capacity for 3000 tyres and is considering expanding production to 2000 tyres. What is the total cost of producing 2000 tyres? A) $78 000 B) $62 000 C) $68 000 D) $39 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 91) Xi’an Manufacturing produces a unique terracotta warrior, and has the capacity to produce 50 000 warriors annually. Currently Xi’an produces 40 000 warriors and is thinking about increasing production to 45 000 warriors next year. What is the most likely behaviour of total manufacturing costs and unit manufacturing costs given this change? A) Total manufacturing costs will increase and unit manufacturing costs will decrease. B) Total manufacturing costs will stay the same and unit manufacturing costs will stay the same. C) Total manufacturing costs will stay the same and unit manufacturing costs will decrease. D) Total manufacturing costs will increase and unit manufacturing costs will stay the same. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 92) The Cycle Centre currently produces 1000 bicycles per month. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$50 5 14 10 $79
The plant has capacity for 3000 bicycles and is considering expanding production to 2000 bicycles. What is the per unit cost of producing 2000 bicycles? A) $134 per unit
B) $158 per unit C) $74 per unit D) $79 per unit Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. Answer the following questions using the information below: Axle and Wheel Manufacturing currently produces 1000 axles per month. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs
$30 5 10 40 $85
93) The plant has capacity for 2000 axles and is considering expanding production to 1500 axles. What is the total cost of producing 1500 axles? A) $170 000 B) $85 000 C) $107 500 D) $102 500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 94) What is the per unit cost when producing 1500 axles? A) $71.67 B) $170.00 C) $85.00 D) $107.50 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex
Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. Answer the following questions using the information below: Pederson Company reported the following: Manufacturing costs Units manufactured Units sold Beginning inventory
$2 000 000 50 000 47 000 units sold for $75 per unit 0 units
95) What is the average manufacturing cost per unit? A) $40.00 B) $42.55 C) $75.00 D) $0.025 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 96) What is the cost of ending finished goods inventory? A) $105 000 B) $120 000 C) $225 000 D) $1 880 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 97) By summing unit costs throughout the , managers calculate the unit cost of the different products or services they deliver and determine the profitability of each product or service. A) organisation B) business environment C) value chain D) organisation structure
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 98) Generally, the decision maker should think in terms of total costs rather than unit costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 99) Generally, the decision maker should think in terms of unit costs rather than total costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 100) When 50 000 units are produced the fixed cost is $10 per unit. Therefore, when 100 000 units are produced fixed costs will remain at $10 per unit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 101) Accounting systems typically report both total cost amounts and average-cost-per-unit amounts. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. 102) Unit costs are found in all areas of the value chain. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. Write your answer in the space provided or on a separate sheet of paper. 103) Rail Bogies Manufacturing currently produces 1000 bogies per month. The following per unit data apply for sales to regular customers: Direct materials $2000 Direct manufacturing labour 300 Variable manufacturing overhead 600 Fixed manufacturing overhead 400 Total manufacturing costs $3300 The plant has capacity for 2000 bogies. Required: a. What is the total cost of producing 1000 bogies? b. What is the total cost of producing 1500 bogies? c. What is the per unit cost when producing 1500 bogies?
Answer: a. [($2000 + $300 + $600) × 1000 units] + ($400 × 1000 units) = $3 300 000 b. [($2000 + $300 + $600) × 1500 units] + $400 000 = $4 750 000 c. $4 750 000 / 1500 = $3166.67 per unit AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Total costs and unit costs Learning Objective: 2.4 Interpret unit costs with caution. Choose the one alternative that best completes the statement or answers the question. 104) Retail sector companies purchase products and then sell them without changing their basic form. A) tangible B) intangible C) packaged D) popular Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 105) sector companies purchase materials and components and convert them into various finished goods. A) Service B) Manufacturing C) Professional D) Retail Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 106) sector companies provide intangible products. A) Professional B) Service C) Retail D) Manufacturing Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 107) 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. A) Direct materials B) Indirect materials C) Fixed D)Variable Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 108) Direct manufacturing
costs include the compensation of all manufacturing labour that can
be traced to the cost object (work in process and then finished goods) in an economically feasible way. A) material B) labour C) overhead D) projected Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 109) 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. A) Fixed B) Unit C) Indirect D) Direct Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 110) costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold. A) Direct B) Indirect C) Variable D) Inventoriable Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 111) Work-in-process inventory would normally include: A) direct materials in stock and awaiting use in the manufacturing process. B) products in their original form intended to be sold without changing their basic form. C) goods fully completed by the firm but not yet sold. D) goods partially worked on but not yet fully completed.
Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 112) Finished goods inventory would normally include: A) direct materials in stock and awaiting use in the manufacturing process. B) goods fully completed but not yet sold. C) products in their original form intended to be sold without changing their basic form. D) goods partially worked on but not yet fully completed. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 113) A retailer’s inventory would normally include: A) goods partially worked on but not yet fully completed. B) direct materials in stock and awaiting use in the manufacturing process. C) goods fully completed by the firm but not yet sold. D) products in their original form intended to be sold without changing their basic form. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 114) Service sector companies report: A) only finished goods inventory. B) direct materials inventory. C) no inventory accounts. D) only work-in-process inventory. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 115) Which of the following do manufacturing companies report?
A) Only finished goods inventory B) No inventory accounts C) Direct materials inventory, work-in-process inventory, finished goods inventory D) Only direct materials inventory Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 116) Manufacturing overhead costs in a motor car manufacturing plant MOST likely include: A) steering wheel costs. B) labour costs of the painting department. C) sales commissions. D) indirect material costs such as lubricants. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 117) Period costs are all costs in the income statement other than: A) prime costs. B) indirect costs. C) fixed costs. D) cost of goods sold. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 118) include the compensation of all manufacturing labour that can be traced to the cost object. A) Indirect manufacturing costs B) Direct manufacturing labour costs C) Direct material costs D) Manufacturing overhead costs Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 119) For manufacturing sector companies, period costs in the income statement are all: A) prime costs. B) non-manufacturing costs. C) fixed costs. D) indirect costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 120) The income statement of a service-sector firm reports: A) period and inventoriable costs but at different times; the reporting varies. B) inventoriable costs only. C) both period and inventoriable costs. D) period costs only. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 121) Manufacturing costs include all of the following EXCEPT: A) both inventoriable and period costs. B) both direct and indirect costs. C) both variable and fixed costs. D) costs incurred inside the factory. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 122) Inventoriable costs: A) are particularly useful in management accounting. B) are also referred to as nonmanufacturing costs. C) include administrative and marketing costs.
D) are expensed in the accounting period in which the products are sold. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 123) Inventoriable costs are expensed on the income statement: A) after the products are manufactured. B) when the products are sold. C) when direct materials for the product are purchased. D) not at any particular time, it varies. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 124) Costs that are initially recorded as assets and expensed when sold are called: A) fixed costs. B) variable costs. C) inventoriable costs. D) period costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 125) For retail sector companies, inventoriable costs include: A) incoming freight costs. B) insurance costs for the goods. C) the cost of the goods themselves. D) All of these answers are correct. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
126) For manufacturing firms, inventoriable costs include: A) costs of dealing with customers after the sale B) plant supervisor salaries C) research and development costs D) distribution costs Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 127) A plant manufactures several different products. The wages of the plant supervisor can be classified as a(n): A) period cost. B) variable cost. C) inventoriable cost. D) direct cost. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 128) The cost of inventory reported on the balance sheet may include all of the following EXCEPT: A) wages of the plant supervisor. B) depreciation of the factory equipment. C) the cost of parts used in the manufacturing process. D) customer-service costs. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 129) For a computer manufacturer, period costs include the cost of: A) assembly-line equipment. B) labour used for assembly and packaging. C) the keyboard. D) distribution. Answer: D
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 130) Period costs: A) include only fixed costs. B) should be treated as an indirect cost rather than as a direct manufacturing cost. C) seldom influence financial success or failure. D) include the cost of selling, delivering, and after-sales support for customers. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 131) Period costs: A) are treated as expenses in the period they are incurred. B) are directly traceable to products. C) are also referred to as manufacturing overhead costs. D) include direct labour. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 132) Which of the following is NOT a period cost? A) General and administrative costs B) Marketing costs C) Research and development costs D) Manufacturing costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 133) Costs expensed on the income statement in the accounting period incurred are called: A) period costs.
B) inventoriable costs. C) indirect costs. D) direct costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 134) For last year, Lewisburn Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1 Purchases of direct materials Ending inventory of direct materials, December 31 Direct manufacturing labour Indirect manufacturing costs Beginning inventory of finished goods, January 1 Cost of goods manufactured Ending inventory of finished goods, December 31 Operating costs
$420 000 22 000 146 000 16 000 18 000 40 000 35 000 104 000 36 000 140 000
How much of the above would be considered period costs for Lewisburn Manufacturing? A) $246 000 B) $140 000 C) $104 000 D) $390 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 135) Direct materials inventory includes which of the following? A) Products in their original form intended to be sold without changing their basic form B) Direct materials in stock and awaiting use in the manufacturing process C) Goods partially worked on but not yet fully completed D) Goods fully completed by the firm but not yet sold Answer: B AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 136) Retail sector firms normally report: A) no inventory accounts. B) only (merchandise) inventory. C) direct materials inventory. D) only work-in-process inventory. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 137) Which of the following costs consists only of all direct manufacturing costs? A) Conversion B) Fixed C) Variable D) Prime Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 138) ‘Prime costs’ include: A) only direct materials. B) direct materials and manufacturing overhead costs. C) direct materials and direct manufacturing labour costs. D) direct manufacturing labour and manufacturing overhead costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 139) ‘Conversion costs’ include: A) only direct materials. B) direct materials and direct manufacturing labour costs.
C) direct manufacturing labour and manufacturing overhead costs. D) direct materials and manufacturing overhead costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 140) ‘Total manufacturing costs’ consists of which of the following? A) Direct manufacturing labour costs + conversion costs B) Direct materials + conversion costs C) Direct materials + prime costs D) Direct manufacturing labour costs + prime costs Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 141) In the cost classification system used by manufacturing firms, assembly workers’ wages would be included in all of the following EXCEPT: A) period cost. B) product cost. C) conversion cost. D) prime cost. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 142) In the cost classification system used by manufacturing firms, total manufacturing costs would include all of the following EXCEPT: A) prime costs and manufacturing overhead costs. B) direct materials costs, direct manufacturing labour costs, and manufacturing overhead costs. C) direct materials costs and conversion costs. D) indirect materials costs, indirect manufacturing labour costs, and manufacturing overhead costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 143) Manufacturing overhead costs may include all of the following EXCEPT: A) salaries of the plant cleaning staff. B) wages paid for unproductive time due to machine breakdowns. C) labour that can be traced to individual products. D) overtime premiums paid to plant workers. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 144) Which of the following formulae determine cost of goods sold in a retail sector company? A) Beginning inventory - Ending inventory - Purchases = Cost of goods sold B) Beginning inventory + Purchases + Ending inventory = Cost of goods sold C) Beginning inventory + Purchases - Ending inventory = Costs of goods sold D) Beginning inventory - Purchases + Ending inventory = Cost of goods sold Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 145) Which of the following formulae determine cost of goods sold in a manufacturing sector company? A) Cost of goods manufactured - Beginning finished goods inventory - Ending finished goods 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) Beginning work-in-process inventory + Cost of goods manufactured + Ending work-in-process inventory = Cost of goods sold Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
146) The following information has been taken from Blue Mountains accounting records: Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory Cost of goods manufactured
$50 000 48 000 180 000 195 000 1 220 000
What is cost of goods sold? A) $1 222 000 B) $1 205 000 C) $1 218 000 D) $1 235 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 147) Duggan Corporation has provided the following information: Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory Cost of goods manufactured
$20 000 23 000 36 000 34 000 246 000
What is cost of goods sold? A) $249 000 B) $248 000 C) $243 000 D) $244 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Answer the following questions using the information below:
The following information pertains to Bondi Creations: Manufacturing costs Units manufactured Units sold Beginning inventory
$1 500 000 30 000 29 500 units sold for $85 per unit 0 units
148) What is the cost of ending finished goods inventory? A) $25 424 B) $1 475 000 C) $25 000 D) $42 500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 149) What is the amount of gross margin? A) $2 507 500 B) $1 500 000 C) $1 475 000 D) $1 032 500 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 150) What is the average manufacturing cost per unit? A) $50.00 B) $17.65 C) $85.00 D) $50.85 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
Answer the following questions using the information below: Beginning finished goods, 1/1/2018 Ending finished goods, 12/31/2018 Cost of goods sold Sales revenue Operating expenses
$40 000 33 000 250 000 600 000 120 000
151) What is cost of goods manufactured for 2018? A) $257 000 B) $250 000 C) $243 000 D) $350 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 152) What is gross margin for 2018? A) $527 000 B) $243 000 C) $357 000 D) $350 000 Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 153) What is operating profit for 2018? A) $230 000 B) $157 000 C) $107 000 D) $123 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
Answer the following questions using the information below: The Mt Tambourine Company manufactures several different products. Unit costs associated with Product SK2040 are as follows: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$60 10 18 32 4 16 $140
154) What are the inventoriable costs per unit associated with Product SK2040? A) $120 B) $140 C) $88 D) $50 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 155) What are the variable costs per unit associated with Product SK2040? A) $88 B) $22 C) $18 D) $92 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 156) What are the fixed costs per unit associated with Product SK2040? A) $32 B) $48 C) $52
D) $102 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 157) What are the period costs per unit associated with Product SK2040? A) $52 B) $4 C) $20 D) $16 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Answer the following questions using the information below: The SouthAus Company manufactures several different products. Unit costs associated with Product ADE108 are as follows: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Sales commissions (2% of sales) Administrative salaries Total
$40 8 12 23 6 9 $98
158) What are the inventoriable costs per unit associated with Product ADE108? A) $48 B) $66 C) $60 D) $83 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs
Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 159) What are the period costs per unit associated with Product ADE108? A) $15 B) $6 C) $27 D) $9 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 160) What are the variable costs per unit associated with Product ADE108? A) $60 B) $48 C) $66 D) $83 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 161) What are the fixed costs per unit associated with Product ADE108? A) $44 B) $32 C) $35 D) $23 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Answer the following questions using the information below: Beginning finished goods, 1/1/2018 Ending finished goods, 12/31/2018 Cost of goods sold
$80 000 67 000 270 000
Sales revenue Operating expenses
500 000 145 000
162) What is cost of goods manufactured for 2018? A) $283 000 B) $257 000 C) $230 000 D) $355 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 163) What is gross margin for 2018? A) $257 000 B) $283 000 C) $230 000 D) $355 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 164) What is operating profit for 2018? A) $85 000 B) $62 000 C) $230 000 D) $112 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 165) For last year, Ulladula Enterprises reported revenues of $420 000, cost of goods sold of $108 000, cost of goods manufactured of $101 000, and total operating costs of $70 000. Operating profit for that year was: A) $312 000 B) $249 000
C) $319 000 D) $242 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 166) For last year, Ulladula Enterprises reported revenues of $420 000, cost of goods sold of $108 000, cost of goods manufactured of $101 000, and total operating costs of $70 000. Gross margin for last year was: A) $249 000 B) $312 000 C) $319 000 D) $242 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 167) For last year, Deniliquin Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1 Purchases of direct materials Ending inventory of direct materials, December 31 Direct manufacturing labour Indirect manufacturing costs Beginning inventory of finished goods, January 1 Cost of goods manufactured Ending inventory of finished goods, December 31 Operating costs
$420 000 22 000 146 000 16 000 18 000 40 000 35 000 104 000 36 000 140 000
What was Deniliquin’s cost of goods sold? A) $103 000 B) $317 000 C) $152 000 D) $268 000 Answer: A AACSB: Able to translate knowledge of business and management into practice
Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 168) For last year, Deniliquin Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1 Purchases of direct materials Ending inventory of direct materials, December 31 Direct manufacturing labour Indirect manufacturing costs Beginning inventory of finished goods, January 1 Cost of goods manufactured Ending inventory of finished goods, December 31 Operating costs
$420 000 22 000 146 000 16 000 18 000 40 000 35 000 104 000 36 000 140 000
What was Deniliquin’s gross margin (or gross profit)? A) $268 000 B) $152 000 C) $103 000 D) $317 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 169) For last year, Lewisburn Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1 Purchases of direct materials Ending inventory of direct materials, December 31 Direct manufacturing labour Indirect manufacturing costs Beginning inventory of finished goods, January 1 Cost of goods manufactured Ending inventory of finished goods, December 31
$420 000 22 000 146 000 16 000 18 000 40 000 35 000 104 000 36 000
Operating costs
140 000
What was Lewisburn’s operating profit? A) $280 000 B) $76 000 C) $177 000 D) $128 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 170) Which of the following cost(s) are inventoried when using variable costing? A) Fixed manufacturing costs B) Direct manufacturing costs C) Variable marketing costs D) Both A and B are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 171) Variable costing regards fixed manufacturing overhead as a(n): A) product cost. B) period cost. C) inventoriable cost. D) administrative cost. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 172) The only difference between variable and absorption costing is the expensing of: A) variable marketing costs. B) direct manufacturing costs. C) fixed manufacturing costs. D) Both A and C are correct.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 173) Which of the following cost(s) are inventoried when using absorption costing? A) fixed manufacturing costs B) variable marketing costs C) direct manufacturing costs D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 174) Variable costing is a method of inventory costing in which all variable manufacturing costs (direct and indirect) are included as: A) period costs. B) conversion costs. C) prime costs. D) inventoriable costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 175) is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs. A) Absorption costing B) Fixed costing C) Mixed costing D) Variable costing Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
Answer the following questions using the information below: Alice Opals produces and sells a mantel clock for $100 per unit. In 2018, 100 000 clocks were produced and 80 000 were sold. Other information for the year includes: Direct materials Direct manufacturing labour Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$30.00 per unit $2.00 per unit $3.00 per unit $5.00 per part $25.00 per unit $15.00 per unit
176) What is the inventoriable cost per unit using variable costing? A) $32 B) $35 C) $40 D) $60 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 177) What is the inventoriable cost per unit using absorption costing? A) $32 B) $35 C) $60 D) $80 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Answer the following questions using the information below: Leongatha Motors produces and sells an auto part for $30.00 per unit. In 2018, 100 000 parts were produced and 75 000 units were sold. Other information for the year includes:
Direct materials Direct manufacturing labour Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$12.00 per unit $2.25 per unit $0.75 per unit $3.00 per part $375 000 per year $135 000 per year
178) What is the inventoriable cost per unit using variable costing? A) $14.25 B) $15.00 C) $18.00 D) $21.75 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 179) What is the inventoriable cost per unit using absorption costing? A) $15.00 B) $18.00 C) $18.75 D) $21.75 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Answer the following questions using the information below: Jindabyne Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation, 2000 units were produced and 1750 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
$20.00 per unit $3.00 per unit $7.00 per unit $15.00 per unit
Ending inventories: Direct materials WIP Finished goods
-0-0250 units
180) What is ‘cost of goods sold’ per unit using variable costing? A) $20 B) $23 C) $30 D) $45 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 181) What is ‘cost of goods sold’ using variable costing? A) $35 000 B) $40 000 C) $47 250 D) $54 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 182) What is contribution margin using variable costing? A) $96 250 B) $91 000 C) $104 000 D) $110 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 183) What is ‘operating profit’ using variable costing? A) $78 750
B) $65 750 C) $52 500 D) $47 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Answer the following questions using the information below: Healesville Animates produces and sells a luxury animal pillow for $40.00 per unit. In the first month of operation, 3000 units were produced and 2250 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
$19 per unit $1 per unit $30 000 per month $6000 per month -0-0750 units
184) What is cost of goods sold per unit when using absorption costing? A) $19 B) $20 C) $29 D) $32 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 185) What is gross margin when using absorption costing? A) $77 250 B) $54 750 C) $45 000 D) $24 750
Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 186) What is operating profit when using absorption costing? A) ($11 750) B) $16 500 C) $18 750 D) $4000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 187) The difference between operating profits under variable costing and absorption costing centres on how to account for: A) fixed manufacturing costs. B) direct materials costs. C) variable manufacturing costs. D) Both B and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 188) When comparing the operating profits between absorption costing and variable costing, and beginning finished inventory exceeds ending finished inventory, it may be assumed that: A) variable costing operating profit exceeds absorption costing operating profit B) variable cost per unit is less than fixed cost per unit C) there is an unfavourable production-volume variance D) sales increased during the period Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
Answer the following questions using the information below: Wangaratta Corporation incurred fixed manufacturing costs of $6000 during 2018. Other information for 2018 includes: The budgeted denominator level is 1000 units. Units produced total 750 units. Units sold total 600 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. 189) Operating profit using absorption costing will be than operating profit if using variable costing. A) $2400 lower B) $3600 lower C) $900 higher D) $2400 higher Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 190) Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) $3600 B) 0 C) $6000 D) $4800 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 191) Fixed manufacturing costs included in ending inventory total: A) 0
B) $1200 C) $900 D) $1500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 192) The production-volume variance is: A) $2400 B) $1500 C) 0 D) $2000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Answer the following questions using the information below: Queanbeyan Company incurred fixed manufacturing costs of $7200 during 2018. Other information for 2018 includes: The budgeted denominator level is 800 units. Units produced total 1000 units. Units sold total 950 units. Beginning inventory was zero. The fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. 193) Under variable costing, the fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) 0 B) $7200 C) $9000 D) $8550 Answer: B
Difficulty: Complex AACSB: Able to translate knowledge of business and management into practice Learning Objective 5: Distinguish between inventoriable costs and period costs. Topic: Illustrating the flow of inventoriable costs and period costs 194) Under absorption costing, fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) $8550 B) 0 C) $7200 D) $9000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 195) Under absorption costing, the production-volume variance is: A) $450 B) 0 C) $1800 D) $1350 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 196) Operating profit using absorption costing will be operating profit if using variable costing. A) $450 higher than B) $1350 lower than C) the same as D) $900 higher than Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 197) Mt Panorama Company has the following information for the current year:
Beginning fixed manufacturing overhead in inventory Fixed manufacturing overhead in production Ending fixed manufacturing overhead in inventory
$95 000 375 000 25 000
Beginning variable manufacturing overhead in inventory Variable manufacturing overhead in production Ending variable manufacturing overhead in inventory
$10 000 50 000 15 000
What is the difference between operating profits under absorption costing and variable costing? A) $70 000 B) $50 000 C) $40 000 D) $5000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 198) Woggoon Nature Corporation has provided the following information: Beginning fixed manufacturing overhead in inventory Ending fixed manufacturing overhead in inventory Beginning variable manufacturing overhead in inventory Ending variable manufacturing overhead in inventory Fixed selling and administrative costs Units produced Units sold
$60 000 45 000 $30 000 14 250 $724 000 5000 units 4800 units
What is the difference between operating profits under absorption costing and variable costing? A) $750 B) $7500 C) $15 000 D) $30 750 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
199) Bradman Corporation has reported operating profit of $30 000 and a fixed overhead cost rate is $20 per unit for the current accounting period. Under absorption costing, if this company now produces an additional 100 units of inventory, then operating profit: A) will increase by $2000. B) will not be affected. C) will increase by $2000 only if the additional 100 units of inventory are sold. D) is indeterminable. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 200) Lindwall Corporation has reported operating profit of $30 000 and a fixed overhead cost rate is $20 per unit for the current accounting period. Under variable costing, if this company produces 100 more units of inventory, then operating profit: A) is indeterminable. B) will increase by $2000. C) will not be affected. D) will increase by $2000 only if the 100 additional units of inventory are sold. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 201) Under variable costing, if a manager’s bonus is tied to operating profit, 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 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 202)
is a method of inventory costing in which all variable and fixed manufacturing costs are
included as inventoriable costs. A) Mixed costing B) Variable costing C) Absorption costing D) Standard costing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 203) Variable costing is a less than perfect term to describe this inventory costing method because not all variable costs are inventoriable costs; only manufacturing costs are inventoriable. A) indirect B) fixed C) variable D) direct Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 204) Absorption costing: A) treats direct manufacturing costs as a period cost. B) includes fixed manufacturing overhead as an inventoriable cost. C) expenses marketing costs as cost of goods sold. D) is required for internal reports to managers. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 205) Which of the following relates to absorption costing? A) Treats direct manufacturing costs as a period cost B) Includes fixed manufacturing overhead as an inventoriable cost C) Expenses marketing costs as cost of goods sold D) Is required for internal reports to managers Answer: B
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 206) 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) Throughput costing C) Direct costing D) Variable costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 207) Which of the following statements is FALSE? A) Operating profit under absorption costing is higher than operating profit under variable costing when production units exceed sales units. B) Absorption costing allocates fixed manufacturing overhead to actual units produced during the period. C) Nonmanufacturing costs are expensed in the future under variable costing. D) Fixed manufacturing costs in ending inventory are expensed in the future under absorption costing. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 208) An unfavourable production-volume variance occurs when: A) production exceeds the denominator level. B) production exceeds unit sales. C) the denominator level exceeds production. D) unit sales exceed production. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
209) When does an unfavourable production-volume variance occur? A) production exceeds the denominator level B) production exceeds unit sales C) the denominator level exceeds production D) unit sales exceed production Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 210) Companies have recently been able to reduce inventory levels because: A) there is better sharing of information between suppliers and manufacturers. B) just-in-time production strategies are being implemented. C) production quotas are being implemented. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 211) For which of the following reasons explains why companies have recently been able to reduce inventory levels? A) There is better sharing of information between suppliers and manufacturers B) Just-in-time production strategies are being implemented C) Production quotas are being implemented D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 212) If the unit level of inventory increases during an accounting period, then: A) operating profit will be the same under absorption costing and variable costing. B) more operating profit will be reported under absorption costing than variable costing. C) less operating profit will be reported under absorption costing than variable costing. D) the exact effect on operating profit cannot be determined. Answer: B
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 213) One way of determining the difference between operating profits for absorption costing and variable costing is to: A) subtract fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory. B) add fixed manufacturing costs to the production-volume variance. C) multiply the number of units produced by the budgeted fixed manufacturing cost rate. D) subtract sales of the previous period from sales of this period. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 214) Many companies have switched from absorption costing to variable costing for internal reporting: A) to increase bonuses for managers. B) so the denominator level is more accurate. C) to reduce the undesirable incentive to build up inventories. D) to comply with external reporting requirements. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 215) Ways to ‘produce for inventory’ that result in increasing operating profit include: A) delaying items that absorb the greatest amount of fixed manufacturing costs. B) switching production to products that absorb the least amounts of fixed manufacturing costs. C) deferring maintenance to accelerate production. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
216) What is the practice of switching production to products that absorb the highest amount of fixed manufacturing costs called? A) cost reduction B) throughput costing C) producing for sales D) cherry picking Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 217) To discourage producing for inventory, management can: A) incorporate a carrying charge for inventory in the internal accounting system B) evaluate performance over a three- to five-year period rather than a single year C) evaluate non-financial measures such as units in ending inventory compared to units in sales D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 218) Which method is NOT a way to discourage producing for inventory? A) Include non-financial measures when evaluating performance B) Evaluate performance on a quarterly basis only C) Incorporate a carrying charge for inventory D) Focus on careful budgeting and inventory planning Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 219) Under absorption costing, if a manager’s bonus is tied to operating profit, 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: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 220) Critics of absorption costing suggest evaluating management on their ability to: A) decrease inventory costs. B) exceed production quotas. C) increase operating profit. D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 221) Which of the following id NOT an example of the drawbacks of using absorption costing? A) Operating profit solely reflects income from the sale of units and excludes the effects of manipulating production schedules B) Management has the ability to manipulate operating profit via production schedules C) Decreasing maintenance activities and increasing production result in increased operating profit D) Manipulation of operating profit may ultimately increase the company’s costs incurred over the long run Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 222) Which of the following inventory costing methods is MOST likely to cause undesirable incentives for managers to build up finished goods inventory? A) Absorption costing B) Direct costing C) Variable costing D) Throughput costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs
Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 223) Which of the following is a costing system that variable and absorption costing CANNOT be combined with? A) Normal costing B) Standard costing C) Mixed costing D) Actual costing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 224) The contribution-margin format of the income statement: A) calculates gross margin. B) is used with absorption costing. C) is used with variable costing. D) distinguishes between manufacturing and nonmanufacturing costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 225) The gross-margin format of the income statement: A) is used with variable costing. B) distinguishes variable costs from fixed costs. C) is used with absorption costing. D) calculates contribution margin. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 226) The contribution-margin format of the income statement: A) calculates gross margin. B) distinguishes manufacturing costs from nonmanufacturing costs. C) is used with absorption costing.
D) highlights the lump sum of fixed manufacturing costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 227) The gross-margin format of the income statement: A) distinguishes between manufacturing and nonmanufacturing costs. B) calculates contribution margin. C) is used with variable costing. D) distinguishes variable costs from fixed costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 228) are subtracted from sales to calculate contribution margin. A) Variable marketing costs B) Variable manufacturing costs C) Fixed manufacturing costs D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 229) are subtracted from sales to calculate gross margin. A) Fixed manufacturing costs B) Variable marketing costs C) Variable manufacturing costs D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
230) Rodney Marsh is paid $10 an hour for straight-time and $15 an hour for overtime. One week he worked 45 hours, which included 5 hours of overtime, and 3 hours of idle time caused by material shortages. Compensation would be reported as: A) $445 of direct labour and $30 of manufacturing overhead B) $420 of direct labour and $55 of manufacturing overhead C) $450 of direct labour and $25 of manufacturing overhead D) $370 of direct labour and $105 of manufacturing overhead Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 231) Joseph Davis worked 44 hours last week for Breakgood Manufacturing. Of the 44 hours, 4 hours were considered overtime, and also Davis was idle for 5 of the 44 hours due to an equipment malfunction. Davis makes $20 per hour and is paid $30 an hour (time and a half) for overtime. Davis’ total compensation for that week would be , and assuming Breakgood charges overtime premium and idle time to indirect labour, the amount of this compensation credited to indirect labour would be . A) $920; $40 B) $840; $140 C) $840; $40 D) $920; $140 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 232) Given a constant contribution margin per unit and constant fixed costs, the period-to-period change in operating profit under variable costing is driven solely by: A) changes in the quantity of units actually sold. B) changes in ending inventory. C) changes in the quantity of units produced. D) changes in sales price per unit. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
Answer the following questions using the information below: Hewitt Corporation incurred fixed manufacturing costs of $6000 during 2018. Other information for 2018 includes: The budgeted denominator level is 1000 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. 233) Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) $3600 B) 0 C) $6000 D) $4800 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 234) Fixed manufacturing costs included in ending inventory total: A) $900 B) $1200 C) $1500 D) 0 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 235) The production-volume variance totals: A) $2400 B) $1500 C) $2000
D) 0 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 236) Operating profit using variable costing will be than operating profit if using absorption costing. A) $2400 lower B) $2400 higher C) $3600 higher D) $900 lower Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 237) Differences between absorption costing and variable costing are much smaller when a: A) large part of the manufacturing process is subcontracted out B) just-in-time inventory strategy is implemented C) significant portion of manufacturing costs are fixed D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 238) are commonly divided into many subclassifications. A) Indirect labour costs B) Direct material costs C) Direct labour costs D) Fixed costs Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs.
Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 239) Retail sector companies purchase and then sell tangible products without changing their basic form. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 240) Manufacturing sector companies purchase raw materials and components to convert them via a process known as the manufacturing process into saleable, finished products. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 241) Retail sector companies only hold two types of inventories: retail inventory, and direct material. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 242) Period costs are all costs in the income statement other than cost of goods sold. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 243) Work-in-process inventory are goods partially worked on but not yet completed. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 244) For manufacturing sector companies, period costs in the income statement are all manufacturing costs.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 245) Acquisition costs of direct materials include freight-in charges, and custom duties. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 246) Retail sector companies purchase materials and components and convert them into various finished goods. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 247) For retail sector companies, period costs in the income statement are all costs not related to the cost of goods purchased for resale. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 248) Direct manufacturing labour includes wages and fringe benefits paid to machine operators. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 249) Because there are no inventoriable costs for service sector companies, all costs in the income statement are period costs. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 250) Manufacturing sector companies purchase and then sell tangible products without changing their basic form. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 251) Inventory of a manufacturing firm includes goods partially worked on but not yet fully completed. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 252) Retail sector companies provide only services or intangible products and so do not hold inventories of tangible products. Answer: AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 253) Insurance on a factory can be classified as a period cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 254) Period costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs
Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 255) Product costs are treated as expenses of the accounting period in which they are incurred because they are expected to benefit revenues in that period and are not expected to benefit revenues in future periods (because there is not sufficient evidence to conclude that such future benefit exists). Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 256) For service sector companies, period costs in the income statement are all costs not related to the cost of goods purchased for resale. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 257) ‘Cost of goods sold’ refers to the cost of goods brought to completion, whether they were started before or during the current accounting period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 258) Inventoriable costs and period costs flow through the income statement of a service company in a similar way to those of a manufacturing company. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 259) Cost of goods manufactured refers to the cost of goods brought to completion, whether they were started before or during the current accounting period. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 260) Prime costs are all direct manufacturing costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 261) Conversion costs represent all manufacturing costs incurred to convert direct materials into finished goods. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 262) Direct manufacturing labour costs are a part of both prime costs and conversion costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 263) Operating profit is sales revenue minus cost of goods manufactured. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 264) Conversion costs include all direct manufacturing costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 265) Direct costing is a perfect way to describe the variable costing inventory method.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 266) The two most common methods of costing inventories in manufacturing companies are variable costing and fixed costing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 267) Absorption costing ‘absorbs’ only variable manufacturing costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 268) Variable costing is a method of inventory costing in which all variable manufacturing costs (direct and indirect) are included as inventoriable costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 269) The main difference between variable costing and absorption costing is the way in which fixed manufacturing costs are accounted for. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 270) Under both variable costing and absorption costing, all variable manufacturing costs are inventoriable costs and all non-manufacturing costs in the value chain (e.g. R&D, marketing), whether variable or fixed, are period costs and are recorded as expenses when incurred.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 271) Absorption costing is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as period costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 272) The income under variable costing will always be the same as the income under absorption costing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 273) Absorption costing is required by GAAP (Generally Accepted Accounting Principles) for external reporting. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 274) When production deviates from the denominator level, a production-volume variance always exists under absorption costing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 275) Fixed manufacturing costs included in cost of goods available for sale + the production-volume variance will always = total fixed manufacturing costs under absorption costing. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 276) The production-volume variance only exists under absorption costing and not under variable costing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 277) If managers report inventories of zero at the start and end of each accounting period, operating profits under absorption costing and variable costing will be the same. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 278) A common problem reported by companies using variable costing is the difficulty of classifying costs into fixed or variable categories. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 279) Under absorption costing, managers can increase operating profit by holding more inventories at the end of the period. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 280) The only inventoriable cost for a retailer is the cost of merchandise, which corresponds to the cost of finished goods manufactured for a manufacturing company. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 281) Under variable costing, managers can increase operating profit by simply producing more inventory at the end of the accounting period even if that inventory never gets sold. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 282) Non-financial measures such as comparing units in ending inventory this period to units in ending inventory last period can help reduce build-up of excess inventory. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 283) Managers can increase operating profit when absorption costing is used by producing more inventory. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 284) A manager can increase operating profit by deferring maintenance beyond the current accounting period when absorption costing is used. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 285) Overtime premium consists of the wages paid to all workers (for both direct labour and indirect labour) in excess of their straight-time wage rates. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 286) If a worker is paid for 8 hours, but is idle for 1 of those 8 hours, the 1 hour of idle time would be considered a component of direct labour. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 287) When the unit level of inventory increases during an accounting period, operating profit is greater under variable costing than absorption costing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 288) The difference in operating profit under absorption costing and variable costing is due solely to the timing difference of expensing fixed manufacturing costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 289) Overtime premium is normally considered as a component of direct labour. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The use of judgement in measuring costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Write your answer in the space provided or on a separate sheet of paper. 290) Explain the difference between an inventoriable cost and a period cost. What potential problems does an inaccurate classification of product and period costs cause?
Answer: Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and which become cost of goods sold only when the product is sold. Period costs are treated as expenses of the accounting period in which they are incurred. An inaccurate classification of inventoriable and period costs could lead to violations of the matching principle, which states that costs used in producing revenue should be matched on the income statement when the revenue is recognised. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Business sectors, types of inventory, inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 291) The following information has come from Bill Lawrie Inc. accounting records for 2018: Direct materials: Beginning inventory Purchases Ending inventory Direct manufacturing labour Manufacturing overhead Beginning work-in-process inventory Ending work-in-process inventory Beginning finished goods inventory Ending finished goods inventory
$40 000 123 200 20 800 32 000 24 000 1600 8000 48 000 32 000
Required: a. What is the cost of direct materials used during 2018? b. What is cost of goods manufactured for 2018? c. What is cost of goods sold for 2018? d. What amount of prime costs was added to production during 2018? e. What amount of conversion costs was added to production during 2018?
Answer: a. $40 000 + $123 200 - $20 800 = $142 400 b. $142 400 + $32 000 + $24 000 + $1600 - $8000 = $192 000 c. $192 000 + $48 000 - $32 000 = $208 000 d. $142 400 + $32 000 = $174 400 e. $32 000 + $24 000 = $56 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex
Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 292) Perth Production Company manufactured 100 000 units in 2018 and reported the following costs: Sandpaper $32 000 Materials handling 320 000 Coolants & lubricants 22 400 Indirect manufacturing labour 275 200 Direct manufacturing labour 2 176 000 Direct materials, 1/1/18 384 000 Finished goods, 1/1/18 672 000 Finished goods, 12/31/18 1 280 000 Work-in-process, 1/1/18 96 000 Work-in-process, 12/31/18 64 000
Leasing costs-plant Depreciation-equipment Property taxes-equipment Fire insurance-equipment Direct material purchases Direct materials, 12/31/18 Sales revenue Sales commissions Sales salaries Advertising costs Administration costs
$384 000 224 000 32 000 16 000 3 136 000 275 200 12 800 000 640 000 576 000 480 000 800 000
Required: a. What is the amount of direct materials used during 2018? b. What manufacturing costs were added to WIP during 2018? c. What is cost of goods manufactured for 2018? d. What is cost of goods sold for 2018?
Answer: a. $384 000 + $3 136 000 - $275 200 = $3 244 800 b. $3 244 800 + $2 176 000 + $32 000 + $320 000 + $22 400 + $275 200 + $384 000 + $224 000 + $32 000 + $16 000 = $6 726 400 c. $6 726 400 + $96 000 - $64 000 = $6 758 400 d. $6 758 400 + $672 000 - $1 280 000 = $6 150 400 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 293) Gosford Manufacturing Company had the following account balances for the quarter ending 31 March, unless otherwise noted:
Work-in-process inventory (1 January) Work-in-process inventory (31 March)
$140 400 171 000
Finished goods inventory (1 January)
540 000
Finished goods inventory (31 March)
510 000
Direct materials used
378 000
Indirect materials used
84 000
Direct manufacturing labour
480 000
Indirect manufacturing labour
186 000
Property taxes on manufacturing plant building
28 800
Salespersons’ company vehicle costs
12 000
Depreciation of manufacturing equipment
264 000
Depreciation of office equipment
123 600
Miscellaneous plant overhead
135 000
Plant utilities
92 400
General office expenses Marketing distribution costs
305 400 30 000
Required: a. Prepare a cost of goods manufactured schedule for the quarter. b. Prepare a cost of goods sold schedule for the quarter.
Answer: a.
Gosford Manufacturing Company Cost of Goods Manufactured Schedule For quarter ending 31 March
Direct materials used Direct manufacturing labour Manufacturing overhead Depreciation of manufacturing equipment Indirect manufacturing labour Indirect materials Miscellaneous plant overhead Plant utilities Property taxes on building Manufacturing costs incurred Add beginning work-in-process inventory
$378 000 480 000 $264 000 186 000 84 000 135 000 92 400 28 800
790 200 $1 648 200 140 400
Total manufacturing costs Less ending work-in-process inventory Cost of goods manufactured b.
$1 788 600 171 000 $1 617 600
Gosford Manufacturing Company Cost of Goods Sold Schedule For the quarter ending 31 March Beginning finished goods inventory Cost of goods manufactured Cost of goods available for sale Ending finished goods inventory Cost of goods sold
$540 000 1 617 600 2 157 600 510 000 $1 647 600
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 294) Using the following information to find the unknown amounts. Assume each set of information is an independent case. a. Merchandise Inventory Purchases $420 000 Cost of goods sold 446 000 Beginning balance 82 000 Ending balance ? b. Direct Materials
Beginning balance Ending balance Purchases Direct materials used
$14 000 28 000 96 000 ?
c.
Work-in-process Inventory
Ending balance Cost of goods manufactured Beginning balance Current manufacturing costs
$44 000 42 000 16 000 ?
d. Finished Goods Inventory
Cost of goods manufactured Ending balance Cost of goods sold Beginning balance
$124 000 40 000 122 000 ?
Answer: a. Ending balance of merchandise inventory: $82 000 + $420 000 - $446 000 = $56 000 b.
Direct materials used: $14 000 + $96 000 - $28 000 = $82 000
c.
Current manufacturing costs: $42 000 + $44 000 - $16 000 = $70 000
d. Beginning balance of finished goods inventory: $40 000 + $122 000 - $124 000 = $38 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 295) 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. c. d. e. f. g. h. i.
Salary of Bedell Electronics CEO Depreciation on Bedell Electronics assembly equipment. Salaries of Bedell’s assembly line workers Purchase of frozen food for sale to customers by Gregory Food Retailers Salaries of frozen food personnel at Gregory Food Retailing Depreciation on freezers at Gregory Food Retailing Salary of a receptionist at Larson Real Estate Depreciation on a computer at Larson Real Estate Salary of a real estate agent at Larson Real Estate
Answer:
a. b. c. d. e. f. g. h. i.
inventoriable (I) costs or period (P) costs Salary of Bedell Electronics CEO P Depreciation on Bedell Electronics assembly equipment. I Salaries of Bedell’s assembly line workers I Purchase of frozen food for sale to customers by Gregory Food Retailers Salaries of frozen food personnel at Gregory Food Retailing Depreciation on freezers at Gregory Food Retailing Salary of a receptionist at Larson Real Estate Depreciation on a computer at Larson Real Estate Salary of a real estate agent at Larson Real Estate
I P P P P
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 296) Werribee 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. Quality control inspection wages b. Raw material purchases c. Sales commissions d. Factory depreciation e. 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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 297) Ruggles Company has provided the following data for the year ended 30 September 2018. 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 profit using the variable-costing approach. b. Determine operating profit using the absorption-costing approach. c. Explain why operating profit is not the same under the two approaches.
Answer: a. 24 000 × $50 = $1 200 000 sales ($525 000/30 000) × 24 000 = $420 000 variable manufacturing cost $1 200 000 - $420 000 - $144 800 = $635 200 contribution margin $635 200 - $372 000 - $77 400 = $185 800 operating profit b. ($372 000/30 000) × 24 000 = $297 600 manufacturing fixed cost $1 200 000 - $420 000 - $297 600 = $482 400 gross margin $482 400 - $144 800 - $77 400 = $260 200 operating profit c.
$260 200 - $185 800 = $74 400 or 6000 units in ending inventory × $12.40 per unit of fixed manufacturing cost.
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex
Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 298) For 2018, Baggy Green Caps Inc., had sales of 75 000 units and production of 100 000 units. Other information for the year included: Direct manufacturing labour Variable manufacturing overhead
$187 500 100 000
Direct materials
150 000
Variable selling expenses
100 000
Fixed administrative expenses
100 000
Fixed manufacturing overhead
200 000
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. Direct materials
Absorption $150 000
Variable $150 000
Direct manufacturing labour
187 500
187 500
Variable manufacturing overhead
100 000
100 000
Fixed manufacturing overhead Total
200 000 $637 500
0 $437 500
Unit costs: $637 500/100 000 units
$6.375
$437 500/100 000 units
$4.375
Ending inventory: 25 000 units × $6.375
$159 375
25 000 units × $4.375
$109 375
b. Cost of goods sold: 75 000 × $6.375
$478 125
75 000 × $4.375
$328 125
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 299) Sutcliffe Corporation manufactures and sells top-of-the-line saxophones and uses standard costing. For the month of September, there was no beginning inventory, there were 1500 units produced and 1250 units sold. The manufacturing variable cost per unit is $770 and the operating cost per unit was $625. The fixed manufacturing cost is $450 000 and the fixed operating cost is $75 000. The selling price per unit is $1850. Required: Prepare the income statement for Sutcliffe Corporation for September under variable costing.
Answer: Revenues (1250 × $1850)
$2 312 500
Variable costs Beginning inventory
$0
Variable manufacturing costs (1500 × $770)
1 155 000
Cost of goods available
1 155 000
Deduct ending inventory (250 × $770)
(192 500)
Variable cost of goods sold
962 500
Variable operating costs (1250 × $625) 781 250 Total variable costs
1 743 750
Contribution margin
568 750
Fixed costs Fixed manufacturing costs
450 000
Fixed operating costs
75 000
Total fixed costs Operating profit
525 000 $43 750
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs
Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 300) Hadlee Company sells its products for $66 each. The current production level is 25 000 units, although only 20 000 units are anticipated to be sold. Unit manufacturing costs are: Direct materials Direct manufacturing labour Variable manufacturing costs Total fixed manufacturing costs Marketing expenses
$12.00 $18.00 $9.00 $180 000 $6.00 per unit, plus $60 000 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 (20 000 × $66) Cost of goods sold (20 000 × $46.20*) Gross margin Marketing: Variable (20 000 × $6) Fixed
$1 320 000 924 000 396 000 $120 000 60 000
Operating profit
180 000 $216 000
* $12.00 + $18.00 + $9.00 + ($180 000/25 000) = $46.20 b. Variable-costing income statement: Sales (20 000 × $66) Variable costs: Cost of goods sold (20 000 × $39*) Marketing (20 000 × $6)
$1 320 000 $780 000 120 000
900 000
Contribution margin Fixed costs: Manufacturing Marketing
420 000 $180 000 60 000
240 000
Operating profit
$180 000
* $12.00 + $18.00 + $9.00 = $39 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 301) SBW Corporation planned to be in operation for three years. ∙ ∙ ∙ ∙
During the first year, 2016, it had no sales but incurred $120 000 in variable manufacturing expenses and $40 000 in fixed manufacturing expenses. In 2017, it sold half of the finished goods inventory from 2016 for $100 000 but it had no manufacturing costs. In 2018, it sold the remainder of the inventory for $120 000, had no manufacturing expenses and went out of business. Marketing and administrative expenses were fixed and totalled $20 000 each year.
Required: a. Prepare an income statement for each year using absorption costing. b. Prepare an income statement for each year using variable costing.
Answer: a. Absorption-costing income statements: Sales Cost of goods sold Gross margin Marketing and administrative Operating profit b. Variable-costing income statements:
2016 $0 0
2017 $100 000 80 000
2018 $120 000 80 000
0 20 000
20 000 20 000
40 000 20 000
$(20 000)
$0
$20 000
2016 $0 0
2017 $100 000 60 000
2018 $120 000 60 000
0
40 000
60 000
$40 000 20 000
$0 20 000
$0 20 000
Total fixed
60 000
20 000
20 000
Operating profit
$(60 000)
$20 000
$40 000
Sales Variable expenses Contribution margin
Fixed expenses: Manufacturing Marketing and administrative
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 302) Woods 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 1 March. Production information for March was: Direct manufacturing labour per unit Fixed selling and administrative costs Fixed manufacturing overhead Direct materials cost per unit Direct manufacturing labour per hour Variable manufacturing overhead per unit Variable selling expenses per unit
15 minutes $40 000 132 000 2 24 4 2
Required: a. Compute the cost per unit under both absorption and variable costing. b. Compute the ending inventories under both absorption and variable costing. c. Compute operating profit under both absorption and variable costing.
Answer: a.
Absorption
Variable
Direct manufacturing labour ($24/4) Direct materials Variable manufacturing overhead Fixed manufacturing overhead ($132 000/30 000)
$6.00 2.00 4.00 4.40
$6.00 2.00 4.00 0
Total cost per unit
$16.40
$12.00
Absorption $0
Variable $0
b. Beginning inventory Cost of goods manufactured: 30 000 × $16.40 30 000 × $12.00
$492 000
Cost of goods available for sale
$492 000
Cost of goods sold: 28 000 × $16.40 28 000 × $12.00
$459 200
Ending inventory c.
$360 000 $360 000
$336 000 $32 800
$24 000
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 profit
96 000 $4800
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
392 000
Contribution margin Fixed costs: Manufacturing Selling and administrative
168 000 $132 000 40 000
172 000
Operating profit
$(4000)
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 303) Coonabarabran Realty bought a 2000-hectare 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 $5000. Storm drains and driveways are installed at an average cost of $8000 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 2017 when 50 lots were sold. During 2018, the company bought another 2000-hectare island for $10 000 000 and developed it exactly the same way. Lot sales in 2018 totalled 300 with an average selling price of $160 000. All costs were the same as in 2017. Required: Prepare income statements for both years using both absorption and variable costing methods.
Answer: Cost per site: Land cost $10 000 000/200 sites Clearing costs Improvements Total Absorption-costing income statements: Sales Cost of goods sold: 50 × ($50 000 + $8000 + $5000)
Absorption $50 000 5000 8000
Variable $0 5000 8000
$63 000
$13 000
2017 $8 000 000
2018 $48 000 000
3 150 000
300 × ($50 000 + $8000 + $5000)
18 900 000
Gross margin Variable marketing Fixed administrative Operating profit
$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
2017 $8 000 000
2018 $48 000 000
800 000
3 900 000 4 800 000
Contribution margin Fixed expenses: Land Administrative Operating profit
$6 550 000
$39 300 000
10 000 000 850 000 $(4 300 000)
10 000 000 850 000 $28 450 000
650 000
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 304) Tamworth Company prepared the following absorption-costing income statement for the year ended 31 May 2018. Sales (16 000 units) Cost of goods sold Gross margin Selling and administrative expenses Operating profit
$320 000 216 000 $104 000 46 000 $58 000
Additional information follows: Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 17 500 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs.
Required: Prepare a variable-costing income statement for the same period.
Answer: Sales Variable expenses: Manufacturing cost of goods sold1 Selling and administrative2
$320 000 $176 000 24 000
Contribution margin Fixed expenses: Fixed factory overhead3 Fixed selling and administrative4 Operating profit
200 000 $120 000
$43 750 22 000
1 2
16 000 units × $11 = $176 000
3
[($216 000/16 000 units) - $11] × 17 500 units = $43 750
4
$46 000 - $24 000 = $22 000
65 750 $54 250
16 000 units × $1.50 = $24 000
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 305) Booti Booti Bottling Works manufactures glass bottles. January and February operations were identical in every way except for the planned production. January had a production denominator of 35 000 units. February had a production denominator of 36 000 units. Fixed manufacturing costs totalled $126 000. Sales for both months totalled 45 000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.40 per unit variable and $60 000 fixed. The selling price was $10 per unit. Required: Compute the operating profit for both months using absorption costing.
Answer: January manufacturing cost per unit:
Variable costs: Fixed costs ($126 000/35 000) Total per unit
$4.00 3.60 $7.60
February manufacturing cost per unit: Variable costs Fixed costs $126 000/36 000 Total per unit
$4.00 3.50 $7.50
January Income Statement Sales (45 000 × $10) Cost of goods sold (45 000 × $7.60) Gross margin Other costs: Variable selling and administrative Fixed selling and administrative
$450 000 342 000 $108 000 $18 000 60 000
78 000
Operating profit
$30 000
February Income Statement Sales (45 000 × $10) Cost of goods sold (45 000 × $7.50)
$450 000 337 500
Gross margin Other costs: Variable selling and administrative Fixed selling and administrative Operating profit
$112 500 $18 000 60 000
78 000 $34 500
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 306) Lillee-Walker Company was concerned that increased sales did not result in increased profits for 2018. Both variable unit and total fixed manufacturing costs for 2017 and 2018 remained constant at $20 and $2 000 000, respectively. In 2017, the company produced 100 000 units and sold 80 000 units at a price of $50 per unit. There was no beginning inventory in 2017. In 2018, the company made 70 000 units and sold 90 000 units at a price of
$50. Selling and administrative expenses were all fixed at $100 000 each year. Required: a. Prepare income statements for each year using absorption costing. 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: 2017 $4 000 000
2018 $4 500 000
0 2 000 000 2 000 000 4 000 000 800 000 3 200 000
800 000 1 400 000 2 000 000 4 200 000 0 4 200 000
Gross margin Selling and administrative
800 000 100 000
300 000 100 000
Operating profit
$700 000
$200 000
Sales Variable expenses
2017 $4 000 000 1 600 000
2018 $4 500 000 1 800 000
Contribution margin
2 400 000
2 700 000
Fixed expenses: Manufacturing Selling and administrative
2 000 000 100 000
2 000 000 100 000
Operating profit
$300 000
$600 000
Sales Cost of goods sold: Beginning inventory Variable Fixed Subtotal Ending inventory Total COGS
b. Variable-costing income statements:
c.
Budgeted fixed manufacturing overhead rate for 2017 = $2 000 000/100 000 = $20
2017 difference of $400 000 = (100 000 - 80 000) × $20 = $400 000 (favours absorption method) 2018 difference of $400 000 = (70 000 - 90 000) × $20 = $400 000 (favours variable method) AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 307) The following information pertains to Ball Company: Manufacturing costs Units manufactured Beginning inventory
$2 400 000 40 000 0 units
39 800 units are sold during the year for $100 per unit. Required: a. What is the average manufacturing cost per unit? b. What is the cost of ending finished goods inventory? c. What is the gross margin?
Answer: a. $2 400 000/40 000 = $60.00 b. (40 000 - 39 800) × $60 = $12 000 c. 39 800 × ($100 - $60) = $1 592 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 308) During 2018, Laker & Lock Corporation incurred manufacturing expenses of $20 000 000 to produce 400,000 finished units. At year-end, it was determined that 370 000 units were sold while 30 000 units remained in ending inventory. 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 amount that will be reported on the balance sheet for ending inventory?
Answer: a. $20 000 000/400 000 = $50.00 b. 370 000 units × $50 = $18 500 000 c. 30 000 units × $50 = $1 500 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 309) On the assembly floor, Vicky Wilson is paid $20 an hour for straight-time and $30 an hour for overtime. One week she worked 43 hours, which included 3 hours of overtime. Required: a. What is Vicky’s total compensation for the week? b. What amount of compensation would be reported as direct manufacturing labour? c. What amount of compensation would be reported as manufacturing overhead?
Answer: a. Direct labour (43 hours × $20) + Overtime premium (3 hrs × $10) = $890 b. Direct manufacturing labour (43 hours × $20) = $860 c. Manufacturing overhead costs = Overtime premium (3 hrs × $10) = $30 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 310) In the manufacturing plant, Margaret Thorpe is paid $20 an hour for straight-time and $30 an hour for overtime. One week she worked 46 hours, which included 6 hours of overtime, and 4 hours of idle time caused by material shortages. Required: a. What is Margaret’s total compensation for the week? b. What amount of compensation would be reported as direct manufacturing labour? c. What amount of compensation would be reported as manufacturing overhead?
Answer: a. Direct manufacturing labour (42 hours × $20) + Idle time (4 hrs × $20) + Overtime premium (6 hrs × $10) = $980 b. Direct manufacturing labour (42 hours × $20) = $840 c. Manufacturing overhead costs = Idle time (4 hrs × $20) + Overtime premium (6 hrs × $10) = $140 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. 311) When should the overtime premium of direct manufacturing labour be considered an indirect manufacturing cost? A direct manufacturing cost?
Answer: The overtime premium of direct manufacturing labour should be considered an indirect manufacturing cost when it is attributable to the overall volume of work, and a direct manufacturing cost when a ‘rush job’ is the sole source of the overtime. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Illustrating the flow of inventoriable costs and period costs Learning Objective: 2.5 Distinguish between inventoriable costs and period costs. Choose the one alternative that best completes the statement or answers the question. 312) Brenda Hicks is paid $10 an hour for straight-time and $15 an hour for overtime. One week she worked 42 hours, which included 2 hours of overtime. Compensation would be reported as: A) $400 of direct labour and $0 of manufacturing overhead. B) $430 of direct labour and $0 of manufacturing overhead. C) $420 of direct labour and $10 of manufacturing overhead. D) $400 of direct labour and $30 of manufacturing overhead. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 313) Product cost for pricing and product-mix decisions may include all costs EXCEPT:
A) customer-service costs. B) marketing costs. C) design costs. D) research and development costs. E) All of the above may be included. Answer: E AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 314) Which of the following reflects what products costs for financial statement purposes may include? A) All costs except marketing costs B) All costs included for pricing and product-mix decisions C) Production costs D) All costs allowed by government agencies Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 315) Which of the following reflects product costs? A) Inventoriable costs for external reporting B) All costs incurred along the value chain for pricing decisions C) Design costs plus manufacturing costs for government contracts D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 316) Product costs used for pricing and product-mix decisions generally include: A) design costs plus manufacturing costs. B) distribution costs only. C) all costs incurred along the value chain. D) manufacturing costs only. Answer: C AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 317) Product costs used for external reporting generally include: A) design costs plus manufacturing costs. B) manufacturing costs only. C) all costs incurred along the value chain. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 318) Inventoriable costs for external reporting purposes are also called: A) product costs. B) variable costs. C) period costs. D) direct manufacturing costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 319) For external reporting: A) costs include amounts that reflect both current and future benefits. B) costs are classified as either inventoriable or period costs. C) costs reflect current values. D) there are no prescribed rules since no one is exactly sure how investors and creditors will use these. numbers Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 320) Which of the following statements is FALSE? A) Product costs and inventoriable costs are interchangeable terms.
B) Inventoriable costs are a special case of product costs. C) Inventoriable costs are important for GAAP. D) ‘Product costs’ refers to the particular costs of a product for the purpose at hand. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 321) Debated items that some companies include as direct manufacturing labour include: A) holiday pay. B) fringe benefits. C) training time. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 322) A product cost is the sum of the costs assigned to a product for a specific purpose. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 323) For the purposes of making decisions about pricing and which products provide the most profits, the manager is interested in the overall (total) profitability of different products and, consequently, assigns costs incurred in all business functions of the value chain to the different products. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. 324) Under Australian Accounting Standards, only manufacturing costs can be assigned to inventories in the financial statements. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The use of judgement in measuring costs Learning Objective: 2.6 Explain why product costs are calculated in different ways for different purposes. Choose the one alternative that best completes the statement or answers the question. 325) When making decisions: A) it is best to use unit costs. B) it is best to use total costs rather than unit costs. C) it is best to use average costs. D) All of these types of costs can be used for decision making; it varies depending on the decision required. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for cost accounting and activity management Learning Objective: 2.7 Describe a framework for cost accounting and activity management. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 326) Budgeting is the most commonly used tool for planning and control. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for cost accounting and activity management Learning Objective: 2.7 Describe a framework for cost accounting and activity management. 327) Budgeting often plays a major role in affecting behaviour and decisions because managers strive to meet budget targets. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for cost accounting and activity management Learning Objective: 2.7 Describe a framework for cost accounting and activity management. 328) When making decisions about strategy design and strategy implementation, managers must understand which revenues and costs to consider and which ones to ignore. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for cost accounting and activity management
Learning Objective: 2.7 Describe a framework for cost accounting and activity management. 329) When making strategic decisions about which products to produce, managers do not need to know how revenues and costs vary with changes in output level. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for cost accounting and activity management Learning Objective: 2.7 Describe a framework for cost accounting and activity management.
Chapter 3 Determining how costs behave Choose the one alternative that best completes the statement or answers the question. 1) For January, the cost components of a picture frame include $0.35 for the glass; $0.65 for the wooden frame, and $0.80 for assembly. The assembly desk and tools cost $600. Two thousand frames are expected to be produced in the coming year. What cost function best represents these costs? A) y = 600 +1.80X B) y = 1.80 + 600X C) y = 2.20 + 2000X D) y = 1.00 + 600X Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 2) The cost components of an air conditioner include $35 for the compressor; $11.50 for the sheet moulded compound frame; and $80 per unit for assembly. The factory machines and tools cost is $55 000. The company expects to produce 1500 air conditioners in the coming year. What cost function best represents these costs? A) y = 55 000 + 126.50X B) y = 55 000 + 1500X C) y = 1500 + 126.5X D) y = 1500 + 55 000X Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 3) A linear cost function can represent: A) variable cost behaviours. B) fixed cost behaviours. C) mixed cost behaviours.
D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 4) The cost function y = 1000 + 5X: A) is a straight line. B) has a slope coefficient of 1000. C) has an intercept of 5. D) represents a fixed cost. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 5) The cost function y = 100 + 10X: A) represents a fixed cost. B) is a nonlinear. C) has an intercept of 100. D) has a slope coefficient of 100. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 6) The cost function y = 8000 + 4X: A) has a slope coefficient of 8000. B) is a curved line. C) will intersect the y-axis at 4. D) represents a mixed cost. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave.
7) The cost function y = 80 + 4X: A) has a slope coefficient of 4. B) has a slope coefficient of -4. C) will intersect the y-axis at 4. D) is a curved line. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 8) Which of the following is an equation of a variable cost function? A) y = a B) y = a + bX C) y = bX D) y = b Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 9) A is a grouping of individual indirect cost items. A) cost pool B) cost assignment C) job-costing system D) cost allocation base Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 10) Each indirect-cost pool of a manufacturing firm: A) relates to one cost object. B) utilises a separate cost-allocation rate. C) is a subset of total indirect costs. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 11) One assumption frequently made in cost behaviour estimation is that changes in total costs can be explained by changes in the level of a single activity. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 12) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 13) All cost functions are linear. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 14) When estimating a cost function, cost behaviour can be approximated by a linear cost function within the relevant range. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 15) Any linear cost function can be graphed by knowing only the slope coefficient. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 16) Knowing the proper relevant range is essential to properly classify costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. Write your answer in the space provided or on a separate sheet of paper. 17) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and X for activity of the cost driver. a. Direct manufacturing labour is $10 per hour. b. Direct materials cost $9.20 per cubic metre. c. Utilities have a minimum charge of $1000, plus a charge of $0.05 per kilowatt-hour. d. Machine operating costs include $200 000 of machine depreciation per year, plus $75 of utility costs for each day the machinery is in operation.
Answer: a. y = $10X b. y = $9.20X c. y = $1000 + $0.05X d. y = $200 000 + $75X AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. 18) Write a linear cost function equation for each of the following conditions. Use y for estimated costs and x for activity of the cost driver. a. Direct materials cost is $.75 per kilo. b. Direct labour cost is $16.75 per hour. c. Car rental has a fixed fee of $75.00 per day plus $.50 per kilometre driven. d. Machine operating costs include $350 of maintenance per month, and $5.00 of coolant usage costs for each day the machinery is in operation.
Answer:
a. y = $.75X b. y = $16.75X c. y = $75 + $0.50X d. y = $350 + $5X AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. Write your answer in the space provided or on a separate sheet of paper. 19) 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 behaviour 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: i. 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; ii. A strictly constant cost of the form Y = a, where a is the total fixed cost or constant; and iii. A mixed or semi-variable 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Basic assumptions and examples of cost functions Learning Objective: 3.1 Describe linear cost functions and three common ways in which they behave. Choose the one alternative that best completes the statement or answers the question. 20) Dougherty Company employs 20 individuals. Eight employees are paid $12 per hour and the rest are salaried employees paid $3000 a month. How would total costs of personnel be classified? A) Variable B) A variable cost within a relevant range C) Mixed D) A fixed cost within a relevant range
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 21) McDevitt Company employs six individuals. They are all paid $12.50 per hour. How would total costs of personnel be classified? A) Mixed B) A variable cost within a relevant range C) A fixed cost within a relevant range D) Variable Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 22) Which statement related to assumptions about estimating linear cost functions is FALSE? A) A cost object is anything for which a separate measurement of costs is desired. B) A linear function approximates cost behaviour within the relevant range of the cost driver. C) Variations in a single cost driver explain variations in total costs. D) A high correlation between two variables ensures that a cause-and-effect relationship exists. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 23) A high correlation between two variables s and t indicates that: A) both may be affected by a third variable. B) s may cause t, or t may cause s. C) the correlation may be due to random chance. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions.
24) Which of the following does NOT represent a cause-and-effect relationship? A) A company is charged 40 cents for each brochure printed and mailed. B) Utility costs increase at the same time that insurance costs increase. C) Material costs increase as the number of units produced increases. D) It makes sense that if a complex product has a large number of parts it will take longer to assemble than a simple product with fewer parts. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 25) Outside of the relevant range, variable and fixed cost-behaviour patterns may change. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 26) It can be inferred that when there is a high correlation between two variables, one is the cause of the other. Answer: False AACSB: Able to analyse and frame problems Topic: Identifying cost drivers Difficulty: Basic Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 27) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 28) Each cost pool may have multiple cost allocation bases. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 29) y = a + bX represents the general form of the linear cost function. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 30) A linear cost function can only represent fixed cost behaviour. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 31) In a graphical display of a cost function, the steepness of the slope represents the total amount of fixed costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 32) The longer the time horizon, the more likely that a cost will have a fixed cost behaviour. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Identifying cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 33) An example of a physical cause-and-effect relationship is when additional units of production increase total direct material costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cause-and-effect criterion in choosing cost drivers Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. 34) When plotted on a graph, cost functions are usually displayed by having the level of activity
(machine-hours, etc.) plotted on the vertical axis (called the y-axis) and the amount of total costs corresponding to (or dependent on) the levels of that activity on the horizontal axis (called the x-axis). Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost drivers and the five-step guide to decisions Learning Objective: 3.2 Explain the importance of causality in estimating cost functions. Choose the one alternative that best completes the statement or answers the question. 35) The ‘industrial engineering method’ estimates cost functions: A) using qualitative rather than quantitative analysis. B) based on analysis and opinions gathered from various departments. C) by analysing the relationship between inputs and outputs in physical terms. D) quickly while incurring little cost. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 36) The ‘conference method’ estimates cost functions: A) using time-and-motion studies. B) using quantitative methods that can be very time-consuming and costly. C) based on analysis and opinions gathered from various departments. D) by mathematically analysing the relationship between inputs and outputs in physical terms. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 37) The ‘account analysis method’ estimates cost functions: A) at a high cost, which renders it seldom used. B) in a manner that cannot be usefully combined with any other cost estimation methods. C) by classifying cost accounts as variable, fixed, or mixed based on qualitative analysis. D) using time-and-motion studies. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation.
38) ‘Quantitative analysis methods’ estimate cost functions: A) based on analysis and opinions gathered from various departments. B) which depend on the experience and judgement of the analyst for accuracy. C) using the pooling of knowledge from each value chain function. D) using significant amounts of historical data. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 39) Gathering cost information through observations and interviews from departments within an organisation is known as the: A) account analysis method. B) conference method. C) industrial engineering method. D) quantitative analysis method. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 40) Which cost estimation method analyses accounts in the subsidiary ledger as variable, fixed, or mixed using qualitative methods? A) The account analysis method B) The conference method C) The industrial engineering method D) The quantitative analysis method Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 41) Which cost estimation method uses a formal mathematical method to develop cost functions based on past data? A) The account analysis method B) The conference method
C) The industrial engineering method D) The quantitative analysis method Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 42) Which cost estimation method may use time-and-motion studies to analyse the relationship between inputs and outputs in physical terms? A) The account analysis method B) The conference method C) The industrial engineering method D) The quantitative analysis method Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. Answer the following questions using the information below: At the Gregan 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 $320 000. Department Number of employees The number of new hires
A 30 8
B 270 12
C 100 5
43) If the number of employees is considered the cost driver, what amount of personnel costs will be allocated to Department A? A) $24 000 B) $102 400 C) $40 000 D) $10 666 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 44) If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated to Department A? A) $24 000 B) $40 000 C) $102 400 D) $10 666 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 45) Which cost estimation method is being used by Gregan Company? A) The industrial engineering method B) The quantitative analysis method C) The account analysis method D) The conference method Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. Answer the following questions using the information below: At the Holden Company, the cost of the library and information centre 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 centre costs. Total library and information centre costs are $75 000. Department Number of employees Number of engineers
A 125 0
B 500 75
C 125 25
46) Which cost estimation method is being used by Holden Company? A) The account analysis method
B) The quantitative analysis method C) The industrial engineering method D) The conference method Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 47) If the number of employees is considered the cost driver, what amount of library and information centre costs will be allocated to Department A? A) $56 250 B) $12 500 C) $0 D) $50 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 48) If the number of engineers is considered the cost driver, what amount of library and information centre costs will be allocated to Department A? A) $56 250 B) $12 500 C) $0 D) $50 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. Answer the following questions using the information below: Hewitt Sporting Goods Store is a small company that has hired you to perform some management advisory services. The following information pertains to 2018 operations. Sales (2000 cricket bats) Cost of goods sold Store manager's salary per year
$900 000 400 000 70 000
Operating costs per year Advertising and promotion per year Commissions (4% of sales)
157 000 15 000 36 000
49) What was the variable cost per unit sold for 2018? A) $18 B) $218 C) $200 D) $339 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 50) What were total fixed costs for 2018? A) $227 000 B) $678 000 C) $242 000 D) $436 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 51) What are the estimated total costs if Hewitt expects to sell 3000 units next year? A) $896 000 B) $1 017 000 C) $678 000 D) $799 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 52) Which cost estimation method is being used by Hewitt Sporting Goods Store? A) The conference method B) The industrial engineering method C) The account analysis method
D) The quantitative analysis method Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. Answer the following questions using the information below: Stosur Courtside Caterers is a small company that has hired you to perform some management advisory services. The following information pertains to 2018 operations. Sales (5000 microwave ovens) Cost of goods sold Store manager's salary per year Operating costs per year Advertising and promotion per year Commissions (4% of sales)
$1 350 000 540 000 75 000 225 000 25 000 67 500
53) Which cost estimation method is being used by Stosur Courtside Caterers? A) The quantitative analysis method B) The industrial engineering method C) The conference method D) The account analysis method Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 54) What was the variable cost per unit sold for 2018? A) $13.50 B) $186.50 C) $121.50 D) $108 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation.
55) What were total fixed costs for 2018? A) $250 000 B) $225 000 C) $325 000 D) $932 500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 56) What are the estimated total costs if Stosur expects to sell 6500 units next year? A) $932 500 B) $1 104 750 C) $665 000 D) $1 017 500 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 57) The industrial engineering method of cost estimation is based on opinions from various departments and is quick and of low cost to apply. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 58) The ‘account analysis method’ of cost estimation classifies account costs as fixed, mixed, or variable using qualitative judgements. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 59) The ‘industrial engineering method’ uses a formal mathematical method to identify cause-and-effect
relationships among past data observations. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 60) The ‘quantitative analysis method’ uses a formal mathematical method to identify cause-and-effect relationships among past data observations. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 61) The most common forms of quantitative analysis are the ‘conference method’ and the ‘account analysis method’. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. Write your answer in the space provided or on a separate sheet of paper. 62) The cost of the personnel department at the Miller Company has always been charged to the production departments based upon number of employees. Recently, opinions gathered from the department managers indicated that the number of new hires might also be a predictor of personnel costs to be assigned. Total personnel department costs are $360 000.
Cost Driver Number of employees The number of new hires
Department A 300 15
Department B 250 25
Department C 50 10
Required: Using the above data, prepare a report that contrasts the different amounts of personnel department cost that would be allocated to each of the production departments if the cost driver used is: a. number of employees b. the number of new hires c. Which cost estimation method is being used by Miller Company?
Answer: Department Department Department Cost Driver A B C a. Number of employees 300/600 250/600 50/600 $180 000 $150 000 $30 000 b. The number of new hires 15/50 25/50 10/50 $108 000 $180 000 $72 000 c. Miller Company is using the CONFERENCE METHOD for cost estimation. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. 63) Akama Allambee, controller, gathered data on overhead costs and direct labour-hours over the past 12 months. List and discuss the different approaches Akama can use to estimate a cost function for overhead costs using direct labour-hours as the cost driver.
Answer: The four approaches to cost estimation are the: 1. The industrial engineering method, also called the 'work-measurement method', estimates cost functions by analysing the relationship between inputs and outputs in physical terms. 2.
The conference method estimates cost functions on the basis of analysis and opinions about costs and their drivers gathered from various departments of an organisation (purchasing, process engineering, manufacturing, employee relations, etc.).
3.
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.
4.
Quantitative analysis of cost relationships are formal methods, such as the high-low method or regression, to fit linear cost functions to past data observations. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Cost estimation methods Learning Objective: 3.3 Describe various methods of cost estimation. Choose the one alternative that best completes the statement or answers the question. 64) The cost to be predicted is referred to as the:
A) regression. B) dependent variable. C) cost driver. D) independent variable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 65) The ‘independent variable’: A) is also referred to as the ‘cost driver’. B) should have an economically plausible relationship with the dependent variable. C) may also be called the 'cost-allocation base' if referring to an indirect cost. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 66) How many separate cost pools should be formed given the following information: Cost Cost driver Postage costs # of brochures mailed Printing and paper costs # of brochures mailed Quality control costs # of inspections Customer service costs # of customers served A) 1 cost pool B) 2 cost pools C) 3 cost pools D) 4 cost pools Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 67) Place the following steps in order for estimating a cost function using quantitative analysis: A = Plot the data B = Estimate the cost function
C = Choose the dependent variable D = Identify the cost driver A) D C A B B) D C B A C) A D C B D) C D A B Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 68) All individual cost items included in the dependent variable should have: A) an economically plausible relationship with the independent variable. B) the same cost driver. C) a cause-and-effect relationship with the independent variable. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 69) Collecting data on the dependent variable and the cost driver may include: A) collecting data from different entities over the same period of time. B) interviews with managers. C) collecting data over a long period of time. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 70) A plot of data that results in bunched points with little slope generally indicates a: A) negative relationship. B) strong relationship. C) weak relationship. D) positive relationship. Answer: C
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 71) A plot of data that results in one extreme observation MOST likely indicates that: A) an unusual event such as a plant shutdown occurred during that month. B) the cost-allocation base has been incorrectly identified. C) more than one cost pool should be used. D) individual cost items do not have the same cost driver. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 72) Cross-sectional data analysis includes: A) comparing information in different cost pools. B) using the highest and lowest observation. C) observing different entities during the same time period. D) using a variety of time periods to measure the dependent variable. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 73) Time-series data analysis includes: A) using the highest and lowest observation. B) comparing information in different cost pools. C) observing different entities during the same time period. D) using a variety of time periods to measure the dependent variable. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 74) When using the high-low method, the two observations used are the high and low observations of the: A) residual term.
B) slope coefficient. C) cost driver. D) dependent variables. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 75) When using the high-low method, the denominator of the equation that determines the slope is the: A) independent variable. B) difference between the high and low observations of the dependent variables. C) dependent variable. D) difference between the high and low observations of the cost driver. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 76) The high-low method: A) easily handles estimating the relationship between the dependent variable and two or more independent variables. B) uses the residual term to measure goodness of fit. C) is more accurate than the regression method. D) calculates the slope coefficient using only two observed values within the relevant range. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 77) 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) C D A B B) D C A B C) A D C B
D) D C B A Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 78) Regression analysis: A) uses the constant to measure goodness of fit. B) is simple to compute. C) is mathematical so it does not require an understanding of operations. D) measures the change in a dependent variable associated with one or more independent variables. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 79) Simple regression differs from multiple regressions in that: A) multiple regressions use all available data to estimate the cost function, whereas simple regression only uses simple data. B) simple regression is limited to the use of only the dependent variables and multiple regressions can use both dependent and independent variables. C) simple regression uses only one dependent variable and multiple regressions uses more than one dependent variable. D) simple regression uses only one independent variable and multiple regressions uses more than one independent variable. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 80) The slope of the line of regression is the: A) rate at which the dependent variable varies. B) level of total variable costs. C) level of total fixed costs. D) rate at which the independent variable varies. Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Answer the following questions using the information below: The Tamworth Company uses the high-low method to estimate the cost function. The information for 2018 is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 800 480
Labour Costs $20 000 $13 600
81) What is the slope coefficient per machine-hour? A) $28.33 B) $25.00 C) $20.00 D) $0.05 Answer: C Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 82) What is the constant for the estimating cost equation? A) $4000 B) $13 600 C) $16 000 D) $20 000 Answer: A Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Topic: Estimating a cost function using quantitative analysis 83) What is the estimate of the total cost when 600 machine-hours are used? A) $4000 B) $8000 C) $12 000 D) $16 000
Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Answer the following questions using the information below: The Yeppoon Company uses the high-low method to estimate its cost function. The information for 2018 is provided below:
Highest observation of cost driver Lowest observation of cost driver
Machine-hours 2000 1000
Costs $225 000 $125 000
84) What is the slope coefficient per machine-hour? A) $10.00 B) $12.50 C) $125.00 D) $100.00 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 85) What is the constant for the estimating cost equation? A) $0 B) $225 000 C) $25 000 D) $125 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 86) What is the estimate of the total cost when 1100 machine-hours are used? A) $150 000 B) $135 000 C) $200 000
D) $125 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Answer the following questions using the information below: For Echuca Company, labour-hours are 50 000 and wages $188 000 at the high point of the relevant range, and labour-hours are 30 000 and wages $140 000 at the low point of the relevant range. 87) What is the slope coefficient per labour-hour? A) $3.76 B) $0.42 C) $2.40 D) $4.67 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 88) What is the constant? A) $68 000 B) $20 000 C) $167 000 D) $48 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 89) What is the estimate of total labour costs at Echuca Company when 40 000 labour-hours are used? A) $208 000 B) $164 000 C) $68 000 D) $184 668 Answer: B AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Answer the following questions using the information below: The Mildura Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Mildura Company has heard about a method of measuring cost functions called the ‘high-low method’ and has decided to use it in this situation. Cost $24 900 24 000 36 400 44 160 45 000
Hours 5250 5500 7500 9750 9500
90) What is the cost function? A) y = $4875 + $5.25X B) y = $43 191 + $0.19X C) y = $41 900 + $0.23X D) y = $2430 + $4.28X Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 91) What is the estimated total cost at an operating level of 8000 hours? A) $43 740 B) $36 670 C) $37 125 D) $46 875 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Answer the following questions using the information below: Presented below are the production data for the first six months of the year for the mixed costs incurred by
Benalla Company. Month January February March April May June
Cost $4890 4024 6480 8840 5800 7336
Units 4100 3200 5300 7500 4800 6600
Benalla Company uses the ‘high-low method’ to analyse mixed costs. 92) How would the cost function be stated? A) y = $440 + $1.12X B) y = $7850 + $0.132X C) y = $3 562.30 + $0.144X D) y = $107.20 + $1.224X Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 93) What is the estimated total cost at an operating level of 5000 units? A) $6227.20 B) $6040.00 C) $8510.00 D) $4283.20 Answer: B Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Answer the following questions using the information below: The Nowra Company has assembled the following data pertaining to certain costs that cannot be easily identified as either fixed or variable. Nowra 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
Cost
Hours
January February March April May June
$40 000 24 400 31 280 36 400 44 160 42 400
3500 2000 2450 3000 3900 3740
94) How is the cost function stated? A) y = $21 360 + $1.52X B) y = $10 112 + $8.64X C) y = $26 672 + $1.84X D) y = $3600 + $10.40X Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 95) What is the estimated total cost at an operating level of 2850 hours? A) $34 736 B) $33 240 C) $25 692 D) $32 016 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 96) The coefficient of determination is important in explaining variances in estimating equations. For a certain estimating equation, the unexplained variation was given as 51 900. The total variation was given as 115 333. What is the coefficient of determination for the equation? A) 0.66 B) 0.55 C) 0.57 D) 0.45 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis
Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 97) The Canberra 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 r2
$21 890 $4560
Number of observations
0.7832 22
X coefficient(s) Standard error of coefficient(s)
11.75 2.1876
What is the linear cost function? A) Y = $4560 + $5.15X B) Y = $20 100 + $4.60X C) Y = $21 890 + $11.75X D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 98) Craig's Cola is to manufacture 1000 cases of cola next week. The accountant provided the following analysis of total manufacturing costs: Variable Constant Independent variable
Coefficient 100 200
Standard Error 71.94 91.74
r2 = 0.82 What is the estimated cost of producing the 1000 cases of cola? A) $200 100 B) $9000 C) $142 071 D) $100 200 Answer: A
t-Value 1.39 2.18
Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 99) Pam's Stables used two different independent variables (trainer hours and number of horses) in two different equations to evaluate the cost of training horses. The most recent results of the two regressions are as follows: Trainer hours: Variable Constant Independent Variable
Coefficient $913.32 $20.90
Standard Error $198.12 $2.94
t-Value 4.61 7.11
Coefficient $4764.50 $864.98
Standard Error $1073.09 $247.14
t-Value 4.44 3.50
r2 = 0.56 Number of horses: Variable Constant Independent Variable r2 = 0.63 What is the estimated total cost for the coming year if 16 000 trainer hours are incurred and the stable has 400 horses to be trained, based on the best cost driver? A) $335 313.32 B) $350 756.50 C) $13 844 444.50 D) $99 929.09 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 100) Multicollinearity, a major concern that arises with multiple regressions, exists when in: A) multiple regressions, when the R2 statistic is low. B) simple regression, when the dependent variable is not normally distributed. C) simple regression, when the R2 statistic is low. D) multiple regressions, when two or more independent variables are correlated with one another.
Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 101) In multiple regressions, when two or more independent variables are correlated with one another, the situation is known as: A) multicollinearity. B) heteroscedasticity. C) homoscedasticity. D) auto-correlation. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 102) Individual cost items included in the dependent variable should have the same cost driver or more than one cost function should be estimated. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 103) The first step in estimating a cost function using quantitative analysis is to identify the independent variable. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 104) In estimating a cost function using quantitative analysis, the independent variable is the factor used to predict the dependent variable. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 105) An example of time-series data is to compile maintenance costs of 12 different manufacturing plants incurred during 2018. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 106) Evidence of relationships and extreme observations are highlighted when costs and their cost drivers are plotted graphically. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 107) ‘Regression analysis’ relies on only two observations to estimate a linear cost function. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 108) The y-intercept of a linear cost function is an accurate cost assessment of using zero machine-hours, even if zero machine-hours is outside of the relevant range. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 109) A positive slope of a regression line indicates that total costs are lower for higher values of the cost driver. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis
Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 110) The ‘high-low method’ is more accurate than the ‘regression method’ of estimating a cost function. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 111) If inaccurate cost estimates are too high, then a company may unknowingly reward a manager for poor performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 112) ‘Simple regression’ is known as 'simple' because it is much less complex than the ‘high-low method’. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 113) The ‘high-low method’ involves choosing the period of highest cost driver activity and the period of lowest cost driver activity. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 114) A strength of the ‘high-low method’ of cost estimation is that the high point and the low point are representative of all data points. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis.
115) In regression analysis, the term 'goodness of fit' indicates the strength of the relationship between the cost driver and the costs. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 116) Accurate cost estimation is useful both in understanding past cost relationships and as a means of predicting costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 117) The coefficient of determination (r2) measures the percentage of variation in Y explained by X (the independent variable). Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 118) Generally, a coefficient of determination (r2) that is less than 0.30 indicates a goodness of fit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 119) Multicollinearity is NOT a concern in simple regression. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 120) Multicollinearity exists in multiple regressions when two or more independent variables are highly correlated with each other.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Write your answer in the space provided or on a separate sheet of paper. 121) Whyalla Storage ran its freezer in July, a slow month, for 500 hours for a total cost of $80 000. In February, a peak month, the freezer ran for 720 hours for a total cost of $114 000. 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)
= ($114 000 - $80 000)/(720 - 500) = $154.55
Constant (fixed cost)
= $114 000 - (720 × $154.55) = $2727
Estimating equation
= $2727 + $154.55DLH
b. Total costs of 500 hours = $2727 + ($154.55 × 500) = $95 457 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 122) Yarrawonga Company has provided the following information: Units of Output Direct materials Workers' wages Supervisors' salaries Equipment depreciation Maintenance Utilities Total
30 000 Units $180 000 1 080 000 312 000 151 200 81 600 384 000 $2 188 800
42 000 Units $252 000 1 512 000 312 000 151 200 110 400 528 000 $2 865 600
Using the high-low method and the information provided above: a. identify the linear cost function equation; and b. estimate the total cost at 36 000 units of output.
Answer: a. Variable cost = ($2 865 600 - $2 188 800)/(42 000 - 30 000) = $56.40 Fixed cost = $2 865 600 - ($56.40 × 42 000) = $496 800 Cost function is y = $496 800 + $56.40X b. Output level of 36 000 units = $496 800 + ($56.40 × 36 000) = $2 527 200 total cost AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 123) As part of his job as cost analyst, Max Thompson collected the following information concerning the operations of the Machining Department: Observation January February March April May
Machine-hours 4000 4600 3800 4400 4500
Total Operating Costs $45 000 49 500 45 750 48 000 49 800
Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. If June's estimated machine-hours total 4200, what are the total estimated costs of the Machining Department?
Answer: a. Slope coefficient = ($49 500 - $45 750)/(4600 - 3800) = $4.6875 per machine-hour Constant = $49 500 - ($4.6875 × 4600) = $27 937.50 Estimating equation = $27 937.50 + $4.6875X b. June's estimated costs = $27 937.50 + ($4.6875 × 4200) = $47 625
Difficulty: Complex AACSB: Able to translate knowledge of business and management into practice Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 124) Jeff Walker Manufacturing Company produces inventory in a highly automated assembly plant in Newcastle. 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 3800 3650 3900 3300 3250 3100
Kilowatt-hours 4 520 000 4 340 000 4 500 000 4 290 000 4 200 000 4 120 000
Total Overhead Costs $138 000 136 800 139 200 136 800 126 000 120 000
Required: a. Use the high-low method to determine the estimating cost function with machine-hours as the cost driver. b. Use the high-low method to determine the estimating cost function with kilowatt-hours as the cost driver. c. For July, the company ran the machines for 3000 hours and used 4 000 000 kilowatt-hours of power. The overhead costs totalled $114 000. Which cost driver was the best predictor for July?
Answer: a. Machine-hours: Slope coefficient = ($139 200 - $120 000)/(3900 - 3100) = $24.00 per machine-hour Constant = $139 200 - ($24 × 3900) = $45 600 Machine-hour estimating equation = $45 600 + $24X b. Kilowatt-hours: Slope coefficient = ($138 000 - $120 000)/(4 520 000 - 4 120 000) = $0.045 per kilowatt-hour Constant = $138 000 - ($0.045 × 4 520 000) = -$65 400
Kilowatt-hour estimating equation = -$65 400 + $0.045KWH c.
July's estimated costs: with machine-hours = $45 600 + ($24 × 3000) = $117 600 with kilowatt-hours = -$65 400 + ($0.045 × 4 000 000) = $114 600 The best predictor for July was the kilowatt-hour cost driver. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 125) Trevor Chappelli, the CEO of Chappelli's Wild Game Company, has asked for information about the cost behaviour of manufacturing overhead costs. Specifically, he wants to know how much overhead cost is fixed and how much is variable. The following data are the only records available: Month February March April May June
Machine-hours 1700 2800 1000 2500 3500
Overhead Costs $20 500 22 250 19 950 21 500 23 950
Required: Using the high-low method, determine the overhead cost equation. Use machine-hours as your cost driver.
Answer: High: June Low: April Difference
3500 1000 2500
$23 950 19 950 $4000
Variable cost per MH: $4000/2500 = $1.60 per MH Fixed cost: $19 950 = a + $1.60 × 1000 a = $18 350 Overhead cost equation: y = $18 350 + $1.60 × 1000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex
Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 126) The managers of the production department have decided to use the production levels of 2012 and 2018 as examples of the highest and lowest years of operating levels. Data for those years are as follows: Year 2012 2018
Chemicals Used 200 000 litres 150 000 litres
Overhead Costs $135 000 $105 000
Required: What is the cost estimating equation for the department if litres of chemicals are used as the cost driver?
Answer: Slope (variable cost) = ($135 000 - $105 000)/(200 000 - 150 000) = $0.60 Constant (fixed cost) = $105 000 - $0.60(150 000) = $15 000 Estimating equation= $15 000 + $0.60DM AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 127) List and briefly describe the six steps in estimating a cost function under quantitative analysis.
Answer: 1. The first step is to select the dependent variable. Selection of which dependent variable to use will depend on the cost function being estimated. 2. 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. 3. 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. 4. 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.
5. 6.
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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 128) The new cost analyst in your accounting department has just received a computer-generated report that contains the results of a simple regression program for cost estimation. The summary results of the report appear as follows: Variable Coefficient Constant $35.92 Independent variable $563.80
Standard Error $16.02 $205.40
t-Value 2.24 2.74
r2 = 0.75 Required: a. What is the cost estimation equation according to the report? b. What is the goodness of fit? What does it tell about the estimating equation?
Answer: a. y = $35.92 + $563.80X b. Goodness of fit is 0.75. It measures how well the predicted values match the actual observations. In this case, the equation passes the goodness of fit test because it is substantially above 0.30, the threshold of acceptance. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 129) Newton Company used ‘least squares regression analysis’ to obtain the following output: Payroll Department Cost Explained by Number of Employees Constant $5800 Standard error of Y estimate 630 2 r 0.8924 Number of observations
20
X coefficient(s) Standard error of coefficient(s)
$1.902 0.0966
Required: a. What is the total fixed cost? b. What is the variable cost per employee? c. Prepare the linear cost function. d. What is the coefficient of determination? Comment on the goodness of fit.
Answer: a. The constant or intercept is the total fixed cost of $5800. b. The variable cost per employee is the X coefficient of $1.902. c. y = $5800 + $1.902X d. The coefficient of determination is the r2 of 0.8924. This represents a very high goodness of fit. The closer to 1.0, the better the cost driver explains the cost. Therefore, the conclusion can be drawn that there is a significant relationship between the cost of the payroll department and the number of employees. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 130) Wallaby 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: Coefficient Variable 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: Coefficient Variable 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 Number of packages b.
y = $748.30 + $52.90X y = $242.90 + $5.60X 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. Difficulty: Complex AACSB: Able to translate knowledge of business and management into practice Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. 131) Sydney Company manufactures chairs. Because the efforts of manufacturing are approximately equal between labour and machinery, management is considering other possible cost drivers. By considering different cost drivers, it is anticipated that the estimating process can be improved. The following cost estimating equations with their r2 values have been determined for 20X9: 1.
X = cutting time
2.
y = $19 500 + $20X
r2 = 0.65 r2 = 0.49
X = labour y = $5000 + $25X 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Estimating a cost function using quantitative analysis Learning Objective: 3.4 Outline six steps in estimating a cost function using quantitative analysis. Choose the one alternative that best completes the statement or answers the question. 132) An inaccurate cost function with a slope coefficient that is estimated too low may MOST likely result in: A) predicting total costs that are too high. B) promoting a product that is actually more profitable than budgeted. C) initiating cost cutting measures when they are unnecessary. D) evaluating a weak manager as having strong performance. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 133) An inaccurate cost function with a constant that is estimated too high may MOST likely result in: A) replicating processes that are truly cost saving. B) predicting total costs that are too low. C) promoting a product that is actually less profitable than budgeted. D) evaluating a weak manager as providing strong performance. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 134) A cost function with a lower constant than a year ago could indicate all of the following EXCEPT: A) a new operations manager is being effective. B) the sales commission percentage has decreased. C) insurance premiums have decreased.
D) last year's cost function was inaccurate. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 135) A cost function with a lower slope coefficient than a year ago could indicate that: A) production has decreased. B) new cost-cutting initiatives are beneficial. C) rental costs have decreased. D) total variable costs have decreased. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 136) If machine maintenance is scheduled at a time when production is at a low level, then: A) an understanding of operations is needed to determine an appropriate cost driver. B) low production should be avoided since it is the cause of machine maintenance. C) machine maintenance cannot be accurately predicted. D) low production is the cost driver of high repair costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 137) Goodness-of-fit measures how well the predicted values in a cost estimating equation: A) determine the level of activity. B) match the actual cost observations. C) rely on the independent variable. D) match the cost driver. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers.
138) A steeply sloped regression line indicates: A) a strong relationship between the cost driver and costs. B) an economically plausible relationship exists. C) a greater proportion of fixed costs than variable costs. D) management should cut costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 139) The smaller the residual term, the: A) steeper the slope of the cost function. B) weaker the relationship between the cost driver and costs. C) stronger the relationship between the cost driver and costs. D) gentler the slope of the cost function. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 140) When evaluating and choosing cost drivers all of the following are true EXCEPT: A) there is a significance of effect of the independent variable. B) there is an independent verification of the relationship by a committee of cost accountants. C) the cost driver is economically plausible. D) there is a goodness of fit between the various data points and the regression line. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 141) When using activity-based costing all of the following are true EXCEPT that: A) all cost drivers should be output unit-level cost drivers. B) there are a great number and variety of cost drivers and cost pools. C) the more cost pools, the greater the chance of estimation error. D) industrial engineering, conference, and regression analysis can be used to estimate slope coefficients. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 142) Machine-hours is a more economically plausible cost driver of machine maintenance than number of direct manufacturing labour-hours. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 143) With regression analysis the smaller the vertical difference between actual costs and predicted costs the better the goodness of fit. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 144) Choosing an economically plausible cost driver for indirect costs is fairly simple and knowledge of operations is generally unnecessary. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 145) A flat or slightly sloped regression line indicates a strong relationship. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 146) Economic plausibility is an important criterion for choosing a cost driver. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating and choosing cost drivers
Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. 147) Because of its accuracy, activity-based costing systems use the quantitative analysis method exclusively for cost estimation. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. Write your answer in the space provided or on a separate sheet of paper. 148) What three criteria should a company use to evaluate and choose a cost driver? Briefly explain each of these 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Evaluating and choosing cost drivers Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 149) When using an activity-based costing system, a batch-level cost must have a batch-level cost driver. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Cost drivers and activity-based costing Learning Objective: 3.5 Describe three criteria used to evaluate and choose cost drivers. Choose the one alternative that best completes the statement or answers the question. 150) Over the short run, a non-linear cost function would MOST likely result from all of the following
EXCEPT: A) quantity discounts for each additional 10 000 parts purchased. B) hiring a third production supervisor. C) purchasing another $250 000 printing machine to double production. D) incurring greater total utility costs for each machine-hour of operation. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 151) Examples of non-linear cost functions include all of the following EXCEPT: A) learning curves. B) step fixed-cost functions. C) step variable-cost functions. D) mixed cost functions. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 152) A step fixed-cost function: A) example includes set-up costs. B) is often approximated with a continuous variable-cost function. C) is fixed over the short run but not over the long run. D) remains the same over a narrow range of activity. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 153) A step variable-cost function: A) is often approximated with a continuous variable-cost function. B) remains the same over a wide range of activity. C) example includes adding additional warehouse space.
D) is fixed over the long run but not over the short run. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 154) An 'economy of scale' function is an example of a linear cost function. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 155) A step cost function is an example of a non-linear cost function. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 156) Step fixed-cost functions are variable over the long run. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 157) An example of a step variable-cost function is the cost of material-handling labour when inputs are acquired in discrete quantities. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve
effects. Write your answer in the space provided or on a separate sheet of paper. 158) Discuss the potential use of non-linear curves in cost functions and cost analysis. Give some examples.
Answer: Cost functions are not always linear. A non-linear cost function is a cost function for which the graph of total costs is not a straight line within the relevant range of operations. One example is a series of straight line segments that change their slopes at critical intersection points within the range of operation. Another example would be a step function. A step function is a function where the cost remains the same over various ranges of the level of activity, but the cost increases by discrete amounts (or steps) as the level of activity advances from one range to another. In addition to the examples mentioned above, there are situations where the cost or use of resources can be represented by a curve instead of a single straight line or a group of segmented straight lines. One example of a curve is a learning curve. A learning curve is a function that measures how labour-hours per unit decline as units of production increase because workers are learning and becoming better at their jobs. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Non-linear cost functions Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. Choose the one alternative that best completes the statement or answers the question. 159) A ‘learning curve’ is a function: A) that increases at a greater rate as workers become more familiar with their tasks. B) where unit costs increase as productivity increases. C) that measures the decline in labour-hours per unit due to workers becoming better at a job. D) that is linear. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 160) An ‘experience curve’: A) measures the decline in cost per unit as production decreases for various value-chain functions such as marketing as production increases.
B) only measures the decline in labour-hours per unit as units produced increases. C) measures the increase in cost per unit as productivity increases. D) is a narrower application of the learning curve. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 161) To complete the first set-up on a new machine took an employee 200 minutes. Using an 80% cumulative average-time learning curve indicates that the second set-up on the new machine is expected to take: A) 60 minutes. B) 120 minutes. C) 80 minutes. D) 160 minutes. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 162) The first set-up on a new machine took an employee 200 minutes to complete. Using an 85% incremental unit-time learning model indicates that the second set-up on the new machine is expected to take: A) 170 minutes. B) 60 minutes. C) 85 minutes. D) 120 minutes. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 163) Learning curve effects can be incorporated: A) into production schedules.
B) when using costs to price products. C) into performance evaluations. D) All of these answers are correct. Answer: D Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 164) The learning-curve models presented in the text examine: A) how efficiency increases as more units are produced. B) the change in variable costs when quantity discounts are available. C) how quality increases over time. D) how set-up costs decline as more workers are added. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 165) A learning curve measures the effect of learning on efficiency. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 166) Plotting learning curve observations is helpful in selecting the appropriate learning curve model. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 167) When new products are introduced, learning curve effects can have a major influence on production
scheduling. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 168) It is appropriate to incorporate expected learning-curve efficiencies when evaluating performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 169) The cumulative average-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 170) The incremental unit-time learning model with a 90% learning curve indicates that if it takes 100 minutes to manufacture the first unit of a new model, then the second unit will take only 90 minutes to manufacture. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 171) A learning curve is a function that measures how labour-hours per unit decrease, as units of production increase. Answer: True Difficulty: Basic
AACSB: Able to analyse and frame problems Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. Write your answer in the space provided or on a separate sheet of paper. 172) Dave's Kitchen Stools manufactures various kitchen stools. Each new employee takes five hours to make the first kitchen stool and four hours to make the second. The manufacturing overhead charge per hour is $20. Required: a. What is the learning-curve percentage, assuming the cumulative average method? b. What is the time needed to build eight kitchen stools by a new employee using the cumulative average-time method? Use an index of -0.1520. c. What is the time needed to produce the 16th stool by a new employee using the incremental unit-time method? Use an index of -0.3219. d. How much manufacturing overhead would be charged to the 16 kitchen stools using the average-time approach?
Answer: a. Job 1 2
Hours 5 4
Cumulative 5 9
Cumulative Average 5 4.5
Learning percentage = 4.5/5 = 0.90 b.
Y
= p Xq = 5 × 8-.1520 = 3.65 hours
or 1 unit = 5 2 units = 5 × 0.9 = 4.5 4 units = 4.5 × 0.9 = 4.05 8 units = 4.05 × 0.9 = 3.65 hours Time to build 8 units: 8 × 3.65 = 29.2 hours c.
Y
= p Xq = 5 × 16-0.3219 = 2.048 hours
or 1 unit = 5 2 units = 5 × 0.8 = 4 4 units = 4 × 0.8 = 3.2 8 units = 3.2 × 0.8 = 2.56 16 units = 2.56 × .8 = 2.048 hours d. Total time = 2.048 × 16 = 32.768 hours Overhead charge = 32.768 × $20 = $655.36 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 173) Each time Stawell Customwood Manufacturers 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 30 hours and the second job averages 24 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 1 2
Hours 30 24
Cumulative 30 54
Cumulative Average 30 27
Learning percentage = 27/30 = 0.90 b.
Y
= p Xq = 30 × 16-.1520 = 19.683 hours
or 1 unit = 30 2 units = 30 × 0.9 = 27 4 units = 27 × 0.9 = 24.3
8 units = 24.3 × 0.9 = 21.87 16 units = 21.87 × 0.9 = 19.683 hours 16 × 19.683 = 314.9 hours AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 174) Samantha's Copy Centre hires a new employee. Sam knows she has to be patient with the employee until the employee gains enough experience to meet production standards. Sam is unsure of the learning curve in her operation, but she knows the first job by a new employee averages 40 minutes and the second job averages 32 minutes. Assume all jobs are 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 1 2
Minutes Cumulative 40 40 32 72
Cumulative Average 40 36
Learning percentage = 36/40 = 0.90 b.
Y
= p Xq = 40 × 32-.1520 = 23.62 minutes
or 1 unit = 40 2 units = 40 × 0.9 = 36 4 units = 36 × 0.9 = 32.4 8 units = 32.4 × 0.9 = 29.16 16 units = 29.16 × 0.9 = 26.244 32 units = 26.244 × 0.9 = 23.62 minutes 32 × 23.62 = 755.827 minutes = Approximately 12 hours and 36 minutes
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. 175) What is 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Learning Curves Learning Objective: 3.6 Explain non-linear cost functions, in particular those arising from learning curve effects. Choose the one alternative that best completes the statement or answers the question. 176) The ideal database contains: A) cost driver observations spanning a wide range. B) numerous cost driver observations. C) reliably measured observations. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. 177) Data collection problems arise when: A) accrual-basis costs are used rather than cash-basis costs. B) fixed and variable costs are not separately identified and both are allocated to products on a per unit basis. C) data are recorded electronically rather than manually. D) purely inflationary price effects are removed. Answer: B AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. 178) Managers who design data collection reports that regularly and routinely obtain required data are helping to ensure that: A) extreme values are not used to calculate cost functions. B) the relationship between the cost driver and the cost remains stable over time. C) all data are recorded. D) inflationary effects are removed. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. 179) Extreme values of observations may be the result of: A) a temporary plant shutdown. B) a misplaced decimal point in the recorded data. C) classifying a cost incorrectly. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. 180) All of the following are cost analysis problems EXCEPT: A) fixed costs are allocated as if they are variable costs. B) time periods differ for measuring items included in the dependent variable and the cost driver(s). C) homogeneous relationships between individual cost items in the dependent variable pool and cost drivers may not be present. D) extreme observations are adjusted or removed. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect.
181) Data collection problems can arise when data is recorded manually rather than electronically. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. 182) Misinterpretation of data can arise when fixed costs are reported on a per unit basis. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. 183) Inflation is a fact, and therefore its influence should not be removed from the data. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. 184) When fixed costs are allocated to individual products as part of the standard costing system, they should be treated as variable costs for purposes of future cost estimation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions. Write your answer in the space provided or on a separate sheet of paper. 185) Roger Moon has just purchased the film studio of a movie company that specialises 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 Moon does not like this 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Data collection and adjustment issues Learning Objective: 3.7 Explain data problems encountered in estimating cost functions.
Chapter 4 Cost–volume–profit analysis Choose the one alternative that best completes the statement or answers the question. 1) A ‘revenue driver’ is defined as: A) any factor that affects revenues. B) only factors that can influence a change in selling price. C) any factor that affects costs and revenues. D) only factors that can influence a change in demand. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 2) Operating profit calculations DO NOT use: A) operating costs. B) income tax expense. C) cost of goods sold. D) revenue. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 3) Which of the following statements about operating profit (OP) is TRUE? A) OP = revenue less fixed costs B) OP = revenue less cost of goods sold less other variable costs C) OP = revenue less variable costs D) OP = revenue less variable and fixed costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 4) Contribution margin equals:
A) revenues minus product costs. B) revenues minus fixed costs. C) revenues minus period costs. D) revenues minus variable costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 5) Fixed costs equal $12 000, unit contribution margin equals $20, and the number of units sold equal 1600. Operating profit is: A) $32 000. B) $20 000. C) $40 000. D) $12 000. Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 6) If selling price per unit is $30, variable costs per unit are $20, total fixed costs are $10 000, the tax rate is 30%, and the company sells 6000 units, net profit after tax is: A) $12 000. B) $40 000. C) $35 000. D) $14 000. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 7) Platypus Company sells its only product for $18 per unit, variable production costs are $6 per unit, and selling and administrative costs are $3 per unit. Fixed costs for 10 000 units are $10 000. The contribution margin is: A) $8 per unit. B) $9 per unit. C) $11 per unit.
D) $12 per unit. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 8) To determine contribution margin use: A) both variable and fixed manufacturing costs B) only fixed manufacturing costs C) only variable manufacturing costs D) both variable manufacturing costs and variable nonmanufacturing costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 9) The selling price per unit less the variable cost per unit is the: A) contribution margin per unit B) margin of safety C) fixed cost per unit D) gross margin Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 10) To perform cost-volume-profit analysis, a company must be able to separate costs into fixed and variable components. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 11) Cost-volume-profit analysis may be used for multi-product analysis when the proportion of different products remains constant.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 12) Many companies find even the simplest CVP analysis helps with strategic and long-range planning. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 13) In CVP analysis, variable costs include direct variable costs, but do not include indirect variable costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 14) If the selling price per unit is $20 and the contribution margin percentage is 30%, then the variable cost per unit must be $6. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 15) Total revenues less total fixed costs equal the contribution margin. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 16) If the selling price per unit of a product is $30, variable costs per unit are $20, and total fixed costs are $10 000 and a company sells 5000 units, operating profit would be $40 000. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 17) Contribution margin = revenue less cost of goods sold. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Essentials of CVP analysis Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. Choose the one alternative that best completes the statement or answers the question. 18) Cost-volume-profit analysis assumes all of the following EXCEPT: A) total fixed costs remain the same over the relevant range. B) total variable costs remain the same over the relevant range. C) units manufactured equal units sold. D) all costs are variable or fixed. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 19) Which of the following items is NOT an assumption of CVP analysis? A) All revenues and costs can be added and compared without taking into account the time value of money. B) The unit-selling price is known and constant. C) Total costs can be divided into a fixed component and a component that is variable with respect to the level of output. D) When graphed, total costs curve upward. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 20) Which of the following items is NOT an assumption of CVP analysis? A) Proportions of different products will remain constant when multiple products are sold. B) Total revenues and total costs are linear in relation to output units. C) Unit selling price and unit fixed costs are known and remain constant. D) Costs may be separated into separate fixed and variable components.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 21) Which of the following is true about the assumptions underlying basic CVP analysis? A) Only selling price is known and constant. B) Only selling price and variable cost per unit are known and constant. C) Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and constant. D) Only selling price, variable cost per unit, and total fixed costs are known and constant. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 22) It is assumed in CVP analysis that the unit selling price, unit variable costs, and unit fixed costs are known and constant. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 23) In CVP analysis it is assumed the number of output units is the only revenue driver. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 24) In CVP analysis, total costs can be separated into a fixed component that does not vary with output and a component that is variable with output level. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis.
25) In CVP analysis, an assumption is made that the total revenues are linear with respect to output units, but that total costs are non-linear with respect to output units. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. 26) A revenue driver is defined as a variable that causes changes in prices. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost–volume–profit assumptions Learning Objective: 4.1 Describe the features of cost–volume–profit (CVP) analysis. Choose the one alternative that best completes the statement or answers the question. 27) At the break-even point of 200 units, variable costs total $400 and fixed costs total $600. The 201st unit sold will contribute to profits. A) $1 B) $2 C) $3 D) $5 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 28) The break-even point is the activity level where: A) revenues equal fixed costs. B) contribution margin equals variable costs. C) revenues equal the sum of variable and fixed costs. D) revenues equal variable costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit.
29) Break-even point is: A) fixed costs divided by contribution margin per unit. B) total costs divided by variable costs per unit. C) contribution margin per unit divided by revenue per unit. D) the sum of fixed and variable costs divided by contribution margin per unit. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 30) Sales total $250 000 when variable costs total $187 500 and fixed costs total $40 000. The break-even point in sales dollars is: A) $40 000. B) $160 000. C) $62 500. D) $250 000. Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 31) The break-even point in CVP analysis is defined as: A) revenues less variable costs equal operating profit. B) when the contribution margin percentage equals total revenues divided by variable costs. C) when fixed costs equal total revenues. D) fixed costs divided by the contribution margin per unit. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 32) Which of the following statements about determining the break-even point is FALSE? A) Revenues equal fixed costs plus variable costs. B) Break-even revenues equal fixed costs divided by the variable cost per unit. C) Contribution margin – fixed costs is equal to zero. D) Operating profit is equal to zero. Answer: B
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 33) What is the break-even point in units, assuming a product’s selling price is $100, fixed costs are $8000, unit variable costs are $20, and operating profit is $32 000? A) 100 units. B) 300 units. C) 400 units. D) 500 units. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 34) If unit outputs exceed the break-even point: A) total sales revenue exceeds total costs. B) there is a profit. C) there is a loss. D) both total sales revenue exceeds total costs and there is a profit. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 35) How many units would have to be sold to yield a target operating profit of $44 000, assuming variable costs are $30 per unit, total fixed costs are $4000, and the unit selling price is $40? A) 4800 units B) 4400 units C) 4000 units D) 3600 units Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit.
36) If the break-even point is 100 units and each unit sells for $50, then: A) sales of $4000 will result in a loss. B) sales of $5000 will result in zero profit. C) selling 125 units will result in a profit. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 37) If break-even point is 100 units, each unit sells for $30, and fixed costs are $1000, then on a graph the: A) revenue line will start at $1000. B) total revenue line and the total cost line will intersect at $3000 of revenue. C) total cost line will be zero at zero units sold. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 38) When fixed costs are $140 000 and variable costs are 30% of the selling price, then break-even sales will be: A) $500 000. B) $200 000. C) $140 000. D) indeterminable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Answer the following questions using the information below: Campesi intends to sell his customers a special round-trip airline ticket package. He is able to purchase the package from the airline carrier for $250 each. The round-trip tickets will be sold for $300 each and the airline intends to reimburse Campesi for any unsold ticket packages. Fixed costs include $7500 in advertising costs.
39) What is the contribution margin per ticket package? A) $50 B) $100 C) $150 D) $200 Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 40) How many ticket packages will Campesi need to sell to break even? A) 65 packages B) 100 packages C) 150 packages D) 250 packages Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 41) How many ticket packages will Campesi need to sell in order to achieve $60 000 of operating profit? A) 367 packages B) 434 packages C) 1100 packages D) 1350 packages Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 42) For every $28 500 of ticket packages sold, operating profit will increase by: A) $4750. B) $10 500. C) $15 750. D) an indeterminable amount. Answer: A
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Answer the following questions using the information below: The following information is for Mt. Panorama Company: Selling price Variable costs Total fixed costs
$300 per unit $180 per unit $500 000
43) The number of units that Mt. Panorama Company must sell to reach targeted operating profit of $180 000 is: A) 3334 units. B) 5667 units. C) 5000 units. D) 4334 units. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 44) If targeted operating profit is $120 000, then targeted sales revenue is: A) $1 550 000. B) $700 000. C) $950 000. D) $1 050 000. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Answer the following questions using the information below: Kelly’s Armoured Suits sells a single product. 10 000 units were sold resulting in $100 000 of sales revenue, $40 000 of variable costs, and $12 000 of fixed costs.
45) Contribution margin per unit is: A) $4.00. B) $4.29. C) $6.00. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 46) Break-even point in units is: A) 2000 units. B) 3000 units. C) 5000 units. D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 47) The number of units that must be sold to achieve $60 000 of operating profit is: A) 10 000 units. B) 11 666 units. C) 12 000 units. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 48) If sales increase by $25 000, operating profit will increase by: A) $10 000. B) $15 000. C) $22 200. D) None of these answers are correct. Answer: B
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Answer the following questions using the information below: Koscuiszko Chalet, Inc. sells burgers during the major ski season. During the current year 11 000 burgers were sold resulting in $220 000 of sales revenue, $55 000 of variable costs, and $24 000 of fixed costs. 49) Contribution margin per burger is: A) $5.00. B) $15.00. C) $20.00. D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 50) Break-even point in units is: A) 1000 burgers. B) 1200 burgers. C) 1600 burgers. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 51) The number of burgers that must be sold to achieve $75 000 of operating profit is: A) 6600 burgers. B) 7500 burgers. C) 8400 burgers. D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 52) If sales increase by $40 000, operating profit will increase by: A) $10 000. B) $20 000. C) $30 000. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Answer the following questions using the information below: Warne’s Flipper Company sells several products. Information of average revenue and costs is as follows: Selling price per unit $25.00 Variable costs per unit: Direct material $5.00 Direct manufacturing labour $1.80 Manufacturing overhead $0.80 Selling costs $2.00 Annual fixed costs $96 000 53) The contribution margin per unit is: A) $8.80. B) $11.00. C) $15.40. D) $16.44. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 54) The number of units that Warne’s Flipper must sell each year to break even is: A) 6234 units. B) 12 896 units.
C) 16 358 units. D) indeterminable. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 55) The number of units that Warne’s Flipper must sell annually to make a profit of $289 000 is: A) 12 000 units. B) 18 000 units. C) 25 000 units. D) 30 000 units. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 56) All of the following are assumed in the above analysis EXCEPT: A) fixed costs increase when activity increases. B) a constant product mix. C) all costs can be classified as either fixed or variable. D) cost and revenue relationships are reflected accurately. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Answer the following questions using the information below: Gundagai Company sells several products. Information of average revenue and costs is as follows: Selling price per unit $28.50 Variable costs per unit: Direct material $5.25 Direct manufacturing labour $1.15 Manufacturing overhead $0.25 Selling costs $1.85
Annual fixed costs
$110 000
57) The contribution margin per unit is: A) $15. B) $20. C) $22. D) $125. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 58) The number of units that Gundagai must sell each year to break even is: A) 1000 units. B) 4000 units. C) 5500 units. D) indeterminable. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 59) The number of units that Gundagai must sell annually to make a profit of $90 000 is: A) 10 000 units. B) 12 000 units. C) 15 000 units. D) 20 000 units. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 60) All of the following are assumed in the above analysis EXCEPT: A) a constant product mix. B) cost and revenue relationships are reflected accurately. C) per unit variable costs increase when activity increases. D) all costs can be classified as either fixed or variable.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Answer the following questions using the information below: Nancy’s Niche sells a single product. 8000 units were sold resulting in $80 000 of sales revenue, $20 000 of variable costs, and $10 000 of fixed costs. 61) The contribution margin percentage is: A) 25.0%. B) 12.5%. C) 37.5%. D) 75.0%. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 62) The break-even point in total sales dollars is: A) $40 000. B) $13 334. C) $100 000. D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 63) To achieve $100 000 in operating profit, sales must total: A) $130 000. B) $440 000. C) $160 000. D) None of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 64) If variable costs decrease by $1 per unit, the new break-even point is: A) 1539 units. B) 492 units. C) $11 765 in total sales dollars. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 65) The break-even point decreases if: A) the selling price per unit decreases. B) the variable cost per unit increases. C) the contribution margin per unit decreases. D) total fixed costs decrease. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 66) The strategy MOST likely to reduce the break-even point would be to: A) decrease the fixed costs and increase the contribution margin. B) decrease both the fixed costs and the contribution margin. C) increase the fixed costs and decrease the contribution margin. D) increase both the fixed costs and the contribution margin. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 67) Which of the following will increase a company’s break-even point? A) Increasing contribution margin per unit B) Reducing its total fixed costs
C) Increasing variable cost per unit D) Increasing the selling price per unit Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 68) Which one of the following is NOT a requirement for calculating the absorption costing break-even point? A) Variable operating costs B) Fixed manufacturing costs C) Unit level of production D) Contribution margin per unit Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 69) The variable costing break-even point is dependent upon: A) contribution margin per unit. B) fixed (manufacturing and operating) costs. C) Both A and B. D) Neither A or B. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 70) The break-even point is not affected by income tax. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 71) The selling price per unit is $30, variable cost per unit $20, and fixed cost per unit is $3. When this
company operates above the break-even point, the sale of one more unit will increase net profit by $7. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 72) A company with sales of $100 000, variable costs of $70 000, and fixed costs of $50 000 will reach its break-even point if sales are increased by $20 000. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 73) Break-even point is not a good planning tool since the goal of business is to make a profit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 74) Break-even point is that quantity of output where total revenues equal total costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 75) In the graph method of CVP analysis, the break-even point is the (X-axis) quantity of units sold for which the total revenues line crosses the total costs line. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit Topic: Break-even point and target profit 76) In the graph method of CVP analysis, the total revenue line can be calculated by determining the total revenue at only one real output level because the starting point of the line is always the intersection of the X and Y axes.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 77) A profit-volume graph shows the impact on operating profit from changes in the output level. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 78) If the selling price per unit of a product is $50, variable costs per unit are $40, and total fixed costs are $50 000, a company must sell 6000 units to make a target operating profit of $10 000. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 79) When variable costing is used, there will be more than one break-even point. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Write your answer in the space provided or on a separate sheet of paper. 80) Ponsford’s Cellular sells phones for $100. The unit variable cost per phone is $50 plus a selling commission of 10%. Fixed manufacturing costs total $1250 per month, while fixed selling and administrative costs total $2500. Required: a. What is the contribution margin per phone? b. What is the break-even point in phones? c. How many phones must be sold to earn pre-tax profit of $7500?
Answer: a. CM per phone = $100 - $50 - 0.1($100) = $40 b. N = Break-even in phones $100N - $50N - $10N - $1250 - $2500 = 0 $40N - $3750 = 0 N = $3750/$40 = 93.75 phones Break-even is 94 phones c.
N = Phones to be sold $100N - $50N - $10N - $1250 - $2500 = $7500 $40N = $11 250 N = $11 250/$40 = 281.25 phones 282 phones must be sold
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 81) Grout Footwear Inc., sells a single product, wicket-keeping boots. The company’s most recent income statement is given below. Sales (8000 units) Less variable expenses Contribution margin Less fixed expenses Net profit
$240 000 (136 000) 104 000 (80 000) $24 000
Required: a. Contribution margin per unit is b. If sales are doubled to $480 000, total variable costs will equal c. If sales are doubled to $480 000, total fixed costs will equal d. If 10 more units are sold, profits will increase by e. Compute how many units must be sold to break even. f. Compute how many units must be sold to achieve profits of $40 000.
$ $ $ $ # #
per unit
Answer: a. Contribution margin per unit is $30 - $17 = $13 b. $136 000 × 2 = $272 000 c. $80 000 d. Contribution margin of $13 × 10 units = $130 e. Fixed costs of $80 000/Contribution margin per unit $13 = 6154 units f. (Fixed costs of $80 000 + Profits $40 000)/CM per unit $13 = 9231 units AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. 82) Archie Jackson 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 profit
$200 000 (120 000) 80 000 (50 000) $30 000
Required: a. Contribution margin ratio is b. Break-even point in total sales dollars is c. To achieve $40 000 in net profit, sales must total d. If sales increase by $50 000, net profit will increase by
% $ $ $
Answer: a. Contribution margin ratio is $80 000/$200 000 = 40% b. Fixed costs $50 000/0.40 CM% = $125 000 in sales c. [Fixed costs $50 000 + Net profit $40 000]/0.40 CM% = $225 000 in sales d. $50 000 × 0.40 CM% = $20 000 increase in net profit AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit.
83) What is the break-even point, and why should a manager be concerned about it?
Answer: The break-even point is the level of production and sales at which total revenues equal total costs. Managers should be concerned about the break-even point because it helps determine when a business venture will be profitable. Break-even point shows a company how far sales can decline before a net loss will be incurred. It helps to assess the risk of loss. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.2 Determine the break-even point and output level needed to achieve a target profit. Choose the one alternative that best completes the statement or answers the question. Answer the following questions using the information below: Assume the following cost information for Murray River Company: Selling price Variable costs Total fixed costs Tax rate
$240 per unit $140 per unit $140 000 40%
84) What minimum volume of sales dollars is required to earn an after tax net profit of $30 000? A) $330 000 B) $165 000 C) $456 000 D) $465 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 85) What is the number of units that must be sold to earn an after-tax net profit of $42 000? A) 2100 units B) 3050 units C) 1875 units D) 4625 units
Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 86) In CVP analysis, focusing on target net profit after tax rather than operating profit before tax: A) will increase the break-even point. B) will not change the break-even point. C) will decrease the break-even point. D) does not allow calculation of break-even point. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 87) To incorporate income tax into cost-volume-profit calculations, managers should use: A) taxable income. B) profit after deducting depreciation and taxation. C) before tax profit. D) after tax profit. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 88) If the tax rate is t, it is possible to calculate planned profit before tax by: A) dividing net profit after tax by 1- t. B) multiplying net profit after tax by 1- t. C) multiplying net profit after tax by t. D) dividing net profit after tax by t. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 89) If Kakadu Realtor plans a profit before tax of $105 000 and the tax rate is 30%, then Kakadu’s planned
net profit after tax should be: A) $178 500. B) $73 500. C) $136 500. D) $31 500. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. Answer the following questions using the information below: Stephanie’s Bridal Shoppe sells wedding dresses. The average selling price of each dress is $1000, variable costs are $400, and fixed costs are $90 000. 90) What is the Bridal Shoppe’s operating profit when 200 dresses are sold? A) $30 000 B) $80 000 C) $200 000 D) $100 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 91) How many dresses are sold when operating profit is zero? A) 225 dresses B) 150 dresses C) 100 dresses D) 90 dresses Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 92) How many dresses must the Bridal Shoppe sell to yield after-tax net profit of $18 000, assuming the tax rate is 40%?
A) 200 dresses B) 170 dresses C) 150 dresses D) 145 dresses Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 93) An increase in the tax rate will increase the break-even point. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 94) When making net profit evaluations, CVP calculations for target profit must be stated in terms of net profit after tax. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 95) If operating profit before tax is $70 000 and the income tax rate is 30%, then net profit after tax will be $49 000. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 96) If planned net profit after tax is $21 000 and the tax rate is 30%, then planned operating profit before tax would be $27 300. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit
Learning Objective: 4.3 Describe how income taxes affect CVP analysis. Write your answer in the space provided or on a separate sheet of paper. 97) In 2017, Thorpe Company has sales of $1 600 000, variable costs of $400 000, and fixed costs of $600 000. In 2018, the company expects annual property taxes to decrease by $30 000. Required: a. Calculate operating profit and the break-even point for 2017. b. Calculate the break-even point for 2018.
Answer: a. In 2017, operating profit is $1 600 000 sales revenue - $400 000 variable costs - $600 000 fixed costs = $600 000. The break-even point for 2017 is $800 000 in total sales dollars. $1 200 000 CM/$1 600 000 sales revenue = 0.75 CM ratio. $600 000 total fixed costs/0.75 CM ratio = $800 000 in total sales to break even. b.
The break-even point for 2018 is $380 000 in total sales dollars.
$600 000 fixed costs - $30 000 reduction in property taxes = $570 000 estimated fixed costs for 2018. $570 000 total fixed costs/75% CM ratio = $760 000 in total sales to break even. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 98) The Sports Drink Company, a producer of specialty drinks, 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% $66.00 $52.80 $462 000.00
Required: a. What is the break-even point in drinks? b. What sales volume is needed to earn an after-tax net profit of $130 284? c. How many drinks must be sold to earn an after-tax net profit of $184 800?
Answer: a. $462 000/($66.00 - $52.80) = 35 000 units b. $130 284/0.70 = $186 120 $186 120 + $462 000 = $648 120 $648 120/$13.20 = 49 100 units 49 100 units × $66.00 = $3 240 600 c.
$184 800/0.70 = $264 000 $264 000 + $462 000 = $726 000 $726 000/$13.20 = 55 000 units AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 99) Casuarina Corporation gathered the following information: Variable costs Income tax rate Contribution-margin ratio
$945 000 40% 30%
Required: a. Compute total fixed costs assuming a break-even volume in dollars of $1 350 000. b. Compute sales volume in dollars to produce an after-tax net profit of $108 000.
Answer: a. $1 350 000 × 0.30 = $405 000 b. $108 000/0.60 = $180 000 ($180 000 + $405 000)/0.3 = $1 950 000 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. 100) What effect, and why, would a decrease in the tax rate have on a company’s break-even point?
Answer: A decrease in the tax rate would have no effect on the break-even point. At the break-even point, before-tax net profit would be zero, so after-tax net profit would also be zero regardless of the tax rate. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Break-even point and target profit Learning Objective: 4.3 Describe how income taxes affect CVP analysis. Choose the one alternative that best completes the statement or answers the question. 101) Assume only the specified parameters change in a cost-volume-profit analysis. If the contribution margin increases by $2 per unit, then operating profits will: A) also increase by $2 per unit. B) decrease by $2 per unit. C) increase by less than $2 per unit. D) be indeterminable. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 102) The Cairns Company has fixed costs of $400 000 and variable costs are 75% of the selling price. To realise profits of $100 000 from sales of 500 000 units, the selling price per unit: A) must be $1.00. B) must be $1.33. C) must be $4.00. D) is indeterminable. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 103) is the process of varying key estimates to identify those estimates that are the most critical to a decision. A) The degree of operating leverage B) Sales mix C) The graph method
D) A sensitivity analysis Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 104) Assume only the specified parameters change in a CVP analysis. The contribution margin percentage increases when: A) variable costs per unit increase. B) variable costs per unit decrease. C) total fixed costs increase. D) total fixed costs decrease. Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 105) Assume there is a reduction in the selling price and all other CVP parameters remain constant. This change will: A) reduce fixed costs. B) reduce operating profit. C) increase variable costs. D) increase contribution margin. Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 106) Assume there is an increase in advertising expenditures and all other CVP parameters remain constant. This change will: A) increase selling price. B) reduce contribution margin. C) increase variable costs. D) reduce operating profit. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex
Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 107) Northern Territory Adventure Company operates on a contribution margin of 35% and currently has fixed costs of $400 000. Next year, sales are projected to be $2 000 000. An advertising campaign is being evaluated that costs an additional $70 000. How much would sales have to increase to justify the additional expenditure? A) $300 000 B) $140 000 C) $200 000 D) $70 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. Answer the following questions using the information below: Ghan Manufacturing produces a single product that sells for $80. Variable costs per unit equal $32. The company expects total fixed costs to be $72 000 for the next month at the projected sales level of 2000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. 108) What is the current break-even point in terms of number of units? A) 1500 units B) 3333 units C) 2250 units D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 109) Suppose management believes that a $32 000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by how much to justify this additional expenditure? A) 400 units B) 667 units C) 800 units
D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 110) Suppose that management believes that a 10% reduction in the selling price will result in a 10% increase in sales. If this proposed reduction in selling price is implemented: A) operating profit will decrease by $8000. B) operating profit will increase by $8000. C) operating profit will increase by $16 000. D) operating profit will decrease by $16 000. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. Answer the following questions using the information below: Gosford Manufacturing produces a single product that sells for $200. Variable costs per unit equal $50. The company expects total fixed costs to be $140 000 for the next month at the projected sales level of 2000 units. In an attempt to improve performance, management is considering a number of alternative actions. Each situation is to be evaluated separately. 111) What is the current break-even point in terms of number of units? A) 934 units B) 2400 units C) 1000 units D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 112) Suppose that management believes that a $48 000 increase in the monthly advertising expense will result in a considerable increase in sales. Sales must increase by how much to justify this additional expenditure?
A) 320 units B) 480 units C) 160 units D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 113) Suppose that management believes that a 20% reduction in the selling price will result in a 20% increase in sales. If this proposed reduction in selling price is implemented: A) operating profit will decrease by $36 000. B) operating profit will decrease by $80 000. C) operating profit will increase by $36 000. D) operating profit will increase by $44 000. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 114) Cost-volume-profit analysis is used PRIMARILY by management: A) to prepare external financial statements. B) as a planning tool. C) to attain accurate financial results. D) for control purposes. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Basic Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. 115) One of the first steps to take when using CVP analysis to help make decisions is: A) calculation of the degree of operating leverage for the company. B) finding out where the total costs line intersects with the total revenues line on a graph. C) estimating how many products will have to be sold to make a decent profit. D) identifying which costs are variable and which costs are fixed. Answer: D AACSB: Able to translate knowledge of business and management into practice
Difficulty: Basic Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 116) A planned increase in advertising would be considered an increase in fixed costs in CVP analysis. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Using CVP analysis for decision making Learning Objective: 4.4 Describe how managers use CVP analysis in decision making. Choose the one alternative that best completes the statement or answers the question. 117) If a change is made in one parameter of CVP analysis, it is an example of: A) incremental budgeting. B) sensitivity analysis. C) operating leverage. D) multiple cost drivers. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 118) The margin of safety is the difference between: A) actual contribution margin and budgeted contribution margin. B) budgeted expenses and break-even expenses. C) actual operating profit and budgeted operating profit. D) budgeted revenues and break-even revenues. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. Answer the following questions using the information below: Dr Charles Hunter, MD, performs a certain outpatient procedure for $1000. His fixed costs are $20 000, while his variable costs are $500 per procedure. Dr Hunter currently plans to perform 200 procedures this month.
119) What is the budgeted revenue for the month assuming that Dr Hunter plans to perform this procedure 200 times? A) $400 000 B) $200 000 C) $300 000 D) $100 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 120) What is the budgeted operating profit for the month assuming that Dr Hunter plans to perform the procedure 200 times? A) $40 000 B) $200 000 C) $80 000 D) $100 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 121) What is the break-even point for the month assuming that Dr Hunter plans to perform the procedure 200 times? A) 40 times B) 30 times C) 20 times D) 10 times Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 122) What is the margin of safety assuming 100 procedures are budgeted? A) $100 000 or 100 times B) $40 000 or 40 times
C) $60 000 or 60 times D) $50 000 or 50 times Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 123) ‘Uncertainty’ may be defined as: A) the possibility that an actual amount will be the same as an expected amount. B) the possibility that a budgeted amount will be higher than the estimated amount. C) the possibility that a budgeted amount will be lower than the estimated amount. D) the possibility that an actual amount will be either higher or lower than the expected amount. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 124) Events, as distinguished from actions, would include: A) decisions on direct material vendors. B) a financial recession. C) decisions on time schedules. D) personnel policy options. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 125) Expected monetary value may be defined as: A) the probability that each outcome will not occur. B) the weighted average of the outcomes with the probability of each outcome serving as the weight. C) the probability that each outcome will occur. D) the average of all possible outcomes. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty.
126) What would be the expected monetary value for the following data using the probability method? Probability 0.20 0.30 0.15 0.35
Cash Inflows $100 000 $80 000 $60 000 $0
A) $94 000 B) $30 000 C) $53 000 D) $20 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 127) Dundee Crocodile Hunters will make $500 000 if the hunting season weather is good, $200 000 if the weather is fair, and would actually lose $50 000 if the weather is poor during the season. If the weather service gives a 40% probability of good weather, a 25% probability of fair weather, and a 35% probability of poor weather, what is the expected monetary value for Dundee Crocodile Hunters? A) $200 000 B) $232 500 C) $267 500 D) $500 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. Answer the following questions using the information below: Patrick Ross has three booth rental options at the country fair where he plans to sell his new product. The booth rental options are: Option 1: Option 2: Option 3:
$1000 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. 128) How many actions and events will a decision table contain? A) 1 action and 3 events B) 3 actions and 6 events C) 2 actions and 3 events D) 31 actions and 6 events Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 129) Which option should Patrick choose to maximise 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 one B) Option two C) Option three D) All options maximise income equally. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 130) Margin of safety is reported on the contribution income statement. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 131) If contribution margin decreases by $1 per unit, then operating profits will increase by $1 per unit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty.
132) A planned decrease in selling price would be expected to cause an increase in the quantity sold. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 133) Sensitivity analysis is a ‘what-if’ technique that managers use to examine how a result will change if the originally predicted data are not achieved or if an underlying assumption changes. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 134) Margin of safety measures the difference between budgeted revenues and break-even revenues. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 135) If a company’s break-even revenue is $100 and its budgeted revenue is $125, then its margin of safety percentage is 25%. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 136) Sensitivity analysis helps to evaluate the risk associated with decisions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. Write your answer in the space provided or on a separate sheet of paper. 137) Keith Miller Inc., sells car batteries to service stations for an average of $30 each. The variable cost of
each battery is $20 and monthly fixed manufacturing costs total $10 000. Other monthly fixed costs of the company total $8000. Required: a. What is the break-even point in batteries? b. What is the margin of safety, assuming sales total $55 000? c. What is the break-even level in batteries, assuming variable costs increase by 20%? d. What is the break-even level in batteries, assuming the selling price goes up by 10%, fixed manufacturing costs decline by 10%, and other fixed costs decline by $1400?
Answer: a. N = Break-even units $30N - $20N - $10 000 - $8000 = 0 $10N - $18 000 = 0 N = $18 000/$10 = 1800 batteries b. Margin of safety = $55 000 - ($30 × 1800) = $1000 c.
N = Break-even units $30N - $24N - $10 000 - $8000 = 0 $6N - $18 000 = 0 N = $18 000/$6 = 3000 batteries
d. N = Break-even units $33N - $20N - $9000 - $6600 = 0 $13N - $16 900 = 0 N = $15 600/$13 = 1200 batteries AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 138) Brightray Inc., sells lamps for $30. The unit variable cost per lamp is $22. Fixed costs total $9600. Required: a. What is the contribution margin per lamp? b. What is the break-even point in lamps? c. How many lamps must be sold to earn a pre-tax profit of $10 000? d. What is the margin of safety, assuming 1500 lamps are sold?
Answer: a. Contribution margin per lamp = $30 - $22 = $8 b.
N = Break-even point in lamps $30N - $22N - $9600 = 0 $8N - $9600 = 0 N = $9600/$8 = 1200 lamps
c.
N = Target sales in lamps $30N - $22N - $9600 - $10 000 = 0 $8N - $19 600 = 0 N = $19 600/$8 = 2450 lamps
d. Margin of safety = Sales - Break-even sales = ($30.00 × 1500) - $36 000 = $9000 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 139) Tom’s Tyres Inc., sells tyres for $110. The unit variable cost per tyre is $85. Fixed costs total $475 000. Required: a. What is the contribution margin per tyre? b. What is the break-even point in tyres? c. How many tyres must be sold to earn a pre-tax profit of $300 000? d. What is the margin of safety, assuming 23 000 tyres are sold?
Answer: a. Contribution margin per tyre = $110 - $85 = $25 b.
N = Break-even point in tyres $110N - $85N - $475 000 = 0 $25N - $475 000 = 0 N = $475 000/$25 = 19 000 tyres
c.
N = Target sales in tyres $110N - $85N - $300 000 - $475 000 = 0 $25N - $775 000 = 0 N = $775 000/$25 = 31 000 tyres
d. Margin of safety = Sales - Break-even sales = ($110 × 23 000) - ($110 × 19 000) = $440 000 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 140) Produce Company needs to know how many kilos of apples to have on hand each day. Each kilo of apples costs $0.50 and can be sold for $0.80. Unsold apples are worthless at the end of the day. The following demands were found after studying the last six months’ sales: 200 kilos of apples 30% of the time 300 kilos of apples 40% of the time 400 kilos of apples 30% of the time Required: Determine whether Produce Company should order 200, 300, or 400 kilos of apples.
Answer: Quantity Ordered 200 300 400 p
Demand Probability 200 300 400 $60 $60 $60 10 90 90 (40) 40 120 0.30 0.40 0.30
Expected Value $60.00 66.00 40.00
Demand example: 300 units ordered; but demand is either 300 or 400 units: ($0.80 × 300) - ($0.50 × 300) = $90 Expected value example: Order 400: ($(40) × 0.30) + ($40 × 0.40) + ($120 × 0.30) = $40 Should order 300 kilos of apples to maximise profit.
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 141) Explain when a manager would use cost-volume-profit analysis and sensitivity analysis.
Answer: Cost-volume-profit analysis is helpful for evaluating the profit impact of management decisions that affect production and sales volume. Sensitivity analysis is helpful for identifying those estimates most critical for a decision. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty. 142) 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 holiday area she had often visited. 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 that might occur based on economic and weather season circumstances. 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 mould 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: It was not necessarily a bad decision for Lauren to purchase the hotel. Decisions are made based on information that is available at the time of evaluating and making the decision. By definition, the nature of uncertainty rules out any guarantees regarding the specific outcome that will be obtained. There are some cases where a bad outcome is obtained even when a good decision has been made. Although the best protection against a bad outcome is a good decision, you can never be 100% certain of a good outcome. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Sensitivity analysis and margin of safety Learning Objective: 4.5 Explain how sensitivity analysis helps managers cope with uncertainty.
Choose the one alternative that best completes the statement or answers the question. Answer the following questions using the information below: Alice Springs University is planning to hold a fundraising banquet at one of the local golf clubs. It has two options for the banquet: OPTION 1: Crestview Golf Club a. Fixed rental cost of $1000 b. $12 per person for food OPTION 2: Tallgrass Golf Club a. Fixed rental cost of $3000 b. A caterer who charges $8.00 per person for food Alice Springs University has budgeted $1800 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. 143) Which option provides the least amount of risk? A) Option one B) Option two C) Both options provide the same amount of risk. D) Neither option has risks. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 144) Which option has the lowest break-even point? A) Option one B) Option two C) Both options have the same break-even point. D) The lowest break-even point cannot be determined. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs.
145) Which option provides the greatest operating profit if 600 people attend? A) Option one B) Option two C) Operating profits are identical. D) Operating profits is indeterminable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 146) 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 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 147) Option 1: Fixed costs of $10 000 and a break-even point of 500 units. Option 2: Fixed costs of $20 000 and a break-even point of 700 units. Which option should you choose if you are expecting to produce 600 units? A) Option one B) Option two C) Both options are equally desirable. D) The best option is indeterminable. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 148) Marsha Marsh is going to sell Christmas tree lights for $20 a box. The lights cost Marsha $5 a unit and any unsold lights can be returned for a full refund. She is planning to rent a booth at the upcoming Baggy Green’s Christmas Convention, which offers three options:
1. 2. 3.
paying a fixed fee of $1500, or paying a $500 fee plus 10% of revenues made at the convention, or paying 25% of revenues made at the convention.
Which of the following statements is FALSE? A) Contribution margin will vary depending upon the option chosen. B) One of the options will allow Marsha to break even, even if she doesn’t sell any lights. C) Operating profit will be the greatest for Option 3. D) Her decision will determine the risk she faces. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 149) In a company with low operating leverage: A) less risk is assumed than in a highly leveraged firm. B) fixed costs are high and variable costs are low. C) large changes in sales volume result in small changes in net profit. D) there is a higher possibility of net loss than a higher-leveraged firm. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Objective: 4.6 Use CVP analysis to plan variable and fixed costs Topic: Cost planning and CVP 150) If the contribution margin ratio is 0.40, targeted net profit is $87 600, and targeted sales volume in dollars is $480 000, then total fixed costs are: A) $87 600. B) $144 000. C) $104 400. D) $67 000. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 151) If the contribution margin ratio is 0.40, targeted net profit is $50 000, and fixed costs are $75 000, then sales volume in dollars is:
A) $250 000. B) $312 500. C) $350 000. D) $275 000. Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 152) If the contribution margin ratio is 0.25, targeted net profit is $25 000, and targeted sales volume in dollars is $200 000, then total fixed costs are: A) $75 000. B) $100 000. C) $50 000. D) $25 000. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 153) Fixed costs: A) reduce the risk of loss B) are considered variable costs over the long run C) are graphed as a steeply sloped line D) provide less operating leverage Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 154) When a greater proportion of costs are fixed costs, then: A) when demand is high the break-even point is increased. B) a decrease in sales reduces the cost per unit. C) a small increase in sales results in a small decrease in operating profit. D) when demand is low the risk of loss is high. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 155) If a company has a degree of operating leverage of 2.0 and sales increase by 25%, then: A) profit will increase by 20% B) total variable costs will not change C) profit will increase by 50% D) total variable costs will increase by 50% Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 156) Companies with a greater proportion of fixed costs have a greater risk of loss than companies with a greater proportion of variable costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 157) 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 profit. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 158) If a company increases fixed costs, then the break-even point will be lower. Answer: False AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 159) Companies that are substituting fixed costs for variable costs receive a greater per unit return above
the break-even point. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 160) A company with a high degree of operating leverage is at lesser risk during downturns in the economy. Answer: False AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 161) Whether the purchase cost of a machine is treated as fixed or variable depends heavily on the time horizon being considered. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 162) 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 variable costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 163) When a company has at least some fixed costs, the degree of operating leverage is different at different levels of sales. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs.
Write your answer in the space provided or on a separate sheet of paper. 164) 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 $5010, or 2. paying an $4000 fee plus 10% of revenue made at the convention, or 3. paying 20% of revenue made at the convention. Required: a. Compute the break-even sales in pillows of each option. b. Which option should Query Company choose, assuming sales are expected to be 800 pillows?
Answer: a. Option 1 N = Break-even in pillows $25N - $10N - $5010 = 0 $15N - $5010 = 0 N = $5010/$15 = 334 pillows Option 2 N = Break-even in pillows $25N - $10N - 0.10($25N) - $4000 = 0 $12.5N - $4000 = 0 N = $4000/$12.5 = 320 pillows Option 3 N = Break-even in pillows $25N - $10N - 0.20($25N) = 0 $10N - $0 = 0 N = $0/$10 = 0 pillows b. Option 1 profit for 800 pillows = $15 × 800 - $5010 = $6990 Option 2 profit for 800 pillows = $12.5 × 800 - 4000 = $6000 Option 3 profit for 800 pillows = $10 × 800 = $8000 Option 3 is the best choice. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs.
165) 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 $9000 plus 10% of revenue received, or 3. paying a base rent of $4800 plus 20% of revenue received up to a maximum rent of $25 000. Required: a. For each option, calculate the break-even sales and the monthly rent paid at break-even. b. Beginning at zero sales, show the sales levels at which each option is preferable up to 5000 units.
Answer: a. Option 1 N = Break-even units $30N - $18N - $15 000 = 0 $12N - $15 000 = 0 N = $15 000/$12 = 1250 units Rent at break-even = $15 000 Option 2 N = Break-even units $30N - $18N - 0.10($30N) - $9000 = 0 $9N - $9000 = 0 N = $9000/$9 = 1000 units Rent at break-even = $9000 + (0.10 × $30 × 1000) = $12 000 Option 3 N = Break-even units $30N - $18N - 0.20($30N) - $4800 = 0 $6N - $4800 = 0 N = $4800/$6 = 800 units Rent at break-even = $4800 + (0.20 × $30 × 800) = $9600 b.
Option 3 from 0 to 1400 units for $4800 plus $6 per unit. Option 2 from 1401 to 2000 for $9000 plus $3 per unit. Option 1 above 2000 for $15 000. Option 1 equals Option 2 when sales are 2000 and favours Option 1 above 2000 units. $15 000 = $9000 + 0.10($30N); $6000 = $3N; N = 2000
Option 1 equals Option 3 when sales are 1700 and favours Option 1 above 1700 units. $15 000 = $4800 + 0.20($30N); $10 200 = $6N; N = 1700 units AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 166) 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 break-even point than for Valerie. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 167) What effects would automating a production line have on a company’s cost structure using CVP terminology? Could these changes have any 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 labour as a result of automation. This would increase the break-even point. This could possibly have a negative effect on the firm if demand for the product produced by this production line is expected to decline in the future. With high fixed costs and low demand, a decline in profits might be more severe due to the presence of unchanging fixed costs as volume drops. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 168) Auto Tyres has been in the tyre business for four years. It rents a building but owns all of its equipment. All regular employees are paid a fixed salary. During the busy season (April-June), temporary help is hired and paid by the hour. Utilities and other operating charges remain fairly constant during each month except those in the busy season. Selling prices per tyre average $75 except during the busy season when discounts run above average
because a large number of customers buy tyres at this time. A 15% discount is given when two tyres are purchased at one time. During the busy months, selling prices per tyre average $60. The CEO of Auto Tyres is somewhat displeased with the company’s management accounting system because the cost behaviour patterns displayed by the monthly break-even charts are inconsistent; the busy months’ charts are different from the other months of the year. The CEO is never sure if the company has a satisfactory margin of safety or if it is just above the break-even point. Required: a. What is wrong with the accountant’s computations? b. How can the information be presented in a better format for the CEO? _ Answer: a. The accounting system includes some assumptions about the CVP model that do not hold for Auto Tyres. 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 tyre 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 behaviours of the company: one for the busy season and one for the other months of the year. It would show that while the break-even point actually increases during the busy months (a negative), the marginal income increases because of increased sales (a positive). AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. 169) Doug and Walter started the DW Restaurant two years ago. They rented a building, bought equipment, and hired two employees to work full time at a fixed monthly salary. Utilities and other operating charges remain fairly constant during each month. The business has grown steadily with average sales increasing 1% a month. This situation pleases both partners. However, 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, because of the effect of leverage, as sales pass the break-even point the profit will increase even faster because the fixed expenses have already been covered. This allows sales to cover only variable expenses before contributing to the profit margin, thereby causing it to increase at a faster rate. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Cost planning and CVP Learning Objective: 4.6 Use CVP analysis to plan variable and fixed costs. Choose the one alternative that best completes the statement or answers the question. Answer the following questions using the information below: The following information is for Walters Corporation: Product Q: Revenue Variable Cost
$10.00 $2.50
Product P: Revenue Variable Cost
$15.00 $5.00
Total fixed costs
$50 000
170) What is the break-even point assuming the sales mix consists of two units of Product Q and one unit of Product P? A) 1012.5 units of P and 2025 units of Q B) 2012.5 units of P and 4025 units of Q C) 1000 units of P and 2000 units of Q D) 2000 units of P and 4000 units of Q Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 171) What is the operating profit, assuming actual sales total 150 000 units, and the sales mix is two units of Product Q and one unit of Product P?
A) $1 200 000 B) $1 250 000 C) $1 750 000 D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 172) If the sales mix shifts to one unit of Product Q and two units of Product P, then the weighted-average contribution margin will: A) decrease per unit. B) stay the same. C) increase per unit. D) be indeterminable. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 173) If the sales mix shifts to one unit of Product Q and two units of Product P, then the break-even point will: A) stay the same. B) decrease. C) increase. D) be indeterminable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 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
174) What is the break-even point, assuming the sales mix consists of three units of Product A and one unit of Product B? A) 10 000 units of A and 5000 units of B B) 11 250 units of A and 3750 units of B C) 4000 units of A and 12 000 units of B D) 12 000 units of A and 4000 units of B Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 175) What is the operating profit, assuming actual sales total 25 000 units, and the sales mix is three units of Product A and one unit of Product B? A) $50 000 B) $60 000 C) $75 000 D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 176) 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) stay the same. B) decrease per unit. C) increase per unit. D) be indeterminable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Objective: 4.7 Apply CVP analysis to a company producing multiple products
Topic: Effects of sales mix on income 177) If the sales mix shifts to four units of Product A and one unit of Product B, then the break-even point will: A) stay the same. B) decrease. C) increase. D) be indeterminable. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Objective: 4.7 Apply CVP analysis to a company producing multiple products Topic: Effects of sales mix on income 178) Assuming a constant mix of 3 units of Little for every 1 unit of Big. Little Big Total Sales $20 $30 VC 14 18 Total fixed costs $48 000 The break-even point in units would be: A) 4800 units of Little and 1600 units of Big. B) 1600 units of Little and 4800 units of Big. C) 1200 units of Little and 400 units of Big. D) 400 units of Little and 1200 units of Big. Answer: A Difficulty: Complex Objective: 4.7 Apply CVP analysis to a company producing multiple products Topic: Effects of sales mix on income AACSB: Able to analyse and frame problems 179) In multiproduct situations, when sales mix shifts toward the product with the highest contribution margin then: A) total revenues will decrease. B) operating profit will increase. C) break-even quantity will increase. D) total contribution margin will decrease. Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex
Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 180) Harvey Cricket Bats Company sells two types of bat, Superdrive and Excalibre.
Selling price Variable cost per unit Total fixed costs
Superdrive $40 $24
Excalibre $50 $40
Total
$840 000
Harvey Cricket Bats sells two units of Superdrive for each unit it sells of Excalibre. If Harvey Cricket Bats has a tax rate of 30% and desires a net after-tax profit of $73 500, the break-even point in units would be: A) 21 750 units of Superdrive and 43 500 units of Excalibre. B) 43 500 units of Superdrive and 21 750 units of Excalibre. C) 22 500 units of Superdrive and 45 000 units of Excalibre. D) 45 000 units of Superdrive and 22 500 units of Excalibre. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 181) Passenger-miles are a potential measure of output for the airline industry. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 182) Kilos of yeast used by a bake shop is a potential measure of output for the bakery industry. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Objective: 4.7 Apply CVP analysis to a company producing multiple products Topic: Effects of sales mix on income 183) In multiproduct situations when sales mix shifts toward the product with the lowest contribution margin, the break-even quantity will decrease. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 184) In multiproduct situations when sales mix shifts toward the product with the highest contribution margin, operating profit will be higher. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 185) To calculate the break-even point in a multi-product situation, one must assume that the sales mix of the various products remains constant. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 186) If a company’s sales mix is 2 units of product A for every 3 units of product B, and the company sells 1000 units in total of both products, only 200 units of product A will be sold. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 187) Barbies Beer Emporium sells beer and ale in the proportions 3:5. This means if it sells 1200 items in total for the day it will sell 450 glasses of beer. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. Write your answer in the space provided or on a separate sheet of paper. 188) Thorpe’s Swimwear Company sells swimwear for men and boys. The average selling price and variable cost for each product are as follows:
Selling Price Variable Cost
Men’s $28.80 $20.40
Selling Price Variable Cost
Boys’ $24.00 $16.80
Fixed costs are $38 400. Required: a. What is the break-even point in units for each type of swimwear, assuming the sales mix is 2:1 in favour of men’s swimwear? b. What is the operating profit, assuming the sales mix is 2:1 in favour of men’s swimwear, and sales total 9000 swimwear?
Answer: a. N = break-even in boys’ swimwear 2N = break-even in men’s swimwear $24N + $28.80(2N) - $16.80N - $20.40(2N) - $38 400 = 0 $81.6N - $57.6N - $38 400 = 0 $24N - $38 400 = 0 N = $38 400/$24 = 1600 swimwear Therefore, to break even, 1600 boys’ swimwear and 3200 men’s swimwear need to be sold.
b. Sales in units Revenue Variable costs Contribution margin Fixed costs Operating profit
Boys’ 3000
Men’s 6000
Total 9000
$72 000 50 400 $21 600
$172 800 122 400 $50 400
$244 800 172 800 $72 000 38 400 $33 600
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products.
189) Dawn’s Divewear 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
Dawn’s Divewear sells two units of Product A for each unit it sells of Product B. Dawn’s Divewear faces a tax rate of 30%. Required: a. What is the break-even 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 break-even point if Dawn’s Divewear’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 Dawn’s Divewear desired an after-tax net profit of $73 500, facing a tax rate of 30%?
Answer: a. N = break-even in product B 2N = break-even 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 break-even point would be the same. At the break-even 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 190) AFL Boots 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
AFL Boots sells three units of Product X for each two units it sells of Product Y. The company has a tax rate of 25%. Required: a. What is the break-even point in units for each product, assuming the sales mix is 3 units of Product X for each two units of Product Y? b. How many units of each product would be sold if AFL Boots desired an after-tax net profit 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 = $630 000/$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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 191) Gabba Catering currently sells hot dogs. During a typical month, the stand reports a profit of $9000 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 $8808. Initial sales of nachos should total 5000 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 CEO believes that hot dog sales will increase to $33 750 a month and nacho sales will increase to 7500 units a month. Required: a. Determine the monthly break-even sales in dollars before adding nachos. b. Determine the monthly break-even sales during the first year of nachos sales, assuming a constant sales mix of 1 hotdog and 2 units of nachos.
Answer: a. Contribution margin = Fixed costs + Profit = $21 000 + $9000 = $30 000 Variable costs
= Sales - Contribution margin = $50 000 - $30 000 = $20 000
Units sold = $20 000/$0.64 = 31 250 units Selling price = $50 000/31 250 = $1.60 per unit Unit Variable costs = $20 000/31 250= $0.64 N = Break-even units $1.60N - $0.64N - $21 000 = 0
$0.96N - $21 000 = 0 N = $21 000/$0.96 = 21 875 units b.
Ratio equal to 1 hot dog to 2 units of nachos. N = Break-even number of units of hot dogs 2N = Break-even number of units of nachos $3(2)N + $1.60N - $0.72(2N) - $0.64N - $29 808 = 0 $7.60N - $2.08N - $29 808 = 0 N = $29 808/$5.52 - 5400 hot dogs
Therefore, 5400 hot dogs and 10 800 units of nachos need to be sold to break even. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 192) Yurus Manufacturing Company produces two products, X and Y. The following information is presented for both products: X Y Selling price per unit $36 $24 Variable cost per unit 28 12 Total fixed costs are $234 000. Required: a. Calculate the contribution margin for each product. b. Calculate break-even point in units of both X and Y if the sales mix is 3 units of X for every unit of Y. c. Calculate break-even volume in total dollars if the sales mix is 2 units of X for every 3 units of Y.
Answer: a. X: $36 - $28 = $8 Y: $24 - $12 = $12 b. (3 × $8) + (1 × $12) = $36 $234 000/$36 = 6500 units X: 6500 × 3 = 19 500 units Y: 6500 × 1 = 6500 units
c.
(2 × $8) + (3 × $12) = $52 $234 000/$52 = 4500 units X: 4500 × 2 = 9000 × $36 = $324 000 Y: 4500 × 3 = 13 500 × $24 = $324 000 Total dollar sales = $648 000 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. 193) Queensland Valve Company makes three types of valves: Speedy Flow, Sure Flow and Fine Flow. Each of the three products has a different contribution margin, and the proportions of the three products sold have remained steady over the years. How could Queensland Valves compute a break-even point given this situation?
Answer: Queensland Valves could consider that it makes a single composite product that represents all three products given the constant sales mix. For example, if the ratio is 3 Speedy, 2 Sure Flow and 1 Fine Flow, Queensland Valves could calculate a weighted average contribution margin for the composite product based on the contribution margins of the individual products using the relative sales mix as weights. Queensland Valves could then divide the fixed costs by this composite contribution margin to determine how many composite units would be needed to be sold to cover the fixed costs. Then the sales mix could be used to determine how many units of each real product is in each composite units. Thus, if 10 000 composite units were required to break even and the sales mix is 3 Speedy, 2 Sure Flow and 1 Fine Flow, Queensland Valves would need to sell 30 000 units of Speedy, 20 000 units of Sure Flow and 10 000 units of Fine Flow to break even. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Effects of sales mix on income Learning Objective: 4.7 Apply CVP analysis to a company producing multiple products. Choose the one alternative that best completes the statement or answers the question. 194) Multiple cost drivers: A) have no unique break-even point. B) can utilise the simple CVP formula. C) have only one revenue driver. D) are the result of multiple products. Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Multiple cost drivers Learning Objective: 4.8 Adapt CVP analysis to situations in which a product has more than one cost driver. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 195) There is no unique break-even point when there are multiple cost drivers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multiple cost drivers Learning Objective: 4.8 Adapt CVP analysis to situations in which a product has more than one cost driver. 196) When there are multiple cost drivers the simple CVP formula of Q = (FC + OI)/CMU can still be used. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Multiple cost drivers Learning Objective: 4.8 Adapt CVP analysis to situations in which a product has more than one cost driver. Choose the one alternative that best completes the statement or answers the question. 197) A non-profit organisation aids the unemployed by supplementing their incomes by $3200 annually, while they seek new employment skills. The organisation has fixed costs of $240 000 and the budgeted appropriation for the year totals $800 000. How many individuals can receive financial assistance this year? A) 175 people B) 75 people C) 130 people D) 100 people Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: CVP analysis in service and not-for-profit organisations Learning Objective: 4.8 Adapt CVP analysis to situations in which a product has more than one cost driver. 198) Court Tennis Foundation is a non-profit organisation that supplies tennis rackets during the summer to under-priviledged children. Fixed costs are $200 000. The tennis rackets cost $20.00 each. The
organisation has a budgeted appropriation of $480 000. How many people can receive a tennis racket during the summer? A) 12 000 people B) 14 000 people C) 34 000 people D) 24 000 people Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: CVP analysis in service and not-for-profit organisations Learning Objective: 4.8 Adapt CVP analysis to situations in which a product has more than one cost driver. Choose the one alternative that best completes the statement or answers the question. 199) The contribution income statement: A) categorises costs as either direct or indirect. B) can be used to predict future profits at different levels of activity. C) is allowed for external reporting to shareholders. D) reports gross margin. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 200) The contribution income statement highlights: A) different product lines. B) products costs and period costs. C) gross margin. D) variable and fixed costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 201) Gross margin is: A) contribution margin less fixed costs. B) sales revenue less cost of goods sold. C) contribution margin less variable costs.
D) sales revenue less variable costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 202) In the merchandising sector: A) fixed overhead costs are subtracted to determine gross profit. B) only variable costs are subtracted to determine gross profit. C) fixed overhead costs are subtracted to determine contribution margin. D) all operating costs are subtracted to determine contribution margin. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 203) The cost of goods sold in a manufacturing company include: A) Fixed manufacturing costs. B) Fixed non-manufacturing costs. C) Fixed manufacturing and selling costs. D) All fixed and variable manufacturing costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 204) For merchandising firms, contribution margin will always be a lesser amount than gross margin. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 205) ‘Contribution margin’ and ‘gross margin’ are terms that can be used interchangeably. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 206) If Johnson’s Manufacturing presented a Financial Accounting Income Statement showing operating profit of $18 000, a Contribution Income Statement would show a different operating profit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 207) Gross margin is a measure of how much a company can charge for its products over and above the cost of acquiring or producing them. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 208) Risk of loss is low if, when sales are low, contribution margin is less then fixed costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. Write your answer in the space provided or on a separate sheet of paper. 209) Healesville Stuffed Animals reported the following: Revenues $2000 Variable manufacturing costs $400 Variable nonmanufacturing costs $460 Fixed manufacturing costs $300 Fixed nonmanufacturing costs $280 Required: a. Compute contribution margin. b. Compute gross margin. c. Compute operating profit.
Answer: a. Contribution margin $2000 - $400 - $460 = $1140 b. Gross margin $2000 - $400 - $300 = $1300 c. Operating profit $2000 - $400 - $460 - $300 - $280 = $560 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 210) Lindwall Electrical reported the following: Revenues Variable manufacturing costs Variable nonmanufacturing costs Fixed manufacturing costs Fixed nonmanufacturing costs
$6000 $1200 $1080 $840 $727
Required: a. Compute contribution margin. b. Compute contribution margin percentage. c. Compute gross margin. d. Compute gross margin percentage. e. Compute operating profit.
Answer: a. Contribution margin $6000 - $1200 - $1080 = $3720 b. Contribution margin percentage = ($3720/$6000) × 100 = 62% c. Gross margin $6000 - $1200 - $840 = $3960 d. Gross margin percentage = ($3960/$6000) × 100 = 66% e. Operating profit $6000 - $1200 - $1080 - $840 - $727 = $2153 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin. 211) Explain why gross margin and contribution margin are often identical in the case of merchandising companies.
Answer: One reason why gross margin and contribution margin are often identical in the case of merchandising companies is that the cost of goods sold equals the variable cost of goods purchased. There are no manufacturing costs, like in a manufacturing company. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Contribution margin versus gross margin Learning Objective: 4.9 Distinguish contribution margin from gross margin.
Chapter 5 Estimating the cost of producing services Choose the one alternative that best completes the statement or answers the question. 1) A cost is anything for which an estimation of costs is sought. A) object B) allocation C) tracer D) accumulation Answer: A Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 2) What type of costs is related to the cost object that managers and management accountants can trace to it in an economically feasible (cost-effective) way? A) Indirect B) Estimated C) Direct D) Actual Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 3) What type of costs is related to the cost object that managers and management accountants cannot trace to it in an economically feasible way? A) Indirect B) Estimated C) Direct D) Actual Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems.
4) What are indirect labour costs frequently divided into? A) Jobs. B) Sub-classifications. C) Systems. D) Processes. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 5) Management accountants form and use cost so that they do not have to allocate each cost to the cost object(s) individually. A) drivers B) allocations C) tracers D) pools Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 6) A cost causes a change in the cost of an activity and has an effect on costs. A) driver B) pool C) allocation D) tracer Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 7) A A) activity-cost B) resource-cost C) target price D) primary Answer: B
driver is used to allocate costs from a resource-cost pool to activity-cost pools.
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 8) A(n) driver is used to allocate costs from an activity-cost pool to a cost object. A) activity-cost B) resource-cost C) target price D) primary Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 9) The difference between the normal wage rate and the overtime rate is called a(n): A) wage rate. B) bonus. C) overtime premium. D) merit pay. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 10) What is the amount of productive capacity available over and above that used to meet consumer demand in the current period called? A) Bonus time B) Idle time C) Waste D) Budgetary slack Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 11) After identifying the purposes for which costs are to be allocated, managers and management
accountants must decide on how to: A) allocate them. B) trace them. C) accumulate them. D) estimate them. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 12) A cost object is anything for which an estimation of costs is sought. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 13) Direct costs of a cost object are costs related to that cost object that managers and management accountants can trace to it in an economically feasible (cost-effective) way. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 14) Indirect costs of a cost object are costs related to the cost object that managers and management accountants can trace to it in an economically feasible way. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 15) The way in which a manager estimates costs depends on the nature of the outputs, the processes underlying them and the purpose for which the manager is estimating the costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 16) A cost driver is a grouping of individual indirect cost items that have the same cost driver. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 17) A cost driver causes a change in the cost of an activity and has an effect on costs. Managers use cost drivers to allocate overhead costs to cost objects. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 18) Whether a management accountant classifies overtime premium as direct or indirect depends on the circumstances. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 19) Used labour capacity, the amount of productive capacity available over and above that used to meet consumer demand in the current period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 20) To motivate people to make decisions and to take actions that are congruent with the goals of the organisation, senior managers often include costs from more than one, but not necessarily all, business functions to emphasise that costs in some functions potentially affect costs in other functions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
AACSB: Able to analyse and frame problems Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 21) Before identifying the purposes for which costs are to be allocated, managers and management accountants must decide on how to allocate them. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 22) Fairness and ability-to-bear are more problematic criteria than cause-and-effect or benefits received, and are thus less frequently used. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 23) When designing costing systems, managers and management accountants must compare the benefits derived from allocating costs with the costs incurred in making these allocations. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 24) An activity-cost driver is used to allocate costs from a resource-cost pool to activity-cost pools. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 25) A resource-cost driver is used to allocate costs from an activity-cost pool to a cost object. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems
Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 26) In general, the more complex the cost allocations, the higher the education costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. Write your answer in the space provided or on a separate sheet of paper. 27) What are the defining characteristics of services?
Answer: One of the defining characteristics of services is intangibility: you cannot hold a service in your hand. In addition to intangibility, commonly accepted service characteristics are simultaneous consumption and production, non-standardisation, perishability and the identification of the service with its producer. The absence of inventory as a buffer means that effective capacity management and revenue management are critical to achieving profitability; for example, if a hotel room or a seat on an airliner remains unoccupied, that revenue is lost forever. However, intangibility is a relative, rather than an absolute, distinguisher. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 28) What central factor in both strategic and operating decisions, and estimating costs, is important for making pricing, performance evaluation, continuous improvement and other decisions?
Answer: An organisation’s outputs, whether they are products, services or both. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 29) What does the extent of the impact of inventory on the reported results of service providers depends on?
Answer: The tangible/intangible mix, the extent of outsourcing and the extent to which lean manufacturing, including just-in-time techniques, is adopted and pursued. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 30) What can choices among costing systems significantly affect?
Answer: An organisation’s reported financial results, because manufacturers usually hold at least some inventory at the beginning and/or end of the reporting period. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. 31) What type of reporting is costing important for?
Answer: Both internal and external reporting AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Building blocks of costing systems Learning Objective: 5.1 Identify and evaluate the building blocks for designing costing systems. Choose the one alternative that best completes the statement or answers the question. 32) Managers use a(n) system when the cost object is a distinct output called a job. A) job-costing B) actual costing C) hybrid costing D) process costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs.
33) In job costing, managers trace costs to a specific . A) process. B) job. C) activity. D) product Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 34) When a job continues across accounting periods, where do costs remain until the job has been completed? A) Finished goods B) Raw materials C) Work in process D) Overhead Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 35) Managers use a(n) system when the output comprises many homogenous (identical or almost identical) units. A) process-costing B) job C) hybrid D) accounting Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 36) A major difference between job costing and process costing is the extent of calculate the unit costs of products or services. A) estimation B) analysis C) strategy
used to
D) averaging Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 37) In a(n) system, individual jobs differ in the extent to which they use quantities of production resources, so it would be incorrect to use average production costs for different jobs. A) job-costing B) process costing C) hybrid D) accounting Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 38) When management accountants use systems, they separate costs into cost categories according to when they are introduced into the process. A) job-costing B) process-costing C) hybrid D) accounting Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 39) All direct materials are generally added to the process at one time and all generally added to the process evenly through time. A) conversion B) labour C) overhead D) activity Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate
costs are
Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 40) What type of costing system blends characteristics of both job-costing and process costing systems? A) Conversion B) Hybrid C) Labour D) Activity Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 41) A(n) is a standardised method or technique performed repetitively, often on different materials, resulting in different finished goods. A) process B) job C) operation D) hybrid Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 42) Multiple operations are usually conducted within a(n): A) department. B) organisation. C) process. D) job. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 43) A(n) identical, products. A) operation-costing
system is a hybrid costing system applied to batches of similar, but not
B) hybrid C) activity-based D) process costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 44) Within each operation, all product units are treated , using identical amounts of the operation’s resources. A) differently B) exactly alike C) similarly D) uniquely Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 45) Irrespective of the costing system that a manager or management accountant might select, the rate is calculated in the same way. A) overhead B) activity C) cost-driver D) hourly Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 46) The shorter the period used to calculate the cost-driver rate, the the influence of seasonal patterns and of non-seasonal, sporadic costs on the dollar-amount of the cost pool (the numerator). A) greater B) lesser C) more irrelevant is D) less irrelevant is
Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 47) Many managers believe that calculating the indirect cost rate provides a more representative and reasonable way to assign indirect costs to jobs. A) monthly B) biweekly C) daily D) annually Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 48) The actual cost-driver rate measures capacity utilisation. A) budgeted B) actual C) estimated D) past Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 49) Managers use a process-costing system when the cost object is a distinct output called a job. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 50) In job costing, managers trace costs to a specific job. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 51) When the job continues across accounting periods, costs remain in work in process until the job has been completed. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 52) Managers use a job-costing system when the output comprises many homogenous (identical or almost identical) units. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 53) A major difference between job costing and process costing is the extent of averaging used to calculate the unit costs of products or services. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 54) In a process-costing system, individual jobs differ in the extent to which they use quantities of production resources, so it would be incorrect to use average production costs for different jobs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 55) When identical or similar units of products or services are mass-produced rather than processed as individual jobs, managers use process costing to calculate an average production cost for all units produced. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 56) When management accountants use process-costing systems, they separate costs into cost categories according to when they are introduced into the process. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 57) Costing systems typically fall neatly into either job-costing or process-costing categories. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 58) A hybrid costing system blends characteristics of both job-costing and process costing systems. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 59) Few production systems are a hybrid because they rarely have some custom-order production features and some mass-production features. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 60) An operation is a standardised method or technique performed repetitively, often on different materials, resulting in different finished goods. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 61) An operation-costing system is a hybrid costing system applied to batches of similar, but not identical, products. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 62) The actual cost-driver rate measures the budgeted capacity utilisation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 63) The budgeted cost-driver rate measures actual capacity utilisation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 64) Normal costing is a costing system that traces actual direct costs to a cost object and allocates indirect costs based on the budgeted cost-driver rate. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 65) Actual costing is a costing system that traces budgeted direct costs to the cost object and allocates indirect costs based on the actual cost-driver rate. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs.
Write your answer in the space provided or on a separate sheet of paper. 66) Compare job-costing and process-costing systems.
Answer: In a job-costing system, individual jobs differ in the extent to which they use quantities of production resources, so it would be incorrect to use average production costs for different jobs. In contrast, when identical or similar units of products or services are mass-produced rather than processed as individual jobs, managers use process costing to calculate an average production cost for all units produced. When management accountants use process-costing systems, they separate costs into cost categories according to when they are introduced into the process. Often, only two cost classifications—direct materials and conversion costs (direct labour and variable overheads)—are necessary to assign costs to products. Why only two? Because all direct materials are generally added to the process at one time and all conversion costs are generally added to the process evenly through time. If, however, two different direct materials were added to the process at different times, two different direct materials categories would be needed to assign these costs to products. Similarly, if production labour costs were added to the process at a different time from when the other conversion costs were added, it would be necessary to assign an additional cost category—direct production labour costs—separately. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 67) What system to manager use when the output comprises many homogenous (identical or almost identical) units?
Answer: Process costing AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 68) When do managers use a job-costing?
Answer: When the cost object is a distinct output.
AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 69) Are job costing and process costing mutually exclusive?
Answer: While these systems might appear to offer mutually exclusive options, they are more properly viewed as opposite ends of a continuum, between which there are several variations. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. 70) What is normal costing?
Answer: Normal costing is a costing system that: (1) traces actual direct costs to a cost object; and (2) allocates indirect costs based on the budgeted cost-driver rate. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Systems for estimating the costs of outputs Learning Objective: 5.2 Identify and evaluate costing systems for estimating the costs of outputs. Choose the one alternative that best completes the statement or answers the question. 71) captures the extent to which the service provider customises its services and interacts with its customers. A) Degree of variation B) Throughput time C) Process time D) Wait time Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing a system for estimating the costs of services Learning Objective: 5.3 Given the context, design a system for estimating the costs of services.
72) The throughput time for a service transaction as compared with others in the industry is known as: A) process time. B) relative throughput time. C) degree of variation. D) hybrid time. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing a system for estimating the costs of services Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 73) Degree of variation captures the extent to which the service provider customises its services and interacts with its customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing a system for estimating the costs of services Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. 74) Variation time as the measure of the time that a molecule in a production process takes ‘from when the molecule is ready to have value added to it until it is a part of the finished product’. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing a system for estimating the costs of services Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. 75) By using a matrix initially to match a service category with a type of costing system, managers and management accountants are able to refine the design of the system to suit the requirements of their organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing a system for estimating the costs of services Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. 76) Schmenner classifies services into four categories—professional service, service shop, mass service and service factory. Answer: True
Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Designing a system for estimating the costs of services Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. 77) Schmenner classifies services according to two dimensions: degree of variation and relative throughput time. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing a system for estimating the costs of services Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. Choose the one alternative that best completes the statement or answers the question. 78) When calculating the budgeted rate for direct professional time, the numerator is: A) budgeted number of professional hours. B) actual number of professional hours. C) budgeted cost of professional time. D) actual cost of professional time. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case: Parsons & Partners Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. 79) When calculating the budgeted rate for direct professional time, the denominator is: A) budgeted number of professional hours. B) actual number of professional hours. C) budgeted cost of professional time. D) actual cost of professional time. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case: Parsons & Partners Learning Objective: 5.3 Given the context, design a system for estimating the costs of services. Choose the one alternative that best completes the statement or answers the question. 80) Where managers use cost information about outputs to guide pricing decisions, they are likely to outputs that they have under-costed, resulting in increased demand for these outputs while profit will fall.
A) underprice B) overprice C) over-cost D) under-cost Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 81) In what type of resource-cost pool do all of the costs have the same or a similar cause-and-effect relationship with a single cost driver? A) Heterogeneous B) Homogeneous C) Innovative D) Advanced Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 82) cross-subsidisation means that if management under-costs one of its outputs, then it will over-cost at least one of its other outputs. A) Input-cost B) Output-price C) Output-cost D) Input-price Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 83) In a homogeneous resource-cost pool, all of the costs have the same or a similar relationship with a single cost driver. A) cause-and-effect
B) inverse C) positive D) negative Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 84) If you identify as many direct costs as is economically feasible, this the amount of costs classified as indirect. A) increases B) reduces C) doesn’t affect D) eliminates Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 85) Where management uses a single cost-driver rate to allocate indirect production costs to outputs, cost data are often the result. A) reliable B) complex C) simplified D) unreliable Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 86) Over-costed outputs lead to overpricing, causing these outputs to lose market share to competitors producing similar outputs. Answer: True
Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 87) Output-cost cross-subsidisation means that if management under-costs one of its outputs, then it will over-cost at least one of its other outputs. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 88) If you identify as many direct costs as is economically feasible, this increases the amount of costs classified as indirect, thereby minimising the extent to which costs have to be allocated rather than traced. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 89) In a heterogeneous resource-cost pool, all of the costs have the same or a similar cause-and-effect relationship with a single cost driver. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 90) With over-costing, an output consumes a high level of resources but is reported to have a low cost per unit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing
system. Write your answer in the space provided or on a separate sheet of paper. 91) How does Schmenner classify services?
Answer: Schmenner classifies services into four categories—professional service, service shop, mass service and service factory—according to two dimensions: degree of variation and relative throughput time. Degree of variation captures the extent to which the service provider customises its services and interacts with its customers. These characteristics determine other aspects, such as the discretion that personnel are able to exercise in dealing with customers/clients, and the number of customers/clients that they are able to serve in a given period. The other dimension is relative throughput time: the throughput time for a service transaction as compared with others in the industry. Schmenner refers to throughput time as the measure of the time that a molecule in a production process takes ‘from when the molecule is ready to have value added to it until it is a part of the finished product’. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 92) Bondi 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 4000 nursing hours and 2000 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:
Patient medicine Direct nursing time
PRE-OP Costs $200 $1000
OR Costs $500 $2000
In-room Costs $2400 $3000
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 = $168 000/4000 hrs. = $42 per hr. Nursing overhead rate OR = $132 000/2000 hrs. = $66 per hr. Overhead rate for surgery floor = $1 200 000/15 000 hrs. = $80 per hr. Patient Fred Adams: PRE-OP $200 1000
OR $500 2000
In-room $2400 3000
Totals $3100 6000
Patient Medicine Direct Nursing Time Nursing Overhead: PRE-OP ($42 × 8) 336 336 OR ($66 × 4) 264 264 In-room ($80 × 96) 0 0 7680 7680 Total $1536 $2764 $13 080 $17 380 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 93) A local solicitor employs 15 full-time professionals. The budgeted compensation per employee is $100 000. The maximum billable hours for each client are 400. Clients always receive their full amount of time. All professional labour costs are included in a single direct-cost category and are traced to jobs on a per-hour basis. Any other costs are included in a single indirect-cost pool, allocated according to professional labour-hours. Budgeted indirect costs for the year are $600 000 and the firm had 30 clients. Required: a. What is the direct-labour-cost rate per hour? b. What is the indirect-cost rate per hour?
Answer: a. Total direct cost = $100 000 × 15= $1 500 000
Total hours = 400 × 30 = 12 000 Direct-cost rate per unit = $1 500 000/12 000 = $125.00 per hour b. Indirect-cost rate per unit = $600 000/12 000 = $50.00 per hour AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 94) A local engineering firm is bidding on a design project for a new client. The total budgeted direct-labour costs for the firm are $800 000. The total budgeted indirect costs are $1 200 000. It is estimated that there are 16 000 billable hours in total. Required: a. What is the budgeted direct-labour cost rate? b. What is the budgeted indirect-cost rate assuming direct-labour cost is the allocation base? c. If the firm has a 20% mark-up percentage, what should it bid on the project if the direct labour hours are estimated at 500 hours?
Answer: a. $800 000/16 000 = $50/hour b. $1 200 000/$800 000 = 150% of direct labour cost c. 1.2 [(500 × 500) + 500 × 50 × 1.5)] = $75 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 95) Hammond and Jarrett provide tax consulting for estates and trusts. Their job-costing system has a single direct-cost category (professional labour) and a single indirect-cost pool (research support). The indirect-cost pool contains all the costs except direct personnel costs. All budgeted indirect costs are allocated to individual jobs using actual professional labour-hours. Required: a. Discuss the reasons a consulting firm might use 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 labour-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). AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 96) What does output-cost cross-subsidisation mean?
Answer: Output-cost cross-subsidisation means that if management under-costs one of its outputs, then it will over-cost at least one of its other outputs. Similarly, if management over-costs one of its outputs, it will under-cost at least one of its other outputs. Output-cost cross-subsidisation is common in situations in which a cost is uniformly spread—that is, broadly averaged across multiple outputs—without recognising the amount of resources consumed by each output. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 97) What does over-costed output lead to?
Answer: Overpricing, causing these outputs to lose market share to competitors producing similar outputs.
AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 98) When does output-cost cross-subsidisation commonly occur?
Answer: Common in situations in which a cost is uniformly spread—that is, broadly averaged across multiple outputs—without recognising the amount of resources consumed by each output. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 99) Why might a costing system that has worked reasonably well in the past might no longer do so?
Answer: Changes within the organisation or in its environment, such as increased competition, an increase in indirect costs (overheads), or increased diversity in the product range or processes. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system. 100) What is under-costing?
Answer: An output consumes a high level of resources but is reported to have a low cost per unit. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Symptoms and potential consequences of a failing costing system Learning Objective: 5.4 Identify and describe the symptoms and potential consequences of a failing costing system.
Chapter 6 Estimating the costs of products and inventory Choose the one alternative that best completes the statement or answers the question. 1) An updated costing system should: A) provide all information for management decision needs. B) focus specifically on the costing needs of the CFO. C) be tailored to fit the underlying operations rather than the current cost system. D) be installed even if the costs outweigh the additional benefits. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 2) What is job costing information used for? A) It is used to make pricing decisions. B) It is used for external financial reporting. C) It is used to develop strategies. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 3) costing is used by a business to price unique products for different jobs. A) Actual B) Process C) Job D) Traditional Answer: C AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 4) Job costing may only be used by: A) merchandising companies. B) service companies. C) manufacturing companies. D) All of these may use job costing. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 5) Microlight Enterprises Company, a producer of microlight aircraft, would use a costing system. A) job B) actual C) process D) traditional Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 6) In a costing system: A) a cost object should be a product and not a department or a geographic territory. B) cost tracing allocates indirect costs. C) cost allocation assigns direct costs. D) a cost-allocation base can be either financial or non-financial. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of
products.. 7) What is the assignment of direct costs to a cost object called? A)Cost assignment B) Cost allocation C) Cost tracing D) Cost pooling Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 8) is the process of distributing indirect costs to products. A) Cost tracing B) Cost pooling C) Job cost recording D) Cost allocation Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 9) A links an indirect cost to a cost object. A) cost assignment B) cost-allocation base C) cost pool D) cost tracing Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 10) Job costing: A) allocates an equal amount of cost to each unit made during a time period.
B) records the flow of costs for each customer. C) is commonly used when each unit of output is identical. D) can only be used in manufacturing. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 11) A job that shows low profitability may be the result of: A) wasting direct materials. B) underpricing the job. C) inefficient direct manufacturing labour. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 12) For a given job the direct costs associated with the job are: A) actual overhead. B) direct manufacturing labour. C) direct material. D) Both direct material and direct manufacturing labour are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 13) Place the following steps in the order suggested by the seven steps used to assign costs to individual jobs: a. identify indirect costs b. compute the total cost of the job c. select cost-allocation bases d. compute the indirect cost rate
A) cadb B) acdb C) bacd D) dcab Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 14) The basic source document for direct manufacturing labour is the: A) materials-requisition record. B) job-cost record. C) labour-time record. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 15) Problems with accurate costing occur when: A) incorrect job numbers are recorded on source documents. B) a computer screen requests an employee number before that employee is able to work on information related to a specific job. C) bar coding is used to record materials used on the job. D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 16) Normandeau Company's actual manufacturing overhead is $1 400 000. Overhead is allocated on the basis of direct labour hours which were 25 000 for the period. What is the manufacturing overhead rate? A) $47.00 B) $56.00
C) $75.00 D) None of the above is correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 17) Copley Enterprises manufactures digital video equipment. Each unit requires $1475 of direct material and $1500 of direct manufacturing labour at $30 per hour. Manufacturing overhead is applied at $35 per direct manufacturing labour hour. Calculate the cost of each unit. A) $3150 B) $4025 C) $4725 D) $2975 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 18) In a job-costing system, a manufacturing firm typically uses an indirect-cost rate to estimate the allocated to a job. A) direct labour B) total costs C) manufacturing overhead costs D) direct materials Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 19) In a job-costing system, what does a manufacturing firm typically allocate to a job? A) Direct labour B) Total costs C) Manufacturing overhead costs
D) Direct materials Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 20) A job-cost sheet details the: A) direct labour costs incurred. B) direct materials purchased and paid for. C) indirect labour costs incurred. D) actual indirect overhead costs incurred. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 21) A job-cost record uses information from: A) a receiving report that indicates the type and quantity of each item received in an order from a supplier. B) a labour-time card to record an employee's wage rate and hours spent on a particular job. C) a materials requisition record to record raw material purchases from suppliers. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 22) Fixed costs remain constant at $200 000 per month. During high-output months variable costs are $160 000, and during low-output months variable costs are $40 000. What are the respective high and low indirect-cost rates if budgeted professional labour-hours are 8000 for high-output months and 2000 for low-output months? A) $45.00 per hour; $120.00 per hour B) $25.00 per hour; $20.00 per hour C) $56.20 per hour; $120.00 per hour D) $45.00 per hour; $45.00 per hour
Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 23) Where do managers and accountants collect most of the cost information from that goes into their systems? A) An information databank B) Source documents C) Computer programs D) Time surveys Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 24) A company would use multiple cost-allocation bases: A) because there is more than one way to allocate overhead. B) because this is a simpler approach than using one cost-allocation base. C) if managers believe that using multiple cost-allocation bases is the only acceptable method. D) if managers believed the benefits exceeded the additional costs of that costing system. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. Answer the following questions using the information below: Brisbane Company has two departments, Machining and Assembly. The following estimates are for the coming year:
Direct manufacturing labour-hours Machine-hours Manufacturing overhead
Machining 15 000 60 000 $300 000
Assembly 75 000 30 000 $600 000
25) A single indirect-cost rate based on direct manufacturing labour-hours for the entire plant is: A) $8 per direct labour-hour B) $10 per direct labour-hour C) $20 per direct labour-hour D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 26) The budgeted indirect-cost driver rate for the Machining Department based on the number of machine-hours in that department is: A) $5 per machine-hour B) $10 per machine-hour C) $20 per machine-hour D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Answer the following questions using the information below: Wagga Wagga Textiles 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 Tumut Brass Band band jacket job. Company Tumut Brass Direct materials $40 000 Direct labour $10 000 Manufacturing overhead costs Machine-hours 100 000 mh
Band Job $1000 $200 $30 000 900 mh
27) For Wagga Wagga Textiles, what is the annual manufacturing overhead cost-allocation rate? A) $0.50 B) $33.33 C) $0.30
D) $0.80 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 28) What amount of manufacturing overhead costs will be allocated to this job? A) $270 B) $720 C) $30 000 D) $450 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 29) What are the total manufacturing costs of this job? A) $1650 B) $1470 C) $1920 D) $1200 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 30) What is the bid price for the Tumut Brass Band job if the company uses a 40% markup of total manufacturing costs? A) $1680 B)$2310 C)$588 D)$2058 Answer: D AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Answer the following questions using the information below: Botany Bay Boatbuilders 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 labour-hours in the Assembly Department. At the beginning of 2010, the following estimates were provided for the coming year:
Direct labour-hours Machine-hours Direct labour cost Manufacturing overhead costs
Machining 30 000 80 000 $500 000 $420 000
Assembly 60 000 20 000 $900 000 $240 000
The accounting records of the company show the following data for Job #316:
Direct labour-hours Machine-hours Direct material cost Direct labour cost
Machining 120 60 $300 $100
Assembly 70 5 $200 $400
31) For Botany Bay Boatbuilders, what is the annual manufacturing overhead cost-allocation rate for the Machining Department? A) $4.00 B) $4.67 C) $4.20 D) $5.25 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 32) What amount of manufacturing overhead costs will be allocated to Job #316? A) $532
B) $502 C) $595 D) $439 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 33) What are the total manufacturing costs of Job #316? A) $1000 B) $880 C) $1595 D) $715 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Answer the following questions using the information below: Sunny Company makes gas pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $15 per direct labour-hour. The following data are obtained from the accounting records for June 2018: Direct materials Direct labour (7000 hours @ $11/hour) Indirect labour Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$280 000 $77 000 $20 000 $60 000 $30 000 $40 000 $50 000
34) The actual amount of manufacturing overhead costs incurred in June 2018 totals: A) $200 000. B) $557 000. C) $110 000. D) $80 000.
Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 35) The amount of manufacturing overhead allocated to all jobs during June 2018 totals: A) $110 000. B) $105 000. C) $77 000. D) $200 000. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 36) If actual indirect-cost rates were calculated monthly rather than annually, then for the month of February with only 28 days: A) variable indirect-cost rates would be lower. B) monthly output would be higher. C) total indirect-cost rates would be higher. D) fixed indirect-cost rates would be lower. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 37) An example of a NUMERATOR REASON for calculating annual indirect-cost rates includes: A) fewer production workdays in a month. B) payment of estimated taxes four times a year. C) higher heating costs during the winter. D) Both B and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 38) An example of a DENOMINATOR REASON for calculating annual indirect-cost rates includes: A) higher heating bills in the winter. B) higher levels of output demanded during the summer months from an ice cream factory. C) semi-annual insurance payments in March and September. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 39) If indirect-cost rates are calculated monthly, distortions might occur because of: A) property tax payments made in July and December. B) routine monthly preventive-maintenance costs that benefit future months. C) rental costs paid monthly. D) Both B and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 40) The difference between actual costing and normal costing is: A) normal costing uses actual direct-cost rates. B) actual costing uses actual quantities of cost-allocation bases. C) actual costing uses actual quantities of direct-cost inputs. D) normal costing uses budgeted indirect-cost rates. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.
41) 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 are traced using a budgeted rate, and indirect costs are allocated using an actual rate. C) Direct costs are traced using an actual rate, and indirect costs are allocated using a budgeted rate. D) Direct costs and indirect costs are traced using budgeted rates. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 42) The budgeted indirect-cost rate is calculated: A) at the end of each quarter. B) during the year. C) at the end of the year. D) at the beginning of the year. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 43) Costs that are subject to short-run fluctuations for given jobs are: A) budgeted indirect costs. B) normal costs. C) budgeted direct costs. D) actual costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Answer the following questions using the information below: For 20X5, Irwin's Animal Supply Manufacturing uses machine-hours as the only overhead cost-allocation base. The accounting records contain the following information:
Manufacturing overhead costs Machine-hours
Estimated $150 000 30 000
Actual $180 000 35 000
44) Using normal costing, the amount of manufacturing overhead costs allocated to jobs during 20X5 is: A) $150 000. B) $175 000. C) $200 000. D) $180 000. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 45) Using job costing, the 20X5 budgeted manufacturing overhead rate is: A) $4.00 per machine-hour. B) $6.00 per machine-hour. C) $5.00 per machine-hour. D) $4.80 per machine-hour. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 46) Using job costing, the 20X5 actual indirect-cost rate is: A) $5.00 per machine-hour. B) $5.14 per machine-hour. C) $4.00 per machine-hour. D) $6.00 per machine-hour. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.
47) Using actual costing, the amount of manufacturing overhead costs allocated to jobs during 20X5 is: A) $190 000. B) $150 000. C) $180 000. D) $135 000. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Answer the following questions using the information below: Cronulla Products uses a normal cost system and had the following data available for 2018: Direct materials purchased on account Direct materials requisitioned Direct labour cost incurred
$74 000 41 000 65 000
Factory overhead incurred Cost of goods completed Cost of goods sold
73 000 146 000 128 000
Beginning direct materials inventory Beginning WIP inventory Beginning finished goods inventory Overhead application rate, as a percent of direct-labour costs
13 000 32 000 29 000 125 percent
48) The ending balance of direct materials inventory is: A) $46 000. B) $87 000. C) $54 000. D) $41 000. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.
49) The ending balance of work-in-process inventory is: A) $65 000. B) $73 25. C) $219 250. D) $211 000. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 50) The ending balance of finished goods inventory is: A) $146 000. B) $29 000. C) $47 000. D) $18 000. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Answer the following questions using the information below: Hunter Valley Corporation uses a job cost system and has two production departments, A and B. Budgeted manufacturing costs for the year are: Department A Direct materials $700 000 Direct manufacturing labour $200 000 Manufacturing overhead $600 000
Department B $100 000 $800 000 $400 000
The actual material and labour costs charged to Job #432 were as follows:
Direct materials: Direct labour: Department A
Total $25 000 $8000
Department B
$12 000 $20 000
Hunter Valley applies manufacturing overhead costs to jobs on the basis of direct manufacturing labour cost using departmental rates determined at the beginning of the year. 51) For Department A, the manufacturing overhead allocation rate is: A) 100%. B) 33%. C) 300%. D) 66%. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 52) For Department B, the manufacturing overhead allocation rate is: A) 50%. B) 100%. C) 300%. D) 200%. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 53) Manufacturing overhead costs allocated to Job #432 total: A) $30 000. B) $36 000. C) $24 000. D) $12 000. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of
products. 54) Manufacturing costs estimated for Job #432 total: A) $55 000. B) $65 000. C) $70 000. D) $75 000. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 55) What source document is used to keep track of direct labour for a job? A) Material requisition B) Balanced scorecard C) Cost object sheet D) Job-cost record Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 56) When a normal costing system is used, clients using proportionately more lawyer time than paraprofessional time will: A) be underbilled for actual resources used. B) be overbilled for actual resources used. C) result in an underallocation of direct costs. D) be billed accurately for actual resources used Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 57)
costing is a cost management system that measures the cost of products, services and
customers. A) Process B) Job C) Normal D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 58) Annual cost rates are preferred over actual cost rates for all of the following reasons EXCEPT: A) budgeted indirect-cost rates are known prior to the inception of a new job. B) budgeted costs allow managers to have cost information on a timely basis. C) budgeted-cost rates can be used to allocate direct or indirect costs D) budgeted costs may be subject to short-run fluctuations. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 59) During an accounting period, job costs are computed on an ongoing basis by the use of: A) overallocated indirect-cost rates. B) actual allocation rates. C) underallocated indirect-cost rates. D) budgeted indirect-cost rates. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 60) What is the advantage of using normal costing instead of actual costing? A) Indirect costs are assigned to a job on a timely basis. B) Normal costing provides a higher gross profit margin. C) The job cost is more accurate under normal costing.
D) Indirect costs are assigned at the end of the year when they are known. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 61) Actual costing is a costing method that allocates indirect costs. A) estimated B) actual C) predetermined D) budgeted Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 62) When using a normal costing system, manufacturing overhead is allocated using the manufacturing overhead rate and the quantity of the allocation base. A) actual; actual B) budgeted; budgeted C) actual; budgeted D) budgeted; actual Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 63) Which of the following statements about actual costing and normal costing is TRUE? A) Manufacturing costs of a job are available earlier under actual costing. B) Manufacturing costs are available earlier under normal costing. C) Corrective actions can be implemented sooner under normal costing. D) Both B and C are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 64) The budgeted direct-labour cost rate includes in the calculation. A) budgeted total direct-labour costs in the denominator B) budgeted total direct-labour costs in the numerator C) budgeted total direct-labour hours in the numerator D) budgeted total costs in the indirect cost pool Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 65) Direct costs are allocated to the cost object using a cost-allocation method. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 66) In a job-costing system the cost object is an individual unit, batch, or lot of a distinct product or service. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 67) In job costing, only direct costs are used to determine the cost of a job. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of
products. 68) Indirect manufacturing costs should be allocated equally to each job. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 69) Gross margin percentage can be used to compare the profitability of different jobs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 70) A job-cost record is a source document, but individual items of the job-cost record may also have source documents. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 71) A materials-requisition record is an example of a source document. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 72) The reliability of the job-cost records depends on the reliability of the inputs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products
Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 73) Manufacturing overhead costs are allocated to individual job-cost records with the use of indirect-cost rates. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 74) For external reporting purposes, it is acceptable to allocate marketing costs to individual jobs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 75) To smooth fluctuating levels of output, separate indirect-cost rates should be calculated for each month. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 76) Air conditioning costs incurred during the summer months will distort indirect-cost rates that are computed monthly. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 77) One reason for using longer time periods to calculate indirect-cost rates is seasonal cost fluctuations. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 78) In some variations of normal costing, organisations use budgeted rates to assign direct costs as well as indirect costs to jobs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 79) 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. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 80) Overhead costs allocated each month are expected to equal actual overhead costs incurred each month. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 81) In each period, job costing divides the total cost of producing an identical or similar product by the total number of units produced to obtain a per-unit cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.
82) Job costing is commonly used to estimate costs in beverage production. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.. 83) The actual costs of all individual overhead categories are recorded in the Manufacturing Overhead Control account. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 84) Companies typically wait for accurate information regarding actual manufacturing overhead costs before pricing a job. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 85) The budgeted indirect cost rate is the budgeted indirect costs divided by budgeted quantity of the cost-allocation base. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 86) Direct costs are traced the same way for actual costing and normal costing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products
Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 87) Normal costing assigns indirect costs based on an actual indirect-cost rate. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 88) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 89) For normal costing, even though the budgeted indirect-cost rate is based on estimates, indirect costs are allocated to products based on actual levels of the cost-allocation base. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 90) A company may choose to use budgeted rates to allocate direct labour accounts if direct labour costs are difficult to trace to jobs as they are completed. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 91) At the end of the year, the direct costs traced to jobs using the budgeted rates will equal actual direct costs.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Write your answer in the space provided or on a separate sheet of paper. 92) For each item below indicate the source documents that would most likely authorise the journal entry in a job-costing system. Required: a. direct materials purchased b. direct materials used c. direct manufacturing labour d. indirect manufacturing labour e. finished goods control f. cost of goods sold
Answer: a. purchase invoice b. materials requisition record c. labour time card/record d. labour time card e. job-cost record f. sales invoice AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 93) Give three examples of costs that can be considered indirect for a product and direct for a department.
Answer: Answers may vary. Supervision, engineering, and quality control AACSB: Able to translate knowledge of business and management into practice
Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 94) Fox Manufacturing is a bespoke cabinetmaker and uses 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 Rosewood Gardens kitchen refurbishment job. Company Direct materials $50 000 Direct manufacturing labour $10 000 Manufacturing overhead costs $40 000 Machine-hours 100 000 mh
Rosewood Gardens Job $1500 $1100 1080 mh
Required: a. For Fox Manufacturing, determine the annual manufacturing overhead cost-allocation rate. b. Determine the amount of manufacturing overhead costs allocated to the Rosewood Gardens job. c. Determine the estimated total manufacturing costs for the Rosewood Gardens job.
Answer: a. Manufacturing overhead cost-allocation rate = $0.40 per mh = $40 000/100 000 mh b.
$432 estimated manufacturing overhead costs = 1080 mh × $0.40 per mh
c. Direct materials $1500 Direct manufacturing labour $1100 Manufacturing overhead costs $432 Estimated total manufacturing costs $3032 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 95) Crows Nest Manufacturing uses departmental cost driver rates to apply manufacturing overhead costs to products. Manufacturing overhead costs are applied on the basis of machine-hours in the Machining
Department and on the basis of direct labour-hours in the Assembly Department. At the beginning of 2013, the following estimates were provided for the coming year:
Direct labour-hours Machine-hours Direct labour cost Manufacturing overhead costs
Machining 10 000 dlh 100 000 mh $80 000 $250 000
Assembly 90 000 dlh 5000 mh $720 000 $360 000
The accounting records of the company show the following data for Job #846:
Direct labour-hours Machine-hours Direct material cost Direct labour cost
Machining 100 dlh 270 mh $3700 $800
Assembly 170 dlh 30 mh $2600 $1900
Required: a. Compute the manufacturing overhead allocation rate for each department. b. Compute the total cost of Job #846. c. Provide possible reasons why Crows Nest 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.
c.
Total cost of Job #846 is $10 355 = Direct materials $6300 + Direct labour $2700 + Manufacturing overhead costs $1355 (Machining $675 + Assembly $680).
Ideally, the cost-allocation base should reflect the factors that cause manufacturing overhead costs to increase. Apparently, Crows Nest regards the use of machines as the principal cause of manufacturing overhead costs (such as depreciation and repairs) in the Machining Department. In contrast, Crows Nest regards direct labour-hours as the principal cause of manufacturing overhead costs (such as indirect labour) in the Assembly Department. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of
products. 96) Parramatta Company has two departments, X and Y. Overhead is applied based on direct labour cost in Department X and machine-hours in Department Y. The following additional information is available: Budgeted Amounts Direct labour cost Factory overhead Machine-hours
Department X $180 000 $225 000 51 000 mh
Actual data for Job #10 Direct materials requisitioned Direct labour cost Machine-hours
Department Y $165 000 $180 000 40 000 mh
Department X $10 000 $11 000 5000 mh
Department Y $16 000 $14 000 3000 mh
Required: a. Compute the budgeted factory overhead rate for Department X. b. Compute the budgeted factory overhead rate for Department Y. c. What is the total overhead cost of Job #10? d. If Job #10 consists of 50 units of product, what is the unit cost of this job?
Answer: a. $225 000/$180 000 = 125% b. $180 000/40 000 hrs. = $4.50 per hour c. ($11 000 × 125 percent) + ($4.50 × 3000 hrs.) = $27 250 d. $10 000 + $16 000 + $11 000 + $14 000 + $27 250 = $78 250/50 units = $1565 per unit AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 97) Job-cost records for Boucher Company contained the following data: Date Job No. Started 220 18 May 221 20 May 222 7 June
Date Finished 12 June 19 June 5 July
Date Sold 20 June 21 June 12 July
Total Cost of Job at 30 June $6000 $4000 $7000
223 224
10 June 19 June
28 June 16 July
1 July 25 July
$6500 $8000
Required: a. Compute WIP inventory at 30 June. b. Compute finished goods inventory at 30 June. c. Compute cost of goods sold for June.
Answer: a. $7000 + $8000 = $15 000 b. $6500 c. $6000 + $4000 = $10 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 98) Maroubra Company has the following balances as of the year ended 31 December 2018. Direct Materials Inventory WIP Inventory Finished Goods Inventory Factory Department Overhead Cost of Goods Sold
$15 000 Dr. 34 500 Dr. 49 500 Dr. 4000 Dr. 74 500 Dr.
Additional information is as follows: Cost of direct materials purchased during 2014 Cost of direct materials requisitioned in 2014 Cost of goods completed during 2014 Factory overhead applied (120% of direct labour) Required: a. Compute beginning direct materials inventory. b. Compute beginning WIP inventory. c. Compute beginning finished goods inventory. d. Compute actual factory overhead incurred.
$41 000 $47 000 $102 000 $48 000
Answer: a. $47 000 - $41 000 + $15 000 = $21 000 b. $48 000/120% = $40 000 direct labour costs incurred $102 000 - $47 000 - $40 000 - $48 000 + $34 500 = $1500 c. $74 500 - $102 000 + $49 500 = $22 000 d. $48 000 + $4000 = $52 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 99) What does the way on which managers estimate costs depend on?
Answer: The way in which managers estimate costs depends on the nature of the products, the underlying processes and the purpose of allocating the costs. The costing system that managers of a manufacturing organisation might choose significantly affects that organisation’s reported financial results, because manufacturers usually hold at least some inventory at the beginning and/or end of the reporting period. This makes product costing important for both internal and external reporting. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 100) The Dougherty Furniture Company manufactures tables. In March, the two production departments had budgeted allocation bases of 4000 machine-hours in Department 100 and 8000 direct manufacturing labour-hours in Department 200. The budgeted manufacturing overheads for the month were $57 500 and $62 500, respectively. For Job A, the actual costs incurred in the two departments were as follows:
Direct materials purchased on account Direct materials used Direct manufacturing labour Indirect manufacturing labour Indirect materials used
Department 100 $110 000 32 500 52 500 11 000 7500
Department 200 $177 500 13 500 53 500 9000 4750
Lease on equipment Utilities
16 250 1000
3750 1250
Job A incurred 800 machine-hours in Department 100 and 300 manufacturing labour-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 summarise the March transactions for Department 100. c. What is the total cost of Job A?
Answer: a. Manufacturing overhead rate Department 100 = $57 500/4000 hours = $14.375 per machine-hour Manufacturing overhead rate Department 200 = $62 500/8000 hours = $7.8125 per labour-hour b. Materials Control Department 100 Accounts Payable Control
110 000 110 000
Work-in-Process Control Department 100 Manufacturing Overhead Control Department 100 Materials Control Department 100
32 500 7500 40 000
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
Work-in-Process Control Dept. 100 ($14.375 × 800 hrs) Manufacturing Overhead Allocated
11 500
c. Job A: Direct materials Dept. 100 Direct materials Dept. 200
63 500
16 250 1000
11 500
$32 500 13 500
Direct manufacturing labour Dept. 100 52 500 Direct manufacturing labour Dept. 200 53 500 Manufacturing overhead Dept. 100 ($14.375 × 800) 11 500 Manufacturing overhead Dept. 200 ($7.8125 × 300) 2344 Total $165 844 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 101) What source document is used to keep track of raw materials for a job?
Answer: A basic source document called a materials-requisition recordis used to keep track of the job for which the raw materials will be used. The materials-requisition record contains information about the cost of direct materials used on a specific job and during which part of the production process. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 102) What source document is used to keep track of direct labour for a job?
Answer: The source document for direct production labour is a labour-time record, which contains information about the amount of labour time used for a specific job in a specific department. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 103) Peterson's Plastic Products Company makes rainwater tanks and applies manufacturing costs to production at a budgeted indirect-cost rate of $8 per direct labour-hour. The following data are obtained from the accounting records for June 2018:
Direct materials Direct labour (8000 hours @ $11/hour) Indirect labour Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$400 000 $88 000 $10 000 $50 000 $20 000 $30 000 $40 000
Required: a. What actual amount of manufacturing overhead costs was incurred during June 2018? b. What amount of manufacturing overhead was allocated to all jobs during June 2018? c. For June 2018, was manufacturing overhead underallocated or overallocated? Explain.
Answer: a. $10 000 + $50 000 + $20 000 = $80 000 b. 8000 × $8 per dlh = $64 000 c. Underallocated: only allocated $64 000 of the $80 000 of actual overhead AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 104) In a job-costing system, explain why it is necessary to apply indirect costs to production through the use of a manufacturing overhead cost-allocation rate.
Answer: First, actual manufacturing overhead costs are not known until the end of year. To price and invoice jobs in a timely manner, annual manufacturing overhead costs need to be estimated and allocated to specific jobs during the accounting period. Secondly, manufacturing overhead costs are usually not incurred evenly throughout the year. The use of a manufacturing overhead cost allocation rate evenly distributes manufacturing overhead costs over the entire year. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products.
105) 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 106) 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 107) Does the costing system used by managers affect the reporting of financial results?
Answer: The costing system that managers of a manufacturing organisation might choose significantly affects that organisation’s reported financial results, because manufacturers usually hold at least some inventory at the beginning and/or end of the reporting period. This makes product costing important for both internal and external reporting. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 108) Explain how a budgeted indirect-cost rate is determined.
Answer: Manufacturing overhead cost-allocation rates are determined by dividing the cost of the resources committed to the manufacturing overhead activity by the capacity made available by the resources committed to the activity. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 109) Modern Electronics manufactures surround sound systems and applies manufacturing costs to production at a budgeted indirect-cost rate of $22 per direct-labour hour. The following data are obtained from the accounting records for August 20X9:
Direct materials Direct labour (7000 hours @ $15/hour) Indirect labour Plant lease Depreciation on plant and equipment Marketing expense Plant utilities
$350 000 $105 000 $15 000 $75 000 $40 000 $20 000 $15 000
Required a. What actual amount of manufacturing overhead cost was incurred during August 20X9? b. What amount of manufacturing overhead was allocated to all jobs during August 20X9? c. For August 20X9, was manufacturing overhead underallocated or overallocated? Explain.
Answer: a. $15 000 + $75 000 + $40 000 + $15 000 = $145 000 b. 7000 × $22 per dlh = $154 000 c. Overallocated allocated 154 000 which is $9000 more than actual of $145 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 110) Why are some costs, such as an automotive repair garage service manager's salary, not traced to a particular motor vehicle repair job?
Answer: Much of an automotive repair garage service manager's salary is incurred as a result of overall service department activities. In addition, some production costs such as indirect materials cannot be easily traced to jobs, so these costs need to be allocated to the jobs on a pre-determined basis. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. 111) Isabelle Pty Ltd uses a budgeted factory overhead rate to apply overhead to production. The following data are available for the year ended 31 December 2018.
Factory overhead Direct labour costs Direct labour-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 labour-hours. b. What is the applied overhead based on direct labour-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 = $3550 overapplied AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: A system for estimating the costs of products Learning Objective: 6.1 Given the context, design and apply a job-costing system for estimating the costs of products. Choose the one alternative that best completes the statement or answers the question. 112) Under normal costing, is the amount of indirect production costs allocated to individual jobs based on the budgeted cost-driver rate multiplied by the quantity used. A) absorption costing B) production overhead allocated C) variable costing D) fixed costing Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective 2: Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 113) At the end of the year, costs allocated using incurred. A) target B)actual
costing will not, in general, equal actual costs
C) budgeted D) normal
Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective 2: Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 114) The production costs of a job are available much earlier under a(n) costing system. A)actual B) target C) normal D) costing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective 2: Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 115) The Materials Control account is increased when: A) direct materials are purchased. B) indirect materials are purchased. C) materials are requisitioned for production. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 116) All of the following are true of the Work-in-Process Control account EXCEPT that: A) it is an asset account. B) the balance equals the sum of amounts from all in-process individual job-cost records. C) it tracks job costs from beginning through completion. D) it tracks all direct material purchases. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 117) Which of the following does NOT increase (are debited to) the Work-in-Process Control account? A) Allocated manufacturing overhead costs B) Direct materials C) Actual plant insurance costs D) Direct manufacturing labour Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 118) When indirect materials are requisitioned, the account is increased. A) Work-in-Process Control B) Accounts Payable Control C) Manufacturing Overhead Control D) Materials Control Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 119) Payment of the total manufacturing payroll decreases the: A) Manufacturing Overhead Control account B) Wages Payable Control account C) Work-in-Process Control account D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products.
120) All of the following are true of plant utility costs EXCEPT: A) it is an indirect cost. B) the cost increases the Work-in-Process Control account. C) the cost increases the Manufacturing Overhead Control account. D) the source document is the utility bill. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 121) Actual (rather than allocated) manufacturing overhead costs are included in the: A) Finished Goods Control account. B) Work-in-Process Control account. C) Manufacturing Overhead Control account. D) Both A and B are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 122) The ending balance in the Finished Goods Control account represents the costs of all jobs that: A) have been completed but not sold. B) have not been completed. C) have been completed and sold to customers. D) are reported on the income statement. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 123) What does the ending balance in the Finished Goods Control account represent with respect to the costs of all jobs? A) Have been completed but not sold B) Have not been completed
C) Have been completed and sold to customers D) Are reported on the income statement Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 124) For externally reported inventory costs, the Work-in-Process Control account is increased (debited) by: A) the purchase costs of direct and indirect materials. B) allocated plant utility costs. C) customer-service costs. D) marketing costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 125) What is the appropriate journal entry if $150 000 of materials were purchased on account for the month of August? A) Manufacturing Allocated 150 000 Accounts Receivable Control 150 000 B) Manufacturing Overhead Control 150 000 Accounts Receivable Control 150 000 C) Materials Control 150 000 Accounts Payable Control 150 000 D) Work-in-Process Control 150 000 Accounts Payable Control 150 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 126) What is the appropriate journal entry if direct materials of $50 000 and indirect materials of $3000 are sent to the manufacturing plant floor?
A) Work-in-Process Control 50 000 Materials Control 50 000 B) Work-in-Process Control 53 000 Materials Control 53 000 C) Work-in-Process Control 50 000 Manufacturing Overhead Control 3000 Materials Control 53 000 D) Manufacturing Overhead Control 3000 Materials Control 50 000 Work-in-Process Control 53 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 127) All of the following items are debited to Work-in-Process EXCEPT: A) allocated manufacturing overhead. B) direct materials consumed. C) direct labour consumed. D) completed goods being transferred out of the plant. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 128) What would be the appropriate journal entry if the following labour wages were incurred in a furniture manufacturing company? Assembly workers Janitors A) Wages Payable Control Work-in-Process Control B) Work-in-Process Control Wages Payable Control C) Work-in-Process Control Manufacturing Overhead Control
$30 000 $20 000 50 000 50 000 50 000 50 000 30 000 20 000
Wages Payable Control 50 000 D) Manufacturing Overhead Control 50 000 Wages Payable Control 50 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 129) Manufacturing overhead costs incurred for the month are: Utilities Depreciation on equipment Repairs
$15 000 $25 000 $10 000
Which is the correct journal entry assuming utilities and repairs were on account? A) Manufacturing Overhead Control 50 000 Accounts Payable Control 25 000 Accumulated Depreciation Control 25 000 B) Manufacturing Overhead Control 50 000 Accumulated Depreciation Control 50 000 C) Accumulated Depreciation Control 25 000 Accounts Payable Control 25 000 Manufacturing Overhead Control 50 000 D) Manufacturing Overhead Control 50 000 Accounts Payable Control 50 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 130) Which of the following statements regarding manufacturing overhead allocation is FALSE? A) It includes all manufacturing costs that cannot be directly traced to a product or service. B) Total costs are unknown at the end of the accounting period. C) Allocated amounts are debited to Work-in-Process. D) The costs can be grouped in either a single indirect-cost pool or in multiple indirect-cost pools. Answer: B
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 131) When a job is complete: A) Work-in-Process Control is debited. B) the cost of the job is transferred to Manufacturing Overhead Control. C) Finished Goods Control is credited. D) actual direct materials, actual direct manufacturing labour and allocated manufacturing overhead. will comprise the total cost of the job Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 132) In a normal costing system, which of the following is TRUE about the Manufacturing Overhead Control account? A) It is increased by allocated manufacturing overhead. B) It is decreased by allocated manufacturing overhead. C) It is credited with amounts transferred to Work-in-Process. D) It is debited with actual overhead costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 133) The Manufacturing Overhead Control account is the record of: A) allocated overhead when using normal costing. B) actual overhead costs. C) actual direct material and direct manufacturing labour costs. D) Both A and B are correct answers when using normal costing. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. Answer the following question using the information below: Cronulla Products uses a normal cost system and had the following data available for 2018: Direct materials purchased on account Direct materials requisitioned Direct labour cost incurred
$74 000 41 000 65 000
Factory overhead incurred Cost of goods completed Cost of goods sold
73 000 146 000 128 000
Beginning direct materials inventory Beginning WIP inventory Beginning finished goods inventory Overhead application rate, as a percent of direct-labour costs
13 000 32 000 29 000 125 percent
134) The journal entry to record the materials placed into production would include a: A) debit to WIP Inventory for $74 000. B) debit to Direct Materials Inventory for $74 000. C) credit to Direct Materials Inventory for $41 000. D) credit to WIP Inventory for $41 000. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Journal entries Learning Objective 2: Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. Answer the following questions using the information below: Because the Goulburn Company used a budgeted indirect-cost rate for its manufacturing operations, the amount allocated ($200 000) was 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
135) What is the journal entry used to write off the difference between allocated and actual overhead directly to cost of goods sold? A) Manufacturing Overhead Allocated 200 000 Cost of Goods Sold 25 000 Manufacturing Overhead Control 225 000 B) Manufacturing Overhead Allocated 200 000 Work-in-Process Control 30 000 Cost of Goods Sold 170 000 C) Manufacturing Overhead Control 200 000 Cost of Goods Sold 25 000 Manufacturing Overhead Allocated 225 000 D) Manufacturing Overhead Control 225 000 Work-in-Process Control 55 000 Cost of Goods Sold 170 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 136) What is the journal entry used to write off the difference between allocated and actual overhead using the proration approach? A) Manufacturing Overhead Control 225 000 Work-in-Process Control 1250 Finished Goods Control 2500 Cost of Goods Sold 21 250 Manufacturing Overhead Allocated 200 000 B) Manufacturing Overhead Allocated 200 000 Work-in-Process Control 10 000 Finished Goods Control 20 000 Manufacturing Overhead Control 230 000 C) Manufacturing Overhead Allocated 225 000 Work-in-Process Control 1250 Finished Goods Control 2500 Cost of Goods Sold 21 250 Manufacturing Overhead Control 200 000 D) Manufacturing Overhead Allocated 200 000
Work-in-Process Control 1250 Finished Goods Control 2500 Cost of Goods Sold 21 250 Manufacturing Overhead Control 225 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 137) Work-in-Process Control will be decreased (credited) for the amount of direct-labour costs incurred. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 138) The Work-in-Process Control account tracks job costs from the time jobs are started until they are completed. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 139) The Finished Goods Control account consists of actual manufacturing overhead costs rather than allocated manufacturing overhead costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 140) The ending balance in Work-in-Process Control represents the total costs of all jobs that have not yet been completed.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. Write your answer in the space provided or on a separate sheet of paper. 141) Why does the manufacturing overhead control account (debit) need to equal the manufacturing overhead allocated account (credit)?
Answer: If these accounts do not equal, then overhead has either been overallocated or underallocated. Either situation means that the cost of the cost object has not been correctly estimated during the period. Evaluation of profitability will be incorrect depending on the materiality of the difference between the two accounts. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 142) Katherine 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 Cost of Goods Sold Manufacturing Overhead Control b. Work-in-process Finished goods Cost of goods sold Total
435 000 10 000 425 000
$40 000 5 % 80 000 10 680 00085 $800 000100 %
× $10 000 = $500 × $10 000 = 1000 × $10 000 = 8500
Manufacturing Overhead Allocated 435 000 Work-in-Process 500 Finished Goods 1000 Cost of Goods Sold 8500 Manufacturing Overhead Control 425 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Journal entries Learning Objective 2: Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. 143) Indooroopilly 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 13 600 Factory Department Overhead Control 13 600 d. $560 000 + $190 000 + $250 000 = $1 000 000 Cost of Goods Sold $560 000/$1 000 000 = 56% × $13 600 = $7616 WIP $190 000/$1 000 000 = 19% × $13 600 = $2584 Finished Goods $250 000/$1 000 000 = 25% × $13 600 = $3400 Cost of Goods Sold 7616 WIP Inventory 2584 Finished Goods Inventory 3400 Factory Department Overhead Control 13 600 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Journal entries Learning Objective: 6.2 Prepare journal entries to record the flow of costs in a job-costing system for estimating the costs of products. Choose the one alternative that best completes the statement or answers the question. 144) When using a normal costing system, year-end accounting records will show that INDIRECT COSTS are: A) overbudgeted B) underallocated C) applied improperly D) overallocated Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods.
145) When the allocated amount of indirect costs is less than the actual amount, indirect costs have been: A) underapplied. B) overabsorbed. C) underallocated. D) Both underapplied and underallocated are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 146) One reason indirect costs may be overapplied is because: A) the actual allocation base quantity exceeds the budgeted quantity. B) requisitioned direct materials exceed budgeted material costs. C) budgeted indirect costs exceed actual indirect costs. D) Both A and B are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 147) The approach re-states all indirect costs using actual cost rates rather than budgeted cost rates. A) adjusted cost-driver rate B) normal costing C) absorption costing D) variable costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 148) Cost of using what has been greatly reduced by the widespread adoption of computerised accounting systems? A) Variable costing approach
B) Absorption costing approach C) Adjusted cost-driver rate approach D) Normal costing approach Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 149) The yields the benefits of both the timeliness and convenience of normal costing during the year and the allocation of actual production overhead costs at year-end. A) normal costing approach B) absorption costing approach C) variable costing approach D) adjusted cost-driver rate approach Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 150) spreads under-allocated overhead or over-allocated overhead among ending work- in-process inventory, finished goods inventory and cost of goods sold. A) Proration B) Allocation C) Attribution D) Normalization Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 151) The write-off to overhead. A) Finished goods B) Cost of goods sold
is the simplest approach for dealing with under- or over-allocated
C) Work-in-process D) Raw materials Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 152) 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 write-off of cost of goods sold approach. C) the proration approach. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 153) The approach adjusts individual job-cost records to account for underallocated or overallocated overhead. A) proration B) adjusted allocation-rate C) write-off to cost of goods sold D) Both A and B are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 154) The adjusted cost-driver rate approach yields the benefits of: A) a timeliness and convenience of normal costing. B) allocation of actual manufacturing overhead costs at the end of the year. C) Both A and B are correct. D) Neither A or B are correct.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 155) Which of the following is the simplest approach to deal with underallocated or overallocated overhead? A) Write-off to cost of goods sold B) Adjusted allocation rate C) Proration D) Both A and B are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 156) The approach carries the underallocated or overallocated amounts to overhead accounts in the following year. A) write-off to cost of goods sold B) adjusted allocation-rate C) proration D) None of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. Answer the following questions using the information below: Sunny Company makes gas pipes and applies manufacturing overhead costs to production at a budgeted indirect-cost rate of $15 per direct labour-hour. The following data are obtained from the accounting records for June 2018: Direct materials Direct labour (7000 hours @ $11/hour)
$280 000 $77 000
Indirect labour Plant facility rent Depreciation on plant machinery and equipment Sales commissions Administrative expenses
$20 000 $60 000 $30 000 $40 000 $50 000
157) For June 2018, manufacturing overhead was: A) overallocated. B) underallocated. C) neither overallocated nor underallocated. D) indeterminable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 158) When actual indirect costs exceed allocated indirect costs, indirect costs have been overapplied. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 159) One reason indirect costs may be underapplied is if actual indirect costs exceed budgeted indirect costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 160) Underallocated indirect costs occur when the allocated amount of indirect costs is greater than the amount incurred for that period. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 161) The proration approach to allocating overapplied or underapplied overhead adjusts individual job-cost records. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 162) The overhead accounts are closed or become zero at the end of each year. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 163) Proration is the spreading of underallocated or overallocated overhead among ending work in process, finished goods, and costs of goods sold. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. Write your answer in the space provided or on a separate sheet of paper. 164) Jacobs Company manufactures refrigerators. The company uses a budgeted indirect-cost rate for its manufacturing operations and during 2018 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 Finished Goods
$100 000 750 000
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 Cost of Goods Sold 100 000 Manufacturing Overhead Control b.
Work-in-process Finished goods Cost of goods sold Total
1 000 000 1 100 000
$100 000 2.0% 750 000 15.0 4 150 00083.0 $5 000 000100.0%
× $100 000 = $2000 × $100 000 = $15 000 × $100 000 = $83 000
Manufacturing Overhead Allocated 1 000 000 Work-in-Process 2000 Finished Goods 15 000 Cost of Goods Sold 83 000 Manufacturing Overhead Control 1 100 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 165) The following information was gathered for Rogers Company for the year ended 31 December 2018.
Direct labour-hours Factory overhead
Budgeted 60 000 dlh $420 000
Actual 67 500 dlh $458 000
Assume that direct labour-hours are the cost-allocation base. Required
a. b. c.
Compute the budgeted factory overhead rate. Compute the factory overhead applied. Compute the amount of over/underapplied overhead.
Answer: a. $420 000/60 000 hrs. = $7.00 per hour b. $7.00 × 67 500 hrs. = $472 500 c. $458 000 - 472 500 = $14 500 overapplied AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 166) 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. 167) Explain under-allocated and over-allocated indirect costs.
Answer: Under-allocated indirect costs occur when the allocated amount of indirect costs in an accounting period is less than the actual (incurred) amount. Over-allocated indirect costs occur when the allocated amount of indirect costs in an accounting period is greater than the actual (incurred) amount. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Disposing of under- and over-allocated indirect costs at the end of the reporting period Learning Objective: 6.3 Dispose of the under- or overallocated indirect production (overhead) costs at the end of the reporting period using three different methods. Choose the one alternative that best completes the statement or answers the question. 168) The more that products are, the more suitable process-costing becomes. A) obsolete B) innovative C) homogeneous D) heterogeneous Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 169) Which of the following systems separate costs into cost categories according to when costs are introduced into the process? A) Normal costing B) Variable costing C) Absorption costing D) Process-costing Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 170) A) Proration B) Equivalent units C) Under-allocation D) Over-allocation Answer: B
is a derived amount of output.
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 171) Process costing: A) is used exclusively in manufacturing. B) results in different costs for different units produced. C) is commonly used by general contractors who construct custom-built homes. D) allocates all product costs, including materials and labour. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 172) Which of the following costing systems are used for the costing of like or similar units of products in mass production? A) Job-costing systems B) Process-costing systems C) Weighted-average costing systems D) Inventory-costing systems Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 173) Which of the following manufactured products would not use process costing? A) Custom built houses B) 19-inch television sets C) 767 jet aircraft D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 174) What is product costing information used for by managers?
A) For planning and control B) For cost management C) To make decisions and strategy D) All of these answers are correct. E) Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 175) When should process costing be used to assign costs to products? A) Calculation of unit costs requires the averaging of unit costs over all units produced B) Units produced are dissimilar C) Units produced are similar D) Either A or C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 176) Which one of the following statements is true? A) In a job-costing system, individual jobs use different quantities of production resources. B) In a process-costing system, each unit uses approximately the same amount of resources. C) An averaging process is used to calculate unit costs in a job-costing system. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 177) Which of the following is TRUE about conversion costs? A) It include direct materials. B) In process costing they are usually considered to be added evenly throughout the production process. C) It include all the factors of production. D) Both B and C are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 178) Which of the following is an example of a business which would have no beginning or ending inventory but which could use process costing to compute unit costs? A) Clothing manufacturer B) Corporation whose sole business activity is processing the customer deposits of several banks C) Manufacturer of large TVs D) Manufacturer of custom houses Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 179) Activity-based costing has less applicability in a process-costing environment because: A) the use of activity-based costing makes the computational process more difficult. B) the products tend to be similar and thus use the resources in a similar manner. C) cost control in process costing is achieved by controlling the cost of the various processes rather than the individual activities. D) Both B and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 180) When a bakery transfers goods from the Baking Department to the Decorating Department, the accounting entry is: A) Work in Process — Decorating Department Accounts Payable B) Work in Process — Baking Department Accounts Payable C) Work in Process — Decorating Department Work in Process — Baking Department D) Work in Process — Baking Department Work in Process — Decorating Department Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing
Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 181) Which of the following statement(s) concerning conversion costs is correct? A) The calculation of equivalent units is relatively easy for the textile industry. B) Estimating the degree of completion of direct materials in a partially completed unit is usually easier to calculate than estimating the degree of completion for conversion costs. C) Estimates are usually not considered acceptable. D) Both B and C are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 182) The purpose of the equivalent-unit computation is to: A) convert partially completed units into the amount of completed output units that could be made with that quantity of input. B) assist the business in determining ending inventory. C) convert completed units into the amount of partially completed output units that could be made with that quantity of input. D) Both B and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 183) In a process-costing system, the calculation of equivalent units is used for calculating: A) the dollar amount of the cost of goods sold for the accounting period. B) the dollar amount of ending inventory. C) the dollar cost of a particular job. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Answer the following questions using the information below: Injection Molding Ltd manufactures plastic moldings for car seats. Its costing system utilises two cost
categories, direct materials and conversion costs. Each product must pass through Department A and Department B. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Department A for February 2018 are: Work-in-process, beginning inventory, 40% converted Units started during February Work in process, ending inventory Costs for Department A for February 2018 are: Work-in-process, beginning inventory: Direct materials Conversion costs $100 000 Direct materials costs added during February $1 000 000 Conversion costs added during February $1 250 000
200 units 600 units 100 units
$100 000
184) What is the unit cost per equivalent unit in Department A? A) $3500 B) $1750 C) $1000 D) $3750 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 185) How many units were completed and transferred out of Department A during February? A) 800 units B) 600 units C) 700 units D) 100 units Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 186) Injection Molding Ltd manufactures plastic moldings for car seats. Its costing system uses two cost categories, direct materials and conversion costs. Each product must pass through Department A and
Department B. Direct materials are added at the beginning of production. Conversion costs are allocated evenly throughout production. Data for Department A for February 2018 are: Work-in-process, beginning inventory, 40% converted Units started during February Work-in-process, ending inventory: 30% complete as to conversion costs 100% complete as to materials Costs for the Department A for February 2018 are: Work-in-process, beginning inventory: Direct materials $100 000 Conversion costs $100 000 Direct materials costs added during February Conversion costs added during February
200 units 600 units 100 units
$1 000 000 $1 250 000
What were the equivalent units of direct materials and conversion costs, respectively, at the end of February? Assume Injection Molding Ltd uses the weighted-average process-costing method. A) 800; 730 B) 800; 800 C) 600; 500 D) 800; 700 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Answer the following questions using the information below: The Swiss Clock Shop 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. Swiss Clock Shop uses weighted-average costing. Data for the Assembly Department for June 2018 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (50% complete)
250 units
Units started during June Work in process, ending inventory: Direct materials (100% complete) Conversion costs (75% complete) Costs for June 2018: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
800 units 150 units
$180 000 $270 000 $1 000 000 $1 000 000
187) What are the equivalent units for direct materials and conversion costs, respectively, for June? A) 1200.5 units; 1160.64 units B) 1050 units; 1012.5 units C) 962 units; 990 units D) 1050 units; 1050 units Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 188) What is the direct materials cost per equivalent unit during June? A) $1123.81 B) $1890.35 C) $1579.00 D) $1730.20 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 189) What is the conversion cost per equivalent unit in June? A) $1254.32 B) $1730.20 C) $1890.35 D) $1579.14
Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 190) What is the total amount debited to the Work-in-Process account during the month of June? A) $2 450 000 B) $2 000 000 C) $2 270 000 D) $450 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 191) What amount of direct materials costs is assigned to the ending Work-in-Process account for June? A) $168 571.50 B) $236 850 C) $283 552.50 D) $259 530 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 192) What amount of conversion costs are assigned to the ending Work-in-Process account for June? A) $126 450.50 B) $141 111.00 C) $101 956.64 D) $188 148.00 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Answer the following questions using the information below:
The Townsend Tractor Company manufactures small garden tractors on a highly automated assembly line. Its costing system uses two cost categories, direct materials and conversion costs. Each tractor must pass through the Assembly Department and the Testing Department. Direct materials are added at the beginning of the production process. Conversion costs are allocated evenly throughout production. Townsend Tractor uses weighted-average costing. Data for the Assembly Department for April 2018 are: Work in process, beginning inventory Direct materials (100% complete) Conversion costs (40% complete) Units started during April Work in process, ending inventory: Direct materials (100% complete) Conversion costs (80% complete)
400 units
1200 units 250 units
Costs for April 2018: Work in process, beginning inventory: Direct materials Conversion costs Direct materials costs added during June Conversion costs added during June
$230 000 $220 000 $700 000 $1 175 000
193) What are the equivalent units for direct materials and conversion costs, respectively, for April? A) 1350 units; 1350 units B) 250 units; 200 units C) 1600 units; 1550 units D) 1850 units; 1690 units Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 194) What is the total amount debited to the Work-in-Process account during the month of April? A) $430 000 B) $2 855 000 C) $2 425 000
D) $230 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 195) What is the direct materials cost per equivalent unit during April? A) $1241.94 B) $1250.00 C) $575.00 D) $581.25 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 196) What is the conversion cost per equivalent unit in April? A) $1250.00 B) $900.00 C) $581.25 D) $575.00 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 197) What amount of direct materials costs are assigned to the ending Work-in-Process account for April? A) $250 000.00 B) $248 387.10 C) $143 750.00 D) $145 312.50 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products.
198) What amount of conversion costs are assigned to the ending Work-in-Process account for April? A) $145 312.50 B) $250 000.00 C) $180 000.00 D) $143 750.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Answer the following questions using the information below: The Sleepyhead Chair Company manufactures a standard recliner. During February, the firm's Assembly Department started production of 75 000 chairs. During the month, the firm completed 85 000 chairs and transferred them to the Finishing Department. The firm ended the month with 10 000 chairs in ending inventory. All direct materials costs are added at the beginning of the production cycle. Weighted-average costing is used by Sleepyhead. 199) How many chairs were in inventory at the beginning of the month? Conversion costs are incurred uniformly over the production cycle. A) 25 000 chairs B) 20 000 chairs C) 15 000 chairs D) 10 000 chairs Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 200) What were the equivalent units for materials for February? A) 95 000 chairs B) 75 000 chairs C) 80 000 chairs D) 85 000 chairs Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products.
201) What were the equivalent units for conversion costs for February if the beginning inventory was 70% complete as to conversion costs and the ending inventory was 40% complete as to conversion costs? A) 89 000 B) 75 000 C) 95 000 D) 85 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 202) Of the 75 000 units Sleepyhead started during February, how many were finished during the month? A) 75 000 B) 95 000 C) 65 000 D) 85 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 203) Mt. Iron 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 3000 20 000 2500
Material Costs $4500 32 000
Conversion Costs $5400 78 200
All materials are added at the beginning of the production process. The beginning inventory was 40% complete as to conversion, while the ending inventory was 30% completed for conversion purposes. Weighty uses the weighted-average costing method. What is the total cost assigned to the units completed and transferred this period? A) $120 100 B) $107 010 C) $113 160 D) $109 440
Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 204) Transferred-in costs are treated as if they are: A) a separate direct material added at the beginning of the process. B) direct labour costs added at the beginning of the process. C) costs of beginning inventory added at the beginning of the process. D) conversion costs added at the beginning of the process. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Answer the following questions using the information below: The Rest-a-Lot chair company manufactures a standard recliner. During February, the firm's Assembly Department started production of 75 000 chairs. During the month, the firm completed 80 000 chairs, and transferred them to the Finishing Department. The firm ended the month with 10 000 chairs in ending inventory. There were 15 000 chairs in beginning inventory. All direct materials costs are added at the beginning of the production cycle and conversion costs are added uniformly throughout the production process. The FIFO method of process costing is used by Rest-a-Lot. Beginning work in process was 30% complete as to conversion costs, while ending work in process was 80% complete as to conversion costs. Beginning inventory: Direct materials Conversion costs
$24 000 $35 000
Manufacturing costs added during the accounting period: Direct materials $168 000 Conversion costs $278 000 205) How many of the units that were started during February were completed during February? A) 75 000 B) 80 000 C) 85 000 D) 65 000 Answer: D
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 206) What were the equivalent units for conversion costs during February? A) 83 500 B) 79 500 C) 85 000 D) 75 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 207) What is the amount of direct materials cost assigned to ending work-in-process inventory at the end of February? A) $22 500 B) $22 400 C) $19 200 D) $25 600 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 208) What is the cost of the goods transferred out during February? A) $476 750 B) $456 015 C) $417 750 D) $505 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Answer the following questions using the information below: The Morgan Models company manufactures replica plastic airplane and motorised vehicle models.
During October, the firm's Assembly Department started production of 60 000 models. During the month, the firm completed 66 000 models, and transferred them to the Finishing Department. The firm ended the month with 22 000 models in ending inventory. There were 28 000 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 used by Morgan. 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 costs Conversion costs
$39 200 $30 800
Manufacturing costs added during the accounting period: Direct materials costs $90 000 Conversion costs $280 000 209) How many of the units that were started during October were completed during October? A) 60 000 B) 38 000 C) 30 000 D) 32 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 210) What were the equivalent units for conversion costs during October? A) 62 000 B) 87 000 C) 70 000 D) 21 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 211) What is the amount of direct materials cost assigned to ending work-in-process inventory at the end of October?
A) $44 000 B) $22 000 C) $39 200 D) $33 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 212) What is the cost of the goods transferred out during October? A) $363 000 B) $340 000 C) $375 000 D) $330 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 213) Unit costs do not fluctuate between periods. Therefore, transferred units may contain batches accumulated at different unit costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 214) Examples of industries that would use process costing include the pharmaceutical and semiconductor industry. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 215) Process-costing systems separate costs into cost categories according to the timing of when costs are introduced into the process.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 216) Process costing would be most likely used by a firm that produces heterogeneous products. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 217) When identical or similar units of products or services are mass produced, job-costing is used to calculate an average production cost for all units produced. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 218) The last step in a process-costing system is to determine the equivalent units for the period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 219) Activity-based costing has more applicability in a process-costing system than in a job-costing environment. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 220) In a process-costing system, there is always a separate Work-in-Process account for each different process. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 221) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 222) Process costing is used to assign manufacturing costs to unique batches of a product. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 223) Job-costing and process-costing systems share the same objective of estimating product costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 224) While costs are measured for individual jobs in a job-costing system, they are measured for individual process stages in a process-costing system. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 225) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing
Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 226) The equivalent unit concept is a means by which a process-costing system can compare partially completed work done in each of the various process categories to obtain a total measure of work done. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 227) A production cost worksheet is used to calculate output in terms of equivalent units, summarise total costs to account for, and compute cost per equivalent unit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 228) Process-costing journal entries and job-costing journal entries are similar with respect to direct materials and conversion costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 229) The accounting (for a bakery) entry to record the transfer of rolls from the mixing department to the baking department is: Work in Process-Mixing Department Work in Process-Baking Department Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 230) 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
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 231) Equivalent units are calculated separately for each input. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 232) Equivalent units in beginning work in process + equivalent units of work done in the current period equals equivalent units completed and transferred out in the current period minus equivalent units in ending work in process. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 233) In order for a process-costing system to work, all units must be measured in the same denominations in all of the departments within the organisation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 234) Each department is regarded as a distinct accounting entity when interdepartmental transfers are present in an organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 235) The cost of units completed can differ materially between the weighted-average and the FIFO (first-in, first-out) methods of process costing. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Write your answer in the space provided or on a separate sheet of paper. 236) List and describe the five steps in process costing.
Answer: Step 1 involves summarising 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 summarised. The fifth step involves assigning the costs to the completed units and the units still remaining in work-in-process. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 237) 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 amounts of costs to finish. Job-costed products tend to be high cost per unit. Thus the costs of each (unique) job are important for planning, pricing, and profitability. In process costing, the jobs or products are similar (or homogeneous). Each job usually requires the same inputs, and results in approximately the same costs per unit. The cost of a product or service is obtained by assigning total costs to many identical or similar units. We assume each unit receives the same amount of direct material costs, direct manufacturing labour costs, and indirect manufacturing costs. Unit costs are then computed by dividing total costs by the number of units. The principal difference between process costing and job costing is the extent of averaging used to
compute unit costs. As noted above in job costing, individual jobs use different quantities of production resources; whereas in process costing, we assume that each job uses approximately the same amount of resources. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 238) The CEO of Gulf Coast Refining Corporation wants to know why his golfing partner, 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 barrels 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 240) Describe the differences between process costing and job costing, and give some examples of where each type of costing system would be used.
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.
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 241) The Wynnum 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 Wynnum's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totalled $895 000, while conversion costs equalled $4 225 00. 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. Cost to account for Divided by equiv units Cost per equivalent units
Direct Materials $895 000 475 000 $1.88
Conversion Costs $4 225 000 450 000 $9.39
Total $5 120 000 $11.27
Equivalent unit for conversion costs = 425 000 completed + (50 000 × 0.5 completed) = 425 000 + 25 000 = 450 000 b. Completed units = $11.27 × 425 000 =$4 789 750 Ending work in process = Direct materials = 50 000 × $1.88 = $94 000 Conversion costs = 25 000 × $9.39 = 234 750 Total $328 750 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products.
242) 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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 243) The Parson Valve Corporation was recently formed to produce a brass valve that forms an essential part of a compressor manufactured by a major corporation. The direct materials are added at the start of the production process while conversion costs are added uniformly throughout the production process. September is Parson's first month of operations, and therefore, there was no beginning inventory. Direct materials cost for the month totalled $1 400 000; while conversion costs equalled $1 800 000. Accounting records indicate that 800 000 valves were started in September and 700 000 valves were completed. Ending inventory was 20% complete as to conversion costs. Required: a. What is the total manufacturing cost per valve for September? b. Allocate the total costs between the completed valves and the valves in ending inventory.
Answer:
a. Direct Materials Cost to account for
Conversion Costs
$1 400 000
$1 800 000
Divided by equiv. units
800 000
720 000
Cost per equiv. units
$1.75
$2.50
Total $3 200 000 $4.25
Equivalent unit for conversion costs = 700 000 completed + (100 000 × 0.2 completed) = 700 000 + 20 000 = 720 000 b. Completed units = $4.25 × 700 000 = $2 975 000 Ending work-in-process = Direct materials = 100 000 × $1.75 = $175 000 Conversion costs = 20 000 × $2.50 = 50 000 Total $225 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 244) 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 245) Cedar Rapids Chemical placed 220 000 litres of direct materials into the mixing process. At the end of the month, 10 000 litres were still in process, 30% converted as to labour and factory overhead. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly during the process. Cedar Rapids Chemical uses weighted-average costing.
Required: 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 litres of chemicals were 40% complete prior to the addition of the 220 000 litres.
Answer: a. Direct materials: Beginning inventory Units started Equivalent units
0 litres 220 000 litres 220 000 litres
Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 litres 220 000 litres 220 000 litres 210 000 litres 10 000 litres
Units transferred out Ending inventory, 30% complete Equivalent units
210 000 litres 3000 litres 213 000 litres
b.
Direct materials: Completed and transferred out (210 000 + 12 000) Ending inventory, 100% complete Equivalent units
222 000 litres 10 000 litres 232 000 litres
Conversion costs: Completed and transferred out 222 000 litres Ending inventory, 30% complete 3000 litres Equivalent units 225 000 litres AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 246) Creative Colours Paint Company placed 315 000 litres of direct materials into the mixing process. All direct materials are placed in mixing at the beginning of the process and conversion costs occur evenly
during the process. Creative Colours uses weighted-average costing. The initial forecast for the end of the month was to have 75 000 litres still in process, 15% converted as to labour and factory overhead. Required: a. Determine the total equivalent units (in process and transferred out) for direct materials and for conversion costs, assuming there was no beginning inventory. b. With the installation of a new paint processing filtration device, the forecast for the end of the month was to have 50 000 litres still in process; 70% converted as to labour and factory overhead. In this event, determine the equivalent units (in process and transferred out) for direct materials and for conversion costs, assuming there was no beginning inventory.
Answer: a. Direct materials: Beginning inventory Units started Equivalent units
0 litres 315 000 litres 315 000 litres
Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 litres 315 000 litres 315 000 litres 240 000 litres 75 000 litres
Units transferred out Ending inventory, 15% complete Equivalent units
240 000 litres 11 250 litres 251 250 litres
Direct materials: Beginning inventory Units started Equivalent units
0 litres 315 000 litres 315 000 litres
Conversion costs: Beginning inventory Units started To account for Units transferred out Ending inventory
0 litres 315 000 litres 315 000 litres 265 000 litres 50 000 litres
b.
Units transferred out 265 000 litres Ending inventory, 70% complete 35 000 litres Equivalent units 300 000 litres AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 247) Jordana Woolens is a manufacturer of wool cloth. The information for March is as follows: Beginning work in process
10 000 units
Units started
20 000 units
Units completed
25 000 units
Beginning work-in-process direct materials
$6000
Beginning work-in-process conversion
$2600
Direct materials added during month
$30 000
Direct manufacturing labour during month
$12 000
Factory overhead
$5000
Beginning work in process was half converted as to labour and overhead. Direct materials are added at the beginning of the process. All conversion costs are incurred evenly throughout the process. Ending work in process was 60% complete. Required: Prepare a production cost worksheet using the weighted-average method. Include any necessary supporting schedules.
Answer: PRODUCTION COST WORKSHEET Flow of production Work in process, beginning Started during period To account for
Physical Units 10 000 20 000 30 000
Direct Materials
Conversion
Units completed Work in process, ending
25 000 5000
25 000 5000
25 000 3000
Accounted for
30 000
30 000
28 000
Costs
Totals
Direct Materials
Conversion
Work in process, beginning Costs added during period
$8600 47 000
$6000 30 000
$2600 17 000
Total costs to account for Divided by equivalent units
$55 600
$36 000 30 000
$19 600 28 000
$1.90
$1.20
$0.70
Equivalent unit costs Assignment of costs Costs transferred out (25 000 × $1.90)
$47 500
Work in process, ending Direct materials (5000 × $1.20) Conversion (5000 × $0.70 × 0.60) Costs accounted for
6000 2100 $55 600
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 248) 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
1600 units
Units started
2000 units
Units placed in finished goods
3200 units
Conversion costs
$200 000
Cost of direct materials
$260 000
Beginning work-in-process costs: Materials
$154 000
Conversion
$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.
Answer: a. PRODUCTION COST WORKSHEET Flow of production Work in process, beginning Started during period To account for 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
Physical Units 1 600 2 000 3 600
Direct Materials
3 200 400 3 600
3 200 400 3 600
3 200 240 3 440
Totals $236 080 460 000 $696 080
Direct Materials $154 000 260 000 $414 000 3 600 $115
Conversion $82 080 200 000 $282 080 3 440 $82
$197
Assignment of costs Completed units (3 200 × $197) Work in process, ending Direct Materials (400 × $115) Conversion (400 × $82 × 0.60) Costs accounted for
$630 400 $46 000 19 680
b. Work in Process Materials Inventory Finished Goods Work in Process
Conversion
260 000 260 000 630 400 630 400
65 680 $696 080
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 249) 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 $6000 for materials and 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 $7000 for transferred-in costs and $10 000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows: Tanning Beginning work-in-process units
Finishing
5000
4000
Units started this period
14 000
?
Units transferred this period
16 000
18 000
Ending work-in-process units
?
2000
Material costs added
$18 000
?
Conversion costs
32 000
$19 000
Transferred-out cost
50 000
?
Required: Prepare a production cost worksheet using weighted-average costing for the finishing department.
Answer: Production Cost Worksheet Finishing Department Weighted-Average Method Flow of production Work in process, beginning
Physical Units
Conversion 4000
Trans-In
Transferred in during period To account for
16 000 20 000
Units transferred out Work in process, ending Accounted for
18 000 2000 20 000
Costs
Totals
18 000 600 18 600 Conversion
18 000 2000 20 000 Trans-in
Work in process, beginning Costs added during period
$17 000 69 000
$10 000 19 000
$7000 50 000
Total costs to account for
$86 000
$29 000
$57 000
$4.41
18 600 $1.56
20 000 $2.85
Divided by equivalent units Equivalent-unit costs Assignment of costs Transferred out (18 000 × $4.41)
$79 380
Work in process, ending Transferred-in costs (2000 × $2.85) Conversion (600 × $1.56) Costs accounted for
$5700 936
6636 $86 016
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 250) When there are multiple support departments within an organisation, 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. Unit costs may fluctuate between periods, consequently, transferred units may contain batches accumulated at different unit costs. 3. 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.
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 251) General Fabricators assembles its product in several departments. It has two departments that process all units. During October, the beginning work in process in the cutting department was half completed as to conversion, and complete as to direct materials. The beginning inventory included $12 000 for materials and $3000 for conversion costs. Ending work-in-process inventory in the cutting department was 40% complete. Direct materials are added at the beginning of the process. Beginning work in process in the finishing department was 75% complete as to conversion. Direct materials are added at the end of the process. Beginning inventories included $16 000 for transferred-in costs and $20 000 for conversion costs. Ending inventory was 25% complete. Additional information about the two departments follows: Cutting
Finishing
Beginning work-in-process units
20 000
20 000
Units started this period
40 000
50 000
Units transferred this period
50 000
Ending work-in-process units
10 000
20 000
Material costs added
$48 000
$28 000
Direct manufacturing labour
$16 000
$40 000
$8000
$24 000
Other conversion costs
Required: Prepare a production cost worksheet using weighted average for the cutting department and FIFO for the finishing department.
Answer: Production Cost Worksheet
Flow of production Work in process, beginning Started during period To account for Units transferred out
Cutting Department Weighted-Average Method Physical Units Direct Materials 20 000 40 000 60 000 50 000
50 000
Conversion
50 000
Work in process, ending Accounted for Costs
10 000 60 000 Totals
10 000 60 000 Direct Materials
4 000 54 000 Conversion
Work in process, beginning Costs added during period
$15 000 72 000
$12 000 48 000
$3000 24 000
Total costs to account for Divided by equivalent units
$87 000
$60 000 60 000
27 000 54 000
$1.50
$1.00
$0.50
Equivalent-unit costs
Assignment of costs Transferred out (50 000 × $1.50)
$75 000
Work in process, ending Direct materials (10 000 × $1.00) Conversion (10 000 × 0.40 × $0.50)
$10000 2000
12 000
Costs accounted for
$87 000
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 252) Surf Products Company uses an automated process to clean and polish its souvenir items. For March, the company had the following activities: Beginning work-in-process inventory Units placed in production Units completed
3000 items, 1/3 complete 12 000 units 9000 units
Ending work-in-process inventory
6000 items, 1/2 complete
Cost of beginning work in process
$2500
Direct material costs, current
$9000
Conversion costs, current
$7700
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.
Answer: PRODUCTION COST WORKSHEET Flow of production Work in process, beginning Started during period To account for
Physical Units 3000 12 000 15 000
Units completed Work in process, beginning Started and completed Work in process, ending
Costs
3000 6000 6000 15 000 Totals
Direct Materials
6000 6000 12 000 Direct Materials
Work in process, beginning Costs added during period
$2500 16 700
Total costs to account for Divided by equivalent units Equivalent unit costs
$19 200 $1.45
Conversion
2000 6000 3000 11 000 Conversion
$9000
0 $7700
$9000 12 000 $0.75
$7700 11 000 $0.70
Assignment of costs Work in process, beginning Completion of beginning (2000 × $0.70)
2500 1400
Total beginning inventory Started and Completed (6000 × $1.45)
3900 8700
Total costs transferred-out
$12 600
Work in process, ending Direct materials (6000 × $0.75) Conversion (6000 × $0.70 × 0.50)
$4500 2100
6600
Costs accounted for
$19 200
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 253) 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 for transferred-in costs and $28 000 for conversion costs. Ending inventory was 30% complete. Additional information about the two departments follows: Cutting Beginning work-in-process units
20 000
Units started this period
60 000
Units transferred this period
64 000
Ending work-in-process units
Finishing 24 000 68 000 20 000
Material costs added
$48 000
$34 000
Conversion costs
28 000
68 500
Transferred-out cost
128 000
Required: Prepare a production cost worksheet, using FIFO for the finishing department.
Answer: Production Cost Worksheet
Flow of production Work in process, beginning Started during period
Finishing Department FIFO Method
Physical Units Direct Materials 24 000 64 000
Conversion
Trans-In
To account for
88 000
Good units completed Beginning work in process Started and completed Ending work in process Accounted for
24 000 44 000 20 000 88 000
Flow of production WIP, beginning Costs added during period Total costs to account for Divided by equivalent units Equivalent-unit costs
24 000 44 000 0 68 000
Physical Units Direct Materials $52 000 230 500 $34 000 $282 500 $34 000 68 000 $3.75 $0.50
4800 44 000 6000 54 800
Conversion $68 500 $68 500 54 800 $1.25
44 000 20 000 64 000
Trans-In $128 000 $128 000 64 000 $2.00
Assignment of costs Work in process, beginning
$52 000
Completion of beginning Direct Materials (24 000 × $0.50) Conversion (4800 × $1.25)
$12 000 6000
$18 000
Total Beginning Inventory Started and Completed (44 000 × $3.75)
70 000 165 000
Total costs transferred out
235 000
Work in process, ending Transferred in (20 000 × $2.00) Conversion (20 000 × $1.25 × 0.30) Costs accounted for
$40 000 7500
47 500 $282 500
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 254) Pet Products Company uses an automated process to manufacture its pet replica products. For June, the company had the following activities: Beginning work-in-process inventory
4500 items, 1/4 complete
Units placed in production
15 000 units
Units completed
17 500 units
Ending work-in-process inventory
2000 items, 3/4 complete
Cost of beginning work in process
$5250
Direct material costs, current
$16 500
Conversion costs, current
$23 945
Direct materials are placed into production at the beginning of the process and conversion costs are incurred evenly throughout the process. Required: Prepare a production cost worksheet using the FIFO method.
Answer: PRODUCTION COST WORKSHEET Flow of production
Physical Units
Work in process, beginning Started during period To account for
Conversion
4500 15 000 19 500
Units completed Work in process, beginning Started and completed Work in process, ending
Costs
Direct Materials
4500 13 000 2000 19 500 Totals
3375 13 000 1500 17 875
13 000 2000 15 000 Direct Materials
Conversion
Work in process, beginning
$5250
Costs added during period Total costs to account for
40 445 $45 695
$16 500 $16 500
$23 945 $23 945
$2.44
15 000 $1.10
17 875 $1.34
Divided by equivalent units Equivalent unit costs
Assignment of costs Work in process, beginning
5250.00
Completion of beginning (3375 × $1.34)
4522.50
Total beginning inventory
9772.50
Started and Completed (13 000 × $2.44)
31 720.00
Total costs transferred out
$41 492.50
Work in process, ending Direct materials (2000 × $1.10) Conversion (2000 × $1.34 × 0.75)
$2200.00 2010.00
Costs accounted for
4210.00 $45 702.50
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 255) Universal Industries operates a division in Zimbabwe, 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 Zimbabwe 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products.
Choose the one alternative that best completes the statement or answers the question. 256) The method merges unit costs from different accounting periods, obscuring period-to-period comparisons. A) weighted-average B) FIFO C) process costing D) job costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 257) Cost of units completed and hence can differ materially between the weighted-average and FIFO methods A) operating profit B) sales C) gross margin D) inventory turnover Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products.
258) A distinct feature of the FIFO process-costing method is that the: A) 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. 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 beginning inventory before the current period is blended with the work done during the current period in the calculation of equivalent units. D) FIFO process-costing method is only minimally different from the weighted-average process-costing method. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products.
259) On occasion, the FIFO and the weighted-average methods of process costing will result in the same dollar amount of costs being transferred to the next department. Which of the following scenarios would have that result? A) When the beginning and ending inventories are equal in terms of unit numbers. B) When there is no ending inventory. C) When the beginning and ending inventories are equal in terms of the percentage of completion for both direct materials, and conversion costs. D) When there is no beginning inventory. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 260) FIFO Aluminium processes a single type of aluminium. During the current period the following information was given:
Beginning Inventory Started During the Current Period Ending Inventory
Units 3000 20 000 2500
Material Costs $4500 48 000
Conversion Costs $4800 65 000
All materials are added at the beginning of the production process. The beginning inventory was 30% complete as to conversion, while the ending inventory was 40% completed for conversion purposes. FIFO Aluminium uses the first-in, first-out system of process costing. What were the costs assigned to the units transferred out this period (round equivalent unit cost to the nearest cent)? A) $113 980 B) $113 236 C) $122 300 D) $113 160 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 261) An assumption of the FIFO process-costing method is that: A) the units in beginning inventory are assumed to be completed first. B) the units in beginning inventory are not necessarily assumed to be completed by the end of the period.
C) ending inventory will always be completed in the next accounting period. D) no calculation of conversion costs is possible. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 262) A reason(s) why 'pure' FIFO is rarely encountered in process costing is that: A) the units transferred into the department during a given time period are usually carried at a single average unit cost. B) FIFO is usually applied within a department to compute the cost of units transferred out. C) tracking costs on a 'pure' FIFO basis is very difficult. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 263) Operating profit can differ materially between the results for the weighted-average and FIFO methods when: A) direct materials or conversion costs per unit vary significantly from period to period. B) the physical inventory levels of work in process are large relative to the total number of units transferred out. C) Neither A nor B is correct. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 264) A major advantage of using the FIFO process-costing method is that: A) in contrast with the weighted-average method, FIFO is considered GAAP. B) FIFO provides managers with information about changes in the costs per unit from one period to the next. C) FIFO makes the unit cost calculations simpler. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 265) A disadvantage of the weighted-average method compared to the FIFO process-costing method is that: A) FIFO provides better management information for planning and control purposes. B) FIFO is computationally simpler. C) the information it provides about changes in unit prices from one period to the next is less useful than the information provided by FIFO. D) when unit cost per input prices fluctuate markedly from month to month, its per unit cost is less representative than FIFO. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Answer the following questions using the information below: Jackson Cabinetry Pty Ltd manufactures standard sized modular cabinet units for kitchens and other applications within the home. Its costing system utilises 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 Finish Department for March 2018 are: Work-in-process, beginning inventory, 25% converted Units started during February Work in process, ending inventory
1000 units 1400 units 300 units
Costs for Finish department for March 2018 are: Work-in-process, beginning inventory: Direct materials Conversion costs Direct materials costs added during February Conversion costs added during February
$150 000 $100 000 $210 000 $800 000
266) What is the unit cost per equivalent unit of the beginning inventory in the finish department? A) $400.00 B) $250.00
C) $550.00 D) $150.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 267) How many units were completed and transferred out of the finish department during March? A) 1400 units B) 1000 units C) 2100 units D) Unknown Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 268) The weighted-average process-costing method calculates the equivalent units by: A) the units started during the current period plus the units in ending inventory. B) the equivalent units completed during the current period plus the equivalent units in ending inventory. C) considering only the work done during the current period. D) the units started during the current period minus the units in ending inventory Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 269) In the computation of the cost per equivalent unit, the weighted-average method of process costing considers all the costs: A) 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. B) 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. C) entering work in process from the units in beginning inventory plus the costs for the work completed during the current accounting period. D) costs that have entered work in process from the units started or transferred in during the current accounting period.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 270) If there was no beginning work in process and no ending work in process under the weighted-average process-costing method, the number of equivalent units for direct materials, if direct materials were added at the start of the process, would be: A) equal to the units completed. B) equal to the units started or transferred in. C) less than the units completed. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 271) Under the weighted-average method, the stage of completion of beginning work in process: A) is irrelevant in determining the equivalent-unit calculation. B) can almost always be determined with a high degree of precision C) is relevant in determining the equivalent units. D) must be combined with the work done during the current period to determine the equivalent units. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 272) The percentage complete for beginning work in process is used in the weighted-average method. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Topic: Methods used in process costing 273) As companies move towards long-run procurement contracts that reduce differences in unit costs from period to period and reduce inventory levels, the difference in cost of units completed under the
weighted-average and FIFO methods will increase. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Topic: Methods used in process costing 274) 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 added at the start of the production process. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 275) To calculate weighted-average conversion cost per equivalent unit, you divide total conversion costs to date by total equivalent units of work done to date. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 276) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 277) The equivalent units are not needed in a weighted-average system, because all costs are just averaged. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products.
278) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 279) Transferred-in costs are incurred in previous departments that are carried forward as the product's cost as it moves to a subsequent process in the production cycle. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 280) Transferred-in costs are treated as if they are a separate type of indirect material added at the beginning of the process. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 281) The first-in, first-out (FIFO) process-costing method assigns the cost of the previous accounting period's equivalent units in beginning work-in-process inventory to the first units completed and transferred out of the process. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 282) A distinctive feature of the FIFO process-costing method is that the work done on beginning inventory before the current period is averaged with work done in the current period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing
Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 2832) The FIFO process-costing method merges the work and the costs of the beginning inventory with the work and the costs done during the current period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 284) The first-in, first-out process-costing method assumes that units in beginning inventory are completed during the current accounting period. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 285) A major advantage of the weighted average process costing is that it provides managers with information about changes in the costs per unit from one period to the next. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. 286) Process-costing FIFO is usually applied to both the units entering a department and the units leaving a department. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Write your answer in the space provided or on a separate sheet of paper. 287) 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Methods used in process costing Learning Objective: 6.4 Design and apply a process-costing system for estimating the costs of products. Choose the one alternative that best completes the statement or answers the question. 288) Many large companies with multiple production methods and processes have hybrid-costing systems that are: A) process costing. B) actual costing. C) a mix of job costing and process costing. D) job costing. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid and operation-costing systems Learning Objective: 6.5 Design and apply a hybrid (operation-) costing system for estimating the costs of products. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 289) Hybrid-costing systems are developed to cost products that are produced in a standardised environment, but which are often customised to meet the needs of some of its customers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid and operation-costing systems Learning Objective: 6.5 Design and apply a hybrid (operation-) costing system for estimating the costs of products. Write your answer in the space provided or on a separate sheet of paper. 290) 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 standardised 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Hybrid and operation-costing systems Learning Objective: 6.5 Design and apply a hybrid (operation-) costing system for estimating the costs of products. Choose the one alternative that best completes the statement or answers the question. 291) Variable costing regards fixed manufacturing overhead as a(n): A) product cost. B) period cost. C) inventoriable cost. D) administrative cost. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 292) The only difference between variable and absorption costing is the expensing of: A) variable marketing costs. B) direct manufacturing costs. C) fixed manufacturing costs. D) Both A and C are correct. Answer: C AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 293) Which of the following cost(s) are inventoried when using absorption costing? A) Fixed manufacturing costs B) Variable marketing costs C) Direct manufacturing costs D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 294) is a method of inventory costing in which only variable manufacturing costs are included as inventoriable costs. A) Absorption costing B) Fixed costing C) Mixed costing D) Variable costing Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Answer the following questions using the information below: Alice Opals produces and sells a mantel clock for $100 per unit. In 2010, 100 000 clocks were produced and 80 000 were sold. Other information for the year includes: Direct materials Direct manufacturing labour Variable manufacturing costs
$30.00 per unit $2.00 per unit $3.00 per unit
Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$5.00 per part $25.00 per unit $15.00 per unit
295) What is the inventoriable cost per unit using variable costing? A) $32 B) $35 C) $40 D) $60 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 296) What is the inventoriable cost per unit using absorption costing? A) $32 B) $35 C) $60 D) $80 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Answer the following questions using the information below: Leongatha Motors produces and sells an auto part for $30.00 per unit. In 2010, 100 000 parts were produced and 75 000 units were sold. Other information for the year includes: Direct materials Direct manufacturing labour Variable manufacturing costs Sales commissions Fixed manufacturing costs Administrative expenses, all fixed
$12.00 per unit $2.25 per unit $0.75 per unit $3.00 per part $375 000 per year $135 000 per year
297) What is the inventoriable cost per unit using variable costing? A) $14.25 B) $15.00 C) $18.00 D) $21.75 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 298) What is the inventoriable cost per unit using absorption costing? A) $15.00 B) $18.00 C) $18.75 D) $21.75 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Answer the following questions using the information below: Jindabyne Pillows produces and sells a decorative pillow for $75.00 per unit. In the first month of operation, 2000 units were produced and 1750 units were sold. Actual fixed costs are the same as the amount budgeted for the month. Other information for the month includes: Variable manufacturing costs Variable marketing costs Fixed manufacturing costs Administrative expenses, all fixed Ending inventories: Direct materials WIP Finished goods
$20.00 per unit $3.00 per unit $7.00 per unit $15.00 per unit -0-0250 units
299) What is cost of goods sold per unit using variable costing? A) $20 B) $23 C) $30 D) $45 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 300) What is cost of goods sold using variable costing? A) $35 000 B) $40 000 C) $47 250 D) $54 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 301) What is contribution margin using variable costing? A) $96 250 B) $91 000 C) $104 000 D) $110 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers.
302) What is operating profit using variable costing? A) $78 750 B) $65 750 C) $52 500 D) $47 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Answer the following questions using the information below: Healesville Animates produces and sells a luxury animal pillow for $40.00 per unit. In the first month of operation, 3000 units were produced and 2250 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
$19 per unit $1 per unit $30 000 per month $6000 per month -0-0750 units
303) What is cost of goods sold per unit when using absorption costing? A) $19 B) $20 C) $29 D) $32 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers.
304) What is gross margin when using absorption costing? A) $77 250 B) $54 750 C) $45 000 D) $24 750 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 305) What is operating profit when using absorption costing? A) ($11 750) B) $16 500 C) $18 750 D) $4000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 306) Bradman Corporation has reported operating profit of $30 000 and a fixed overhead cost rate is $20 per unit for the current accounting period. Under absorption costing, if this company now produces an additional 100 units of inventory, then operating profit: A) will increase by $2000 B) will not be affected C) will increase by $2000 only if the additional 100 units of inventory are sold D) is indeterminable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers.
307) Lindwall Corporation has reported operating profit of $30 000 and a fixed overhead cost rate is $20 per unit for the current accounting period. Under variable costing, if this company produces 100 more units of inventory, then operating profit: A) is indeterminable B) will increase by $2000 C) will not be affected D) will increase by $2000 only if the 100 additional units of inventory are sold Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 308) Under variable costing, if a manager's bonus is tied to operating profit, 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 AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 309) is a method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs. A) Mixed costing B) Variable costing C) Absorption costing D) Standard costing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing
Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 310) Absorption costing is required for all of the following EXCEPT: A) generally accepted accounting principles. B) income tax reporting. C) determining a competitive selling price. D) external reporting to shareholders. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 311) Absorption costing: A) treats direct manufacturing costs as a period cost. B) includes fixed manufacturing overhead as an inventoriable cost. C) expenses marketing costs as cost of goods sold. D) is required for internal reports to managers. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 312) 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) Throughput costing C) Direct costing D) Variable costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing
Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 313) Which of the following statements is FALSE? A) Operating profit under absorption costing is higher than operating profit under variable costing when production units exceed sales units. B) Absorption costing allocates fixed manufacturing overhead to actual units produced during the period. C) Nonmanufacturing costs are expensed in the future under variable costing. D) Fixed manufacturing costs in ending inventory are expensed in the future under absorption costing. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 314) When does an unfavourable production-volume variance occur? A) Production exceeds the denominator level B) Production exceeds unit sales C) The denominator level exceeds production D) Unit sales exceed production Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 315) Companies have recently been able to reduce inventory levels because: A) there is better sharing of information between suppliers and manufacturers. B) just-in-time production strategies are being implemented. C) production quotas are being implemented. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing
Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 316) What will be the result if the unit level of inventory increases during an accounting period? A) Operating profit will be the same under absorption costing and variable costing. B) More operating profit will be reported under absorption costing than variable costing. C) Less operating profit will be reported under absorption costing than variable costing. D) The exact effect on operating profit cannot be determined. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 317) One way of determining the difference between operating profits for absorption costing and variable costing is to: A) subtract fixed manufacturing overhead in beginning inventory from fixed manufacturing overhead in ending inventory. B) add fixed manufacturing costs to the production-volume variance. C) multiply the number of units produced by the budgeted fixed manufacturing cost rate. D) subtract sales of the previous period from sales of this period. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 318) Ways to 'produce for inventory' that result in increasing operating profit include: A) delaying items that absorb the greatest amount of fixed manufacturing costs. B) switching production to products that absorb the least amounts of fixed manufacturing costs. C) deferring maintenance to accelerate production. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 319) Switching production to products that absorb the highest amount of fixed manufacturing costs is also called: A) cost reduction. B) throughput costing. C) producing for sales. D) cherry picking. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 320) The two most common methods of costing inventories in manufacturing companies are variable costing and fixed costing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 321) Absorption costing 'absorbs' only variable manufacturing costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 322) Variable costing includes all variable costs—both manufacturing and nonmanufacturing—in
inventory. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 323) Under both variable and absorption costing, all variable manufacturing costs are inventoriable costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 324) Under variable costing, fixed manufacturing costs are treated as an expense of the period. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 325) When production deviates from the denominator level, a production-volume variance always exists under absorption costing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 326) Fixed manufacturing costs included in cost of goods available for sale + the production-volume variance will always = total fixed manufacturing costs under absorption costing. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 327) The production-volume variance only exists under absorption costing and not under variable costing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 328) If managers report inventories of zero at the start and end of each accounting period, operating profits under absorption costing and variable costing will be the same. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 329) A common problem reported by companies using variable costing is the difficulty of classifying costs into fixed or variable categories. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Write your answer in the space provided or on a separate sheet of paper. 330) For 2018, Baggy Green Caps Inc., had sales of 75 000 units and production of 100 000 units. Other information for the year included:
Direct manufacturing labour Variable manufacturing overhead Direct materials 150 000 Variable selling expenses Fixed administrative expenses Fixed manufacturing overhead
$187 500 100 000 100 000 100 000 200 000
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. Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total Unit costs: $637 500/100 000 units $437 500/100 000 units Ending inventory: 25 000 units × $6.375 25 000 units × $4.375
Absorption $150 000 187 500 100 000 200 000 $637 500
Variable $150 000 187 500 100 000 0 $437 500
$6.375 $4.375
$159 375 $109 375
b. Cost of goods sold: 75 000 × $6.375 $478 125 75 000 × $4.375 $328 125 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 331) Sutcliffe Corporation manufactures and sells top-of-the-line saxophones and uses standard costing.
For the month of September there was no beginning inventory, there were 1500 units produced and 1250 units sold. The manufacturing variable cost per unit is $770 and the operating cost per unit was $625. The fixed manufacturing cost is $450 000 and the fixed operating cost is $75 000. The selling price per unit is $1850. Required: Prepare the income statement for Sutcliffe Corporation for September under variable costing.
Answer: Revenues (1250 × $1850) $2 312 500 Variable costs Beginning inventory $0 Variable manufacturing costs (1500 × $770) 1 155 000 Cost of goods available 1 155 000 Deduct ending inventory (250 × $770) (192 500) Variable cost of goods sold 962 500 Variable operating costs (1250 × $625) 781 250 Total variable costs 1 743 750 Contribution margin 568 750 Fixed costs Fixed manufacturing costs 450 000 Fixed operating costs 75 000 Total fixed costs 525 000 Operating profit $43 750 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 332) SBW Corporation planned to be in operation for three years. • • •
During the first year, 2016, it had no sales but incurred $120 000 in variable manufacturing expenses and $40 000 in fixed manufacturing expenses. In 2017, it sold half of the finished goods inventory from 2016 for $100 000 but it had no manufacturing costs. In 2018, it sold the remainder of the inventory for $120 000, had no manufacturing expenses and went out of business.
•
Marketing and administrative expenses were fixed and totalled $20 000 each year.
Required: a. Prepare an income statement for each year using absorption costing. b. Prepare an income statement for each year using variable costing.
Answer: a. Absorption-costing income statements: 2016
2017
2018
Sales
$0
$100 000
$120 000
Cost of goods sold
0
80 000
80 000
Gross margin
0
20 000
40 000
20 000
20 000
20 000
$(20 000)
$0
$20 000
2016
2017
2018
Sales
$0
$100 000
$120 000
Variable expenses
0
60 000
60 000
Contribution margin
0
40 000
60 000
$40 000
$0
$0
Marketing and administrative
Operating profit b. Variable-costing income statements:
Fixed expenses: Manufacturing
Marketing and administrative
20 000
20 000
20 000
Total fixed
60 000
20 000
20 000
Operating profit
$(60 000)
$20 000
$40 000
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 333) Woods Golf Company sells a special putter for $20 each. In March, it sold 28 000 putters while manufacturing 30 000. There was no beginning inventory on March 1. Production information for March was: Direct manufacturing labour per unit
15 minutes
Fixed selling and administrative costs
$40 000
Fixed manufacturing overhead
132 000
Direct materials cost per unit
2
Direct manufacturing labour per hour
24
Variable manufacturing overhead per unit
4
Variable selling expenses per unit
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 profit under both absorption and variable costing.
Answer: a.
Absorption
Variable
Direct manufacturing labour ($24/4) Direct materials Variable manufacturing overhead Fixed manufacturing overhead ($132 000/30 000) Total cost per unit
b. Beginning inventory
$6.00 2.00 4.00 4.40 $16.40
$6.00 2.00 4.00 0 $12.00
Absorption
Variable
$0
$0
Cost of goods manufactured: 30 000 × $16.40 30 000 × $12.00
$492 000
Cost of goods available for sale
$492 000
Cost of goods sold: 28 000 × $16.40 28 000 × $12.00
$459 200
Ending inventory
$32 800
$360 000 $360 000
$336 000 $24 000
c. Absorption-costing income statement: Sales (28 000 × $20) Cost of goods sold (28 000 × $16.40)
$560 000 459 200
Gross margin Less: Variable selling and administrative Fixed selling and administrative
100 800 $56 000 40 000
Operating profit
96 000
$4800
Variable-costing income statement: Sales (28 000 × $20) Variable COGS (28 000 × $12)
$560 000 $336 000
Variable selling expenses (28 000 × $2) Contribution margin Fixed costs: Manufacturing Selling and administrative
56 000
392 000 168 000
$132 000 40 000
172 000
Operating profit $(4000) AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 334) Coonabarabran Realty bought a 2000-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 $5000. Storm drains and driveways are installed at an average cost of $8000 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 2017 when 50 lots were sold. During 2018, the company bought another 2000-acre island for $10 000 000 and developed it exactly the same way. Lot sales in 2018 totalled 300 with an average selling price of $160 000. All costs were the same as in 2018. Required: Prepare income statements for both years using both absorption and variable costing methods.
Answer: Cost per site: Land cost $10 000 000/200 sites Clearing costs Improvements Total Absorption-costing income statements: Sales
Absorption $50 000 5000 8000
Variable $0 5000 8000
$63 000
$13 000
2017 $8 000 000
2018 $48 000 000
Cost of goods sold: 50 × ($50 000 + $8000 + $5000) 300 × ($50 000 + $8000 + $5000)
3 150 000
Gross margin Variable marketing Fixed administrative Operating profit
$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
2017 $8 000 000
2018 $48 000 000
18 900 000
650 000 800 000
3 900 000 4 800 000
Contribution margin $6 550 000 $39 300 000 Fixed expenses: 10 000 000 10 000 000 Land Administrative 850 000 850 000 Operating profit $(4 300 000) $28 450 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 335) Tamworth Company prepared the following absorption-costing income statement for the year ended May 31, 2018. Sales (16 000 units) Cost of goods sold Gross margin Selling and administrative expenses Operating profit
$320 000 216 000 $104 000 46 000 $58 000
Additional information follows: Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning
inventory, and 17 500 units were produced. Variable manufacturing costs were $11 per unit. Actual fixed costs were equal to budgeted fixed costs. Required: Prepare a variable-costing income statement for the same period.
Answer: Sales Variable expenses: Manufacturing cost of goods sold1 Selling and administrative2
$320 000 $176 000 24 000
Contribution margin Fixed expenses: Fixed factory overhead3 Fixed selling and administrative4 Operating profit
200 000 $120 000
$43 750 22 000
1
16 000 units × $11 = $176 000
2
16 000 units × $1.50 = $24 000
3
[($216 000/16 000 units) - $11] × 17 500 units = $43 750
65 750 $54 250
4
$46 000 - $24 000 = $22 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 336) Booti Booti Bottling Works manufactures glass bottles. January and February operations were identical in every way except for the planned production. January had a production denominator of 35 000 units. February had a production denominator of 36 000 units. Fixed manufacturing costs totalled $126 000. Sales for both months totalled 45 000 units with variable manufacturing costs of $4 per unit. Selling and administrative costs were $0.40 per unit variable and $60 000 fixed. The selling price was $10 per unit. Required: Compute the operating profit for both months using absorption costing.
Answer: January manufacturing cost per unit: Variable costs: Fixed costs ($126 000/35 000) Total per unit
$4.00 3.60 $7.60
February manufacturing cost per unit: Variable costs Fixed costs $126 000/36 000 Total per unit
$4.00 3.50 $7.50
January Income Statement Sales (45 000 × $10) Cost of goods sold (45 000 × $7.60) Gross margin Other costs: Variable selling and administrative Fixed selling and administrative
$450 000 342 000 $108 000 $18 000 60 000
78 000
Operating profit
$30 000
February Income Statement Sales (45 000 × $10) Cost of goods sold (45 000 × $7.50)
$450 000 337 500
Gross margin Other costs: Variable selling and administrative Fixed selling and administrative Operating profit
$112 500 $18 000 60 000
78 000 $34 500
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers.
337) Lillee-Walker Company was concerned that increased sales did not result in increased profits for 2018. Both variable unit and total fixed manufacturing costs for 2017 and 2018 remained constant at $20 and $2 000 000, respectively. In 2017, the company produced 100 000 units and sold 80 000 units at a price of $50 per unit. There was no beginning inventory in 2017. In 2018, the company made 70 000 units and sold 90 000 units at a price of $50. Selling and administrative expenses were all fixed at $100 000 each year. Required: a. Prepare income statements for each year using absorption costing. 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: 2017 $4 000 000
2018 $4 500 000
0 2 000 000 2 000 000 4 000 000 800 000 3 200 000
800 000 1 400 000 2 000 000 4 200 000 0 4 200 000
Gross margin Selling and administrative
800 000 100 000
300 000 100 000
Operating profit
$700 000
$200 000
Sales Variable expenses
2017 $4 000 000 1 600 000
2018 $4 500 000 1 800 000
Contribution margin
2 400 000
2 700 000
Fixed expenses: Manufacturing Selling and administrative
2 000 000 100 000
2 000 000 100 000
Sales Cost of goods sold: Beginning inventory Variable Fixed Subtotal Ending inventory Total COGS
b. Variable-costing income statements:
Operating profit c.
$300 000
$600 000
Budgeted fixed manufacturing overhead rate for 2015 = $2 000 000 / 100 000 = $20 2017 difference of $400 000 = (100 000 - 80 000) × $20 = $400 000 (favours absorption method)
2018 difference of $400 000 = (70 000 - 90 000) × $20 = $400 000 (favours variable method) AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 338) The following information pertains to Ball Company: Manufacturing costs Units manufactured Beginning inventory
$2 400 000 40 000 0 units
39 800 units are sold during the year for $100 per unit. Required: a. What is the average manufacturing cost per unit? b. What is the cost of ending finished goods inventory? c. What is the gross margin?
Answer: a. $2 400 000 / 40 000 = $60.00 b. (40 000 - 39 800) × $60 = $12 000 c. 39 800 × ($100 - $60) = $1 592 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 339) During 2018, Laker & Lock Corporation incurred manufacturing expenses of $20 000 000 to produce
finished units. At year-end, it was determined that 370 000 units were sold while 30 000 units remained in ending inventory. 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 amount that will be reported on the balance sheet for ending inventory?
Answer: a. $20 000 000 / 400 000 = $50.00 b. 370 000 units × $50 = $18 500 000 c. 30 000 units × $50 = $1 500 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 340) Ruggles Company has provided the following data for the year ended September 30, 2013. 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 profit using the variable-costing approach. b. Determine operating profit using the absorption-costing approach. c. Explain why operating profit is not the same under the two approaches.
Answer: a. 24 000 × $50 = $1 200 000 sales
($525 000/30 000) × 24 000 = $420 000 variable manufacturing cost $1 200 000 - $420 000 - $144 800 = $635 200 contribution margin $635 200 - $372 000 - $77 400 = $185 800 operating profit b. ($372 000/30 000) × 24 000 = $297 600 manufacturing fixed cost $1 200 000 - $420 000 - $297 600 = $482 400 gross margin $482 400 - $144 800 - $77 400 = $260 200 operating profit c.
$260 200 - $185 800 = $74 400 or 6000 units in ending inventory × $12.40 per unit of fixed manufacturing cost. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The cost of inventory: comparing variable costing and absorption costing and absorption costing Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Choose the one alternative that best completes the statement or answers the question. 341) The difference between operating profits under variable costing and absorption costing centres on how to account for: A) fixed manufacturing costs B) direct materials costs C) variable manufacturing costs D) Both B and C are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 342) When comparing the operating profits between absorption costing and variable costing, and beginning finished inventory exceeds ending finished inventory, it may be assumed that: A) variable costing operating profit exceeds absorption costing operating profit B) variable cost per unit is less than fixed cost per unit C) there is an unfavourable production-volume variance D) sales increased during the period Answer: A AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Answer the following questions using the information below: Wangaratta Corporation incurred fixed manufacturing costs of $6000 during 2018. Other information for 2018 includes: The budgeted denominator level is 1000 units. Units produced total 750 units. Units sold total 600 units. Beginning inventory was zero. The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. 343) Operating profit using absorption costing will be than operating profit if using variable costing. A) $2400 lower B) $3600 lower C) $900 higher D) $2400 higher Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 344) Fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) $3600 B) 0 C) $6000 D) $4800 Answer: A AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 345) Fixed manufacturing costs included in ending inventory total: A) 0 B) $1200 C) $900 D) $1500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 346) The production-volume variance is: A) $2400 B) $1500 C) 0 D) $2000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Answer the following questions using the information below: Queanbeyan Company incurred fixed manufacturing costs of $7200 during 2018. Other information for 2018 includes: The budgeted denominator level is 800 units. Units produced total 1000 units. Units sold total 950 units. Beginning inventory was zero.
The fixed manufacturing cost rate is based on the budgeted denominator level. Manufacturing variances are closed to cost of goods sold. 347) Under variable costing, the fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) 0 B) $7200 C) $9000 D) $8550 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 348) Under absorption costing, fixed manufacturing costs expensed on the income statement (excluding adjustments for variances) total: A) $8550 B) 0 C) $7200 D) $9000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 349) Under absorption costing, the production-volume variance is: A) $450 B) 0 C) $1800 D) $1350 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements
Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 350) Operating profit using absorption costing will be operating profit if using variable costing. A) $450 higher than B) $1350 lower than C) the same as D) $900 higher than Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 351) Mt Panorama Company has the following information for the current year: Beginning fixed manufacturing overhead in inventory Fixed manufacturing overhead in production Ending fixed manufacturing overhead in inventory
$95 000 375 000 25 000
Beginning variable manufacturing overhead in inventory Variable manufacturing overhead in production Ending variable manufacturing overhead in inventory
$10 000 50 000 15 000
What is the difference between operating profits under absorption costing and variable costing? A) $70 000 B) $50 000 C) $40 000 D) $5000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 352) Woggoon Nature Corporation has provided the following information:
Beginning fixed manufacturing overhead in inventory Ending fixed manufacturing overhead in inventory Beginning variable manufacturing overhead in inventory Ending variable manufacturing overhead in inventory
$60 000 45 000 $30 000 14 250
Fixed selling and administrative costs Units produced Units sold
$724 000 5000 units 4800 units
What is the difference between operating profits under absorption costing and variable costing? A) $750 B) $7500 C) $15 000 D) $30 750 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 353) The main difference between variable costing and absorption costing is the way in which fixed manufacturing costs are accounted for. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 354) The contribution-margin format of the income statement is used with absorption costing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as
impact on operating profit, internal and external performance measurement, and remuneration of managers. 355) The contribution-margin format of the income statement distinguishes manufacturing costs from nonmanufacturing costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 297) The gross-margin format of the income statement highlights the lump sum of fixed manufacturing costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 356) When variable costing is used, an income statement will show gross margin. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 357) The income under variable costing will always be the same as the income under absorption costing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers.
Write your answer in the space provided or on a separate sheet of paper. 358) Hadlee Company sells its products for $66 each. The current production level is 25 000 units, although only 20 000 units are anticipated to be sold. Unit manufacturing costs are: Direct materials Direct manufacturing labour Variable manufacturing costs Total fixed manufacturing costs Marketing expenses
$12.00 $18.00 $9.00 $180 000 $6.00 per unit, plus $60 000 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 (20 000 × $66) Cost of goods sold (20 000 × $46.20*) Gross margin Marketing: Variable (20 000 × $6) Fixed
$1 320 000 924 000 396 000 $120 000 60 000
Operating profit
180 000 $216 000
* $12.00 + $18.00 + $9.00 + ($180 000/25 000) = $46.20 b. Variable-costing income statement: Sales (20 000 × $66) Variable costs: Cost of goods sold (20 000 × $39*) Marketing (20 000 × $6) Contribution margin Fixed costs: Manufacturing
$1 320 000 $780 000 120 000
$180 000
900 000 420 000
Marketing Operating profit
60 000
240 000 $180 000
* $12.00 + $18.00 + $9.00 = $39 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Variable costing versus absorption costing: operating profit and income statements Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Choose the one alternative that best completes the statement or answers the question. 359) What can management do to discourage production for inventory purposes? A) Incorporate a carrying charge for inventory in the internal accounting system B) Evaluate performance over a three- to five-year period rather than a single year C) Evaluate non-financial measures such as units in ending inventory compared to units in sales D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 360) Which method is NOT a way to discourage producing for inventory? A) Include non-financial measures when evaluating performance B) Evaluate performance on a quarterly basis only C) Incorporate a carrying charge for inventory D) Focus on careful budgeting and inventory planning Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 361) Non-financial measures such as comparing units in ending inventory this period to units in ending
inventory last period can help reduce build-up of excess inventory. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 362) Managers can increase operating profit when absorption costing is used by producing more inventory. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 363) Many companies use variable costing for internal reporting to reduce the undesirable incentive to build up inventories. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 364) Under variable costing, managers can increase operating profit by simply producing more inventory at the end of the accounting period even if that inventory never gets sold. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 365) A manager can increase operating profit by deferring maintenance beyond the current accounting
period when absorption costing is used. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 366) Under absorption costing, managers can increase operating profit by holding more inventories at the end of the period. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Absorption costing and performance measurement Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Choose the one alternative that best completes the statement or answers the question. 367) Variable costing: A) expenses administrative costs as cost of goods sold. B) is required for external reporting to shareholders. C) includes fixed manufacturing overhead as an inventoriable cost. D) treats direct manufacturing costs as a product cost. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A comparison of variable and absorption inventory-costing methods Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. 368) Why have many companies switched from absorption costing to variable costing for internal reporting? A) To increase bonuses for managers B) So the denominator level is more accurate C) To reduce the undesirable incentive to build up inventories D) To comply with external reporting requirements Answer: C
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A comparison of variable and absorption inventory-costing methods Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 369) Absorption costing is required by GAAP (Generally Accepted Accounting Principles) for external reporting. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A comparison of variable and absorption inventory-costing methods Learning Objective: 6.6 Compare and evaluate inventory-costing methods in terms of criteria such as impact on operating profit, internal and external performance measurement, and remuneration of managers.
Chapter 7 Target costing, managing activities and managing capacity Choose the one alternative that best completes the statement or answers the question. 1) Long-run pricing decisions include: A) adjusting product mix and output volume in a competitive market. B) pricing a one-time-only special order. C) pricing a product in a major market in which there is some leeway in setting price. D) None of the above. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.1 Distinguish between market-based and cost-based prices. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 2) The two basic approaches for pricing are: competition-based and cost-based pricing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.1 Distinguish between market-based and cost-based prices. 3) Fixed costs are relevant for short-run pricing decisions because they cannot be changed. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.1 Distinguish between market-based and cost-based prices. Write your answer in the space provided or on a separate sheet of paper. 4) What are the major influences that must be considered when pricing a new product? Discuss each briefly.
Answer: The major influences are customers, competitors, and costs. CUSTOMERS: Managers must always examine pricing problems through the eyes of their customers. A price increase may cause customers to reject a company’s product and choose a competing or substitute product. COMPETITORS: Competitors’ reactions influence pricing decisions. At one extreme, a rival’s prices and products may force a business to lower its prices to be competitive. At the other extreme, a business without a rival in a given situation can set higher prices. A business with knowledge of its rivals’ technology, plant capacity, and operating policies is able to estimate its rivals’ costs, which is valuable information in setting competitive prices. COSTS: Companies price products to exceed the costs of making them. The study of cost-behaviour patterns gives insight into the income that results from different combinations of price and output quantities sold for a particular product. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.1 Distinguish between market-based and cost-based prices. Choose the one alternative that best completes the statement or answers the question. 5) Target pricing: A) estimates are based on customers’ perceived value of the product. B) is used for short-term pricing decisions. C) is one form of cost-based pricing. D) refers to the fact that relevant costs are all variable costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 6) The price is the basis for calculating target cost per unit. A) market B) hybrid C) selling D) target Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 7) The department usually in the best position to identify customers’ needs is the: A) production department. B) distribution department. C) sales and marketing department. D) design department. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 8) 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. A) Value engineering B) Target costing C) Market costing D) Capacity costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 9) 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 profit A) A B C D B) B D A C C) B A D C D) A D B C Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs
Learning Objective: 7.2 Set output prices using target costing. 10) Which of the following is FALSE regarding target costing? A) Customer input is essential to the target costing process B) Improvements are implemented in small incremental amounts C) A key goal is to minimise costs over the product’s useful life D) Input is requested from suppliers and distributors Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 11) Which of the following is NOT associated with target costing? A) The mark-up component B) All value-chain business functions C) Cross-functional teams D) Value engineering Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 12) When target costing and target pricing are used together: A) the focus of target pricing is to undercut the competition. B) the target cost is established first, then the target price. C) target costs are generally higher than current costs. D) the target cost is the estimated long-run cost that enables a product or service to achieve a desired profit. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 13) 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 profit is referred to as: A) full costing.
B) cost-plus pricing. C) target costing. D) Kaizen costing. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. Answer the following questions using the information below: Elliott Manufacturing has decided to produce a new interior door to complement its exterior door line. The new door is expected to sell for $60 each, and the annual target sales volume for the doors is 20 000. Elliott has target operating profit of 20% of sales. 14) What are target sales revenues? A) $960 000 B) $2 000 000 C) $1 200 000 D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 15) What is the target operating profit? A) $240 000 B) $180 000 C) $300 000 D) $192 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 16) What is the target cost? A) $1 260 000 B) $960 000
C) $900 000 D) $1 008 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 17) What is the target cost for each interior door? A) $48 B) $58 C) $45 D) $60 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. Answer the following questions using the information below: Potter Products has produced an electric coffee pot to complement its range of kitchen products. The new coffee pot can be sold at a target price of $46, and annual target sales volume for the coffee pot is 250 000. Potter has target operating profit of 20% of sales. 18) What are the target sales revenues? A) $1 150 000 B) $11 500 000 C) $12 000 000 D) $1 200 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 19) What is the target operating profit? A) $1 242 000 B) $1 200 000 C) $2 400 000
D) $2 300 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 20) What is the total target cost? A) $2 484 000 B) $9 200 000 C) $1 000 000 D) $11 500 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 21) What is the target cost for each coffee pot? A) $42.15 B) $36.80 C) $35.50 D) $46.00 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. Answer the following questions using the information below: Perth TV currently sells flat screen televisions for $180. It has costs of $140. A competitor is bringing a new flat screen television to market that will sell for $150. Perth believes it must lower the price of its television sets to $150 to remain competitive. Marketing believes that the new price will cause sales to increase by 10%, even with the new competitor in the market. Perth’s sales are currently 100 000 televisions per year. 22) What is the target cost if target operating profit is 25% of sales? A) $45.00 B) $135.00 C) $112.50
D) $37.50 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 23) What is the change in operating profit if marketing is correct and only the sales price is changed? A) $(1 100 000) B) $1 100 000 C) $300 000 D) $(2 900 000) Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 24) 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) $140.00 B) $113.64 C) $123.34 D) $112.50 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. Answer the following questions using the information below: Ace Books Company currently sells eBook readers for $270. It has costs of $210. A competitor is bringing a new eBook reader to market that will sell for $225. Management believes it must lower the price to $225 to compete in the market for eBook readers. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Ace’s sales are currently 10 000 eBook readers per year. 25) What is the target cost if operating profit is 25% of sales? A) $56.25 B) $202.50
C) $168.75 D) $67.50 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 26) What is the change in operating profit if Marketing is correct and only the sales price is changed? A) $(165 000) B) $45 000 C) $165 000 D) $(435 000) Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 27) What is the target cost if the company wants to maintain its same profit level, and Marketing is correct (rounded to the nearest cent)? A) $168.75 B) $170.46 C) $210.00 D) $185.00 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 28) Target pricing is a form of cost-based pricing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 29) The first step in target pricing is to determine the target cost of the product.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 30) Market-based pricing starts with an assessment of market conditions, including customers’ perceived value of an entity’s output and how competitors are likely to price competing outputs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 31) Sellers that set a target price have an idea of the amount of operating profit that they expect from setting that price. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 32) Cost-plus pricing starts with what customers are willing to pay, and then adds a desired profit. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Z Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. costs 33) Target operating profit per unit is the operating profit that a seller aims to earn per unit of output sold. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. Write your answer in the space provided or on a separate sheet of paper. 34) 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 so that target profit and sales are achieved. 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 35) Derwent Fishing Company manufactures fishing rods that have a price of $35.00. It has costs of $26.50. A competitor is introducing a new fishing rod that will sell for $30.00. Management believes it must lower the price to $30.00 to compete in the highly cost-conscious fishing rod market. Marketing believes that the new price will maintain the current sales level. Derwent Fishing Company’s sales are currently 450 000 rods per year.
Required: a. What is the target cost for the new price if target operating profit is 20% of sales? b. What is the change in operating profit for the year if $30.00 is the new price and costs remain the same? c. What is the target cost per unit if the selling price is reduced to $30.00 and the company wants to maintain its same income level? Answer: a. $30.00 - ($30.00 × 0.20) = $24.00 b. Change = 450 000 × ($35.00 - $26.50) - [450 000 × ($30.00 - $26.50)] = $3 825 000 - $1 575 000 = $2 250 000 reduction in income c.
Current income = 450 000 × ($35.00 - $26.50) = $3 825 000 Target cost per unit:
$3 825 000 = (450 000 × $30.00) - 450 000y 450 000y = $9 675 000 y = $21.50 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Setting target prices and target costs
Learning Objective: 7.2 Set output prices using target costing. 36) NSW Medical Equipment Company manufactures hospital beds. Its most popular model, Comfy2, sells for $5000. It has variable costs totalling $2800 and fixed costs of $1000 per unit, based on an average production run of 5000 units. It normally has four production runs a year, with $400 000 in set-up 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 Comfy2 that will sell for $4000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Comfy2 beds it can produce. Required: a. What is the annual operating profit from Comfy2 at the current price of $5000? b. What is the annual operating profit from Comfy2 if the price is reduced to $4000 and sales in units increase by 25%? c. What is the target cost per unit for the new price if target operating profit is 20% of sales?
Answer: a. Sales (20 000 × $5000) Costs: Variable costs (20 000 × $2800) Fixed costs ($1000 × 5000 × 4) Set-up costs ($400 000 × 4)
b.
$100 000 000 $56 000 000 20 000 000 1 600 000
77 600 000
Operating profit
$22 400 000
Sales (25 000 × $4000) Costs: Variable costs (25 000 × $2800) Fixed costs, same Set-up costs ($400 000 × 5)
$100 000 000
Operating profit
$70 000 000 20 000 000 2 000 000
92 000 000 $8 000 000
c. $4000 - ($4000 × 0.20) = $3200 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Setting target prices and target costs
Learning Objective: 7.2 Set output prices using target costing. 37) Mt Safety Avionics currently sells radios for $1800 each. Each radio costs $1400 to make. A competitor is introducing a new radio that will sell for $1600. Mt Safety believes it must lower the price to $1600 to compete in the market for radios. However, its Marketing Department believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Mt Safety’s sales are currently 1000 radios per year. Required: a. What is the target cost if target operating profit is 25% of sales? b. What is the change in operating profit if marketing is correct and only the sales price is changed? c. What is the target cost if the company wants to maintain its same profit level, and marketing is correct?
Answer: a. $1600 - ($1600 × 0.25) = $1200 b. (1000 × ($1800 - $1400)) - (1100 × ($1600 - $1400)) = $180 000 c.
Current profit = 1000 × ($1800 - $1400) = $400 000 Target cost y: $400 000 = (1100 × $1600) - 1100y y = $1 360 000/1100 y = $1236.3636 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. 38) Hobart Boating Supplies currently sells motor boats for $16 000. It has costs of $13 000. A competitor is bringing a new motor boat to the market that will sell for $15 500. Management believes it must lower the price to $15 500 to compete in the market for motor boats. Marketing believes that the new price will cause sales to increase by 12.5%, even with a new competitor in the market. Hobart Boating Supplies’ sales are currently 2000 motor boats per year. Required: a. What is the target cost if target operating profit is 25% of sales? b. What is the change in operating profit if marketing is correct and only the sales price is changed? c. What is the target cost if the company wants to maintain its same profit level, and marketing is correct?
Answer: a. $15 500 - ($15 500 × 0.25) = $11 625 b. (2000 × ($16 000 - $13 000)) - (2250 × ($15 500 - $13 000)) = $375 000 less operating profit c.
Current profit = 2000 × ($16 000 - $13 000) = $6 000 000 Target cost y: $6 000 000 = (2250 × $15 500) - 2250y y = $28 875 000/2250 y = $12 834 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Setting target prices and target costs Learning Objective: 7.2 Set output prices using target costing. Choose the one alternative that best completes the statement or answers the question. 39) Value engineering may result in all of the following EXCEPT: A) the evaluation of all business functions within the value chain. B) changes in materials specifications. C) increases in the quantity of non-value-added cost drivers. D) improved product design. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 40) A(n) represents something that one or more people within an organisation do to assist in achieving its objective. A) value B) activity C) capacity D) supply chain Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering.
41) To design costs out of products is a goal of: A) target costing. B) cost-plus pricing. C) Kaizen costing. D) peak-load costing. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 42) Which of the following is not a value engineering method of reducing costs? A) Simplifying the design and thereby decreasing the number of component parts B) Building efficiencies into value-added costs C) Reducing the number of features offered D) Redesigning alternative options over and over until the wishes of all cross-functional team members are accommodated Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 43) analysis is a fundamental tool in value engineering. A) Activity B) Value C) Strategic D) Hybrid Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 44) Value engineering has the objective of reducing costs while still satisfying customer needs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs
Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 45) Reverse engineering has the objective of reducing costs while still satisfying customer needs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 46) Rework is an example of a value-added cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 47) It is always clear which activities add value and which do not add value to a product. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 48) We describe an activity as a value-added activity if its elimination by a manager would reduce the perceived value or utility (usefulness) that customers experience from using the relevant output. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. 49) Activity analysis is a fundamental tool in value engineering, the systematic evaluation of all aspects of the value chain with the objective of reducing costs and achieving a quality level that satisfies customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.3 Given the context, analyse activities and apply value engineering. Choose the one alternative that best completes the statement or answers the question.
50) Concerns about target costing include all the following EXCEPT: A) development time may decrease. B) cross-functional teams may add too many features. C) excessive pressure is put on suppliers. D) burnout of design engineers. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 51) Direct material costs are locked in when they are: A) sold. B) designed. C) assembled. D) delivered. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 52) Cost accounting systems focus on when costs are: A) incurred. B) locked in. C) used for setting prices for products and services. D) paid for. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 53) A locked-in cost is a(n): A) cost that can be changed in the short run. B) cost that has not yet been incurred but, based on decisions that have already been made, will be incurred in the future. C) opportunity cost that is fixed in the short run. D) cost that has been incurred, but based on decisions that have already been made, will not be incurred in the future.
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 54) Which of the following focuses on reducing costs during the manufacturing stage? A) Kaizen costing B) Life-cycle costing C) Cost-plus pricing D) Target costing Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 55) Which of the following can be included in cross-functional engineering teams? A) Management accountants B) Marketing managers C) Suppliers D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 56) In some industries, such as legal and consulting, most costs are locked in: A) during the marketing stage. B) when they are incurred. C) during the customer-service stage. D) during the design stage. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 57) Value engineering can reduce all of the following EXCEPT:
A) existing fixed manufacturing costs. B) non-value-added costs. C) rework-hours. D) value-added costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 58) A graph comparing locked-in costs with incurred costs will have: A) 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. B) locked-in costs rising much faster initially, but dropping to zero after the product is manufactured. C) no differences unless the product is manufactured inefficiently. D) the two cost lines running parallel until the end of the process, when they join. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 59) Graphic analysis of incurred and locked-in costs provides several insights as to how the different concepts influence decisions. Which of the following statements is FALSE? A) When and how costs are locked in are more important than when and how costs are incurred. B) Costs are generally locked in before they are incurred. C) Most costs are locked in during the manufacturing process. D) After a product’s design has been approved, costs are difficult to influence. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 60) Designed-in or (locked-in) costs are costs that have not yet been incurred but will be incurred in the future (and cannot be avoided) because they are dictated by the design of the output. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 61) Locked-in costs have already been incurred. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 62) For manufacturing firms, product costs are generally locked in during the manufacturing stage. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 63) To manage activities well, management must identify how design choices lock in costs before the costs are incurred. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 64) Customers are sometimes willing to pay for non-value-added costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 65) Many companies combine value engineering with kaizen, or continuous improvement, methods that seek to reduce the time it takes to do a task and to eliminate waste during production and delivery of outputs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs.
Write your answer in the space provided or on a separate sheet of paper. 66) In target costing, what are at least two techniques used to achieve target-costing goals?
Answer: In target costing, techniques used to achieve target-costing goals include value engineering, cross-functional teams, and supply-chain management. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 67) Compare target costing and kaizen costing.
Answer: Target costing focuses on reducing costs for products during the design stage. Kaizen costing focuses on reducing costs for products in the manufacturing stage. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. 68) Explain the difference between locked-in costs and costs incurred. Which of these types of costs does a traditional accounting system emphasise? 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 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex
Topic: Setting target prices and target costs Learning Objective: 7.4 Distinguish between costs incurred and designed-in costs. Choose the one alternative that best completes the statement or answers the question. 69) Most of a product’s life-cycle costs are locked in by decisions made during the function of the value chain. A) marketing B) customer-service C) design D) manufacturing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting.
business
70) In budgeting, managers estimate the revenues and business function costs of the value chain attributable to each product from its initial R&D to its final customer service and support. A) product life-cycle B) target C) value D) capacity Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 71) What can an understanding of life-cycle costs lead to? A) Cost-effective product designs that are easier to service B) Less need for evaluation of the competition C) Mutually beneficial relationships between buyers and sellers D) Additional costs during the manufacturing cycle Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 72)
costing tracks and accumulates business function costs of the value chain attributable to each
product from initial R&D to final customer service and support. A) Product B) Life-cycle C) Target D) Process Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 73) Life-cycle budgeting and life-cycle costing help highlight: A) large ordering costs due to the great number of component parts used. B) an increase in customer-service costs due to using inferior materials. C) an increase in annual operating profit resulting from the new product. D) high production costs caused by a complex design. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 74) Life-cycle budgeting: A) gives companies more insight into total costs when manufacturing costs consume the majority of the resources. B) is most useful to companies that manufacture small items such as household plastics. C) has little in common with target pricing. D) helps companies estimate revenues over a multi-year horizon. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 75) costs comprise the total costs that a customer incurs to acquire, use, maintain and dispose of a product or service. A) Target B) Customer life-cycle C) Product D) Manufacturing
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. Answer the following questions using the information below: Snowy River Transformers is in the process of evaluating a new product using the following information: ∙ ∙ ∙ ∙ ∙ ∙ ∙ ∙
A new transformer has two production runs each year, each with $10 000 in set-up costs. The new transformer incurred $30 000 in development costs and is expected to be produced over the next three years. Direct costs of producing the transformers are $40 000 per run of 5000 transformers. Indirect manufacturing costs charged to each run are $45 000. Destination charges for each transformer average $1.00. Customer service expenses average $0.20 per transformer. The transformers are selling for $25 the first year and will increase by $3 each year thereafter. Sales units equal production units each year.
76) What are estimated life-cycle revenues? A) $310 000 B) $250 000 C) $280 000 D) $840 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 77) What is the estimated life-cycle operating profit for the first year? A) $18 000 B) $48 000 C) $20 000 D) $119 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing
Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 78) What is the estimated life-cycle operating profit for the first three years? A) $840 000 B) $204 000 C) $174 000 D) $636 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. Answer the following questions using the information below: Waugh, Chapple, Border and Associates is in the process of evaluating its new client services for the business consulting division. ∙ ∙ ∙ ∙ ∙
Estate planning, a new service, incurred $600 000 in development costs and employee training. The direct costs of providing this service, which is all labour, averages $100 per hour. Other costs for this service are estimated at $2 000 000 per year. The current program for estate planning is expected to last for two years. At that time, a new law will be in place that will require new operating guidelines for the tax consulting. Customer service expenses average $400 per client, with each job lasting an average of 400 hours. The current staff expects to bill 40 000 hours for each of the two years the program is in effect. Billing averages $140 per hour.
79) What are the estimated life-cycle revenues? A) $22 400 000 B) $6 400 000 C) $11 200 000 D) $8 000 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 80) What is the estimated life-cycle operating profit for the first year? A) $(1 040 000)
B) $6 640 000 C) $(1 400 000) D) $5 600 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 81) What is the estimated life-cycle operating profit for the first two years? A) $(1 480 000) B) $11 200 000 C) $(1 400 000) D) $3 200 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. Answer the following questions using the information below: Davidson, Lindwall Associates is in the process of evaluating its new client services for the business systems consulting division. ∙ ∙ ∙ ∙ ∙
Distribution planning, a new service, incurred $250 000 in development costs. The direct costs of providing the service, which is all labour, averages $50 per hour. Other costs for this service are estimated at $300 000 per year. The current program for Distribution planning is expected to last for two years. At that time, expected new operating systems are likely to make the service non-viable. Customer service expenses average $250 per client, with each job lasting an average of 40 hours. The current staff expects to bill 15 000 hours for each of the two years the program is in effect. Billing averages $90 per hour.
82) What are the estimated life-cycle revenues? A) $2 700 000 B) $1 350 000 C) $3 000 000 D) $3 400 000 Answer: A
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 83) What is the estimated life-cycle operating profit for the first year? A) $162 500 B) $43 750 C) $(43 750) D) $206 250 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 84) What is the estimated life-cycle operating profit for both years combined? A) $(87 500) B) $162 500 C) $(43 750) D) $206 250 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 85) Life-cycle budgeting is particularly important when non-production costs are significant. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 86) Many companies use life-cycle budgeting to determine target prices. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Life-cycle budgeting and costing
Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 87) The product life-cycle spans the time period from initial R&D on a product to the point at which the seller no longer offers customer service and support for that product. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 88) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 89) A firm using product life-cycle reporting will have a calendar-based focus for this report. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. Write your answer in the space provided or on a separate sheet of paper. 90) Benaud Company is in the process of evaluating a new part using the following information. ∙ Flipperball has one production run each month, each with $16 000 in set-up costs. ∙ Flipperball incurred $40 000 in development costs and is expected to be produced over the next three years. ∙ Direct costs of producing Flipperball are $56 000 per run of 24 000 parts each. ∙ Indirect manufacturing costs charged to each run are $88 000. ∙ Destination charges for each run average $18 000. ∙ Flipperball is selling for $12.50 in the Australia 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 profit for the first year?
Answer: a. Domestic ($12.50 × 12 months × 24 000 × 3 yrs. × 1/3) Export ($25 × 12 months × 24 000 × 3 yrs. × 2/3)
$ 3 600 000 14 400 000
Estimated life-cycle revenues
$18 000 000
b. Sales Domestic ($12.50 × 12 months × 24 000 × 1/3) Export ($25 × 12 months × 24 000 × 2/3)
$ 1 200 000 4 800 000
Total Sales Costs: Development costs Set-up costs (12 × $16 000) Direct manufacturing costs (12 × $56 000) Indirect manufacturing costs (12 × $88 000) Destination costs (12 × $18 000)
6 000 000
$40 000 192 000 672 000 1 056 000 216 000
2 176 000
Estimated life-cycle operating profit, first year $3 824 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 91) Laker and Lock 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 $15 300 in set-up costs. ∙ The lamp product line incurred $55 000 in development costs and is expected to be produced over the next six years. ∙ Direct costs of producing the lamps average $155 each. Each lamp requires 12 labour-hours and 2 machine-hours. ∙ Indirect manufacturing costs are estimated at $180 000 per year. ∙ Customer service expenses average $18 per lamp. ∙ Current sales are expected to be 2000 units of each lamp pattern. Each lamp sells for $250. ∙ Sales units equal production units each year.
Required: a. What are the estimated life-cycle revenues? b. What is the estimated life-cycle operating profit for the first year?
Answer: a. Estimated life-cycle revenues: (2000 × 2 patterns per year × $250 per lamp)
$1 000 000 × 6 years $6 000 000
b. Annual revenues (2000 × $250 × 2) Set-up costs ($15 300 × 2) Development costs Direct manufacturing costs (2000 × $155 × 2) Indirect manufacturing costs Customer service costs ($18 × 2000 lamps × 2)
$1 000 000 $30 600 55 000 620 000 180 000 72 000
957 600
Estimated life-cycle operating profit for the first year $42 400 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 92) Queensland Greeting Cards Incorporated is starting a new business venture and is in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows: ∙ Sixteen times each year, a new card design will be put into production. Each new design will require $600 in set-up 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 2500 units of each card design. Each card sells for $3.50. ∙ Sales units equal production units each year. Required: a. What are the estimated life-cycle revenues?
b. What is the estimated life-cycle operating profit for the first year? c. What is the estimated life-cycle operating profit per year for the years after the first year? d. What is the total estimated life-cycle operating profit?
Answer: a. Estimated life-cycle revenues: (2500 × 16 designs per year × $3.50 per card sold)
$140 000 × 4 years $560 000
b. Annual revenues (2500 × $3.50 × 16) Development costs Set-up costs ($600 × 16) Direct manufacturing costs (2500 × $0.50 × 16) Indirect manufacturing costs Customer service costs ($0.10 × 2500 cards × 16)
c.
$140 000 $75 000 9600 20 000 50 000 4000
158 600
Estimated life-cycle operating profit (loss) for the first year
$(18 600)
Annual revenues (2500 × $3.50 × 16)
$140 000
Set-up costs ($600 × 16) Direct manufacturing costs (2500 × $0.50 × 16) Indirect manufacturing costs Customer service costs ($0.10 × 2500 cards × 16) Estimated life-cycle operating profit (loss) for the first year
$9600 20 000 50 000 4000
83 600 $56 400
d. Estimated life-cycle operating profit for all four years $150 600 (3 × $56 400 - $18 600) AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. 93) Linguistics Inc. provides materials that let people teach themselves to speak Mandarin. 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 Linguistics Inc. 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 Linguistics Inc. 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Life-cycle budgeting and costing Learning Objective: 7.5 Apply life-cycle budgeting and costing to guide price-setting. Choose the one alternative that best completes the statement or answers the question. 94) reduces theoretical capacity for unavoidable operating interruptions. A) Normal capacity utilisation B) Theoretical capacity C) Practical capacity D) Budgeted capacity utilisation Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates.
95) capacity represents an ideal goal, which some managers may wish to set as an aspirational goal. A) Practical B) Master budget C) Theoretical D) Normal Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 96) capacity utilisation is the level of capacity that managers expect to be used for the current budget period, which is typically one year. A) Budgeted B) Actual C) Master D) Theoretical Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 97) is based on the demand for the output of the plant. A) Practical capacity B) Budgeted capacity utilisation C) Normal capacity utilisation D) Both B and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 98) Managers can use technical specifications to estimate capacity, and a combination of technical specifications, engineering studies and human resource considerations (e.g. worker safety) to obtain a reliable estimate of practical capacity for the budget period. A) theoretical B) practical
C) master budget D) strategic Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 99) Although an average of demand and production over the previous years is a reasonably objective starting point for estimating normal capacity utilisation, answers to the question as to what is ‘normal’ can be influenced by subjectivity. A) 1-2 B) 5-10 C) 8-12 D) 3–5 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 100) capacity utilisation typically focuses on the expected capacity utilisation for the next year and can thus be more reliably estimated than normal capacity utilisation. A) Actual B) Normal C) Theoretical D) Budgeted Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 101) Which of the following is the budgeted fixed manufacturing cost rate the lowest for? A) Theoretical capacity B) Practical capacity C) Budgeted capacity utilisation D) Normal capacity utilisation Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 102) generally provides the lowest estimate of denominator-level capacity. A) Theoretical capacity B) Budgeted capacity utilisation C) Normal capacity utilisation D) Practical capacity Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 103) is the level of capacity utilisation that satisfies average customer demand over a period that includes seasonal, cyclical and trend factors. A) Budgeted capacity utilisation B) Normal capacity utilisation C) Practical capacity D) Theoretical capacity Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. Answer the following questions using the information below: Cycle Safety company is able to produce 1000 safety helmets per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 850 units per hour. The plant actually operates only 27 days per month. 104) What is the theoretical capacity for the month of April? A) 240 000 units B) 720 000 units C) 518 400 units D) 1 000 000 units Answer: B AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 105) What is the practical capacity for the month of April? A) 720 000 units B) 1 000 000 units C) 550 800 units D) 240 000 units Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 106) Budgeted fixed manufacturing costs of a product using practical capacity: A) should be used to evaluate a marketing manager’s performance in the current year. B) can result in setting selling prices that are not competitive. C) includes the cost of unused capacity. D) represents the cost per unit of supplying capacity. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 107) Normal capacity utilisation: A) when used for product costing results in the lowest cost estimate of the four capacity options. B) can result in setting selling prices that are not competitive. C) represents the maximum units of production intended for current capacity. D) represents real capacity available to the company. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 108) Both theoretical and practical capacity measure capacity in terms of demand for the output. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 109) Managers cannot reduce the costs of capacity easily or quickly because they are fixed. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 110) Normal capacity utilisation is the expected level of capacity utilisation for the current budget period, which is typically one year. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 111) In business and accounting, ‘capacity’ usually implies a constraint or an upper limit, which is not easily lifted, at least in the short run. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 112) When managers measure capacity on the assumption that the entity is capable of producing at 100% efficiency all the time, that is, 24 hours a day, seven days a week, this represents theoretical capacity. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 113) Theoretical capacity allows time for regular machine maintenance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 114) Whether managers adopt theoretical capacity as an aspirational goal or not, they recognise that, in practice, operating interruptions (such as scheduled maintenance time, shutdowns for holidays and so on) are unavoidable. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 115) ‘Budgeted capacity utilisation’ is the level of capacity that managers expect to be used for the current budget period, which is typically one year. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. 116) ‘Theoretical capacity’ is the capacity level that represents what the firm is able to obtain under reasonable circumstances. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. Write your answer in the space provided or on a separate sheet of paper. 117) Wallace’s Wrench Company manufactures socket wrenches. ∙ For next month, the vice CEO of production plans on producing 4400 wrenches per day. ∙ The company can produce as many as 5000 wrenches per day, but is more likely to produce 4500 per day. ∙ The demand for wrenches for the next three years is expected to average 4250 wrenches per day. ∙ Fixed manufacturing costs per month total $336 600. ∙ The company works 20 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?
b. What is the practical fixed manufacturing overhead rate per wrench? c. What is the normal fixed manufacturing overhead rate per wrench? d. What is the budgeted fixed manufacturing overhead rate per wrench?
Answer: a. Theoretical fixed manufacturing overhead rate = $336 600/(5000 × 20) = $3.366 b.
Practical fixed manufacturing overhead rate = $336 600/(4500 × 20) = $3.74
c.
Normal fixed manufacturing overhead rate = $336 600/(4250 × 20) = $3.96
d. Budgeted fixed manufacturing overhead rate = $336 600/(4400 × 20) = $3.825 AACSB: Able to translate knowledge of business and management into practiceDifficulty: Complex Topic: Managing capacity and estimating its cost Learning Objective: 7.6 Explain the four main capacity concepts and calculate relevant rates. Choose the one alternative that best completes the statement or answers the question. 118) Theoretical capacity: A) when used for product costing, results in the lowest cost estimate of the four capacity options. B) represents real capacity available to the company. C) provides the best perspective of actual long-run costs. D) replicates the cost of capacity in a competitor’s cost structure. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 119) 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) normal capacity utilisation. C) an unattainable level of capacity. D) normal costing. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose
Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 120) Managers frequently their organisation’s output cost structure against those of competitors. A) plan B) compare C) benchmark D) publicise Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 121) From the perspective of long-run product costing, which of the following is the best to use? A) Theoretical capacity for performance evaluation B) Practical capacity for pricing decisions C) Budgeted capacity utilisation to highlight unused capacity D) Normal capacity utilisation for benchmarking purposes Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 122) What is the term used for the continuing reduction in the demand for a company’s products that occurs when it fails to meet or better competitors’ prices? A) downward demand spiral B) target cost C) target price D) capacity cost Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 123) 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) Normal capacity
C) Theoretical capacity D) Practical capacity Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 124) Using budgeted capacity to set selling prices: A) uses the perspective of long-run product pricing. B) can result in a downward demand spiral. C) spreads fixed costs over available capacity. D) avoids the recalculation of unit costs when expected demand levels change. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 125) capacity utilisation is an average that provides no meaningful feedback to a manager for a particular year. A) Practical B) Theoretical C) Master budget D) Normal Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 126) When significant differences exist between practical capacity and budgeted capacity utilisation, companies may: A) use practical capacity for meaningful feedback to the marketing manager. B) use budgeted capacity utilisation for setting selling prices. C) classify the difference as planned unused capacity. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 127) What is the effect of spreading fixed manufacturing costs over a shrinking budgeted capacity utilisation amount? A) Increased unit costs B) Greater utilisation of capacity C) Greater demand for the product D) More competitive selling prices Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 128) When there are significant differences between practical capacity and budgeted capacity utilisation, several companies classify the difference as planned capacity. A) unused B) practical C) theoretical D) used Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 129) It is most difficult to estimate because of the need to predict demand for the next few years. A) normal capacity utilisation B) practical capacity C) budgeted capacity utilisation D) theoretical capacity Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 130) With which of the following do managers face uncertainty when estimating? A) Demand of the product
B) Total fixed manufacturing costs for the next accounting period C) The denominator level for practical capacity D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 131) Unused capacity: A) is a definite sign of wasted resources. B) provides capacity for potential demand surges. C) is intended for future use. D) Both B and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 132) Capacity costs: A) don’t provide a useful planning tool for non-production businesses. B) cannot be used with activity-based costing. C) are difficult to estimate. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 133) Practical capacity: A) cannot be altered unless there is a major plant expansion. B) may increase over time due to improvements in plant layout. C) may decrease over time due to efficiencies offered by new technologies. D) Both A and B are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose
Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 134) The Australian Taxation Office (ATO) requires the use of for calculating fixed manufacturing costs per unit. A) practical capacity B) theoretical capacity C) normal capacity utilisation D) budgeted capacity utilisation Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 135) When calculating activity cost rates, management should use: A) normal capacity utilisation. B) budgeted capacity utilisation. C) practical capacity. D) None of the above. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Other applications of capacity concepts Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 136) Fixed manufacturing cost per unit will be the same no matter what capacity concept is used. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 137) By selecting the practical capacity concept, management recognises that the cost of capacity is represented by the cost of supplying the capacity, regardless of the demand for it. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept.
138) If a company chooses practical capacity for planning purposes, it must also use practical capacity for performance evaluation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 139) ‘Theoretical capacity’ is most often used to cost a product. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 140) By highlighting the cost of capacity available but not used, the management accountant directs attention to it and to the need for actions that can be taken to reduce it. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 141) For benchmarking purposes, it is best to use budgeted capacity because all competitors use about the same capacity for production. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 142) Although the Australian Taxation Office (ATO) requires that business taxpayers ascertain the cost of inventory using absorption costing, it does not specify the capacity concept that the taxpayer should use to calculate the fixed production cost per unit. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept.
143) Capacity costs also arise in non-production parts of the value chain. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 144) Using ‘practical capacity’ is best for evaluating the marketing manager’s performance for a particular year. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 145) When actual production is below practical capacity, there is unused capacity in the distribution function as well as in the production function. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 146) The higher the denominator level, the higher the budgeted fixed manufacturing cost rate per unit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 147) Budgeted capacity utilisation can be more reliably estimated than normal capacity utilisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 148) ‘Unused capacity’ is considered wasted resources and the result of poor planning. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 149) Challenges only result from estimating the denominator level, but not the costs in the numerator of the fixed manufacturing cost rate. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 150) Estimating capacity costs is unique to manufacturing and it is not applicable to non-production entities. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 151) If the capacity level chosen to calculate the budgeted fixed production overhead cost rate is more than the actual production, an unfavourable production-volume variance will result. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 152) Costing systems recognise uncertainty the same way managers recognise it. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 153) Capacity cost issues are prominent in many service-sector companies, even though these companies carry no inventory and so have no inventory costing problems. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Other applications of capacity concepts Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 154) Capacity costs arise in non-production parts of the value chain. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Other applications of capacity concepts Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 155) When actual production is below practical capacity, there is unused capacity in the distribution function but not in the manufacturing function. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Other applications of capacity concepts Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. Write your answer in the space provided or on a separate sheet of paper. 156) Match each of the denominator-level capacity concepts (a-d) to the following descriptor items (1-10) by putting the appropriate letter(s) by each item: a. Theoretical capacity b. Practical capacity c. Normal capacity utilisation d. Budgeted capacity utilisation 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 utilisation 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 utilisation that managers expect for the current budget period 8. Ideal goal of capacity utilisation 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 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 157) a. List the four different measures of capacity. b. Which measure of capacity is best for setting prices? Why? c. Which measure of capacity is best for evaluating the performance of the marketing manager for the current year? Why?
Answer: a. Theoretical capacity, practical capacity, normal capacity utilisation and budgeted capacity utilisation are the four measures of capacity. b. Practical capacity is best to use when setting prices because only the actual cost of capacity used for production is included in the cost of a unit. c. Budgeted capacity utilisation is best for evaluating performance of managers over the current year because the manager should only be held accountable for budgeted sales of the current year and not production capacity, especially when there is unused capacity. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 158) How does using budgeted capacity utilisation for setting prices lead to a downward demand spiral?
Answer: If budgeted capacity utilisation 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 a 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept. 159) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Selecting a capacity concept that is fit-for-purpose Learning Objective: 7.7 Evaluate capacity concepts and select a fit-for-purpose capacity concept.
Chapter 8 Activity-based management and activity-based costing Choose the one alternative that best completes the statement or answers the question. 1) All of the following illustrate purposes for allocating costs to cost objects EXCEPT to: A) provide information for economic decisions. B) determine a selling price the market will bear. C) motivate managers and employees. D) measure income and assets for reporting to external parties. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 2) Which of the following illustrates a purpose for allocating costs to cost objects? A) To provide information to customers B) To measure liabilities C) To determine a selling price the market will bear D) To motivate managers and employees Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 3) The costs of all six value-chain functions should be included when determining: A) the selling price of a service. B) whether to make or buy a component part from another manufacturer. C) whether to add a new product line. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 4) Management accountants might initially have developed costing systems primarily or entirely to estimate the cost of inventory for purposes. A) management B) forecasting C) financial reporting D) internal reporting Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 5) Where outputs consume resources , the management accountant traces these to the cost objects. A) gradually B) indirectly C) spontaneously D) directly Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 6) Why is there an accelerated need for refined cost systems? A) A shift toward increased direct costs B) Global monopolies C) Rising prices D) Intense competition Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Why might the managers of an organisation need a sophisticated costing system?
Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 7) One department indirect-cost rate is sufficient when: A) the same allocation base is appropriate for all departmental activities. B) product costs are significantly cross-subsidised. C) it is a service department. D) activities relate to more than one level of the cost hierarchy. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 8) Different indirect costs may be allocated if the purpose of the allocation is long run pricing than if the purpose is considering whether to make or buy a product. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 9) Indirect costs are costs that cannot be traced to cost objects in an economically feasible way. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 10) In the early days of costing systems, financial reporting imperatives set the priorities for the design of costing systems. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need
a sophisticated costing system. 11) Managers need to track activity costs across the value chain to estimate the cost of producing each output. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 12) In earlier times, when organisations produced a limited variety of products and indirect costs were a relatively small percentage of total costs, managers found that traditional costing systems were reasonably accurate and both easy and inexpensive to use. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 13) Managers do not use costing systems to inform them when making a variety of decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 14) Today, companies are simplifying their cost systems and moving toward less-detailed and less-complex cost-allocation bases. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 15) Direct costs plus indirect costs equal total costs. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 16) An individual cost item can be simultaneously a direct cost of one cost object and an indirect cost of another cost object. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. Write your answer in the space provided or on a separate sheet of paper. 17) What are three criteria necessary for an ABC system to emerge?
Answer: The three criteria necessary for an ABC system to emerge are: 1. a high level of overhead costs relative to total costs 2. diversity of processes and outputs 3. a relatively high level of competition. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 18) An electronics manufacturer is trying to encourage its engineers to design simpler products so that overall costs are reduced. Required: Which of the value-chain function costs (R&D, design, production, marketing, distribution and customer service) should be included in product-cost estimates to achieve the above purpose? Why?
Answer: All costs that are affected by the design should be included in the product cost estimate. These costs
include the cost of design, production, distribution and customer service. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 19) What factors 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 increase 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. 20) How can the need for a more refined costing system be identified?
Answer: Signs that there is a need for a more refined costing system include: a. Significant amounts of indirect costs are allocated using only one or two cost pools. b. All or most indirect costs are identified as output unit-level costs rather than batch-level, product-sustaining, or facility-sustaining activities. c. Products make diverse demands on resources because of differences in volume, process steps, batch size, or complexity. d. Products that a company is well suited to make and sell show small profits; whereas, products that a company is less suited to make and sell show large profits. e. Operations staff have significant disagreements with the accounting staff about the costs of manufacturing and marketing products and services.
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Why might the managers of an organisation need a sophisticated costing system? Learning Objective: 8.1 Identify and explain the reasons why the managers of an organisation might need a sophisticated costing system. Choose the one alternative that best completes the statement or answers the question. 21) focuses on observing and analysing activities as a basis for making a range of decisions, including pricing outputs, deciding on output mix, how to reduce costs, how to improve processes, product design, profitability and customer satisfaction. A) Activity-based costing B) Traditional costing C) Activity-based management D) Financial costing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 22) are at the heart of both ABM and ABC. A) Costs B) Activities C) Processes D) Conventions Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 23) Managers are able to achieve a great deal through systems. A) traditional costing B) management accounting C) ABM D) financial accounting Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate
without resorting to sophisticated costing
Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 24) Activity-based costing information: A) may assist in improving product design and efficiency. B) should be used when services place similar demands on resources. C) will yield inaccurate cost numbers when products are similar. D) does not support activity-based management. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 25) Activity-based management (ABM) includes decisions about all of the following EXCEPT: A) improving processes. B) smoothing costs. C) reducing costs. D) pricing and product mix. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 26) ABC systems: A) help control non-financial items such as number of set-up hours. B) help identify new designs to reduce costs. C) reveal activities that can be eliminated. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 27) A well-designed, activity-based cost system helps managers make better decisions because information derived from an ABC analysis: A) is easy to analyse and interpret. B) emphasises how managers can achieve higher sales.
C) can be used to eliminate non-value-added activities. D) takes the choices and judgement challenges away from the managers. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 28) A PRIMARY reason for assigning selling and distribution costs to products for analytical purposes is: A) that all indirect costs must be assigned. B) that different processes, products and customers require different quantities of selling and distribution activities. C) that controllers are required to assign all costs when valuing inventories. D) to justify a varied product mix. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 29) Products make diverse demands on resources because of differences in all of the following EXCEPT: A) complexity. B) selling price. C) batch size. D) volume. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 30) The UNIQUE feature of an ABC system is the emphasis on: A) individual activities. B) department indirect-cost rates. C) multiple-cost pools. D) costing individual jobs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing activities
Learning Objective: 8.2 Explain and apply activity-based management. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 31) Activity-based management focuses on observing and analysing activities as a basis for making a range of decisions, including pricing outputs, deciding on output mix, how to reduce costs, how to improve processes, product design, profitability and customer satisfaction. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 32) Even by analysing activities, managers cannot uncover information that helps them to make the decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 33) Activities are at the heart of both ABM and ABC. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 34) Managers and workers acquire outputs in the form of materials, labour, power, equipment and other resources and transform them into inputs through processes comprising activities. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 35) Managers and workers do not use activity analysis, value engineering and activity-based costing information to achieve target costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 36) Although managers are able to achieve a great deal through ABM without resorting to sophisticated costing systems, there is a point at which they might need more fine-grained information to progress further, information that ABC is capable of providing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 37) It is important to assess and simplify organisational design before introducing ABC so that fewer costs need to be tracked. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. 38) Information derived from an ABC analysis might be used to eliminate non-value-added activities. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. Write your answer in the space provided or on a separate sheet of paper. 39) What is ‘activity-based management’ and how can it be used to improve the profitability of a company?
Answer: Activity-based management is a method of management decision making that uses activity-based costing information to improve customer satisfaction and profitability. Some of the typical issues that require a refined costing system (such as ABC) are pricing and product mix decisions, cost reduction initiatives, streamlining of processes and decisions that can lead to improved product design based on knowledge of detailed costs of the existing product lines. The gathering of timely and accurate information is one of the crucial steps in the decision-making process. A properly designed ABC system will be likely to efficiently provide detailed costing information to managers in companies that manufacture and distribute diverse
product lines. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Managing activities Learning Objective: 8.2 Explain and apply activity-based management. Choose the one alternative that best completes the statement or answers the question. 40) Managers are able to apply ABC not only within the organisation but also beyond organisational boundaries to the: A) government. B) supply chain. C) customers. D) competition. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 41) gives managers information about the costs of making and selling diverse outputs, rooted in activities. A) Financial accounting B) Activity-based costing C) Management accounting D) Inventory control Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 42) cause resources to be consumed and so have an effect on costs. A) Accounting systems B) Inventory controls C) Management systems D) Activities Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities
Learning Objective: 8.3 Explain and apply activity-based costing. 43) ABC systems include all resources consumed by cost , irrespective of whether the costs are variable or fixed in the short run. A) objects B) controls C) accounting D) systems Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 44) Which of the following is a challenge to using cost-benefit criteria for allocating costs? A) Cost systems are being simplified and fewer multiple cost-allocation bases are being used B) The costs of collecting and processing information keep spiralling upward C) The costs of designing and implementing complex cost allocations are not readily apparent D) The benefits of making better-informed pricing decisions are difficult to measure Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 45) What is the first step in the seven-step guideline for ABC systems? A) Identify and trace the direct costs to the cost objects (outputs). B) Identify the outputs that are represented by cost objects. C) Identify and select the activities, associated activity-cost drivers and activity-cost pools to allocate the costs to outputs. D) Identify the indirect costs for each resource-cost pool and associated resource-cost drivers to allocate the costs to activity-cost pools. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 46) Managers set cost reduction targets in terms of reducing the cost per unit of the activity: A) cost pools.
B) cost analysis. C) cost savings. D) cost drivers. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 47) What can under-costing a particular product result in? A) Lower profits B) Understating total product costs C) Operating inefficiencies D) Loss of market share Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 48) What is the second step in the seven-step guideline for ABC systems? A) Identify and trace the direct costs to the cost objects (outputs). B) Identify the outputs that are represented by cost objects. C) Identify and select the activities, associated activity-cost drivers and activity-cost pools to allocate the costs to outputs. D) Identify the indirect costs for each resource-cost pool and associated resource-cost drivers to allocate the costs to activity-cost pools. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 49) Put the following steps in a simple costing system for a single indirect-cost pool into correct order: A. Select the cost-allocation bases to use for allocating indirect (or overhead) costs to the products. B. Calculate the indirect costs allocated to the products. C. Identify the direct costs of the products. D. Identify the products that are the chosen cost objects. A) DCAB B) BCAD
C) ABCD D) BADC Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 50) Put the following steps in a simple costing system for a single indirect-cost pool into correct order: A. Identify the indirect costs associated with each cost-allocation base. B. Calculate the total cost of the products by adding all direct and indirect costs assigned to the products. C. Calculate the rate per unit of each cost-allocation base. D. Identify the direct costs of the products. A) ACBD B) ADBC C) CBDA D) DACB Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 51) What is the last step in the seven-step guideline for ABC systems? A) Calculate the total costs of the cost objects (outputs) by adding the direct costs traced to them and the activity-based costs allocated to them. B) Identify the outputs that are represented by cost objects. C) Identify and select the activities, associated activity-cost drivers and activity-cost pools to allocate the costs to outputs. D) Identify the indirect costs for each resource-cost pool and associated resource-cost drivers to allocate the costs to activity-cost pools. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 52) Corporate administrative costs allocated to a division cost pool are MOST likely to be: A) output unit-level costs.
B) product-sustaining costs. C) organisation-sustaining costs. D) batch-level costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 53) What should a corporation focus on to manage set-up costs? A) Batch-level costs incurred per set-up-hour B) Number of units included in each production run C) Number of set-up-hours D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 54) 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) BADC C) CDAB D) DBCA Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 55) ABC systems identify A) short-term variable B) long-term fixed C) all D) short-term fixed
costs used by products.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 56) What is the focus of ABC systems? A) Long-term decisions B) Short-term decisions C) Special-pricing decisions D) Make-or-buy decisions Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 57) ABC assumes all costs are because over the long run management can adjust the amount of resources employed. A) committed B) fixed C) variable D) non-discretionary Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 58) Companies use ABC system information to: A) prepare budgets. B) analyse costs. C) evaluate performance. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing.
59) It is important that the product costs reflect as much of the diversity and complexity of the manufacturing process as possible so that: A) product costs will reflect their relative consumption of resources. B) there is less likelihood of cross subsidising of product costs. C) non-value-added costs can be eliminated. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 60) ABC systems do not include all resources consumed by cost objects. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 61) ABC brings out the cause-and-effect relationships between activities and costs; activities cause resources to be consumed and so have an effect on costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 62) 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 Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 63) If managers were interested in long-run decisions, they would focus on the variable costs only. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 64) Management accountants express the acquired resources in dollar terms and identify the cost objects that consume these resources, either direct cost objects or the activities that are required to produce the outputs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 65) If a company makes several types of a single product (e.g. televisions) a simple costing system will provide the information needed for decision-making purposes. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 66) Once a cost pool has been established, it should not need to be revisited or revised. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 67) When there is a lesser degree of homogeneity, fewer cost pools are required to accurately explain the use of company resources. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 68) ABC systems include all resources consumed by cost objects, irrespective of whether the costs are variable or fixed in the short run. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 69) When refining a costing system, a company should classify as many costs as possible as ‘indirect costs’. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 70) Production and distribution personnel use ABC systems to focus on how and where both to improve activities (and hence processes) and to reduce costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 71) Unit-level measures can distort product costing because the demand for overhead resources may be driven by batch-level or product-sustaining activities. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 72) Output unit-level costs cannot be determined unless you know how many units are in a given batch. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 73) Using multiple unit-level cost drivers generally constitutes an effective activity-based cost system. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing.
74) Misleading cost numbers are exacerbated when unit-level assignments and the alternative activity-cost-driver assignments are proportionately similar to each other. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 75) ABC systems include all resources consumed by cost objects, irrespective of whether the costs are variable or fixed in the short run. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 76) Managers use ABC systems for information when they focus on long-run decisions and are able to manage activities that affect a broader range of costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 77) Costing systems with multiple cost pools are considered ABC systems. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 78) Some well-known companies have achieved significant benefits from ABC systems with relatively few cost drivers. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 79) Department-costing systems are a further refinement of ABC systems.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 80) ABC costing systems are primarily for use in manufacturing and marketing and not for design engineering. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 81) Activity-based costing systems provide more accurate product costs than traditional systems because they employ more activity-cost drivers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 82) Production department employee wages are a corporate cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 83) Corporate costs do not belong to a particular production centre. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. Write your answer in the space provided or on a separate sheet of paper. 84) For what four purposes might a company choose to allocate corporate costs to various divisions within the company? Give an example of each.
Answer: 1. To provide information for economic decisions; for example, allocating costs from all six value-chain functions to decide on the selling price of a customised product. 2. To motivate managers and employees; for example, allocating corporate costs such as accounting support to division managers to discourage requesting a multitude of unnecessary financial reports. 3. To justify costs or compute reimbursement; for example, to allocate fixed design and production costs when arriving at a fair price for a government contract. 4. To measure income and assets for reporting to external parties; for example, allocating manufacturing overheads when costing inventories for financial statements are presented in the company’s annual report. NOTE: Examples will vary. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 85) For each cost pool listed below, select an appropriate allocation base. An allocation base may be used only once. Assume a manufacturing company. ALLOCATION BASES for which the information system can provide data: 1. Number of employees per department. 2. Employee wages and salaries per department. 3. Production facility square metreage. 4. Hours of operation of each production department. 5. Machine-hours by department. 6. Operations costs of each department. 7. Hours of computer use per month per department. 8. Indirect labour-hours per department. Cost pools: a. b. c. d. e.
Vice CEO of Finance’s office expenses. Computer operations used in conjunction with manufacturing. Personnel Department. Manufacturing machinery cost. Energy costs.
Answer: 6a. Operations costs of each department. 7b. Hours of computer use per month per department. 1c. Number of employees per department. 5d. Machine-hours by department. 4e. Hours of operation of each production department. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 86) Explain how a top-selling product may 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. 87) 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 organisation 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 the 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 classes of cost drivers are able to be considered in a simple fixed-variable dichotomy. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Estimating the costs of activities Learning Objective: 8.3 Explain and apply activity-based costing. Choose the one alternative that best completes the statement or answers the question. 88) systems are capable of producing reasonably accurate costs where a single activity accounts for a sizeable proportion of a department’s indirect costs. A) ABC B) Traditional C) Financial accounting D) Management accounting Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 89) systems are capable of producing reasonably accurate costs where significant costs are incurred on different activities within a department but the same cost driver applies to all the activities in the department. A) Traditional B) ABC C) Financial accounting D) Management accounting Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 90) From a purely standpoint, department rates and activity-cost-driver rates will give the same product costs if significant costs are incurred for different activities within a department but different outputs use resources from the different activities in the same proportions. A) financial accounting B) decision making C) product-costing D) management accounting
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 91) An activity-based costing system is a model. A) one-stage B) two-stage C) three-stage D four-stage Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 92) Which type of cost system recognises different resource-consumption patterns and eschews broad averages? A) Traditional B) ABC C) Information D) Financial accounting Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 93) In an ABC system, the allocation is the allocation of costs accumulated in support departments to each activity-cost pool. A) fourth-stage B) third-stage C) second-stage D) first-stage Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing.
94) Managers also need to update cost drivers and cost-driver rates: A) once. B) annually. C) twice. D) regularly. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 95) What does the effort and cost of collecting data depend on? A) Relevance B) Usefulness C) Availability D) Reliability Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 96) ABC systems create: A) activity-cost pools with a broad focus. B) homogenous activity-related cost pools. C) activity-cost pools containing many direct costs. D) one large cost pool. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 97) ABC systems: A) allocate costs based on the overall level of activity. B) limit cost drivers to units of output. C) generally under-cost complex products. D) highlight the different levels of activities. Answer: D
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 98) Why might a single indirect-cost rate distort product costs? A) Costs are not consistently recorded B) It fails to measure the correct amount of total costs C) There is an assumption that all support activities affect all products D) It recognises specific activities that are required to produce a product Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 99) Why do traditional cost systems distort product costs? A) Competitive pricing is ignored B) They apply average support costs to each unit of product C) They emphasise financial accounting requirements D) They do not know how to identify the appropriate units Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 100) Which of the following statements about activity-based costing is NOT true? A) Activity-based costing is useful for allocating marketing and distribution costs. B) Activity-based costing differs from traditional costing systems in that products are not cross-subsidised. C) 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. D) Activity-based costing seeks to distinguish batch-level, product-sustaining and facility-sustaining costs, especially when they are not proportionate to one another. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing.
101) How does activity-based costing eliminate cost distortions? A) Recognises interactions between different departments in assigning support costs B) Eliminates product variations C) Establishes multiple cost pools D) Develops cost drivers that have a cause-and-effect relationship with the activities performed Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 102) Which of the following statement is FALSE? A) Traditional product costing systems seek to assign all manufacturing costs to products. B) ABC product costing systems seek to assign all manufacturing costs to products. C) Cost distortions occur when a mismatch (incorrect association) occurs between the way indirect costs are incurred and the basis for their assignment to individual products. D) Traditional product costing systems are more refined than an ABC system. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. Answer the following questions using the information below: Barnes 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 Set-ups 22 28
Number of Components 8 12
$30 000
$60 000
Number of Direct Labour Hours 500 300
103) Assume a traditional costing system applies the $90 000 of overhead costs based on direct labour hours. What is the total amount of overhead costs assigned to the standard model? A) $24 800 B) $22 500 C) $56 250
D) $35 200 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 104) Assume a traditional costing system applies the $90 000 of overhead costs based on direct labour hours. What is the total amount of overhead costs assigned to the deluxe model? A) $37 500 B) $24 800 C) $35 200 D) $33 750 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 105) Number of set-ups and number of components are identified as activity-cost drivers for overheads. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the standard model? A) $35 200 B) $24 800 C) $37 200 D) $22 500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 106) Number of set-ups and number of components are identified as activity-cost drivers for overheads. Assuming an activity-based costing system is used, what is the total amount of overhead costs assigned to the deluxe model? A) $22 500 B) $52 800 C) $37 500 D) $24 800 Answer: B
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. Answer the following questions using the information below: Mt Panorama Racing Corporation manufactures two models of motorised go-carts, a standard and a deluxe model. The following activity and cost information has been compiled:
Product Standard Deluxe Overhead costs
Number of Set-ups 15 35
Number of Components 10 15
$30 000
$50 000
Number of Direct Labour Hours 750 500
107) Assume a traditional costing system applies the $80 000 of overhead costs based on direct labour hours. What is the total amount of overhead cost assigned to the standard model? A) $50 000 B) $48 000 C) $32 000 D) $30 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 108) Assume a traditional costing system applies the $80 000 of overhead costs based on direct labour hours. What is the total amount of overhead cost assigned to the deluxe model? A) $32 000 B) $30 000 C) $48 000 D) $50 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing.
109) Number of set-ups and number of components are identified as activity-cost drivers for overheads. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the standard model? A) $48 000 B) $30 000 C) $29 000 D) $51 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 110) Number of set-ups and number of components are identified as activity-cost drivers for overheads. Assuming an activity-based costing system is used, what is the total amount of overhead cost assigned to the deluxe model? A) $51 000 B) $48 000 C) $25 000 D) $50 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 111) Smaller cost distortions occur when the traditional system’s single indirect-cost rate and the activity-cost-driver rates: A) are similar in proportion to each other. B) use the same total costs for computations. C) use the same cost driver units. D) are more different than alike. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 112) When do activity-based costing systems provide better product costs?
A) When they employ more activity-cost drivers B) When they identify and cost more indirect cost differences among products C) When they employ fewer activity-cost drivers D) They always yield more accurate product costs than traditional systems Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 113) Factories producing a more varied and complex mix of products have higher costs than factories producing only a narrow range of products because: A) they require more direct labourers. B) they require more engineers. C) more variations and complexities require more activities. D) they buy more robotics. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 114) Which of the following is NOT a sign that a ‘smoothing out’ costing system exists? A) Products that a company is well suited to make and sell show large profits. B) Operations managers don’t use the data originated by the cost system. C) New product variations have been added, but the cost system has not been upgraded. D) The company loses bids they believe were priced competitively. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 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. 115) 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) identical to C) less than D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 116) Given this change in the cost: A) SR6 has benefited from the new system. B) 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. C) SR6 will now command a higher sales price. D) SR6 is definitely more accurately costed. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 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 labour 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 types of wood used. The new cost of a set of chess pieces was determined to be $298.00 per set. 117) The total amount of indirect cost assigned to produce chess pieces using the traditional method is the total amount assigned using ABC. A) more than B) identical to C) less than D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 118) 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 are definitely more accurately costed. C) chess will now have a lower sales price. D) chess pieces have benefited from the new system. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 119) What is the goal of a properly constructed ABC system? A) Identify more indirect costs B) Have separate allocation rates for each department C) Develop the best cost system for an economically viable cost D) Have the most accurate cost system Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 120) A key reason for using an ABC system rather than a department-costing system is because ABC assigns indirect costs: A) more simply than a department-costing system. B) in a less costly manner. C) to reflect differences required by different processes as well as customers. D) using broader averages. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect.
121) The benefits of implementing a more complex cost-allocation system are relatively easy to quantify for application of the cost-benefit approach. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 122) From a purely product-costing standpoint, department rates and activity-cost-driver rates will give the same product costs if significant costs are incurred for different activities within a department but different outputs use resources from the different activities in the same proportions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 123) Indirect labour and distribution costs would most likely be in the same activity-cost pool. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 124) Traditional systems are capable of producing reasonably accurate costs, but only under certain conditions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 125) An activity-based costing system is necessary for costing services that are similar. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 126) Traditional systems are capable of producing reasonably accurate costs where a single activity
accounts for a sizeable proportion of a department’s indirect costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 127) Traditional systems are capable of producing reasonably accurate costs where significant costs are incurred on different activities within a department but the same cost driver applies to all the activities in the department. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. Write your answer in the space provided or on a separate sheet of paper. 128) 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 recognise the specific activities that are required to produce that product. Activity-based costing differs from traditional costing systems in that products are not cross-subsidised 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 129) Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?
Answer: No. Traditional systems contain smaller and fewer cost distortions when the traditional systems’ unit-level assignments and the alternative activity-cost drivers are relatively similar in proportion to each other. Still, the use of unit-level measures to assign indirect costs is more likely to under-cost low-volume products and more complex products. Both traditional product-costing systems and ABC product-costing systems seek to assign all manufacturing costs to products. Cost distortions occur when a mismatch (incorrect association) occurs between the way support costs are incurred and the basis for their assignment to individual products. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 130) Horse Groomers Inc. 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 Set-ups 3 7
Number of Components 30 50
$30 000
$70 000
Number of Direct labour hours 700 200
Assume a traditional costing system applies the $100 000 of overhead costs based on direct labour hours. a. What is the total amount of overhead costs assigned to the standard model? b. What is the total amount of overhead costs assigned to the deluxe model? Assume an activity-based costing system is used and that the number of set-ups 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. [$100 000/(700 + 200)] × 700 = $77 778
b. [$100 000/(700 + 200)] × 200 = $22 222 c.
Set-ups: $30 000/(3 + 7) = $3000 Components: $70 000/(30 + 50) = $875 ($3000 × 3) + ($875 × 30) = $35 250
d. ($3000 × 7) + ($850 × 50) = $63 500 e.
Because the products do not all require the same proportionate shares of the overhead resources of set-up hours and components, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labour hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 131) Come-On-In Manufacturing produces two types of entry doors: deluxe and standard. The assignment basis for support costs has been direct labour dollars. For 2018, Come-On-In compiled the following data for the two products:
Sales units
Deluxe $50 000
Standard $400 000
Sales price per unit Direct material and labour costs per unit Manufacturing support costs per unit
$650.00 $180.00 $80.00
$475.00 $130.00 $120.00
Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2018: Activity Set-ups Machine-related Packing
Cost Driver Cost of set-ups $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. Review the machine-related costs above. What is a likely explanation for machine-related costs being so high? What might explain why total machining hours for the deluxe doors (300 000 hours) are the same as for the standard doors (300 000 hours)? d. Using the activity-based costing data presented above: 1. compute the cost-driver rate for each overhead activity. 2. compute the revised manufacturing overhead cost per unit for each type of entry door. 3. compute the revised total cost to manufacture one unit of each type of entry door. e. Is the deluxe door as profitable as the original data estimated? Why or why not? f. What considerations need to be examined when determining a sales mix strategy?
Answer: a. Currently estimated deluxe door total cost per unit is $260 = $180 + $80. Currently estimated standard door total cost per unit is $250 = $130 + $120. Currently estimated deluxe door profit per unit is $390 = $650 - $260. Currently estimated standard door profit per unit is $225 = $475 - $250. b. Support manufacturing costs are currently allocated based on direct labour dollars. Because the deluxe doors are manufactured using the new robotics system, it appears that less direct labour is needed to manufacture each unit in the deluxe product line. c.
The high machine-related costs are probably a result of purchasing the new robotics equipment for the deluxe product line. Yes, the total number of machine hours is the same for each product line, but the deluxe line uses 6 machine hours per unit (300 000 mh/50 000 units), while the standard product line only uses 0.75 machine hours per unit (300 000 mh/400 000 units). By evaluating machine hours per unit rather than total machine hours, these numbers make more sense.
d1. Manufacturing overhead cost driver rates: Set-up activity is $1000/set-up = $500 000/500 set-ups. Machine-related activity is $73.33/machine hour = $44 000 000/600 000 machine hours. Packing activity is $20/shipment = $5 000 000/250 000 shipments. d2. Revised overhead costs per unit:
Deluxe door is $468 per unit = [($1000 × 400) + ($73.33 × 300 000) + ($20 × 50 000)]/50 000 units. Standard door is $65.25 per unit = [($1000 × 100) + ($73.33 × 300 000) + ($20 × 200 000)]/400 000 units. d3. Revised total cost per unit for the deluxe door is $648.00 = $180.00 + $468.00. Revised total cost per unit for the standard door is $195.25 = $130.00 + $65.25. e. No, the deluxe door is not as profitable as originally estimated because the deluxe door requires a disproportionate share of the overhead activities (the robotics system) and thus, more of the overhead costs are assigned to the deluxe door when using an ABC system. Revised profit per unit for the deluxe door is $2.00 = $650.00 - $648.00. Revised profit per unit for the standard door is $279.75 = $475.00 - $195.25. Currently estimated deluxe door profit per unit is $390 = $650 - $260. Currently estimated standard door profit per unit is $225 = $475 - $250. f.
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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 132) Brilliant Accents Company manufactures and sells three styles of kitchen taps: brass, chrome and white. Production takes 25, 25 and 10 machine hours to manufacture 1000-unit batches of brass, chrome and white taps, respectively. The following additional data apply:
Projected sales in units PER UNIT data: Selling price Direct materials Direct labour Overhead cost based on direct labour hours (traditional system) Hours per 1000-unit batch:
BRASS 30 000
CHROME 50 000
WHITE 40 000
$40
$20
$30
$8 $15
$4 $3
$8 $9
$12
$3
$9
Direct labour hours Machine hours Set-up hours Inspection hours
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 Overhead costs Direct labour hours Machine hours Set-ups $465 500 Inspections $405 000 $870 500
Activity levels 2900 hours 2400 hours 95 set-up hours 2700 inspection hours
Required: a. Using the traditional system, determine the operating profit per unit for each style of tap. b. Determine the activity-cost-driver rate for set-up costs and inspection costs. c. Using the ABC system, for each style of tap: 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?
Answer: a. Traditional system: Operating profit per unit for brass taps is Operating profit per unit for chrome taps is Operating profit per unit for white taps is
$5 = $40 - ($8 + $15 + $12) $10 = $20 - ($4 + $3 + $3) $4 = $30 - ($8 + $9 + $9)
b. The activity-cost-driver rate for set-up costs is $4900 per set-up hour = $465 500/95, and for inspection costs is $150 per inspection hour = $405 000/2700. c.
ABC system: Overhead costs per unit for BRASS TAPS are $9.40 per unit. 30 000 units in projected sales/1000 units per batch = 30 batches; 30 batches × 1 set-up hour per batch = 30 set-up hours; 30 batches × 30 inspection hours per batch = 900 inspection hours 30 set-up hours × $4900 = $147 000/30 000 units = $4.90/unit
900 inspection hours × $150 = $135 000/30 000 units = $4.50/unit Overhead costs for brass taps ($4.90 + $4.50) = $9.40 per unit Operating profit per unit for brass taps is $7.60 = $40 - ($8 + $15 + $9.40). Overhead costs per unit for CHROME TAPS are $5.45 per unit. 50 000 units in projected sales/1000 units per batch = 50 batches; 50 batches × .5 set-up hour per batch = 25 set-up hours; 50 batches × 20 inspection hours per batch = 1000 inspection hours 25 set-up hours × $4900 = $122 500/50 000 units = $2.45/unit 1000 inspection hours × $150 = $150 000/50 000 units = $3.00/unit Overhead costs for chrome taps ($2.45 + $3.00) = $5.45 per unit Operating profit per unit for chrome taps is $7.55 = $20 - ($4 + $3 + $5.45). Overhead costs per unit for WHITE TAPS are $7.90 per unit. 40 000 units in projected sales/1000 units per batch = 40 batches; 40 batches × 1 set-up hour per batch = 40 set-up hours; 40 batches × 20 inspection hours per batch = 800 inspection hours 40 set-up hours × $4900 = $196 000/40 000 units = $4.90/unit 800 inspection hours × $150 = $120 000/40 000 units = $3.00/unit Overhead costs for white taps ($4.90 + $3.00) = $7.90 per unit. Operating profit per unit for white taps is $5.10 = $30 - ($8 + $9 + $7.90). d. Traditional system: Operating profit per unit for brass taps is Operating profit per unit for chrome taps is Operating profit per unit for white taps is
$5 = $40 - ($8 + $15 + $12). $10 = $20 - ($4 + $3 + $3). $4 = $30 - ($8 + $9 + $9).
ABC system: Operating profit per unit for brass taps is $7.60 = $40 - ($8 + $15 + $9.40). Operating profit per unit for chrome taps is $7.55 = $20 - ($4 + $3 + $5.45). Operating profit per unit for white taps is $5.10 = $30 - ($8 + $9 + $7.90). Because the products do not all require the same proportionate shares of the overhead resources of set-up hours and inspection hours, the ABC system provides different results than the traditional system, which allocates overhead costs on the basis of direct labour hours. The ABC system considers some important
differences in overhead resource requirements and thus provides a better picture of the profitability from each tap style provided that the activity measures are fairly estimated. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. 133) Aunt Ethel’s Fancy Cookie Company manufactures and sells three flavours of biscuits: Macaroon, Sugar and Buttercream. The batch size for the biscuits is limited to 1000 biscuits based on the size of the ovens and biscuit moulds owned by the company. Based on budgetary projections, the information listed below is available: Macaroon 500 000
Sugar 800 000
Buttercream 600 000
PER UNIT data: Selling price
$0.80
$0.75
$0.60
Direct materials Direct labour
$0.20 $0.04
$0.15 $0.02
$0.14 $0.02
2 1 0.5
1 1 0.5
1 1
Projected sales in units
Hours per 1000-unit batch: Direct labour hours Oven hours Packaging hours
Total overhead costs and activity levels for the year are estimated as follows: Activity Direct labour Oven $210 000 Packaging
Overhead costs
$150 000 $360 000
Activity levels 2400 hours 1900 oven hours 950 packaging hours
Required: a. Determine the activity-cost-driver rate for packaging costs. b.
Using the ABC system, for the sugar biscuit: 1. compute the estimated overhead costs per thousand biscuits 2. compute the estimated operating profit per thousand biscuits.
0.5
c. Using a traditional system (with direct labour hours as the overhead allocation base), for the sugar biscuit: 1. compute the estimated overhead costs per thousand biscuits 2. compute the estimated operating profit per thousand biscuits. d. Explain the difference between the profits obtained from the traditional system and the ABC system. Which system provides a better estimate of profitability? Why?
Answer: a. 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 biscuits (using the ABC system), first calculate the activity-cost-driver rate for the oven activity. activity-cost-driver rate
= oven overhead/oven hours = $210 000/1900 hours = $110.53 per oven hour
Then calculate the overhead for a 1000-biscuit 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 biscuits (using the ABC system), subtract the costs from the revenues: Revenue Direct Material Direct labour Overhead Operating Profit c.
= 1000 * $0.75 = 1000 * $.015 = 1000 * $.02
= $750.00 = ($150.00) = ($20.00) = ($189.48) = $390.52
1. To compute the estimated overhead costs for a batch of sugar biscuits (using the traditional system),
first calculate the overhead rate per direct labour hour. Overhead per direct labour hour
= Total Overhead/Total Direct labour Hours = $360 000/2400 hours = $150.00 per direct labour hour
Since it takes 1 direct labour hour per 1000 sugar biscuits, the overhead is $150.00. 2. To compute the estimated operating profit for a batch of sugar biscuits (using the traditional system), subtract the costs from the revenues: Revenue Direct Material Direct labour Overhead Operating Profit
= 1000 * $0.75 = 1000 * $.015 = 1000 * $.02
= $750.00 = ($150.00) = ($20.00) = ($150.00) = $430.00
d. Traditional system: Operating profit per batch of sugar biscuits is $430.00. ABC system: Operating profit per batch of sugar biscuits is $390.52. Because the products do not all require the same proportionate shares of the direct labour resources, the allocation of the total overhead on that basis is not as accurate as using the ABC system. The ABC system allocates the overhead based on activity levels for the specific categories as well as activity usage by the product lines. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Comparing activity-based costing with traditional costing Learning Objective: 8.4 Compare activity-based costing with traditional costing. Choose the one alternative that best completes the statement or answers the question. 134) To be useful for planning, control and making decisions, managers specify budgeted costs for activities and use cost-driver rates to estimate the cost of outputs. A) actual B) estimated C) budgeted D) historical Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 135) A well-designed ABC system allows managers to identify unused in each major activity and to estimate its cost. A) steps B) procedures C) processes D) capacity Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 136) Once the system highlights the cost of unused capacity as a separate line item, managers are able to pursue a number of options to reduce unused capacity and improve performance. A) traditional B) information C) financial D) ABC Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 137) To calculate the activity-driver rate, the total cost of resources in the form of indirect costs, including personnel, supervision, insurance, space occupancy, technology and supplies, is divided by capacity. A) theoretical B) actual C) practical D) budgeted Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system.
138) When individual activities within a cost pool have a similar relationship with the cost driver, those costs: A) need to be reallocated. B) need multiple cost drivers. C) are considered an allocated cost pool. D) are considered a homogeneous cost pool. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 139) What do homogeneous cost pools lead to? A) The need for more cost drivers B) More accurate costs of a given cost object C) More resources being assigned to that cost object D) Both A and C are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 140) Identifying homogeneous cost pools: A) should include a cost-benefit analysis. B) should include the input of management. C) requires judgement and should be re-evaluated on a regular basis. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 141) What does the design of an ABC system require? A) That a cause-and-effect relationship exists between resource costs and individual activities B) That the job bid process be redesigned C) An adjustment to product mix D) Both B and C are correct. Answer: A
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 142) When designing a costing system, it is easiest to: A) calculate long-term costs first and then short-term costs. B) calculate short-term costs first and then long-term costs. C) calculate total costs first and then per-unit cost. D) calculate per-unit costs first and then total costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 143) A manufacturing firm produces multiple families of products requiring various combinations of different types of parts. Of the following, the MOST appropriate cost driver for assigning materials handling costs to the various products is: A) direct labour hours. B) number of parts used. C) number of suppliers involved. D) number of units produced. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 144) Product lines that produce different variations (models, styles or colours) often require specialised manufacturing activities that translate into: A) fewer indirect costs for each product line. B) greater overhead costs for each product line. C) decisions to drop product variations. D) a greater number of direct manufacturing labour cost allocation rates. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system.
145) Which method of allocation probably best estimates actual overhead costs used? Why? A) Single direct labour-hours cost driver because it is the easiest to analyse and interpret. B) Three activity-cost drivers because they best reflect the relative consumption of resources. C) Single direct labour-hours cost driver because it is best to allocate total costs uniformly to individual jobs. D) Three activity-cost drivers because product costs can be significantly cross-subsidised. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 146) Activity-based costing is most likely to yield benefits for companies with all of the following characteristics EXCEPT: A) a highly competitive environment, where cost control is critical. B) numerous products that consume different amounts of resources. C) operations that remain fairly consistent. D) accessible accounting and information systems expertise to maintain the system. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 147) In which of the following situations does it make sense to implement an ABC system? A) When its benefits exceed implementation costs B) When ABC traces more costs as indirect costs C) When there is a weak cause-and-effect relationship between costs in the cost pools and their cost-allocation bases D) When ABC doesn’t provide information to make better decisions Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 148) Which of the following is a sign that an ABC system may be useful? A) Operations staff agrees with accountants about the costs of manufacturing and marketing products and services
B) There are small amounts of indirect costs C) Products make diverse demands on resources because of differences in volume, process steps, batch size or complexity D) Products a company is less suited to produce and sell show small profits Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 149) For service organisations that bill customers at a predetermined average rate, activity-based cost systems can help to: A) identify the profitability of various service activities. B) clarify appropriate cost assignments for various service activities. C) Both A and B are correct. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 150) Using activity-cost rates rather than department indirect-cost rates to allocate costs results in different product costs when: A) different products use different resources in the same proportion. B) there are several homogeneous cost pools. C) different activities have the same cost-allocation base. D) a single activity accounts for a sizeable portion of department costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 151) Where outputs consume resources directly, the management accountant traces these to the cost objects. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 152) When designing an ABC system, managers must decide on the level of detail required. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 153) ABC systems always provide decision-making benefits that exceed implementation costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. 154) The primary costs of an ABC system are the measurements necessary to implement the system. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. Write your answer in the space provided or on a separate sheet of paper. 155) For each of the following activities, identify an appropriate activity-cost driver: a. machine maintenance b. machine set-up 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. A. Machine Maintenance
# of machines
Machine hours
Actual times for various maintenances of various
B. Machine Set-up C. Quality Control D. Material Ordering E. Production Scheduling F. Warehousing
G. Engineering Design
machines Actual times for various set-ups for various machines # of inspections Inspection hours Actual times for various inspections for various controls Actual times for various # of orders Ordering hours orders for various materials # of runs Scheduling hours Actual times for various runs for various schedules Actual times for various # of bins, aisles Picking hours parts for various warehousing activities # of engineers Engineering hours Actual times for various # of designs engineering designs # of set-ups
Set-up hours
AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Designing an activity-based costing system Learning Objective: 8.5 Given the context, design an activity-based costing system. Choose the one alternative that best completes the statement or answers the question. 156) Snowy River Company produces a special spray nozzle. The budgeted indirect total cost of inserting the spray nozzle is $90 000. The budgeted number of nozzles to be inserted is 60 000. What is the budgeted indirect cost-allocation rate for this activity? A) $1.00 B) $0.50 C) $1.50 D) $2.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below:
Katoomba Company provides the following ABC costing information: Activities Total Costs Account inquiry hours $800 000 Account billing lines $560 000 Account verification accounts $300 000 Correspondence letters $100 000 Total costs $1 760 000
Activity-cost Drivers 20 000 hours 8 000 000 lines 80 000 accounts 8000 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 2000 hours 400 000 lines 20 000 accounts 1000 letters
Department B 8000 hours 200 000 lines 8000 accounts 1600 letters
157) How much of the account inquiry cost will be assigned to Department A? A) $80 000 B) $160 000 C) $800 000 D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 158) How much of the account billing cost will be assigned to Department B? A) $560 000 B) $28 000 C) $14 000 D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 159) How much of the account verification costs will be assigned to Department A?
A) $300 000 B) $75 000 C) $30 000 D) $20 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 160) How much of the correspondence costs will be assigned to Department B? A) $100 000 B) $1600 C) $12 500 D) $20 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 161) How much of the total costs will be assigned to Department A? A) $195 500 B) $228 000 C) $880 000 D) $80 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 162) How much of the total costs will be assigned to Department B? A) $80 000 B) $158 000 C) $228 000 D) $880 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Dandenong Enterprises has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year: Cost Pool Overhead Costs Supervision of direct labour $320 000 Machine maintenance $120 000 Facility rent $200 000 Total overhead costs $640 000
Cost Driver Activity level Direct labour-hours 800 000 Machine-hours 960 000 Square metres of area 100 000
The accounting records show the Leongatha job consumed the following resources: Cost Driver Direct labour-hours Machine-hours Square metres of area
Actual Level 300 2400 75
163) If direct labour-hours are considered the only overhead cost driver, what is the single cost driver rate for Dandenong Enterprises? A) $0.40 per direct labour-hour B) $0.80 per direct labour-hour C) $1.20 per direct labour-hour D) $0.50 per direct labour-hour Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 164) Using direct labour-hours as the only overhead cost driver, what is the amount of overhead costs allocated to the Leongatha job? A) $160 B) $125 C) $240 D) $120 Answer: C
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 165) If Dandenong Enterprises uses the three activity cost pools to allocate overhead costs, what are the activity-cost driver rates for supervision of direct labour, machine maintenance and facility rent, respectively? A) $1.25 per dlh, $0.25 per mh, $0.50 per sq mtr B) $0.60 per dlh, $0.025 per mh, $0.80 per sq mtr C) $0.40 per dlh, $0.05 per mh, $0.20 per sq mtr D) $0.40 per dlh, $0.125 per mh, $2 per sq mtr Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 166) Using the three cost pools to allocate overhead costs, what is the total amount of overhead costs to be allocated to the Leongatha job? A) $170 B) $570 C) $675 D) $200 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Kosciuszko Land and Snow Company provides the following ABC costing information: Activities Labour hours Fuel Invoices Total costs
Total Costs $240 000 $27 000 $30 000 $1 912 000
Activity-cost Drivers 12 000 hours 9 000 litres 3 750 invoices
The above activities used by their three departments are:
Labour hours Fuel Invoices
Lawn Department Bush Department 2500 hours 1200 hours 1500 litres 800 litres 1600 invoices 400 invoices
Ploughing Department 4300 hours 3700 litres 500 invoices
167) How much of the labour cost will be assigned to the Lawn Department? A) $50 000 B) $30 000 C) $12 800 D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 168) How much of the fuel cost will be assigned to the Ploughing Department? A) $15 000 B) $11 100 C) $25 000 D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 169) How much of invoice cost will be assigned to the Bush Department? A) $3200 B) $12 800 C) $4000 D) $30 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system.
170) How much of the fuel cost will be assigned to the Lawn Department? A) $2400 B) $11 100 C) $4500 D) $10 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 171) How much of the total cost will be assigned to the Ploughing Department? A) $1 912 000 B) $101 100 C) $89 000 D) $67 300 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 172) How much of the total costs will be assigned to the Lawn Department? A) $29 600 B) $50 000 C) $100 000 D) $67 300 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Ghan Collectibles produces T-shirts and sweatshirts. Product profitability is analysed as follows:
Production and sales volume Selling price
T-SHIRTS 60 000 units $16.00
SWEATSHIRTS 35 000 units $29.00
Direct material Direct labour Manufacturing overhead Gross profit Selling and administrative Operating profit
$2.00 $4.50 $2.00 $7.50 $4.00 $3.50
$5.00 $7.20 $3.00 $13.80 $7.00 $6.80
Ghan Collectibles’s managers have decided to revise their current assignment of overhead costs to reflect the following ABC cost information: Activity Supervision Inspection
Activity cost $100 920 $124 000
Activity-cost driver Direct labour hours (DLH) Inspections
Activities demanded T-SHIRTS SWEATSHIRTS 0.75 DLH/unit 1.2 DLH/unit 45 000 DLHs 42 000 DLHs 60 000 inspections 17 500 inspections 173) Under the revised ABC system, the activity-cost driver rate for the supervision activity is: A) $2.24 B) $2.40 C) $2.58 D) $1.16 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 174) Under the revised ABC system, supervision costs allocated to sweatshirts will be: A) $48 720 B) $100 800 C) $100 920 D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system
Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 175) Under the revised ABC system, total overhead costs allocated to sweatshirts will be: A) $48 720 B) $76 720 C) $224 920 D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 176) Under the revised ABC system, overhead costs per unit for the sweatshirts will be: A) $1.60 per unit B) $1.39 per unit C) $2.19 per unit D) $2.47 per unit Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 177) Using an ABC system, next year’s estimates show manufacturing overhead costs will total $228 300 for 52 000 T-shirts. If all other T-shirt costs and sales prices remain the same, the profitability that can be expected is: A) ($0.81) per T-shirt B) $4.39 per T-shirt C) $1.11 per T-shirt D) $5.41 per T-shirt Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Flinders Potters 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 Set-ups Inspections Total support costs
Overhead Costs $50 000 $300 000 $270 000 $110 000 $730 000
Activity-cost Driver 100 000 orders 15 000 maintenance hours 45 000 set-ups 22 000 inspections
Production Estimates Production units: Regular = 8 000 000 units Jumbo = 16 000 000 units Machine-hours = 200 000 mh Labour-hours = 400 000 dlh Flinders Potters uses an ABC system and assigns overhead costs based on the overhead activity information provided above. 178) The activity-cost driver for the materials handling activity is: A) orders. B) maintenance hours. C) set-ups. D) production units. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 179) The materials handling activity-cost driver rate is: A) $20.00 B) $2.00 C) $0.50 D) $5.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system.
180) The inspections activity-cost driver rate is: A) $20.00 B) $2.00 C) $0.50 D) $5.00 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 181) During October, Flinders produced 700 000 regular ceramic paperweights and Flinders’ production manager counted 2000 orders; 1000 maintenance-hours; 2000 set-ups; and 2000 inspections for the regular product line. For October, Flinders’ controller assigned indirect costs to the regular product line. A) $43 000 B) $25 000 C) $34 000 D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Warne Limited manufactures remote controls. Currently, the company uses a plant-wide rate for allocating manufacturing overhead. The plant manager believes it is time to refine the method of cost-allocation and has the accounting department identify the primary production activities and their cost drivers: Activities Material handling Assembly Inspection
Cost Driver Number of parts Labour hours Time at inspection station
Allocation Rate $3 per part $30 per hour $4.50 per minute
The current traditional cost method allocates overhead based on direct manufacturing labour hours using a rate of $200 per labour hour.
182) What are the indirect manufacturing costs per remote control assuming the traditional method is used and a batch of 500 remote controls is produced? The batch requires 1000 parts, 10 direct manufacturing labour hours and 15 minutes of inspection time. A) $2.00 per remote control B) $2000.00 per remote control C) $0.25 per remote control D) $4.00 per remote control Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 183) What are the indirect manufacturing costs per remote control assuming an Activity-based costing method is used and a batch of 50 remote controls is produced? The batch requires 100 parts, 6 direct manufacturing labour hours and 2.5 minutes of inspection time. A) $4.00 per remote control B) $9.83 per remote control C) $327.50 per remote control D) $24.00 per remote control Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 184) What are the indirect manufacturing costs per remote control assuming an Activity-based costing method is used and a batch of 100 remote controls is produced? The batch requires 500 parts, 10 direct manufacturing labour hours and 5 minutes of inspection time. A) $18.23 per remote control B) $24.30 per remote control C) $1823 per remote control D) $48.60 per remote control Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below:
Geelong Publishing has contracts to complete weekly supplements required by 46 customers. For the year 2018, manufacturing overhead cost estimates total $420 000 for an annual production capacity of 12 million pages. For 2018, Geelong Publishing has decided to evaluate the use of additional cost pools. After analysing manufacturing overhead costs, it was determined that the number of design changes, set-ups and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost Pool Manufacturing Overhead Costs Design changes $60 000 Set-ups 320 000 Inspections 40 000 Total manufacturing overhead costs $420 000
Activity Level 400 design changes 8000 set-ups 8000 inspections
During 2018, two customers, Kidscare Books and Biodata Research, are expected to use the following printing services: Activity Pages Design changes Set-ups Inspections
Kidscare Books 60 000 10 20 30
Biodata Research 76 000 0 10 38
185) What is the cost driver rate if manufacturing overhead costs are considered one large cost pool and are assigned based on 12 million pages of production capacity? A) $0.025 per page B) $0.035 per page C) $0.35 per page D) $0.05 per page Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 186) Using pages printed as the only overhead cost driver, what is the manufacturing overhead cost estimate for Kidscare Books during 2018? A) $2500
B) $3000 C) $2100 D) $1750 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 187) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, set-ups and inspections cost pools? A) $150 per change, $40 per set-up, $5 per inspection B) $180 per change, $160 per set-up, $3.20 per inspection C) $143 per change, $76 per set-up, $10 per inspection D) $84 per change, $269 per set-up, $21 per inspection Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 188) Using the three cost pools to allocate overhead costs, what is the total manufacturing overhead cost estimate for Kidscare Books during 2018? A) $5096 B) $6850 C) $2450 D) $3250 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 189) When costs are assigned using the single cost driver, number of pages printed, then: A) Kidscare Books will likely seek to do business with competitors. B) Kidscare Books is unfairly over-billed for its use of printing resources. C) Kidscare Books is grossly under-billed for the job, while other jobs will be unfairly over-billed. D) Geelong Publishing will want to retain this highly profitable customer. Answer: C AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Gold Coast Printing has contracts to provide fortnightly advertising supplements to 94 customers. For the year 2018, manufacturing overhead cost estimates total $600 000 for an annual production capacity of 24 million pages. For 2018, Gold Coast Printing decided to evaluate the use of additional cost pools. After analysing manufacturing overhead costs, it was determined that number of design changes, set-ups and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis: Cost Pool Manufacturing Overhead Costs Design changes $80 000 Set-ups 400 000 Inspections 120 000 Total manufacturing overhead costs $600 000
Activity Level 200 design changes 4000 set-ups 16 000 inspections
During 2018, two customers, Wealth Managers and Health Systems, are expected to use the following printing services: Activity Pages Design changes Set-ups Inspections
Wealth Managers 60 000 10 20 30
Health Systems 76 000 2 10 38
190) If manufacturing overhead costs are considered one large cost pool and are assigned based on 24 million pages of production capacity, what is the cost driver rate? A) $0.035 per page B) $0.05 per page C) $0.025 per page D) $0.25 per page Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system
Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 191) Using the cost driver rate determined in the previous question, what is the manufacturing overhead cost estimate for Health Systems during 2018? A) Manufacturing overhead costs applied to Health Systems total $2660. B) Manufacturing overhead costs applied to Health Systems total $1900. C) Manufacturing overhead costs applied to Health Systems total $2100. D) Manufacturing overhead costs applied to Health Systems total $3800. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 192) Assuming activity-cost pools are used, what are the activity-cost driver rates for design changes, set-ups and inspections cost pools? A) $300 per change, $80 per set-up, $2.50 per inspection B) $210 per change, $105 per set-up, $26.25 per inspection C) $250 per change, $200 per set-up, $3.75 per inspection D) $400 per change, $100 per set-up, $7.50 per inspection Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 193) Using the activity-cost driver rates determined in the previous question, what is the manufacturing overhead cost estimate for Health Systems during 2018? A) $3412.50 B) $2085.00 C) $3113.75 D) $2068.00 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 194) When costs are assigned using the single cost driver, number of pages printed, then Health Systems: A) will likely seek to do business with competitors.
B) is fairly billed because resources are allocated uniformly to all jobs. C) will contribute too little to profits and Gold Coast Printing will not want to accept additional work from the company. D) is grossly under-billed for the job, while other jobs will be unfairly over-billed. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Fremantle Corporation has two departments, Sails and Masts. Central costs could be allocated to the two departments in various ways.
Square metreage Number of employees Sales
Sails Department 6000 1120 $400 000
Masts Department 18 000 480 $2 000 000
195) If an advertising expense of $300 000 is allocated on the basis of sales, the amount allocated to the Sails Department would be: A) $50 000 B) $75 000 C) $250 000 D) $210 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 196) If a total advertising expense of $300 000 is allocated on the basis of sales, the amount allocated to the Masts Department would be: A) $50 000 B) $225 000 C) $250 000 D) $90 000 Answer: C AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 197) If total payroll processing costs of $96 000 are allocated on the basis of number of employees, the amount allocated to the Sails Department would be: A) $67 200 B) $28 000 C) $16 000 D) $24 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 198) If total payroll processing costs of $60 000 are allocated on the basis of number of employees, the amount allocated to the Masts Department would be: A) $45 000 B) $18 000 C) $42 000 D) $50 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 199) If a total rent expense of $120 000 is allocated on the basis of square metreage, the amount allocated to the Sails Department would be: A) $84 000 B) $30 000 C) $90 000 D) $20 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system.
200) If a total rent expense of $288 000 is allocated on the basis of square metreage, the amount allocated to the Masts Department would be: A) $72 000 B) $240 000 C) $86 400 D) $216 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Trustme Vehicle Rental Corporation has two departments, Car Rental and Truck Rental. Central costs may be allocated to the two departments in various ways.
Number of vehicles in fleet Number of employees Sales
Car Rental 700 150 $1 500 000
Truck Rental 300 50 $750 000
201) If the administrative expense of $125 000 is allocated on the basis of number of employees, the amount allocated to the Truck Rental Department would be: A) $93 750 B) $75 000 C) $125 000 D) $31 250 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 202) If the administrative expense of $125 000 is allocated on the basis of number of employees, the amount allocated to the Car Rental Department would be: A) $31 250 B) $125 000 C) $93 750 D) $75 000
Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 203) If an advertising expense of $150 000 is allocated on the basis of sales, the amount allocated to the Car Rental Department would be: A) $100 000 B) $75 000 C) $50 000 D) $125 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 204) If an advertising expense of $225 000 is allocated on the basis of sales, the amount allocated to the Truck Rental Department would be: A) $125 000 B) $112 500 C) $75 000 D) $175 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Learning Objective 6: Given the context, evaluate an activity-based costing system. Topic: Evaluating an activity-based costing system 205) If the facility lease expense of $350 000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Truck Rental Department would be: A) $200 000 B) $105 000 C) $150 000 D) $245 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system
Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 206) If the facility lease expense of $350 000 is allocated on the basis of vehicles in the fleet, the amount allocated to the Car Rental Department would be: A) $245 000 B) $200 000 C) $150 000 D) $105 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: The Sparky Electrical Products Company has an Electric Mixer Division and an Electric Lamp Division. Of a $30 000 000 bond issue, the Electric Mixer Division used $21 000 000 and the Electric Lamp Division used $9 000 000 for expansion. Interest costs on the bond totalled $1 500 000 for the year. 207) What amount of interest costs should be allocated to the Electric Mixer Division? A) $4 300 000 B) $1 050 000 C) $450 000 D) $21 000 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 208) What amount of interest costs should be allocated to the Electric Lamp Division? A) $450 000 B) $4 300 000 C) $9 000 000 D) $1 050 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Case study: Plaslenz Limited
Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 209) The above interest costs would be considered a(n): A) product-sustaining cost. B) organisation-sustaining cost. C) output unit-level cost. D) batch-level cost. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 210) ABC systems use the concept of a to identify the cost drivers that best demonstrate the cause-and-effect relationship between each activity and the costs in the related cost pool. A) cost driver B) cost pool C) cost allocation D) cost hierarchy Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 211) The MOST likely example of an output unit-level cost is: A) engineering costs. B) general administrative costs. C) machine depreciation. D) paying suppliers for orders received. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 212) The MOST likely example of a batch-level cost is: A) product-designing costs. B) set-up costs. C) utility costs.
D) machine repairs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 213) Design costs are an example of: A) organisation-sustaining costs. B) product-sustaining costs. C) batch-level costs. D) unit-level costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 214) costs support the organisation as a whole. A) Batch-level B) Organisation-sustaining C) Product-sustaining D) Unit-level Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 215) To set realistic selling prices: A) only unit-level costs should be allocated. B) costs should only be allocated when there is a strong cause-and-effect relationship. C) only unit-level costs and batch-level costs should be allocated. D) all costs should be allocated to products. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system.
216) Different products consume different proportions of production overhead costs because of differences in all of the following EXCEPT: A) selling prices. B) product design. C) set-up times. D) customers’ customisation specifications. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 217) 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) under-costed B) fairly costed C) over-costed D) ignored Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Answer the following questions using the information below: Products S5 and CP8 each are assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less set-up time than CP8. 218) According to an ABC system, CP8 is A) under-costed B) accurately costed C) over-costed D) fairly costed Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited
under the traditional system.
Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 219) According to an ABC system, S5 uses a disproportionately: A) smaller amount of unit-level costs. B) larger amount of batch-level costs. C) larger amount of unit-level costs. D) smaller amount of batch-level costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 220) Before anyone is able to evaluate an ABC system, he/she must review all facets of the design, application and context of that ABC system. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 221) Managers might be inclined to shy away from ABC systems because of their apparent complexity and the perceived potential for the costs of these systems to exceed the benefits derived. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 222) ABC systems are useful in manufacturing, but not in the merchandising or service industries. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 223) ABC is not complex in concept. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 224) Although ABC calls for more cost pools, more cost drivers and more calculations, the procedures are similar to those used in traditional systems. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 225) Once an ABC system has been set up, these calculations are routine and the management accountant, as a member of the management team, can computerise them with relatively little effort. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. Write your answer in the space provided or on a separate sheet of paper. 226) The Marionettes Company is noted for an exceptionally impressive line of Mardi Gras masks. Marionettes has established the following selling and distribution support activity-cost pools and their corresponding activity drivers for the year 2018: Activity Marketing Customer service Order execution Warehousing
Cost $30 000 10 000 5000 5000
Cost Driver $500 000 of sales 5000 customer 100 orders 50 product lines
Required: a. Determine the activity-cost-driver rate for each of the four selling and distribution activities. b. Under what circumstances is it appropriate to use each of the activity-cost drivers? c. Describe at least one possible negative behavioural consequence for each of the four activity-cost drivers.
Answer: a. Activity-cost driver rate for Marketing = 6% of sales = $30 000/$500 000.
Activity-cost driver rate for Customer Service = $2 per customer = $10 000/5000. Activity-cost driver rate for Order Execution = $50 per order = $5000/100. Activity-cost driver rate for Warehousing = $100 per order = $5000/50. b. For marketing, using 6% of stipulated sales is appropriate when management wants to limit marketing costs to a budgeted proportion to sales. Using the number of customers for customer service is appropriate when the customer service costs are similar enough to use the average for all customers. Using the number of orders for order execution is appropriate when all orders are sufficiently alike in terms of resources used that they can be averaged. Using the number of product lines for warehousing is appropriate when each product line requires similar proportions of the warehousing efforts. c.
For marketing, using 6% of sales limits the marketing activities to an arbitrary amount without consideration for potential opportunities. Using the number of customers for customer service can lead to customer service initiatives to limit the amount of time servicing each customer to cause the number of customers serviced to increase. Using the number of orders for order execution can result in purchasers splitting orders to increase the numbers of orders executed. Using the number of product lines for warehousing can lead warehouse personnel to designate more product line differences in the warehouse. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 227) At Deutschland Electronics, product lines are charged for call centre support costs based on sales revenue. Last year’s summary of call centre operations revealed the following: Surveillance Products Specialty Products Number of calls for information 1000 4000 Average call length for information 3 minutes 8 minutes Number of calls for warranties 300 1200 Average call length for warranties 7 minutes 15 minutes Sales revenue $8 000 000 $5 000 000 Deutschland Electronics currently allocates call centre support costs using a rate of 0.5% of sales revenue. Required: a. Compute the amount of call centre support costs allocated to each product line under the current system. b. Assume Deutschland decides to use the AVERAGE CALL LENGTH FOR INFORMATION to assign last year’s support costs. Does this allocation method seem more appropriate than percentage of sales?
Why or why not? Assume Deutschland decides to use the NUMBERS OF CALLS FOR INFORMATION AND FOR WARRANTIES to assign last year’s support costs of $65 000. Compute the amount of call centre support costs assigned to each product line under this revised ABC system. d. Deutschland Electronics assigns bonuses based on departmental profits. How might the Specialty Products manager try to obtain higher profits for next year if support costs are assigned based on the average call length for information? e. Discuss the barriers for implementing ABC for this call centre. c.
Answer: a. Call centre support costs allocated to surveillance products is $40 000 = 0.005 × $8 000 000 and to specialty products is $25 000 = 0.005 × $5 000 000. b.
Yes, average call length appears to be a more appropriate allocation method because it allocates more support costs to specialty products, which consume a greater portion of the call centre’s resources. c.
$65 000 of support costs/6500 total calls (Surveillance 1000 + 300 + Specialty 4000 + 1200) = $10 per call. Call centre support costs allocated to surveillance products is $13 000 = 1300 calls × $10 per call, and to specialty products is $52 000 = 5200 calls × $10 per call.
d. To increase profits, Specialty Product managers would want less cost allocated to their departments. Therefore, if support cost allocation were based on length of call, Specialty Products management may emphasise keeping calls for their department short and to the point, rather than emphasising understanding and helping the caller. e. Poor model design or poor analytical interpretation and accountability consequences may function as barriers to using ABC assignments for the call centre activities. It is also important to recognise that the call volumes from this year may be an anomaly so that in an average year, the current allocation rate on sales may not be as distortive as it appears for this year. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Evaluating an activity-based costing system Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 228) Discuss what managers need to consider in implementing an ABC system.
Answer: Managers might be inclined to shy away from ABC systems because of their apparent complexity and the
perceived potential for the costs of these systems to exceed the benefits derived. However, ABC is not complex in concept. Although it calls for more cost pools, more cost drivers and more calculations, the procedures are similar to those used in traditional systems. Once the system has been set up, these calculations are routine and the management accountant, as a member of the management team, can computerise them with relatively little effort. Some well-known companies have achieved significant benefits from ABC systems with relatively few cost drivers. As illustrated in this chapter, the work and challenge lies in the design of the system and ensuring the commitment and involvement of all members of the organisation, including the management team. It is critical to think deeply about the design issues and how to apply them. A related issue is to assess and simplify organisational design before introducing ABC, so that fewer costs need to be tracked. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 229) How are cost drivers selected in activity-based costing systems?
Answer: First, indirect costs are divided into homogeneous cost pools and classified as output unit-level, batch-level, product-sustaining, or facility-sustaining costs. The cost pools correspond to activities. Costs are allocated to products, services, or customers using activity drivers or cost-allocation bases that have a cause-and-effect relationship with each cost pool. Choices about how to economise on the number of activity-cost drivers, how to isolate events (because activities triggered by the same event often can use the same activity cost driver) and which cost drivers to select are influenced by the fact that the benefit of obtaining cost driver information needs to exceed implementation costs. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system. 230) Explain how traditional cost systems, using a single unit-level cost rate, may distort product costs.
Answer: Unit-level measures can distort product costing because the demand for indirect activities may be driven by batch-level, product-sustaining, customer-sustaining or facility-sustaining activities. Cost distortions are larger when the traditional systems’ unit-level cost drivers and the alternative activity-cost drivers differ proportionately more from each other. Traditional systems are likely to under-cost products with
lower production volumes (relatively fewer units of production) and over-cost products with higher production volumes (relatively greater units of production). AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Case study: Plaslenz Limited Learning Objective: 8.6 Given the context, evaluate an activity-based costing system.
Chapter 9 Pricing and customer profitability Choose the one alternative that best completes the statement or answers the question. 1) Companies must ALWAYS examine their pricing: A) based on the supply of the product. B) through the eyes of their competitors. C) based on the cost of producing the product. D) through the eyes of their customers. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 2) Companies should ONLY produce and sell units as long as: A) the revenue from an additional unit exceeds the cost of producing it. B) there is customer demand for the product. C) there is a generous supply of low-cost direct materials. D) the competition allows it. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 3) The cost of producing a product: A) in highly competitive markets controls pricing. B) is an important influence on pricing. C) affects the willingness of a company to supply a product. D) for pricing decisions includes manufacturing costs, but not product design costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 4) In a competitive market with differentiated products like cameras, what is/are the key factor(s) affecting
pricing decisions? A) customer’s willingness to pay B) cost of producing and delivering the product C) the price charged for alternative products D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 5) Long-run pricing decisions: A) and short-run pricing decisions generally have the same relevant costs. B) have a time horizon of less than one year. C) include adjusting product mix in a competitive environment. D) use prices that include a reasonable return on investment. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 6) For long-run pricing decisions, what is the advantage of using stable prices? A) Helps to build buyer-seller relationships B) Minimises the need to frequently monitor competitors’ prices C) Reduces the need to change cost structures frequently D) Reduces competition Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 7) A price-bidding decision for a one-time-only special order includes an analysis of all: A) manufacturing costs. B) fixed manufacturing costs. C) direct and indirect variable costs of each function in the value chain. D) cost drivers related to the product. Answer: C AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 8) Which of the following factors should NOT be considered when pricing a special order? A) The incremental cost of one unit of product B) Revenues that will be lost on existing sales if prices are lowered C) Stable pricing to earn the desired long-run return D) The likely bids of competitors Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Answer the following questions using the information below: Acacia Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $140 per table, consisting of 60% variable costs and 40% fixed costs. The company has surplus capacity available. It is Acacia Furniture’s policy to add a 50% mark-up to full costs. 9) Acacia Furniture is invited to bid on a one-time-only special order to supply 250 rustic tables. What is the lowest price Acacia Furniture should bid on this special order? A) $21 000 B) $7200 C) $14 400 D) $12 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 10) A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Acacia Furniture is invited to submit a bid to the hotel chain. What per unit price will Acacia Furniture MOST likely bid on this long-term order? A) $108 per unit B) $72 per unit C) $210 per unit D) $140 per unit
Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Answer the following questions using the information below: Gold Coast Freshair (GCF) manufactures single room-sized air conditioners. The cost accounting system estimates manufacturing costs to be $120 per air conditioner, consisting of 75% variable costs and 25% fixed costs. The company has surplus capacity available. It is GCF’s policy to add a 40% mark-up to full costs. 11) GCF is invited to bid on a one-time-only special order to supply 50 air conditioners. What is the lowest price GCF should bid on this special order? A) $4750 B) $4500 C) $6175 D) $6250 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 12) 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. GCF is invited to submit a bid to the motel chain. What per unit price will GCF MOST likely bid for this special order of 50 units? A) $140.00 per unit B) $120.00 per unit C) $168.00 per unit D) $71.25 per unit Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Answer the following questions using the information below:
Alice Water Coolers is approached by Mrs Hu Qi, a new customer, to fulfil a large one-time-only special order for a product similar to one offered to regular customers. Alice Water Coolers has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Mark-up (30%) Estimated selling price
$250 80 50 100 480 144 $624
13) For Alice Water Coolers, what is the minimum acceptable price of this one-time-only special order? A) $380 B) $330 C) $624 D) $480 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 14) Before accepting this one-time-only special order, Alice Water Coolers should consider the impact on: A) long-term customers. B) competitors. C) current plant capacity. D) All of these answers are correct. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 15) If Mrs Hu Qi wanted a long-term commitment for supplying this product, what price would MOST likely be quoted to her? A) $330 B) $380 C) $480 D) $624
Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Answer the following questions using the information below: Geelong Generators is approached by Stephen Fleming, a new customer, to fulfil a large one-time-only special order for a product similar to one offered to regular customers. Geelong Generators has excess capacity. The following per unit data apply for sales to regular customers: Direct materials Direct manufacturing labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Mark-up (20%) Estimated selling price
$850 50 100 75 1075 215 $1290
16) For Geelong Generators, what is the minimum acceptable price of this one-time-only special order? A) $1075 B) $1000 C) $1290 D) $900 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 17) Before accepting this one-time-only special order, Geelong Generators wants to know how much profit would be made on the order. A) $0 B) $1000 C) Loss of $75 D) $215 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 18) If Stephen Fleming wanted a long-term commitment for supplying this product, what price would MOST likely be quoted to him? A) $1400 B) $1000 C) $1290 D) $1075 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Answer the following questions using the information below: Rockhampton Manufacturing is approached by a Brazilian customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Rockhampton Manufacturing has a policy of adding a 10% mark-up to full costs and currently has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labour Manufacturing overhead Marketing costs Fixed costs: Manufacturing overhead Marketing costs Total costs Mark-up (10%) Estimated selling price
$30 10 15 5 100 20 180 18 $198
19) If the Brazilian customer wanted a long-term commitment for supplying this product, what price would MOST likely be quoted? A) $180.00 B) $217.80 C) $198.00 D) $66.00
Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 20) What is the full cost of the product per unit? A) $66 B) $180 C) $60 D) $198 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 21) For Rockhampton Manufacturing, what is the minimum acceptable price of this one-time-only special order? A) $66 B) $40 C) $60 D) $55 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 22) A short-run pricing decision typically has a time horizon of less than: A) one year. B) two years. C) five years. D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions.
Answer the following questions using the information below: Eucalyptus Products manufactures office desks. Eucalyptus Products has a policy of adding a 20% mark-up to full costs and currently has excess capacity. The following information pertains to the company’s normal operations per month: Output units Machine-hours Direct manufacturing labour-hours Direct materials per unit Direct manufacturing labour per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
30 000 tables 8000 hours 10 000 hours $50 $6 $161 250 $600 000 $450 000 $562 500
23) Eucalyptus Products is approached by an overseas customer to fulfil a one-time-only special order for 2000 units. All cost relationships remain the same except for a one-time set-up charge of $20 000. No additional design, marketing, or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? A) $67.38 B) $80.85 C) $111.13 D) $77.38 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 24) For long-run pricing of the office desks, what price will MOST likely be used by Eucalyptus? A) $80.85 B) $67.38 C) $111.13 D) $133.35 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions
Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Answer the following questions using the information below: Ozfone manufactures high-tech mobile phones. Ozfone has a policy of adding a 30% mark-up to full costs and currently has excess capacity. The following information pertains to the company’s normal operations per month: Output units Machine-hours Direct manufacturing labour-hours Direct materials per unit Direct manufacturing labour per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
20 000 phones 8000 hours 5000 hours $25 $20 $175 000 $425 000 $400 000 $475 000
25) Ozfone is approached by an overseas customer to fulfil a one-time-only special order for 1000 units. All cost relationships remain the same except for a one-time set-up charge of $15 000. No additional design, marketing or distribution costs will be incurred. What is the minimum acceptable bid per unit on this one-time-only special order? A) $92.50 B) $180.00 C) $53.75 D) $234.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 26) For long-run pricing of the mobile phones, what price will MOST likely be used by Ozfone? A) $65.00 B) $92.50 C) $180.00 D) $134.88 Answer: D AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 27) Predatory pricing is a type of price discrimination that: A) deliberately sets prices very low, sometimes even below costs, to minimise competition. B) allows prices to be cut to the level of variable costs. 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: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 28) Which of the following is NOT allowed in Australia? A) Discounting of prices B) Competitive pricing C) Price fixing D) Price wars Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 29) Organisation-sustaining costs should be allocated to: A) evaluate distribution-channel managers. B) determine the selling price that will cover all costs. C) identify the most profitable customers. D) motivate changes in customer behaviour. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 30) Companies must always examine pricing decisions through the eyes of their customers. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 31) Companies that produce high quality products do not have to pay attention to the actions of their competitors. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 32) A perfect market is characterised by many buyers and many sellers, a homogenous product, zero transaction costs and some other conditions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 33) In markets with little or no competition, the key factor affecting price is costs, not customers’ willingness to pay or competitors. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 34) Profit margins are often set to earn a reasonable return on investment for short run pricing decisions, but not long-run pricing decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 35) Full costs of a product are relevant for one-time-only special order pricing decisions. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 36) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 37) In a one-time-only special order situation, if the price offered by the potential buyer is less than the absorption cost per unit, the producer should not accept the special offer. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 38) Businesses have complete freedom to set prices. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 39) Price fixing is allowed in Australia. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 40) ‘Dumping’ and ‘predatory’ pricing are the same. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions.
41) Price dumping occurs when a domestic company is trying to get rid of out-of-style products at a substantially reduced price. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Write your answer in the space provided or on a separate sheet of paper. 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 tend to be more opportunistic. Prices are decreased when demand is weak and increased when demand is strong. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 43) Bluegum Incorporated manufactures coffee tables. The cost accounting system estimates manufacturing costs to be $100 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Bluegum’s policy to add a 50% mark-up to full costs. a. Bluegum Incorporated is invited to bid on an order to supply 100 coffee tables. What is the lowest price Bluegum 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 Bluegum style. Bluegum Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Bluegum should bid on this long-term order?
Answer: a. The lowest price Bluegum should bid on the 100 table one-time special order is $7000 = Variable costs
($100 × .70 × 100 tables), the short-term incremental costs. b. The lowest price Bluegum should bid on the long-term hotel chain order is $150 per table = Full costs $100 + 50% mark-up, the long-term targeted price. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. 44) Boomerang Company manufactures basketball backboards. The following information pertains to the company’s normal operations per month: Output units Machine-hours Direct manufacturing labour-hours
15 000 boards 4000 hours 5000 hours
Direct manufacturing labour per hour Direct materials per unit Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs
$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. Boomerang Company is approached by an overseas city to fulfil a one-time-only special order for 1000 units. All cost relationships remain the same except for an additional one-time set-up 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 Direct manufacturing labour ($12 × 5000)/15 000 Variable manufacturing ($150 000/15 000) Fixed manufacturing ($300 000/15 000) Marketing and distribution ($250 000/15 000) Research and development ($200 000/15 000) Total
$100.00 4.00 10.00 2.00 16.67 13.33 $146.00
b. Direct materials Direct manufacturing labour Variable manufacturing Set-up ($40 000/1000)
$100.00 4.00 10.00 40.00
Total $154.00 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A framework for pricing decisions Learning Objective: 9.1 Develop and apply a framework for pricing decisions. Choose the one alternative that best completes the statement or answers the question. 45) 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) operating profit. B) contribution margin. C) production costs. D) gross margin. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 46) Too high a price may: A) indicate supply is too plentiful. B) deter a customer from purchasing a product. C) increase demand for the product. D) decrease a competitor’s market share. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 47) Which of the following reflects price discrimination? A) Charging different prices to different customers or clients for the same products or services B) Charging different prices according to quantity amounts C) Setting different prices for different products
D) Using variable costing for some products and full costing for other products when setting prices Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 48) WA Utility Company charges its high-usage commercial customers a lower rate per kilowatt-hour than other customers. This is an example of: A) high-load pricing. B) price discrimination. C) peak-load pricing. D) customer-preference pricing. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. Answer the following questions using the information below: LeBlanc Lighting manufactures table lamps and is considering raising the price by $15 a unit for the coming year. With a $15 price increase, demand is expected to fall by 2500 units.
Demand Selling price Variable costs per unit
Current 20 000 units $150 $100
Projected 17 500 units $165 $100
49) Would you recommend the $15 price increase? A) No, because demand decreased. B) Yes, because contribution margin per unit increases. C) No, because the selling price increases. D) Yes, because operating profit increases. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices.
50) The demand for this product is: A) elastic. B) greatly inelastic. C) slightly inelastic. D) indeterminable. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 51) The Cronulla Sea Eagles are evaluating ticket prices for basketball games. Studies show that Friday and Saturday night games average more than twice the fans of games on other days. The following information pertains to the stadium’s normal operations per season: Average fans per game (all games) 2500 Average fans per Friday and Saturday night games 3500 Number of home games per season 30 Stadium capacity 3500 Variable operating costs per operating hour $5000 Marketing costs per season for basketball $238 750 Customer-service costs per season for basketball $75 000
fans fans games seats
The stadium is open for five 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) $10.60 B) $171.45 C) $14.19 D) $6.40 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 52) Plaza Video Rentals 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
1150 500 12 10 000
Variable operating costs per hour Marketing costs per week Customer service costs per week
$40 $1500 $250
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) $0.60 B) $0.90 C) $0.83 D) $1.07 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 53) When demand is elastic, an increase in price will lead to an increase in profits. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 54) Companies that operate in non-competitive environments offering products or services that differ from each other can charge a very high price for their products and services. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 55) ‘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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 56) ‘Peak-load pricing’ is a form of price discrimination and is illegal. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 57) Companies that operate in non-competitive environments offering products or services that differ from each other use a market-based approach when making their long-run pricing decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 58) Sellers estimate a target price for a product or service that potential customers will be willing to pay based on their understanding of customers’ perceived value of its outputs and how competitors will price competing products or services. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 59) ‘Reverse engineering’ involves disassembling and analysing competitors’ products to determine product designs and materials and to become acquainted with the technologies that competitors use. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 60) Different categories of customers are willing to pay different prices for services depending on their
circumstances. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. Write your answer in the space provided or on a separate sheet of paper. 61) A hotel in Fiji experiences peak periods and slower times. How should prices be adjusted during peak periods? How should prices be adjusted 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. 62) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Market-based pricing Learning Objective: 9.2 Set market-based prices. Choose the one alternative that best completes the statement or answers the question. 63) A formula for pricing does not require a detailed analysis of cost behaviour patterns to separate costs into fixed and variable components for each product. A) variable cost
B) fixed cost C) full-cost D) activity cost Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 64) The rate of return on investment leads to the mark-up percentage and the prospective selling price. A) internal B) external C) target D) expected Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 65) Which approach reduces the need to go back and forth between prospective cost-plus prices, customer reactions and design modifications? A) Cost-plus B) Target-pricing C) Full cost D) Variable cost Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. Answer the following questions using the information below: Laver Shavers manufactures electric shavers and is considering decreasing the price by $2.50 a unit for the coming year. With a $2.50 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 $1 per unit. Currently
Projected
Demand Selling price Variable costs per unit
10 000 units $51 $45
12 500 units $48.50 $44
66) Would you recommend the $2 price decrease? A) Yes, because demand increases. B) No, because contribution margin per unit decreases. C) No, because operating profit decreases. D) No, because the selling price decreases. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 67) The demand for this product is: A) slightly inelastic. B) greatly inelastic. C) elastic. D) indeterminable. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 68) For pricing decisions, full product costs: A) include all manufacturing and selling costs. B) include all direct costs plus an appropriate allocation of the indirect costs of all business functions. C) include all costs that are traceable to the product. D) allow for the highest possible product prices. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 69) What is the general form of the cost-plus pricing approach? A) Variable cost + Fixed cost + Contribution margin = Prospective selling price B) Prospective selling price - Cost base = Mark-up component
C) Cost base + Mark-up component = Prospective selling price D) Cost base + Gross margin = Prospective selling price Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 70) A product’s mark-up percentage needs to cover operating profits when the cost base is: A) variable manufacturing costs. B) the full cost of the product. C) the variable cost of the product. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 71) Northern Territory Company is considering pricing its 25 000-litre petroleum tanks using either variable manufacturing or full product costs as the base. The variable cost base provides a prospective price of $23 000 and the full cost base provides a prospective price of $23 050. The difference between the two prices is: A) the estimated amount of profit. B) known as ‘price discrimination’. C) that the variable cost base estimates fixed costs in the mark-up percentage while the full cost base includes an amount for fixed costs. D) caused by the inability of most companies to estimate fixed cost per unit with any degree of reliability. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 72) Which of the following starts with estimated product costs and next adds desired operating profit? A) Cost-plus pricing B) Target costing C) Life-cycle budgeting D) Kaizen costing Answer: A
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 73) The mark-up percentage is usually higher if the cost base used is: A) variable manufacturing costs. B) the variable cost of the product. C) total manufacturing costs. D) the full cost of the product. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 74) Suppliers who provide unique products and services (e.g. accountants and management consultants) usually use pricing. A) target B) cost-plus C) full cost D) variable Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 75) Which of the following statements is FALSE regarding cost-plus pricing? A) The selling price computed is only a prospective price. B) A company uses a mark-up percentage that estimates a product price that covers full product costs and earns the required return on investment. C) A company selects a cost base that it regards as reliable. D) The cost-plus price chosen has already been studied for customer reaction to the price. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices.
76) Advantages of using the full cost of the product as the cost base include all of the following EXCEPT that: A) it does not require a detailed analysis of cost behaviour for computations. B) it limits the ability of a salesperson to cut prices. C) managers are informed regarding the minimum long-run cost they need to recover to stay in business. D) fixed cost allocations can be arbitrary. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. Answer the following questions using the information below: Cairns Company has invested $2 000 000 in a plant to make spear guns for fishing. The target operating profit desired from the plant is $300 000 annually. The company plans annual sales of 1500 spear guns at a selling price of $2000 each. 77) What is the target rate of return on investment for Cairns Company? A) 15.0% B) 11.1% C) 17.6% D) 10.0% Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 78) What is the mark-up percentage as a percentage of cost for Cairns Company? A) 17.6% B) 12.8% C) 10.0% D) 11.1% Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices.
79) What is the cost base of each spear gun for Cairns Company? A) $1700 B) $1802 C) $1780 D) $1739 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. Answer the following questions using the information below: Botany Manufacturers has invested $1 000 000 in a plant to make commercial juicer machines. The target operating profit desired from the plant is $180 000 annually. The company plans annual sales of 7000 juicer machines at a selling price of $200 each. 80) What is the target rate of return on investment for Botany Manufacturers? A) 12.9% B) 18.0% C) 14.8% D) 22.0% Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 81) What is the mark-up percentage as a percentage of cost for Botany Manufacturers? A) 18.0% B) 12.9% C) 14.8% D) 22.0% Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 82) What is the cost base of each juicer machine for Botany Manufacturers?
A) $174 B) $162 C) $152 D) $169 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. Answer the following questions using the information below: Bondi Corporation budgeted the following costs for the production of its unicycle for 2017. Direct materials Direct labour Manufacturing overhead Variable Fixed Selling and administrative Variable Fixed Total costs
$562 500 390 000 420 000 322 500 180 000 240 000 $2 115 000
Bondi has an annual target operating profit of $450 000. 83) The mark-up percentage for setting prices as a percentage of total manufacturing costs is: A) 51% B) 125% C) 245% D) 185% Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 84) The mark-up percentage for setting prices as a percentage of variable manufacturing costs is: A) 122% B) 87%
C) 169% D) 54% Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 85) The mark-up percentage for setting prices as a percentage of the variable cost of the product is: A) 36% B) 228% C) 328% D) 65% Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 86) The mark-up percentage for setting prices as a percentage of the full cost of the product is: A) 328% B) 228% C) 36% D) 21% Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 87) Action Toys has a new video game for the upcoming holiday season. What will be the target cost per unit for the new game if the selling price per unit is $60, and the firm wants to earn a target operating profit of 12% of sales? A) $53.57 B) $52.80 C) $67.20 D) $48.00 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 88) Short run pricing decisions: A) tend to decrease prices when demand is strong. B) have a time horizon of more than one year. C) use costs that may be irrelevant for long-run pricing decisions. D) tend to be more opportunistic than long-run pricing decisions. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 89) For long-run pricing decisions, which of the following costs of a product informs managers of the minimum cost they need to recover to continue in business? A) Fixed B) Full C) Variable D) Activity Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 90) Determining the cost of each activity and product is not straightforward. A) cost-plus B) discriminatory C) variable D) predatory Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 91) The approach reduces the need to go back and forth between prospective cost-plus prices, customer reactions and design modifications. A) full cost
B) variable cost C) target-pricing D) fixed cost Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 92) Surveys indicate that most managers do not use the full cost of the product for their cost-based pricing decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 93) Managers do not believe that basing prices on the full cost of the product promotes price stability because it limits the ability and temptations of salespeople to cut prices. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 94) A full-cost formula for pricing requires a detailed analysis of cost behaviour patterns to separate costs into fixed and variable components for each product. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 95) In cost-plus pricing, the mark-up is a rigid number that determines the actual selling price. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices.
96) The ‘target rate of return on investment’ is another way of referring to the mark-up percentage. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 97) Cost bases that include fewer costs also have lower mark-ups. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 98) The ‘time and materials method’ is a market-based pricing method. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 99) Full costs of a product include variable costs, but not fixed costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 100) An incremental product cost is generally a fixed cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 101) The target-pricing approach reduces the need to go back and forth between prospective cost-plus prices, customer reactions and design modifications. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing
Learning Objective: 9.3 Set cost-based prices. 102) Relative to cost-plus pricing, target pricing first determines product characteristics and target price on the basis of customer preferences and expected competitor responses, and then a target cost. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 103) Determining a target price can be difficult in markets where products are differentiated from one another. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. Write your answer in the space provided or on a separate sheet of paper. 104) Coffs Harbour Company has budgeted sales of $400 000 with the following budgeted costs: Direct materials Direct manufacturing labour Factory overhead Variable Fixed Selling and administrative expenses Variable Fixed
$60 000 40 000 30 000 50 000 20 000 30 000
Compute the average mark-up percentage for setting prices as a percentage of: a. The full cost of the product b. The variable cost of the product c. Variable manufacturing costs d. Total manufacturing costs
Answer: a. $60 000 + $40 000 + $30 000 + $50 000 + $20 000 + $30 000 = $230 000 ($400 000 - $230 000)/$230 000 = 73.9%
b. $60 000 + $40 000 + $30 000 + $20 000 = $150 000 ($400 000 - $150 000)/$150 000 = 166.7% c.
$60 000 + $40 000 + $30 000 = $130 000 ($400 000 - $130 000)/$130 000 = 207.7%
d. $60 000 + $40 000 + $30 000 + $50 000 = $180 000 ($400 000 - $180 000)/$180 000 = 122.27% AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 105) Margaret River Company has budgeted sales of $750 000 with the following budgeted costs: Direct materials Direct manufacturing labour Factory overhead Variable Fixed Selling and administrative expenses Variable Fixed
$168 000 132 000 96 000 108 000 72 000 100 000
Compute the average mark-up percentage for setting prices as a percentage of: a. Total manufacturing costs b. The variable cost of the product c. The full cost of the product d. Variable manufacturing costs
Answer: a. $168 000 + $132 000 + $96 000 + $108 000 = $504 000 ($750 000 - $504 000)/$504 000 = 48.88% b. $168 000 + $132 000 + $96 000 + $72 000 = $468 000 ($750 000 - $468 000)/$468 000 = 60.27% c.
$168 000 + $132 000 + $96 000 + $108 000 + $72 000 + $100 000 = $676 000
($750 000 - $676 000)/$676 000 = 10.9% d. $168 000 + $132 000 + $96 000 = $396 000 ($750 000 - $396 000)/$396 000 = 89.4% AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. 106) What factors may influence the level of mark-ups?
Answer: Factors affecting the level of mark-ups include the strength of demand, the elasticity of demand and the intensity of competition. In addition, strategic reasons may also influence the level of mark-ups. For instance, a firm may either choose a low mark-up to penetrate the market and win market share from established products of its competitors, or employ a high mark-up 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Cost-based pricing Learning Objective: 9.3 Set cost-based prices. Choose the one alternative that best completes the statement or answers the question. 107) To determine whether or not a product, customer, program or department is profitable, managers must _ costs. A) determine B) calculate C) assign D) evaluate Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 108) Which of the following activities support individual customers, irrespective of the number of units or batches delivered to the customer? A) Customer-sustaining
B) Distribution-channel C) Customer-output-unit level D) Organisation-sustaining Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 109) Which of the following activities relate to a specific distribution channel rather than to an individual unit, a batch or a specific customer? A) Distribution-channel B) Organisation-sustaining C) Customer-sustaining D) Customer-batch-level Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 110) Price discounts are influenced by: A) negotiating skills of the sales person. B) the volume of product purchased. C) a desire to sell to a customer in an area with high-growth potential. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 111) Price discounts should never be viewed as: A) collusive pricing. B) predatory pricing. C) price discrimination. D) unethical. E) All of the above are correct. Answer: E AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 112) A customer cost hierarchy categorises costs related to customers into different cost pools on the basis of different: A) types of cost drivers. B) levels of cause-and-effect relationships. C) benefits-received relationships. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 113) Costs incurred to process orders would MOST likely be classified as a: A) customer batch-level cost. B) customer-sustaining cost. C) organisation-sustaining cost. D) customer output unit-level cost. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 114) Top management and general administration costs would MOST likely be classified as a: A) customer batch-level cost. B) customer-sustaining cost. C) customer output unit-level cost. D) organisation-sustaining cost. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 115) The cost of visiting customers would MOST likely be classified as a: A) customer batch-level cost.
B) organisation-sustaining cost. C) customer-sustaining cost. D) customer output unit-level cost. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 116) Costs incurred to handle each unit sold would MOST likely be classified as a: A) customer batch-level cost. B) customer output unit-level cost. C) organisation-sustaining cost. D) customer-sustaining cost. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 117) The cost of the manager of a retail distribution channel would MOST likely be classified as a: A) customer batch-level cost. B) distribution-channel cost. C) organisation-sustaining cost. D) customer-sustaining cost. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 118) Which item is NOT a category in the customer-cost hierarchy? A) Distribution-channel costs B) Organisation-sustaining costs C) Customer output unit-level costs D) Customer batch-level costs E) None of the above. Answer: E AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 119) Customer actions will LEAST affect: A) customer batch-level costs B) distribution-channel costs C) customer-sustaining costs D) customer output unit-level costs Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 120) is the reporting and analysis of revenues earned from customers and the costs incurred to earn those revenues. A) Profitability analysis B) Activity analysis C) Customer-profitability analysis D) Cost-plus analysis Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 121) categorises 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 revenues B) Price discounting C) Customer-cost hierarchy D) Customer-profitability analysis Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 122)
are a function of many factors, such as the volume of product purchased (higher-volume
customers receive higher discounts) and the desire to sell to a customer who might help promote sales to other customers. A) Price discounts B) Target costs C) Pricing formulae D) Target prices Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 123) Customer revenues are one element of customer profitability. The other, equally important, element is the cost of acquiring, serving and retaining . A) customers B) suppliers C) markets D) products Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 124) Customeractivities related to a group of units (computers) sold to a customer; for example, process a sales order or make a delivery. A) unit-level B) distribution-channel C) sustaining D batch-level Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 125) Customers are more valuable when they are all of the following EXCEPT: A) in an industry with high-growth potential. B) well-known in the community. C) expected to continue to do business with a company.
D) require special attention on a regular basis. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 126) Dropping an unprofitable customer will: A) eliminate most short-run costs assigned to that customer. B) increase the potential to cross-sell other products that are more desirable. C) decrease long-run profitability. D) eliminate long-run costs assigned to that customer. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 127) Other factors that managers should consider in deciding how to allocate resources among customers include the: A) likelihood of customer retention. B) ability to learn from customers. C) potential for sales growth. D) long-run customer profitability. E) All of these are correct. Answer: E AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 128) All customers are equally important to a company and should receive equal levels of attention. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 129) ‘Price discrimination’ is the illegal practice of charging some customers a higher price than is charged
to other customers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 130) Price discounts must be uniform among all customers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 131) Companies that only record the invoice price can usually track the magnitude of price discounting. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 132) A customer cost hierarchy categorises costs related to customers into different cost pools on the basis of using only one cost driver. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 133) The cost of visiting customers is an example of a customer output unit-level cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 134) In general, distribution-channel costs are more easily influenced by customer actions than customer batch-level costs. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 135) If one of four distribution channels is discontinued, organisation-sustaining costs such as general administration costs will most likely be reduced by 25%. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. 136) To more accurately assess customer profitability, organisation-sustaining costs should be allocated. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. Write your answer in the space provided or on a separate sheet of paper. 137) List at least three different levels of costs in a customer-cost hierarchy and provide an example of each.
Answer: List any three of the following: 1. Customer output unit-level costs, product-handling costs of each product sold 2. Customer batch-level costs, order processing costs incurred 3. Customer-sustaining costs, costs of visits to the customer 4. Distribution-channel costs, a particular distribution channel manager’s salary 5. Organisation-sustaining costs, costs of top management Note: Examples will vary. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Customer profitability Learning Objective: 9.4 Calculate and report customer-level profit. Choose the one alternative that best completes the statement or answers the question. 138) Customers with established reputations, also called customers, help generate sales from
other customers through product endorsements. A) happy B) loyal C) valuable D) reference Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 139) Customers making large contributions to the profitability of the company should: A) not be offered the volume-based price discounts offered to less profitable customers. 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) be treated the same as other customers because all customers are important. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 140) To improve customer profitability, companies should: A) strictly enforce their volume-based price discounting policy. B) track discounts by sales person. C) track discounts by customer. D) Both B and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 141) To improve customer profitability, companies should track: A) only the final invoice price of a sale. B) the volume of the products purchased by each customer. C) discounts taken by each customer. D) Both B and C are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 142) The allocation of organisation-sustaining costs is useful for: A) motivating distribution-channel management. B) focusing on the cause-and-effect relationships with the cost-allocation bases. C) evaluating the performance of salespersons with individual customer accounts. D) None of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 143) If deciding whether to eliminate a distribution channel, allocating organisation-sustaining costs to distribution channels: A) evaluates the effectiveness of sales personnel. B) helps define cost reduction possibilities. C) gives the misleading impression of potential cost savings. D) identifies administrative inefficiencies. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 144) When organisation-sustaining costs are fully allocated to distribution channels, then the sum of the distribution-channel operating profits is: A) greater than company-wide operating profit. B) equal to company-wide operating profit. C) less than company-wide operating profit. D) indeterminable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 145) An advantage of using a bar chart to visualise customer profitability is that:
A) trends in the volume of purchases become apparent. B) loss customers stand out. C) differences in commissions paid to sales persons stand out. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 146) Which of the following is relevant when managing customer profitability? A) Estimation of the customer-level costs each customer will incur in the future B) Estimation of the revenues expected from each customer C) Identifying past revenues generated by each customer D) All of the above. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 147) Companies try to keep their best customers happy in a number of ways, including special phone numbers and upgrade privileges for elite-level frequent flyers and free usage of luxury hotel suites and big credit limits for high-rollers at casinos. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 148) The higher the likely growth of a customer’s sales, the more valuable the customer. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 149) Customers with established reputations, also called ‘reference customers’, help generate sales from other customers through product endorsements.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 150) Customers who provide ideas about new products or ways to improve existing products are especially valuable. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 151) Managers should be cautious about discontinuing customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 152) Managers use the customer-profitability profiles to identify the small set of customers who deserve the highest service and priority. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 153) The higher the likely growth of the customer’s industry and the customer’s sales, the more valuable the customer. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 154) It is common to find that a small number of customers generate a high percentage of a firm’s operating profit. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 155) It is possible that the largest customer in terms of revenue is not the most profitable customer. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 156) Managers who utilise customer profitability charts should drop customers that generate a negative customer operating profit, since dropping an unprofitable customer will automatically cause overall income to increase. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. Write your answer in the space provided or on a separate sheet of paper. 157) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 158) Why would a manager perform a customer-profitability analysis?
Answer: A 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 organisation. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. 159) 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 counselled on how to use less resources and be restored to profitability in the future. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Analysing and reporting on customer profitability Learning Objective: 9.5 Report on and analyse customer profitability. Choose the one alternative that best completes the statement or answers the question. 160) What type of costs are not relevant to a decision as to whether or not to close a business-sales distribution channel? A) Target B) Variable C) Full D) Division-sustaining Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 161) Allocating all costs motivates division managers to examine how corporate costs are planned and controlled. A) unit B) distribution C) target D) corporate Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 162) Allocating costs to distribution channels motivates the managers of the distribution channels to monitor costs incurred in the division. A) division B) full C) variable D) corporate Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 163) Managers who want to calculate the costs of serving customers must allocate all corporate, division and distribution-channel costs to customers. A) target B) full C) corporate D) distribution Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 164) Managers and management accountants argue that in the long run, customers and products must eventually be profitable on a basis. A) product cost B) full-cost C) variable cost D) fixed cost Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 165) If a company decides not to allocate some or all corporate, division or channel costs, it results in total
company profitability being less than the sum of the profitability of individual: A) customers. B) marketing plans. C) strategies. D) sales. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 166) Managers believe that salespeople responsible for managing individual customer accounts would lose motivation if sales bonuses were adversely affected by allocating to customers distribution-channel costs over which salespeople have little or no influence. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 167) Allocating division-sustaining costs to distribution channels exaggerates the potential cost savings from discontinuing a distribution channel. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 168) Some managers and management accountants advocate fully allocating all costs to distribution channels and to customers because all costs are incurred to support the sales of products to customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 169) Allocating all corporate costs motivates division managers to examine how corporate costs are planned and controlled. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 170) Managers who want to calculate the full costs of serving customers must allocate all corporate, division and distribution-channel costs to customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. 171) An activity-based costing system may focus on customers rather than products. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability. Write your answer in the space provided or on a separate sheet of paper. 172) Handy-Man Services is a repair-service company specialising in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:
Marveline Burnett J Jackson Roger Jones Paul Saas Becky Stephan
Customer Revenues Customer Costs $300 $225 200 305 80 75 75 110 350 220
Required: a. Compute the operating profit for each of the five customers. b. What options should Handy-Man Services consider in light of the customer-profitability results? c. What problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer? Answer:
a. Customer Revenues Marveline Burnett $300 J Jackson 200 Roger Jones 80 Paul Saas 75 Becky Stephan 350
Customer Costs $225 305 75 110 220
Operating Profit $75 (105) 5 (35) 130
b. 1. Pay increased attention to the profitable customers Stephan and Burnett. 2. Seek ways of reducing costs and increasing revenues for the loss accounts of J Jackson and Paul Saas. Work with the customers so their behaviour 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 profit 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 profit. For example, how is the cost of a trip for parts for three different customers allocated? AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Activity-based operating profit statement Learning Objective: 9.6 Report on and analyse activity-based profitability.
Chapter 10 Decision making and relevant information Choose the one alternative that best completes the statement or answers the question. 1) Which of the following does a decision model involve? A) Both quantitative and qualitative analyses B) Only quantitative analyses C) A manager’s instinct D) Only qualitative analyses Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. 2) What could feedback regarding previous actions affect? A) The decision model B) Implementation of the decision C) Future predictions D) All of these answers are correct Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. 3) Place the following steps from the five-step decision process in order: A = Make predictions about future costs B = Evaluate performance to provide feedback C = Implement the decision D = Choose an alternative A) ADCB B) DCAB C) CDAB D) DCBA
Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. 4) What is the formal process of choosing between alternatives known as? A) Alternative model B) Decision model C) Prediction model D) Relevant model Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. 5) When using the five-step decision process, which one of the following steps should be done last? A) Implementing the decision B) Evaluation and feedback C) Choose an alternative D) Obtain information Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. 6) When using the five-step decision process, which one of the following steps should be done first? A) Implementing the decision B) Obtain information C) Evaluation and feedback D) Choose an alternative Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect.
7) A decision model is a formal method for making a choice, frequently involving both quantitative and qualitative analyses. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. 8) Management accountants work with managers by analysing and presenting relevant data to guide decisions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. 9) Good managers use a five-step guide to making decisions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. Write your answer in the space provided or on a separate sheet of paper. 10) The textbook discusses a five-step decision process. Briefly explain each of the five steps.
Answer: The five-step decision process is (a) obtain information, (b) make predictions, (c) choose an alternative, (d) implement the decision, and (e) evaluate performance to provide feedback. 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 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 maximises the difference between the expected benefits and the expected costs. Implementing the decision involves actioning 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Information and the decision process Learning Objective: 10.1 Use the five-step guide to making decisions between different options. Choose the one alternative that best completes the statement or answers the question. 11) Ruggles Circuit Company manufactures circuit boards for other firms. Management is attempting to search for ways to reduce manufacturing labour costs and has received a proposal from a consulting company to rearrange the production floor next year. Using the information below regarding current operations and the new proposal, which of the following decisions should management accept?
Required machine operators Materials-handling workers Employee average pay Hours worked per employee
Currently 5 1.25 $8 per hour 2000
Proposed 4.5 1.25 $9 per hour 2000
A) Do not change the production floor. B) Rearrange the production floor. C) Either, because it makes no difference to the employees. D) It doesn’t matter because the costs incurred will remain the same. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Answer the following questions using the information below: Bright Lights Company manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3000 units.
Demand Selling price Incremental cost per unit
Currently 20 000 units $4.50 $3.00
Projected 18 000 units $5.00 $3.00
12) If the price increase is implemented, operating profit is projected to: A) decrease by $4500. B) decrease by $4000. C) increase by $6000. D) increase by $4000. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 13) Would you recommend the 50-cent price increase? A) Yes, because contribution margin per unit increases. B) No, because the selling price increases. C) No, because demand decreased. D) Yes, because operating profits increase. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 14) For decision making, a listing of the relevant costs: A) will only include costs that differ among alternatives. B) will only include future costs. C) will help the decision maker concentrate on the pertinent data. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 15) factors are outcomes that are difficult to measure accurately in numerical terms. A) Quantitative B) Relevant C) Qualitative D) Environmental Answer: C AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 16) Sunk costs: A) have future implications. B) are differential. C) are relevant. D) are ignored when evaluating alternatives. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 17) Relevant-cost analysis generally emphasises factors that can be expressed in financial terms. A) qualitative B) strategic C) operational D) quantitative Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 18) Just because qualitative factors and quantitative non-financial factors cannot be measured easily in financial terms does not make them: A) relevant. B) unimportant. C) important. D) noteworthy. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 19) costs are expected future costs and relevant revenues are expected future revenues that differ between the optional courses of action being considered.
A) Relevant B) Quantitative C) Qualitative D) Financial Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 20) Which of the following costs always differs among future alternatives? A) Historical costs B) Relevant costs C) Fixed costs D) Variable costs Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 21) Revenues and costs that are not relevant are said to be: A) sunk. B) qualitative. C) quantitative. D) irrelevant. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Answer the following questions using the information below: George’s 5-year-old Geo Prizm requires repairs estimated at $3000 to make it roadworthy again. His friend, Julie, suggested that he should instead buy a 5-year-old used Honda Civic for $3000 cash. Julie estimated the following costs for the two cars:
Acquisition cost
Geo Prizm $15 000
Honda Civic $3000
Repairs Annual operating costs (Fuel, maintenance, insurance)
$3000
—
$2280
$2100
22) The cost NOT relevant for this decision is the: A) annual operating costs of the Honda Civic. B) acquisition cost of the Honda Civic. C) repairs to the Geo Prizm. D) acquisition cost of the Geo Prizm. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 23) What should George do? What are his savings in the first year? A) Fix the Geo Prizm; $5518 B) Fix the Geo Prizm; $5280 C) Buy the Honda Civic; $180 D) Buy the Honda Civic; $9780 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 24) Every decision deals with selecting a course of action based on its expected results. A) future B) past C) sunk D) qualitative Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 25) that do not differ will not matter and hence will have no bearing on the decision being made. A) Sunk costs B) Costs and revenues
C) Strategic plans D) Opportunity costs Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 26) Relevant information has all of these characteristics EXCEPT: A) all future revenues and expenses are relevant. B) past costs are irrelevant. C) different alternatives can be compared by examining differences in total revenue and expenses. D) qualitative factors should be considered. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 27) Past costs are also called ‘sunk costs’ because they are and cannot be changed no matter what action is taken. A) relevant B) avoidable C) unavoidable D) financial Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 28) Qualitative factors: A) include customer satisfaction. B) may include either financial or non-financial information. C) generally are easily measured in quantitative terms. D) are generally irrelevant for decision making. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance
Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 29) Historical costs are helpful: A) for making future predictions. B) because they are quantitative. C) for decision making. D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 30) Focusing on the relevant data is especially helpful when all the information needed to prepare a detailed is unavailable. A) income statement B) cost sheet C) balance sheet D) analysis Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 31) An example of a quantitative factor for the decision-making process is: A) product quality. B) manufacturing overhead. C) customer satisfaction. D) employee morale. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 32) Which of the following concepts applies to all decision situations? A) sunk costs B) opportunity cost C) relevance
D) outsourcing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 33) One type of decision that affects levels is accepting or rejecting special orders when there is idle production capacity and the special orders have no long-run implications. A) input B) relevant C) output D) financial Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 34) The sum of all costs (variable and fixed) in a particular business function of the value chain, such as manufacturing costs or marketing costs, are called costs. A) relevant B) opportunity C) business function D) sunk Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 35) Problems that should be avoided when identifying relevant costs include all of the following EXCEPT: A) assuming all fixed costs are irrelevant. B) using total costs that separate variable and fixed components. C) assuming all variable costs are relevant. D) using unit costs that do not separate variable and fixed components. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance
Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 36) The assumption of no or strategic implications is crucial to management’s analysis of the one-time-only special order decision. A) short-run B) financial C) long-run D) qualitative Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 37) One-time-only special orders should only be accepted if: A) differential revenues exceed variable costs. B) incremental revenues exceed incremental costs. C) incremental revenues exceed fixed costs. D) total revenues exceed total costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 38) When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following EXCEPT: A) consider the special order’s impact on future prices of their products. B) determine whether excess capacity is available. C) verify past design costs for the product. D) analyse product costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 39) When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when: A) it never makes sense.
B) the company placing the order is in the same market segment as your current customers. C) incremental revenues exceed incremental costs. D) additional fixed costs must be incurred to accommodate the order. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 40) Managers must watch for incorrect general in relevant-cost analysis. A) costs B) revenues C) opportunities D) assumptions Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Answer the following questions using the information below: Welch Manufacturing is approached by a European customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. Welch Manufacturing has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials Direct labour Manufacturing support Marketing costs Fixed costs: Manufacturing support Marketing costs Total costs Mark-up (50%) Targeted selling price 41) What is the full cost of the product per unit? A) $255
$40 20 35 15 45 15 170 85 $255
B) $170 C) $110 D) $85 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 42) What is the contribution margin per unit? A) $255 B) $85 C) $145 D) $110 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 43) For Welch Manufacturing, what is the minimum acceptable price of this special order? A) $110 B) $145 C) $255 D) $170 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 44) What is the change in operating profits if the one-time-only special order for 1000 units is accepted for $180 a unit by Welch? A) $70 000 increase in operating profits B) $75 000 decrease in operating profits C) $10 000 decrease in operating profits D) $10 000 increase in operating profits Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 45) Wollongong Company has a current production level of 20 000 units per month. Unit costs at this level are: Direct materials Direct labour Variable overhead Fixed overhead Marketing - fixed Marketing/distribution - variable
$0.25 0.40 0.15 0.20 0.20 0.40
Current monthly sales are 18 000 units. Jim Company has contacted Wollongong Company about purchasing 1500 units at $2.00 each. Current sales would not be affected by the one-time-only special order and variable marketing/distribution costs would not be incurred on the special order. What is Wollongong Company’s change in operating profits if the special order is accepted? A) $400 increase in operating profits B) $1800 decrease in operating profits C) $1800 increase in operating profits D) $400 decrease in operating profits Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 46) Black Tool Company has a production capacity of 1500 units per month, but current production is only 1250 units. The manufacturing costs are $70 per unit and marketing costs are $10 per unit. Doug Hall offers to purchase 250 units at $80 each for the next five months. Should Black accept the one-time-only special order if only absorption-costing data are available? A) No, since only the employees will benefit. B) No, the company will only break even. C) Yes, good customer relations are essential. D) Yes, since operating profits will most likely increase. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations.
Answer the following questions using the information below: Grant’s Cakes is approached by Ms Tammy Wang, a new customer, to fulfil a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Mark-up (60%) Targeted selling price
$455 300 45 100 900 540 $1440
Grant’s Kitchens has excess capacity. Ms Wang wants layered cream cheese pound cakes rather than plain pound cakes, so direct material costs will increase by $30 per unit. 47) For Grant’s Cakes, what is the minimum acceptable price of this one-time-only special order? A) $830 B) $785 C) $930 D) $1440 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 48) Other than price, what other items should Grant’s Cakes consider before accepting this one-time-only special order? A) Price is the only consideration B) Demand for cherry cabinets C) Reaction of shareholders D) Reaction of existing customers to the lower price offered to Ms Wang Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations.
49) If Ms Wang wanted a long-term commitment for supplying this product, this analysis: A) would definitely be different. B) would not be different. C) may be different. D) does not contain enough information to determine if there would be a difference. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Answer the following questions using the information below: Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $100 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods’ policy to add a 50% mark-up to full costs. 50) Northwoods is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the lowest price Northwoods should bid on this special order? A) $9000 B) $8000 C) $13 500 D) $6300 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 51) A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Northwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Northwoods should bid on this long-term order? A) $72 B) $63 C) $90 D) $150 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 52) Cochran Corporation has a plant capacity of 100 000 units per month. Unit costs at capacity are: Direct materials Direct labour Variable overhead Fixed overhead Marketing—fixed Marketing/distribution—variable
$4.00 6.00 3.00 1.00 7.00 3.60
Current monthly sales are 95 000 units at $30.00 each. Suzie Inc., has contacted Cochran Corporation about purchasing 3000 units at $20.00 each. Current sales would not be affected by the one-time-only special order. What is Cochran’s change in operating profits if the one-time-only special order is accepted? A) $10 200 increase B) $17 200 increase C) $33 200 increase D) $22 000 increase Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 53) The sum of all the costs incurred in a particular business function (for example, marketing) is called the: A) business function cost. B) multi-product cost. C) full product cost. D) gross product cost. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 54) The sum of all costs incurred in all business functions in the value chain (product design, manufacturing, marketing and customer service, for example) is known as the: A) full product cost
B) multi-product cost C) business cost D) gross product cost Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Learning Objective 2: Distinguish relevant from irrelevant information in decision situations. Topic: The concept of relevance 55) Unit cost data can potentially mislead decision makers when costs are included. A) sunk B) irrelevant C) opportunity D) relevant Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 56) Direct materials $50, direct labour $20, variable overhead costs $40, and fixed overhead costs $30. What is the incremental cost of one unit in the short term? A) $30 B) $70 C) $110 D) $140 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 57) The cost to produce Part A was $10 per unit in 2017 and in 2018 it has increased to $11 per unit. In 2018, Supplier XYZ has offered to supply Part A for $9 per unit. For the make-or-buy decision: A) incremental costs are $1 per unit. B) incremental revenues are $2 per unit. C) net relevant costs are $1 per unit. D) differential costs are $2 per unit. Answer: D Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice
Learning Objective 2: Distinguish relevant from irrelevant information in decision situations. Topic: The concept of relevance Answer the following questions using the information below: Jamberry Preserves currently makes jams and spreads 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 labour Unit-related support costs Batch-related support costs Product-sustaining support costs Facility-sustaining support costs Total cost per jar
$0.25 0.03 0.10 0.12 0.22 0.28 $1.00
58) The relevant cost per jar is: A) $0.72 per jar. B) $1.00 per jar. C) $0.38 per jar. D) $0.28 per jar. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 59) The maximum price that Jamberry Preserves should be willing to pay for the decorative jars is: A) $0.28 per jar. B) $0.72 per jar. C) $0.38 per jar. D) $1.00 per jar. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 60)
contribution equals revenues minus the direct materials costs of the goods sold.
A) Total B) Unit C) Throughput D) Financial Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance
Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Answer the following questions using the information below: Stephans Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials Direct labour Variable overhead Fixed overhead Total
$1.00 10.00 5.00 8.00 $24.00
Bill Company has contacted Stephans with an offer to sell them 5000 of the subassemblies for $22.00 each. Stephans will eliminate $25 000 of fixed overhead if it accepts the proposal. 61) What are the relevant costs for Stephans? A) $125 000 B) $140 000 C) $105 000 D) $80 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 62) Should Stephans make or buy the subassemblies? What is the difference between the two alternatives? A) Buy; savings = $50 000 B) Make; savings = $60 000 C) Buy; savings = $20 000 D) Make; savings = $5000
Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 63) When are costs relevant to a particular decision? A) If they are fixed costs B) If they differ across the alternatives being considered C) If they are variable costs D) If they remain unchanged across the alternatives being considered Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 64) Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 65) Revenues that remain the same for two alternatives being examined are relevant revenues. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 66) Quantitative factors are outcomes that are measured in numerical terms. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations.
67) TOC considers a short-run time period and assumes that operating costs are fixed costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 68) Qualitative factors are outcomes that are measured in numerical terms, such as the costs of direct labour. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 69) If a manufacturer chooses to continue purchasing direct materials from a supplier because of the ongoing relationship that has developed over the years, the decision is based on qualitative factors. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 70) Relevant-cost analysis generally emphasises qualitative factors that can be expressed in financial terms. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 71) Relevant revenues and relevant costs are the only information managers need to select among alternatives. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 72) Relevant costs of a bidding decision should exclude revenues lost on lower-priced sales to existing
customers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 73) Full costs of a product are relevant for one-time-only special order pricing decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 74) Full costs of a product include variable costs, but not fixed costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 75) One type of decision that affects output levels is accepting or rejecting special orders when there is idle production capacity and the special orders have no long-run implications. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 76) The sum of all costs (variable and fixed) in a particular business function of the value chain, such as manufacturing costs or marketing costs, are called ‘business function costs’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 77) The assumption of no short-run or strategic implications is crucial to management’s analysis of the one-time-only special order decision. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 78) Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions, but not long-term pricing decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 79) Absorption cost per unit is the best product cost to use for one-time-only special order decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 80) Managers must watch for incorrect general assumptions in relevant-cost-analysis. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 81) Generally, managers use total costs rather than unit costs because total costs are easier to work with and reduce the chance for erroneous conclusions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 82) An incremental product cost is generally a fixed cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance
Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 83) If Option 1 costs $100 and Option 2 costs $80, then the differential cost is $180. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 84) Producing another 10 000 units MAY increase the fixed cost of rent. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 85) ‘Outsourcing’ is purchasing goods and services from outside vendors rather than insourcing, which is producing the same goods or providing the same services within the organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 86) All variable costs are relevant and all fixed costs are irrelevant. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Write your answer in the space provided or on a separate sheet of paper. 87) 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. AACSB: Able to communicate effectively orally and in writing
Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 88) Explain why sunk costs are not considered relevant when choosing among alternatives.
Answer: Amounts that remain the same among alternatives do not add useful information for selecting an alternative, and therefore, are not considered relevant for decision making. Sunk costs by definition are those costs that have already been committed, cannot be changed, and will never differ among alternatives. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 89) Assume you are a student and are committed to earning an undergraduate degree. Your current decision is whether to finish university 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. 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 uni or taking a year off and working. Relevant costs for continuing your university 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 uni tuition and books during the past two years. 2. Amounts committed for uni tuition and books for the remaining two years. c.
A qualitative consideration would include having different activities and priorities than your friends who are students, graduating later than students who started university the same time you did, and retaining information over the year off from school.
AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 90) A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated décor 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: a. For the decision of whether to update the restaurant’s image, 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 91) For short-term pricing decisions, what costs are relevant when there is available surplus capacity? When there is no available surplus capacity?
Answer: For both situations the relevant costs are the future incremental costs. However, when there is limited capacity the incremental costs will be greater because they will include the costs of adding capacity or the opportunity costs of alternative manufacturing choices.
Difficulty: Complex AACSB: Able to communicate effectively orally and in writing Learning Objective 2: Distinguish relevant from irrelevant information in decision situations. Topic: The concept of relevance 92) Under what conditions might a manufacturing firm sell a product for less than its long-term price? Why?
Answer: The price for a short-term order may be less than the price offered to a long-term customer. If a firm has excess capacity that is sitting idle, it is more profitable for the firm to accept a special order for a price below the long-run price than it is to let the capacity sit idle. In addition, the firm may use this strategy for market penetration and to obtain greater market share. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 93) Wombat 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 CEO 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: Indicate 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 labour, Part A k. Total direct manufacturing labour, 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 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 94) Axle and Wheel Manufacturing is approached by a European customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Mark-up (50%) Targeted selling price
$33 15 24 52 124 62 $186
Axle and Wheel Manufacturing has excess capacity. Required: a. What is the full cost of the product per unit? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?
d. For Axle and Wheel Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Axle and Wheel Manufacturing consider a price of $100 per unit? Why or why not?
Answer: a. $124 b. $114 = Selling price $186 - Variable costs ($33 + $15 + $24). c. Relevant costs for decision making are those costs that differ between alternatives, which in this situation are the incremental costs. The incremental costs total $72 = Variable costs ($33 + $15 + $24). d. The minimum acceptable price is $72 = Variable costs ($33 + $15 + $24), which are the incremental costs in the short term. e. Yes, because this price is greater than the minimum acceptable price of this special order determined in (d). AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 95) Manawatu Furniture Ltd is approached by Ms Jenny Zhang, a new customer, to fulfil a large one-time-only special order for cabinets similar to one offered to regular customers. The following per unit data apply for sales to regular customers: Direct materials Direct labour Variable manufacturing support Fixed manufacturing support Total manufacturing costs Mark-up (60%) Targeted selling price
$150 125 80 75 430 258 $688
Manawatu Furniture Ltd has excess capacity. Ms Zhang wants the cabinets in cherry rather than oak, so direct material costs will increase by $50 per unit. Required: a. For Manawatu Furniture Ltd, what is the minimum acceptable price of this one-time-only special order? b. Other than price, what other items should Manawatu Furniture Ltd consider before accepting this one-time-only special order?
c.
How would the analysis differ if there was limited capacity?
Answer: a. $415 = Variable costs ($150 + $125 + $80) + $50 additional cost for cherry. b. Manawatu Furniture Ltd 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 $415. If additional capacity is needed to process this order, these incremental costs will increase by the cost of adding capacity. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 96) Mammoth Earthmoving manufactures part WB23 used in several of its truck models. 10 000 units are produced each year with production costs as follows: Direct materials Direct manufacturing labour Variable support costs Fixed support costs Total costs
$45 000 15 000 35 000 25 000 $120 000
Mammoth Earthmoving has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If WB23 is outsourced, 40% of the fixed costs cannot be immediately converted to other uses. a. Describe avoidable costs. What amount of the WB23 production costs is avoidable? b. Should Mammoth Earthmoving outsource WB23? Why or why not? c. What other items should Mammoth Earthmoving consider before outsourcing any of the parts it currently manufactures?
Answer: a. Avoidable costs are those costs eliminated when a part, product, product line, or business segmented is discontinued. Avoidable production costs for WB23 total $110 000, which are all but the $10 000 ($25 000 × 40%) of fixed costs that cannot be immediately converted to other uses. b. Based on the financial considerations given, Mammoth Earthmoving should NOT outsource WB23 because the $112 000 (10 000 units × $11.20 per part) outsourced cost is greater than the $110 000
reduction in annual production costs. In other words, the outsourcing would cost Mammoth Earthmoving an additional $2000 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 97) Auswest Company needs 1000 motors in its manufacture of motor cars. It can buy the motors from Bathurst Motors for $1250 each. Auswest’s plant can manufacture the motors for the following costs per unit: Direct materials Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
$500 250 200 350 $1300
If Auswest buys the motors from Bathurst, 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 Auswest consider in deciding whether or not to make or buy the motors?
Answer: a. Cost to buy the part: (1000 × $1250) Relevant costs to make: Variable costs: Direct materials (1000 × $500) Direct manufacturing labour (1000 × $250) Variable manufacturing overhead (1000 × $200) Total Avoidable fixed costs: ($350 × 1000 × 0.30) Savings if part is manufactured
$1 250 000
$500 000 250 000 200 000 950 000 105 000
1 055 000 $195 000
b. Management should consider several qualitative factors in deciding whether to make or buy the motors. ∙ ∙ ∙ ∙ ∙
Quality controls Delivery Reputation Term Facilities
The company’s ability to manufacture quality motors versus that of the supplier. Can they make them when needed versus Bathurst delivering them when needed? What is the overall reputation of Bathurst? Is Bathurst willing to make long-term commitments for delivery of the motors? What are the opportunity costs of using the space and equipment to manufacture other items? AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 98) Le Giro Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labour cost. The direct materials and direct labour cost per unit to make the wheels are $75 and $25, respectively. Normal production is 200 000 wheels per year. A supplier offers to make the wheels at a price of $108 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $420 000 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 Le Giro Bicycles buy the wheels from the outside supplier? Justify your answer.
Answer: a. Direct materials (200 000 × $75) Direct labour (200 000 × $25) Variable manufacturing costs ($500 000 × 30%) Purchase price (200 000 × $108) Total annual cost
Make $15 000 000 5 000 000
Buy -0-0-
1 500 000 -0$21 500 000
-021 600 000 $21 600 000
b. The wheels should continue to be manufactured by Le Giro Bicycles. The company’s net income would decrease $100 000 by purchasing the wheels. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex
Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. 99) Are relevant revenues and relevant costs the only information needed by managers to select among alternatives? Explain using examples.
Answer: No, relevant revenues and costs provide a financial analysis but do not take into consideration qualitative implications. In a make-or-buy decision, examples of qualitative issues include the supplier’s ability to meet expected quality and delivery standards, and the likelihood that suppliers increase prices of the components in the future. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The concept of relevance Learning Objective: 10.2 Distinguish relevant from irrelevant information in decision situations. Choose the one alternative that best completes the statement or answers the question. 100) When evaluating a make-or-buy decision, which of the following does NOT need to be considered? A) The original cost of the production equipment B) The reliability of the supplier’s delivery schedule C) The quality of the supplier’s product D) Alternative uses of the production capacity Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 101) For make-or-buy decisions, a supplier’s ability to deliver the item on a timely basis is considered a(n): A) relevant cost. B) opportunity cost. C) qualitative factor. D) differential factor. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making.
102) Which of the following would NOT be considered in a make-or-buy decision? A) Potential rental income from space occupied by the production area B) Unchanged supervisory costs C) Variable costs of production D) Fixed costs that will no longer be incurred Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 103) Which of the following describes ‘outsourcing’? A) Never a viable option B) Purchasing goods and services from outside vendors C) Purchasing goods and services internally D) More desirable than insourcing Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 104) Which of the following is a factor in deciding whether to outsource a part? A) The original cost of equipment currently used for production of that part B) The supplier’s cost of direct materials C) Past design costs used to develop the current composition of the part D) If the supplier is reliable Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 105) Which of following are risks of outsourcing the production of a part? A) Unreliable delivery B) Unscheduled price increases C) Unpredictable quality D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 106) Which of the following minimise the risks of outsourcing? A) Building close relationships with the supplier B) The responsibility for on-time delivery is now the responsibility of the supplier C) The use of short-term contracts that specify price D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. Answer the following questions using the information below: Casper’s Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1000 units are as follows: Direct materials Direct labour Variable overhead costs Fixed overhead costs Total costs
$40 000 10 000 30 000 20 000 $100 000
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Casper’s Engine Company has the option of purchasing the part from an outside supplier at $85 per unit. 107) If Casper’s Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total: A) $82 000 B) $100 000 C) $98 000 D) $50 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions
Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 108) If Casper’s Engine Company purchases 1000 TE456 parts from the outside supplier per month, then its monthly operating profit will: A) increase by $80 000. B) decrease by $85 000. C) decrease by $3000. D) increase by $2000. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 109) The MAXIMUM price that Casper’s Engine Company should be willing to pay the outside supplier is: A) $100 per TE456 part. B) $82 per TE456 part. C) $80 per TE456 part. D) $98 per TE456 part. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. Answer the following questions using the information below: Nullabor Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10 000 units of this part are as follows: Direct materials Direct labour Variable factory overhead Fixed factory overhead Total costs
$45 000 65 000 30 000 70 000 $210 000
Of the fixed factory overhead costs, $30 000 is avoidable. 110) Phil Company has offered to sell 10 000 units of the same part to Nullabor Corporation for $18 per unit. Assuming there is no other use for the facilities, Nullabor should:
A) buy the part, as this would save $3 per unit. B) buy the part, as this would save the company $30 000. C) make the part, as this would save $3 per unit. D) make the part, as this would save $1 per unit. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 111) Assuming no other use of their facilities, the highest price that Nullabor should be willing to pay for $10 000 units of the part is: A) $180 000 B) $140 000 C) $170 000 D) $210 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 112) If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the: A) market value less the usual mark-up on the product. B) market value of the product. C) total variable cost of producing the product. D) total cost of producing the product. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 113) Increasing numbers of businesses are including ethical considerations in relation to the community as well as the environment when making decisions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. 114) Outsourcing is without risks. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Insourcing-versus-outsourcing and make-versus-buy decisions Learning Objective: 10.3 Explain the importance of strategic and qualitative factors in decision making. Choose the one alternative that best completes the statement or answers the question. 115) If Ruapehu Inc. doesn’t use one of its limited resources in the best possible way, the lost contribution to income could be called a(n): A) fixed cost. B) sunk cost. C) variable cost. D) opportunity cost. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 116) When a firm has constrained capacity as opposed to surplus capacity, opportunity costs will be: A) variable. B) greater. C) the same. D) lower. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 117) Opportunity costs: A) result in a cash outlay. B) should be maximised for the best decision. C) only are considered when selecting among alternatives. D) are recorded in the accounting records. Answer: C
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 118) The cost of holding inventory is the income forgone by tying up money in inventory and not investing it elsewhere. A) future B) estimated C) sunk D) opportunity Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 119) Which of the following reflects the opportunity cost of holding significant inventory? A) Additional insurance costs B) The interest forgone on an alternative investment C) Additional storage costs D) All of these answers are correct Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 120) A recent college graduate has the choice of buying a new car for $30 000 or investing the money for four years with a 5% 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) $30 000. B) $6000. C) $1500. D) zero, since there is no opportunity cost for this decision. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making.
121) A supplier offers to make Part A for $70. Jansen Company has relevant costs of $80 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is: A) $10 000. B) $70 000. C) 0. D) indeterminable. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 122) Jensen Company has relevant costs of $80 per unit to manufacture Part A. A current supplier offers to make Part A for $70 per unit. If capacity is constrained, the opportunity cost of buying Part A from the supplier is: A) $70 000. B) 0. C) $10 000. D) indeterminable. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 123) Deciding to use a resource in a particular way causes a manager to forgo the opportunity to use the resource in optional ways. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 124) ‘Opportunity cost’ is the contribution to operating profit that is forgone by not using a limited resource in its next best optional use. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 125) In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is relevant. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 126) Opportunity costs are not incorporated into formal financial accounting records. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 127) If the $20 000 spent to purchase inventory could be invested and earn interest of $1200, then the opportunity cost of holding inventory is $20 000. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 128) The opportunity cost of holding inventory is the income forgone by tying up money in inventory and not investing it elsewhere. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. Write your answer in the space provided or on a separate sheet of paper. 129) Kirkland Company manufactures a part for use in its production of hats. When 10 000 items are produced, the costs per unit are: Direct materials Direct manufacturing labour
$0.60 3.00
Variable manufacturing overhead Fixed manufacturing overhead Total
1.20 1.60 $6.40
Mike Company has offered to sell to Kirkland 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 $9000 if Kirkland 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 Kirkland Company? By how much?
Answer: a. Direct materials Direct manufacturing labour Variable manufacturing overhead Avoidable fixed manufacturing overhead Total relevant per unit costs Make
b. Purchase price Savings in space Direct materials Direct mfg. labour Variable overhead Fixed overhead saved Totals
$0.60 3.00 1.20 1.00 $5.80 Buy $60 000 (9000)
$6000 30 000 12 000 $48 000
(10 000) $41 000
Effect of Buying $(60 000) 9000 6000 30 000 12 000 10 000 $7000
The best alternative is to buy the part. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. 130) Lewis Auto Company manufactures a part for use in its production of motor cars. When 10 000 items are produced, the costs per unit are: Direct materials
$12
Direct manufacturing labour Variable manufacturing overhead Fixed manufacturing overhead Total
60 24 32 $128
Monty Company has offered to sell Lewis Auto Company 10 000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180 000 if Lewis Auto accepts the supplier’s offer. In addition, $20 per unit of fixed manufacturing overhead on the original part would be eliminated. Required: a. What is the relevant per unit cost for the original part? b. Which alternative is best for Lewis Auto Company? By how much?
Answer: a. Direct materials Direct manufacturing labour Variable manufacturing overhead Avoidable fixed manufacturing overhead Total relevant per unit costs b.
Make Purchase price Savings in space Direct materials $120 000 Direct manufacturing labour 600 000 Variable overhead 240 000 Fixed overhead saved Totals $960 000
$12 60 24 20 $116 Buy $1 200 000 (180 000)
(200 000) $820 000
Effect of Buying $(1 200 000) 180 000 120 000 600 000 240 000 200 000 $140 000
The best alternative is to buy the part. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Opportunity costs and outsourcing Learning Objective: 10.4 Explain the opportunity cost concept and why it is used in decision making. Choose the one alternative that best completes the statement or answers the question. 131) Determining which products should be produced when the plant is operating at full capacity is referred to as:
A) a short-run focus decision. B) a product-mix decision. C) an outsourcing analysis. D) production scheduling analysis. Answer: B Able to analyse and frame problems Difficulty: Moderate AACSB: Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 132) Product-mix decisions: A) focus on selling price per unit. B) have a long-run focus. C) help determine how to maximise operating profits. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 133) Constraints may include: A) linear square metres of display space for a retailer. B) the availability of direct materials in manufacturing. C) direct labour in the service industry. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 134) With a constraining resource, which product should a manager select to emphasise? A) Highest gross profit B) Highest contribution margin per unit of the constraining resource C) Lowest contribution margin per unit of the constraining resource D) Highest sales price
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 135) For determining the best mix of products, the one with the LEAST amount of influence is: A) the use of capacity resources. B) corporate office costs allocated to each product. C) the market price of the products. D) contribution margins. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 136) In product-mix decisions: A) never focus on the short-term, but include only long-term considerations. B) always focus on maximising total contribution margin. C) focus on the product with the greatest contribution margin per machine-hour. D) focus on the full costs of the product. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. Answer the following questions using the information below: White’s Brakes manufactures three different product lines, Model X, Model Y and Model Z. Considerable market demand exists for all models. The following per unit data apply: Model X
Model Y
Model Z
Selling price
$50
$60
$70
Direct materials Direct labour ($12 per hour)
6 12
6 12
6 24
Variable support costs ($4 per machine-hour) 4 Fixed support costs 10
8 10
8 10
137) Which model has the greatest contribution margin per unit? A) Model X B) Model Y C) Model Z D) Models X and Y Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 138) Which model has the greatest contribution margin per machine-hour? A) Model X B) Model Y C) Model Z D) Models Y and Z Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 139) If there is excess capacity, which model is the most profitable to produce? A) Model X B) Model Y C) Model Z D) Models X and Y Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 140) If there is a machine breakdown, which model is the most profitable to produce?
A) Model X B) Model Y C) Model Z D) Models Y and Z Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 141) How can Lisa White encourage her salespeople to promote the more profitable model? A) Provide higher sales commissions for higher priced items. B) Put all sales persons on salary. C) Provide higher sales commissions for items with the greatest contribution margin per constrained resource. D) Both B and C are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. Answer the following questions using the information below: Darwin’s Rockers manufactures two models, Deluxe and Super Deluxe. Weekly demand is estimated to be 100 units of the Deluxe Model and 70 units of the Super Deluxe Model. The following per unit data apply:
Contribution margin per unit Number of machine-hours required
Deluxe
Super Deluxe
$18 3
$20 4
142) The contribution per machine-hour is: A) $54 for Deluxe, $80 for Super Deluxe. B) $15 for Deluxe, $16 for Super Deluxe. C) $18 for Deluxe, $20 for Super Deluxe. D) $6 for Deluxe, $5 for Super Deluxe. Answer: D AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 143) If there are 496 machine-hours available per week, how many rockers of each model should Jim Darwin produce to maximise profits? A) 100 units of Deluxe and 49 units of Super Deluxe B) 100 units of Deluxe and 70 units of Super Deluxe C) 85 units of Deluxe and 60 units of Super Deluxe D) 72 units of Deluxe and 70 units of Super Deluxe Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 144) If there are 600 machine-hours available per week, how many rockers of each model should Jim Darwin produce to maximise profits? A) 100 units of Deluxe and 49 units of Super Deluxe B) 85 units of Deluxe and 60 units of Super Deluxe C) 100 units of Deluxe and 70 units of Super Deluxe D) 72 units of Deluxe and 70 units of Super Deluxe Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. Answer the following questions using the information below: Frank’s Furniture Company manufactures three sizes of lounge chairs: small, medium and large. Product information is provided below. Medium Large Small Unit selling price $250 $500 $150 Unit costs: Variable manufacturing (60) (120) (200) Fixed manufacturing (40) (50) (120)
Variable selling and administrative Unit profit
(30) $20
(30) $50
(30) $150
Demand in units Machine-hours per unit
100 20
120 40
100 100
The maximum machine-hours available are 6000 per week. 145) What is the contribution margin per machine-hour for a large chair? A) $1.80 B) $5.00 C) $2.70 D) $3.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 146) Which of the three product models should be produced first if management incorporates a short-run profit maximising strategy? A) small chairs B) medium chairs C) large chairs D) either medium or large chairs Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 147) How many of each product should be produced per month using the short-run profit maximising strategy? Medium Large A) Small 100 20 40 Medium Large B) Small 100 0 40 C) Small Medium Large
0 120 12 Medium Large D) Small 100 100 0 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 148) Favata Corporation manufactures two products, AA and CC. The following information was available:
Selling price per unit Variable cost per unit Total fixed costs
AA $37 34
CC $26 21
$18 000
If Favata Corporation could produce and sell either 10 000 units of AA or 5000 units of CC at full capacity, it should produce and sell: A) 10 000 units of AA and none of CC B) 5000 units of CC and none of AA C) 3000 units of CC and 6000 units of AA D) 4000 units of AA and 5000 units of CC Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 149) Product-mix decisions are typically long-run decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints.
150) For short-run product-mix decisions, managers should focus on minimising total fixed costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 151) Regardless of the restraining resource, managers should produce more of the product with the greatest contribution margin per unit to maximise profits. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 152) Management should focus on per unit costs when deciding whether to discontinue a product or not. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. Write your answer in the space provided or on a separate sheet of paper. 153) Norton’s Mufflers manufactures three different product lines, Model X, Model Y and Model Z. Considerable market demand exists for all models. The following per unit data apply:
Selling price Direct materials Direct labour ($10 per hour) Variable support costs ($5 per machine-hour) Fixed support costs a. b. c.
Model X $80 30 15 5 20
Model Y $90 30 15 10 20
Model Z $100 30 20 10 20
For each model, compute the contribution margin per unit. For each model, compute the contribution margin per machine-hour. 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 Norton encourage her sales people to promote the more profitable model?
Answer: a. The contribution margin per unit is: $30 for Model X ($80 - $30 - $15 - $5) $35 for Model Y ($90 - $30 - $15 - $10) $40 for Model Z ($100 - $30 - $20 - $10). b. The contribution margin per machine-hour is: $30 for Model X ($30 contribution margin/1.0 machine-hour per unit), $17.50 for Model Y ($35/2.0) $20 for Model Z ($40/2.0). c. When there is excess capacity, Model Y is the most profitable because it has the greatest contribution margin per unit. d. When there are machine-hour capacity constraints, Model X is the most profitable because it has the greatest contribution margin per constrained resource. e. To encourage sales persons to promote specific products, Norton may want to provide marketing incentives such as higher sales commissions for products contributing the most to profits. Norton may also want to educate salespeople about the effects of constrained resources. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Product-mix decisions with capacity constraints Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. 154) 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 maximise output from the machine which is the limited resource. This involves maximising 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Product-mix decisions with capacity constraints
Learning Objective: 10.5 Analyse data to determine which product(s) to produce when there are capacity constraints. Choose the one alternative that best completes the statement or answers the question. 155) What occurs in an operation when the work to be performed exceeds the available capacity to do it? A) Opportunity B) Bottleneck C) Sunk cost D) Qualitative factor Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 156) Which of the following describes methods to maximise operating profit when faced with some bottleneck and some non-bottleneck operations? A) Theory of constraints B) Quantitative factor C) Qualitative factor D) Sunk cost Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 157) TOC emphasises management of operations as the key to improving performance of production operations as a whole. A) sunk B) manufacturing C) bottleneck D) relevant Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 158) When making short-term decisions, it is important that decision makers are aware that the
approach tends to lend itself more to short-term decisions while ABC often has long-term implications. A) qualitative B) relevant C) quantitative D) TOC Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 159) Throughput contribution equals revenues minus the direct materials costs of the goods sold. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 160) TOC considers a short-run time period and assumes that operating costs are fixed costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 161) Recognising that the bottleneck operation determines throughput contribution of the entire system is the first step in managing bottleneck operations. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 162) TOC emphasises management of bottleneck operations as the key to improving performance of production operations as a whole. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints
Learning Objective: 10.6 Explain how to manage bottlenecks. 163) Because TOC regards operating costs as difficult to change in the short run, it does not identify individual activities and cost drivers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 164) The short-run TOC emphasis on maximising throughput contribution by managing bottlenecks complements the long-run strategic-cost-management focus of ABC. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 165) When making short-term decisions, it is important that decision makers are aware that the TOC approach tends to lend itself more to short-term decisions while ABC often has long-term implications. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 166) A bottleneck occurs in an operation when the work to be performed exceeds the available capacity to do it. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. 167) TOC tends to be more in line with an absorption costing approach to decision making, which may result in a wrong decision being made for the company’s long-term profitability. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints
Learning Objective: 10.6 Explain how to manage bottlenecks. 168) The theory of constraints describes methods to maximise operating profit when faced with some bottleneck and some non-bottleneck operations. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Theory of constraints Learning Objective: 10.6 Explain how to manage bottlenecks. Choose the one alternative that best completes the statement or answers the question. 169) When deciding whether to discontinue a segment of a business, managers should focus on: A) equipment used by that segment that could become idle. B) how total costs differ among alternatives. C) operating profit per unit of the discontinued segment. D) reallocation of corporate costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 170) Which of the following do relevant costs exclude when deciding whether to discontinue a segment of a business? A) Variable marketing costs per unit of product sold B) Cost of goods sold C) Future administrative costs that will continue D) Fixed supervision costs that can be eliminated Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 171) Molly 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) The company’s total fixed costs will increase
B) Total fixed costs will decrease by the amount of the product line’s fixed costs C) Net profit will decrease by the amount of the contribution margin of the product line being discontinued D) Net profit will decrease by the amount of the product line’s fixed costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 172) Discontinuing unprofitable products will increase profitability: A) automatically B) if the resources no longer required by the discontinued product can be eliminated C) when a large portion of the fixed costs are unavoidable D) if capacity constraints are adjusted Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 173) A segment has the following data: Sales Variable costs Fixed costs
$600 000 320 000 310 000
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) $290 000 decrease B) $30 000 increase C) $280 000 decrease D) $310 000 decrease Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping
customers or segments. 174) Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarised below: Sales (1000 units) Manufacturing costs: Direct materials Direct labour ($15 per hour) Overhead Operating loss
$300 000 150 000 60 000 100 000 ($10 000)
Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value. If Model AE2 is dropped from the product line, operating profit will: A) increase by $30 000. B) decrease by $20 000. C) decrease by $10 000. D) increase by $10 000. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. Answer the following questions using the information below: The management accountant for Robbie’s Sports Shoe Store has prepared the following income statement for the most current year: Rugby boots Football boots Golf shoes Total Sales $60 000 $100 000 $40 000 $200 000 Cost of goods sold 36 000 65 000 20 000 121 000 Contribution margin
24 000
35 000
20 000
79 000
Order and delivery processing 18 000
21 000
8000
47 000
Rent (per sq. metre used)
2000
1000
3000
6000
Allocated corporate costs Corporate profit
7000
7000
7000
21 000
$(3000)
$6000
$2000
$5000
175) If the rugby boots product line had been discontinued prior to this year, the company would have reported: A) the same amount of corporate profits. B) greater corporate profits. C) less corporate profits. D) resulting profits cannot be determined. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 176) If the football boots line had been discontinued, corporate profits for the current year would have decreased by: A) $6000 B) $14 000 C) $13 000 D) $35 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. Answer the following questions using the information below: Rockhampton Company has three products, X, Y and Z. The following information is available: Product X $60 000 36 000
Product Y $90 000 48 000
Product Z $24 000 15 000
24 000
42 000
9000
Avoidable
9000
18 000
6000
Unavoidable Operating profit
6000
9000
5400
$9000
$15 000
$(2400)
Sales Variable costs Contribution margin Fixed costs:
177) Rockhampton Company is thinking of dropping Product Z because it is reporting a loss. Assuming Rockhampton drops Product Z and does not replace it, operating profit will: A) decrease by $5400. B) increase by $2400. C) decrease by $3000. D) increase by $3000. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 178) Assuming Product Z is discontinued and the space formerly used to produce Product Z is rented for $12 000 per year, operating profit will: A) increase by $14 400. B) increase by $9000. C) increase by $12 000. D) increase by $6600. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 179) Wombat Wholesalers Company has prepared the following income statement showing sales for the current year: Company Sales Cost of sales Contribution margin Marketing support Sales and delivery processing costs Fixed costs allocated: Rent Depreciation Administrative expenses
A $ 50000 30 000 20 000 2000 1500
B $ 20000 10 000 10 000 500 500
C $ 30 000 20 000 10 000 1500 3000
Total $ 100 000 60 000 40 000 4000 5000
2500 3000 4500
1000 1200 2600
1500 1800 5900
5000 6000 13 000
Operating profit
6500
4200
(3700)
7000
The following additional information is available: * The rent of $1500 assigned to Company C is not avoidable if the company is dropped. * The company’s total depreciation would not be affected by dropping Company C. * Elimination of Company C will make it possible to cut two people from the administrative staff; their combined salaries total $3000. If Company C was dropped, Wombat would have reported: A) greater corporate profits. B) the same amount of corporate profits. C) lower corporate profits. D) resulting profits cannot be determined. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 180) Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 181) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 182) In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are always relevant. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. Write your answer in the space provided or on a separate sheet of paper. 183) Bikelites Company is considering eliminating Model AE1 from its rear lights line because of losses over the past quarter. The past three months of information for model AE1 is summarised below: Sales (2000 units) Manufacturing costs: Direct materials Direct labour ($15 per hour) Support Operating loss
$500 000 280 000 60 000 200 000 ($40 000)
Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE1 that has no resale value. Should Bikelites Company eliminate Model AE1 from its product line? Why or why not? Answer: No, Bikelites Company should not eliminate Model AE1 from its product line because it contributes $20 000 toward fixed costs and profits. Sales (2000 units) $500 000 Manufacturing costs: Direct materials 280 000 Direct labour 60 000 140 000 Variable support ($200 000 × 70%) Contribution margin $20 000 AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 184) 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 2000 Rent (per sq. metre used) 3000 Allocated corporate costs 5000 Corporate profit $4000
Chocolate Lite $25 000 15 000 10 000 3000 3000 5000 $(1000)
Fudge $35 000 19 000 16 000 2000 2000 5000 $7000
Total $100 000 60 000 40 000 7000 8000 15 000 $10 000
a. Do you recommend discontinuing the Chocolate-Lite 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 Chocolate-Lite product line because this product line contributes $4000 towards corporate costs and profits. $25 000 - $15 000 - $3000 - $3000 = $4000 Without the Chocolate-Lite product line, corporate profits would be $4000 less than currently reported. b. If the Chocolate product line were discontinued, corporate profits would immediately decrease by $9000. $40 000 - $26 000 - $2000 - $3000 = $9000 AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 185) Clinton Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $100 per month. The other existing equipment will be used for additional production of product A. One employee earning $200 per month can be terminated if product B production is dropped. Clinton’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
Product A $10 000
Product B $8000
Total $18 000
Direct materials Direct labour Equipment rental Other allocated overhead Operating profit
2500 2000 300 1000 $4200
2000 1200 2600 2100 $100
4500 3200 2900 3100 $4300
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% Product B decrease in sales Incremental decrease in revenue
$4000 (8000) ($4000)
Incremental change in variable costs: Direct materials: Product A increase $2500 × 40% (1000) Product B decrease 2000 Direct labour: Product A increase $2000 × 40% (800) 200 Product B decrease Incremental decrease in variable costs 400 100 Equipment rental deduction Incremental decrease in profits if product B is dropped ($3500) AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. 186) Doggie Dinner Ltd currently manufactures three different types of scientifically balanced dog food. The firm is considering eliminating one of the three products. What factors should be taken into account in making this decision?
Answer: In deciding whether or not to eliminate a product, the firm should determine if costs that can be eliminated will exceed the revenues that will be lost. The firm needs to classify the costs into those costs which will be eliminated and therefore are relevant, and which costs will continue even if the product is deleted. Costs that often continue are those costs which have been allocated rather than incurred directly
by the product. The firm must also look to see if any other products may be harmed by the elimination of the product. Maybe the products are complements, and loss of one sale will result in loss of another. The firm should consider whether another product’s sales might increase if the product is deleted, which could be an opportunity to earn more contribution from another area. Can the firm use the space freed up for some other purpose that could generate additional inflows, which is an opportunity cost? The firm must also look at how its reputation among its customers for selling a full line of products might be damaged as a result of this decision. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Customer profitability, activity-based costing and relevant costs Learning Objective: 10.7 Analyse and apply the factors managers consider when adding or dropping customers or segments. Choose the one alternative that best completes the statement or answers the question. 187) When deciding to lease a new cutting machine or continue using the old machine, the following costs are relevant EXCEPT the: A) $10 000 selling price of the old machine. B) $20 000 cost of the new machine. C) $3000 annual savings in operating costs if the new machine is purchased. D) $50 000 cost of the old machine. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 188) For machine-replacement decisions, depreciation is a cost that is: A) incremental. B) not relevant. C) differential. D) variable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 189)
is/are relevant in a decision to replace equipment.
A) Cost of old equipment B) Book value of old equipment C) Future maintenance costs of old equipment D) Accumulated depreciation on old equipment Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 190) In a decision to keep or replace existing equipment, is a false statement. A) depreciation on the new equipment is relevant B) the disposal value of the old equipment is irrelevant C) the cost of the new equipment is relevant D) the book value of the old equipment is irrelevant Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 191) The amount—original cost minus accumulated depreciation—of existing equipment is a past cost that is irrelevant. A) opportunity B) sunk C) carrying D) financial Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 192) What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? A) It is not relevant since it reduces the cost of the old equipment B) It is relevant since it reduces the cost of the new equipment
C) It is relevant since it increases the cost of the new equipment D) It is not relevant to the decision since it does not impact the cost of the new equipment Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. Answer the following questions using the information below: Flowers For Everyone 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: Existing van Original cost $100 000 Annual operating cost $33 000 Accumulated depreciation $60 000 Current salvage value of the existing van $45 000 Remaining life 10 years Salvage value in 10 years $0 Annual depreciation $4000
New van $180 000 $20 000 — — 10 years $0 $18 000
193) ‘Sunk costs’ include: A) the original cost of the existing van. B) the annual operating cost of the new van. C) the original cost of the new van. D) the current salvage value of the existing van. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 194) ‘Relevant costs’ for this decision include: A) the current salvage value. B) accumulated depreciation. C) the salvage value in 10 years. D) the original cost of the existing van.
Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 195) If Flowers For Everyone replaces the existing delivery van with the new one, over the next 10 years operating profit will: A) decrease by $180 000. B) increase by $130 000. C) decrease by $130 000. D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. Answer the following questions using the information below: Frederick Company 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 $45 000 10 5 $25 000 $6000 0 $6500
Replacement Machine $35 000 5 0 — — 0 $4000
196) Which of the data provided in the table is a sunk cost? A) The annual cash operating costs of the replacement machine B) The original cost of the old machine C) The annual cash operating costs of the old machine D) The disposal value of the old machine Answer: B
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 197) For the decision to keep the old machine, the relevant costs of keeping the old machine total: A) $72 000 B) $32 500 C) $47 000 D) $60 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 198) The difference between keeping the old machine and replacing the old machine is: A) $37 000 in favour of keeping the old machine. B) $16 500 in favour of keeping the old machine. C) $16 500 in favour of replacing the old machine. D) $37 000 in favour of replacing the old machine. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 199) The difference between the original cost of an asset and the accumulated depreciation is known as the: A) historical cost. B) depreciable cost. C) market value. D) book value. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Irrelevance of past costs and equipment-replacement decisions
Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 200) When replacing an old machine with a new machine, the purchase price of the old machine is a relevant cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. Write your answer in the space provided or on a separate sheet of paper. 201) 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 $5000 $40 000 5 years $10 000 $0
New Turbo Oven $50 000 — — 5 years $7500 $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:
• • • c.
Acquisition cost of the new Turbo oven Current disposal value of the existing convection oven Annual operating expenses for the existing and the new Turbo oven.
Net cash flows over 5 years with the new Turbo oven: Cash inflow: Decrease in annual operating expenses ($2500 × 5) Sale of the existing oven Cash outflow: Acquisition of the new Turbo oven Net cash inflow (outflow)
$12 500 40 000 (50 000) $2500
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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. 202) Why is the book value of old equipment irrelevant to the equipment replacement decision?
Answer: The book value of old equipment is made up of the cost and accumulated depreciation, both of which are sunk costs and therefore irrelevant. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Irrelevance of past costs and equipment-replacement decisions Learning Objective: 10.8 Explain why the carrying amount of equipment is irrelevant in equipment-replacement decisions. Choose the one alternative that best completes the statement or answers the question. 203) An important factor in decisions is the manager’s perception of whether the decision model is consistent with how the manager’s performance will be judged after the decision is implemented.
A) quantitative B) relevant C) outsourcing D) replacement Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 204) From the perspective of their own careers, it is no surprise that managers tend to favour the replacement decision option that makes their look better. A) future B) status C) opportunity D) performance Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 205) Resolving the conflict between the model and the performance-evaluation model is frequently a baffling problem in practice. A) financial B) qualitative C) opportunity D) decision Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 206) Which of the following focuses on responsibility centres for a specific period, not on projects or individual items of equipment over their useful lives? A) Performance evaluation
B) Relevant costing C) Quantitative analysis D) Qualitative analysis Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 207) Managers tend to favour the alternative that makes their performance look best. Therefore, they tend to focus on: A) the measures used in the decision model. B) the measures used in the performance evaluation model. C) gathering the required information. D) how to implement the chosen alternative. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 208) 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) quantitative model. B) decision model. C) production evaluation model. D) performance evaluation model. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 209) Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is: A) consistent with the decision model. B) based solely on quantitative factors.
C) not consistent with the decision model. D) focused on short-term performance. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 210) The three steps involved in linear programming include all of the following EXCEPT: A) determining the objective. B) determining the relevant and irrelevant costs. C) computing the optimal solution. D) determining the basic relationship. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 211) In linear programming, what are the goals of management expressed in? A) An objective function B) Business functions C) Constraints D) Operating policies Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 212) What is a mathematical inequality or equality that must be appeased called? A) Constraint B) Objective function C) Business function D) Operating policy Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 213) Surfing Products produces two surfboards, Standard and Superfast. Standard surfboards have a unit contribution margin of $128 and Superfast surfboards have a unit contribution margin of $720. The demand for Standards exceeds Surfing Product's production capacity, which is limited by available machine-hours and direct manufacturing labour-hours. The maximum demand for Superfast surfboards is 80 per month. Management desires a product mix that will maximise the contribution toward fixed costs and profits. Direct manufacturing labour is limited to 1600 hours a month and machine-hours are limited to 1200 a month. The Standard surfboards require 20 hours of labour and 8 machine-hours. Superfast surfboards require 34 labour-hours and 20 machine-hours. Let R represent Standard surfboards and S represent Superfast surfboards. The correct set of equations for the surfboard production process is: A) maximise: $128R + $720S Constraints: labour-hours: 20R + 34S ≥ 1600 Machine-hours: 8R + 20S ≥≤ 1200 Superfast: S ≥ 80 S≥0 Standard: R≥0 B) maximise: $128R + $720S Constraints: labour-hours: 20R + 34S ≤ 1600 Machine-hours: 8R + 20S ≤ 1200 Superfast: S ≤ 80 S≥0 Standard: R≥0 C) maximise: $128R + $720S Constraints: labour-hours: 20R + 34S ≤ 1600 Machine-hours: 8R + 20S ≤ 1200 Superfast: S ≥ 80 S≤0 Standard: R≤0 D) maximise: $720S + $128R Constraints: labour-hours: 20R + 8S ≤ 1600
Machine-hours: Superfast:
34R + 20S ≤ 1200 S ≤ 80 S≥0 R≥0
Standard: Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 214) Managers tend to favour alternatives that make their own performance look better. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 215) Linear programming is a tool that maximises total contribution margin of a mix of products with multiple constraints. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. Write your answer in the space provided or on a separate sheet of paper. 216) 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 manager’s performance on short-term results, when the firm would like decisions made that would maximise long-term performance. AACSB: Able to communicate effectively orally and in writing
Difficulty: Complex Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. 217) Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand for steel beams exceeds Local Steel Construction Company’s production capacity, which is limited by available direct labour and machine-hours. The maximum demand for wood beams is 90 per week. Management desires that the product mix should maximise the weekly contribution toward fixed costs and profits. Direct manufacturing labour is limited to 3000 hours a week and 1000 hours is all that the company’s outdated machines can run a week. The steel beams require 120 hours of labour and 60 machine-hours. Wood beams require 150 labour hours and 120 machine-hours. Required: Formulate the objective function and constraints necessary to determine the optimal product mix.
Answer: S = steel beams
W = wood beams
maximise:
$200S + $150W
labour hours: 120S + 150W ≤ 3000 60S + 120W ≤ 1000 Machine-hours: Wood beams: W ≤ 90 W ≥ 0 S≥0 Steel beams: AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Decisions and performance evaluation Learning Objective: 10.9 Explain how conflicts can arise between the decision model used by a manager and the performance-evaluation model used to evaluate the manager. Constraints:
Chapter 11 Budgeting, management control and responsibility accounting Choose the one alternative that best completes the statement or answers the question. 1) A budget: A) generally includes both financial and non-financial aspects of the plan. B) is the quantitative expression of a proposed plan of action by management. C) serves as a blueprint for the company to follow in an upcoming period. D) is an aid to coordinate what needs to be done. E) All of the above are correct. Answer: E AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 2) Examples of non-financial budgets include all of the following EXCEPT: A) units sold B) cash collections from customers C) units manufactured D) number of new products introduced Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 3) At the end of the financial year, managers and management accountants take into account which of the following as they begin to make plans for the next period? A) Market feedback B) Changed conditions C) Their own experiences D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 4) The master budget expresses management’s and financial plans for a specified period. A) strategic B) learning C) controllable D) operating Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 5) Operating decisions PRIMARILY deal with: A) the use of scarce resources. B) satisfying shareholders. C) acquiring equipment and buildings. D) how to obtain funds to acquire resources. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 6) Financing decisions PRIMARILY deal with: A) how to obtain funds to acquire resources. B) the use of scarce resources. C) preparing financial statements for shareholders. D) acquiring equipment and buildings. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 7) Which of the following does budgeting NOT provide? A) An ethical framework for decision making B) A means to communicate the organisation’s short-term goals to its members
C) Support for the management functions of planning and coordination D) A means to anticipate problems Answer: A AACSB: Able to identify ethical issues and address issues in a socially responsible manner Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 8) If initial budget estimates prove unacceptable, planners achieve the MOST benefit from: A) deciding not to budget this year. B) using last year’s budget. C) planning again in light of feedback and current conditions. D) accepting an unbalanced budget. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 9) Which of the following regarding operating budgets and financial budgets is TRUE? A) Combined from the master budget B) Are prepared after the master budget C) Are prepared before the master budget D) Have nothing to do with the master budget Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 10) A good budgeting system forces managers to examine the business as they plan, so they can: A) detect inaccurate historical records. B) set specific expectations against which actual results can be compared. C) get promoted for doing a good job. D) complete the budgeting task on time. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits.
Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 11) Few businesses plan to fail, but many of those that don’t succeed have failed to plan. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Benefits of budgeting Learning Objective: 11.1 Describe the master budget and explain its benefits. 12) The master budget reflects the impact of operating decisions, but not financing decisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 13) Budgeted financial statements are also referred to as PRO FORMA STATEMENTS. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 14) Budgeting includes only the financial aspects of the plan and not any non-financial aspects such as the number of physical units manufactured. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 15) Budgets help managers assess strategic risks and opportunities (including both environmental and social opportunities) by providing them with feedback about the likely effects of their strategies and plans. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 16) Budgeting is most useful when it is integrated with a company’s strategy.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 17) Long-run planning and short-run planning are best performed independently of each other. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 18) Operating decisions deal with how to best use the limited resources of an organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 19) Investing decisions deal with how to obtain the funds to acquire resources. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. 20) Well-managed companies usually cycle through the four budgeting steps during the course of the financial year: Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgets and the budgeting cycle Learning Objective: 11.1 Describe the master budget and explain its benefits. Choose the one alternative that best completes the statement or answers the question. 21) A budget can do all of the following EXCEPT: A) determine actual profitability. B) motivate managers. C) promote coordination among subunits.
D) motivate employees. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 22) Which of the following can a budget not do? A) Help management allocate limited resources B) Become the performance standard against which firms can compare the actual results C) Be adjusted if new opportunities become available during the year D) Be prepared by managers from different functional areas working independently of each other Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 23) A limitation of comparing a company’s performance against actual results of last year is that: A) it includes adjustments for future conditions. B) past results can contain inefficiencies of the past year. C) feedback is no longer a possibility. D) the budgeting time period is set at one year. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 24) Which of the following do challenging budgets tend to do? A) Reduce learning B) Motivate improved performance C) Reduce coordination D) Decrease line-management participation in attaining corporate goals Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets.
25) Actual results should NOT be compared against past performance because: A) past results may contain mistakes and substandard performance. B) past performance is an indicator of future performance. C) future conditions will be similar to past conditions. D) past results will never happen again. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 26) A company’s actual performance should be compared against budgeted rather than actual amounts for the same accounting period so that: A) no feedback is possible. B) a rolling budget can be implemented. C) adjustments for expected changes in future conditions can be included in the comparison. D) inefficiencies of the past year can be included in the comparison. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 27) Participation creates greater and accountability towards the budget among lower-level managers. A) resistance B) animosity C) concern D) commitment Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 28) As employees get closer to a goal, they: A) relax. B) tell their friends. C) set a new goal. D) work harder to achieve it.
Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 29) To gain the benefits of budgeting, must understand and support the budget. A) customers B) management at all levels C) suppliers D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 30) One of the most valuable benefits of budgeting is that it helps managers: A) communicate. B) learn. C) develop new strategies. D) acquire power. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 31) Line managers who feel that top management does not believe in the budget are MOST likely to: A) spend less time on the budgeting process. B) be motivated by the budget. C) pick up the slack and participate in the budgeting process. D) convert the budget to a shorter more reasonable time period. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 32) Budgets should:
A) be administered rigidly. B) include only variable costs. C) be flexible. D) only be developed for short periods of time. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 33) After management has agreed upon and finalised the budget, the amounts should not be changed for any reason. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 34) Budgeting is a time-consuming process that involves all levels of management. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 35) Budgets should not be administered rigidly, as changing conditions usually call for changes in plans. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 36) Even in the face of changing conditions, attaining the original budget is critical. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets.
37) Top management support is critical for obtaining lower-level management’s participation in the formulation of budgets and for successful administration of budgets. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 38) When administered wisely, budgets promote communication and coordination among the various subunits of the organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. Write your answer on a separate sheet of paper. 39) Describe the benefits to an organisation of preparing an operating budget. Answer: A well-prepared operating budget should serve as a guide for a company to follow during the budgeted period. It is not ‘set in stone’. If new information or opportunities arise, the budget should be adjusted. A well-prepared operating budget assists management with the allocation of scarce resources. It can help management see trouble spots in advance, and then management can decide where to allocate its limited resources. A well-prepared operating budget fosters communication and coordination among various segments of the company. The process of preparing a budget requires managers from different functional areas to work together and communicate performance levels they both want and can attain. A well-prepared operating budget can become the performance standard against which firms can compare the actual results. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. 40) Alberto and Marko have just purchased a small soap manufacturing company that was having financial difficulties. After a brief operating period, they decided that the company’s main problem was the lack of any financial planning. The company made a good product and market potential was great. Required:
Explain why a company needs a good budgeting plan. Specifically address the need for a master budget. Answer: The master budget is a series of interrelated budgets that quantify management’s expectations about a company’s revenues, expenses, net income, cash flows, and financial position. When administered wisely, a budget: 1. provides a framework for judging performance 2. motivates managers and employees; and 3. promotes coordination and communication among subunits within the company. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Advantages of budgets Learning Objective: 11.2 Describe the advantages of budgets. Choose the one alternative that best completes the statement or answers the question. 41) The time coverage of a budget should be: A) one year. B) guided by the purpose of the budget. C) longer rather than shorter. D) covered by the period of the design, manufacture and sale of the product. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 42) A rolling budget is created by continually adding a month, quarter or just ended. A) week B) year C) day D) weekend Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 43) Operating budgets include all of the following EXCEPT: A) the revenues budget. B) the administrative costs budget.
to the period that
C) the budgeted income statement. D) the budgeted balance sheet. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 44) The direct materials quantities depend on the efficiency with which materials are consumed to produce a product. A) purchased B) sold C) estimated D) used Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 45) The operating budget process generally concludes with the preparation of the: A) budgeted income statement. B) research and development budget. C) production budget. D) distribution budget. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 46) A financial budget focuses on how operations and planned capital outlays affect A) cash. B) inventory. C) receivables. D) payables. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget
.
Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 47) Which of the following does the financial budget include? A) Marketing costs budget B) Administrative costs budget C) Capital expenditures budget D) Production budget Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 48) includes a budgeted cash flow statement and a budgeted balance sheet. A) The operating budget B) The capital expenditures budget C) An annual report D) The financial budget Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 49) The order to follow when preparing the operating budget is: A) revenues budget, production budget, and direct manufacturing labour costs budget. B) revenues budget, manufacturing overhead costs budget, and production budget. C) cash expenditures budget, revenues budget, and production budget. D) costs of goods sold budget, production budget, and cash budget. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 50) The following budgets are developed in which order (from first to last)? A = Production budget B = Direct materials costs budget C = Budgeted income statement D = Revenues budget
A) DABC B) ABDC C) DCAB D) CABD Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 51) The cash budget and the budgeted income statement can be used to prepare two other summary financial statements—the budgeted balance sheet and the budgeted . A) bank statement. B) income statement. C) statement of cash flows. D) operating budget. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 52) is the usual starting point for budgeting. A) The production budget B) The revenues budget C) Net profit D) The cash budget Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 53) The sales forecast should be PRIMARILY based on: A) production capacity. B) statistical analysis. C) input from the board of directors. D) input from sales managers and sales representatives. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 54) The sales forecast is influenced by: A) competition. B) general economic conditions. C) advertising and sales promotions. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 55) A sales forecast is: A) a summary of product costs that influence pricing decisions. B) developed primarily to prepare next year’s marketing campaign. C) solely based on sales of the previous year. D) often the outcome of elaborate information gathering and discussions among sales managers. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 56) approaches, such as regression and trend analysis, can help in sales forecasting. A) Behavioural B) Historical C) Empirical D) Statistical Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 57) The number of units in the sales budget and the production budget may differ because of a change in: A) direct material inventory levels. B) sales returns and allowances.
C) overhead charges. D) finished goods inventory levels. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 58) Production budget is primarily based on: A) the revenues budget. B) the administrative costs budget. C) the capital expenditures budget. D) the projected profit. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 59) Budgeted production depends on: A) budgeted sales and expected changes in inventory levels. B) the manufacturing overhead costs budget. C) the direct manufacturing labour budget. D) the direct materials usage budget and direct material purchases budget. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 60) The direct materials usage budget is based on: A) the predetermined factory overhead rate. B) budgeted sales dollars. C) the units to be produced during a period. D) the amount of labour-hours worked. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules.
61) Direct material purchases equal: A) production needs plus beginning inventories. B) production needs plus target ending inventories. C) production needs. D) production needs plus target ending inventories less beginning inventories. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 62) After revenues are budgeted, the manufacturing manager prepares the budget. A) direct materials B) direct labour C) cost of goods sold D) production Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 63) The manufacturing overhead costs budget includes budgeted amounts for: A) indirect manufacturing labour. B) direct materials. C) direct manufacturing labour. D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 64) Budgeted manufacturing overhead costs include all types of factory expenses EXCEPT: A) indirect labour such as the salary of the plant supervisor. B) variable items such as plant supplies. C) fixed items such as depreciation of manufacturing machinery. D) direct labour and direct materials. Answer: D
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 65) Non-manufacturing costs include: A) product design. B) direct materials purchased. C) direct labour. D) direct materials used. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 66) Tumbi Umbi Company expects to manufacture and sell 30 000 baskets in 2018 for $6 each. There are 3000 baskets in beginning finished goods inventory with target ending inventory of 4000 baskets. The company keeps no work-in-process inventory. What amount of sales revenue will be reported on the 2018 budgeted income statement? A) $186 000 B) $180 000 C) $174 000 D) $204 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 67) Maroochydore Corporation has budgeted sales of 20 000 units, target ending finished goods inventory of 3000 units, and beginning finished goods inventory of 2900 units. How many units should be produced next year? A) 21 900 units B) 20 100 units C) 18 000 units D) 15 900 units Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex
Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 68) For next year, Toowong Inc. has budgeted sales of 70 000 units, target ending finished goods inventory of 1000 units, and beginning finished goods inventory of 9800 units. All other inventories are zero. How many units should be produced next year? A) 60 000 units B) 58 800 units C) 61 200 units D) 64 800 units Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 69) Wollondilly Company has budgeted sales volume of 33 000 units and budgeted production of 30 000 units, while 5000 units are in beginning finished goods inventory. How many units are targeted for ending finished goods inventory? A) 3000 units B) 8000 units C) 5000 units D) 2000 units Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: Ku-ring-gai & Co expects to sell 25 000 pool cues for $12.00 each. Direct materials costs are $2.00, direct manufacturing labour is $4.00, and manufacturing overhead is $0.80 per pool cue. The following inventory levels apply to 2017:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 24 000 units 0 units 2000 units
Ending inventory 24 000 units 0 units 2500 units
70) On the 2018 budgeted income statement, what amount will be reported for sales? A) $312 000 B) $300 000 C) $246 000 D) $318 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 71) How many pool cues need to be produced in 2018? A) 19 500 cues B) 22 500 cues C) 25 500 cues D) 22 000 cues Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 72) On the 2018 budgeted income statement, what amount will be reported for cost of goods sold? A) $150 000 B) $170 000 C) $152 600 D) $179 400 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 73) What are the 2018 budgeted costs for direct materials, direct manufacturing labour, and manufacturing overhead, respectively? A) $0; $96 000; $19 200 B) $80 000; $40 000; $16 000 C) $39 000; $78 000; $15 600 D) $51 000; $102 000; $20 400 Answer: D
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: Pilbara Co Pty Ltd expects to sell 6000 ceramic vases for $20 each. Direct materials costs are $2, direct manufacturing labour is $10, and manufacturing overhead is $3 per vase. The following inventory levels apply to 2017:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 1000 units 0 units 400 units
Ending inventory 1000 units 0 units 500 units
74) On the 2018 budgeted income statement, what amount will be reported for sales? A) $122 000 B) $140 000 C) $118 000 D) $120 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 75) How many ceramic vases need to be produced in 2018? A) 6000 vases B) 6100 vases C) 7000 vases D) 5900 vases Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 76) On the 2018 budgeted income statement, what amount will be reported for cost of goods sold? A) $88 500
B) $105 000 C) $90 000 D) $91 500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 77) What are the 2018 budgeted costs for direct materials, direct manufacturing labour, and manufacturing overhead, respectively? A) $12 200; $61 000; $18 300 B) $2000; $10 000; $3000 C) $2000; $0; $18 000 D) $12 000; $60 000; $18 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: The following information pertains to the January operating budget for Brindabella Corporation, a retailer: Budgeted sales are $300 000 for January Collections of sales are 50% in the month of sale and 50% the next month Cost of goods sold averages 70% of sales Merchandise purchases total $250 000 in January Marketing costs are $3000 each month Distribution costs are $5000 each month Administrative costs are $10 000 each month 78) For January, budgeted gross margin is: A) $100 000. B) $50 000. C) $90 000. D) $140 000. Answer: C
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 79) For January, the amount budgeted for the non-manufacturing costs budget is: A) $168 000. B) $10 000. C) $78 000. D) $18 000. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 80) For January, budgeted net profit is: A) $72 000. B) $50 000. C) $52 000. D) $60 000. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: Cathfree Inc. expects to sell 35 000 athletic uniforms for $70 each in 2018. Direct materials costs are $20, direct manufacturing labour is $8, and manufacturing overhead is $6 for each uniform. The following inventory levels apply to 2017:
Direct materials Work-in-process inventory Finished goods inventory
Beginning inventory 12 000 units 0 units 6000 units
Ending inventory 10 000 units 0 units 5000 units
81) What is the amount budgeted for cost of goods manufactured in 2018? A) $986 000
B) $1 020 000 C) $1 156 000 D) $1 190 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 82) How many uniforms need to be produced in 2018? A) 29 000 uniforms B) 34 000 uniforms C) 35 000 uniforms D) 26 000 uniforms Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 83) What is the amount budgeted for direct material purchases in 2018? A) $640 000 B) $760 000 C) $600 000 D) $580 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 84) What is the amount budgeted for cost of goods sold in 2018? A) $1 156 000 B) $2 400 000 C) $1 190 000 D) $986 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget
Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: Beds4us Inc. estimates the following number of mattress sales for the first four months of 2018: Month January February March April
Sales 6000 8500 7500 7500
Finished goods inventory at the end of December is 1500 units. Target ending finished goods inventory is 30% of the next month’s sales. 85) How many mattresses need to be produced in January 2018? A) 7100 mattresses B) 7050 mattresses C) 7500 mattresses D) 5400 mattresses Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 86) How many mattresses need to be produced in the first quarter (January, February, March) of 2018? A) 19 400 mattresses B) 22 400 mattresses C) 22 750 mattresses D) 18 500 mattresses Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: Beerwah Company provides the following data for next year:
Month January February March April
Budgeted Sales $160 000 144 000 176 000 192 000
The gross profit rate is 40% of sales. Inventory at the end of December is $21 600 and target ending inventory levels are 30% of next month’s sales, stated at cost. 87) Purchases budgeted for January total: A) $72 000. B) $74 160. C) $100 320. D) $130 800. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 88) Purchases budgeted for February total: A) $92 160. B) $115 200. C) $60 480. D) $64 800. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 89) Molonglo Industries produces two products, Deluxe and Supreme. Molonglo expects to sell 10 000 units of product Supreme and to have an inventory of 2000 units of Supreme on hand at the end of the period. Currently, Molonglo has 800 units of Supreme on hand. Supreme requires two labour operations, moulding and polishing. Each unit of Supreme requires one hour of moulding and two hours of polishing. The direct labour rate for moulding is $20 per moulding hour and the direct labour rate for polishing is $25 per polishing hour. The expected cost of direct labour for Supreme is: A) $560 000. B) $224 000.
C) $616 000. D) $784 000. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 90) Molonglo Industries produces two products, Deluxe and Supreme. Molonglo expects to sell 10 000 units of product Supreme and to have an inventory of 2000 units of Supreme on hand at the end of the period. Currently, Molonglo has 800 units of Supreme on hand. Supreme requires two labour operations, moulding and polishing. Each unit of Supreme requires one hour of moulding and two hours of polishing. The direct labour rate for moulding is $20 per moulding hour and the direct labour rate for polishing is $25 per polishing hour. The expected number of hours of direct labour for Supreme is: A) 17 600 hours of moulding; 8800 hours of polishing. B) 11 200 hours of moulding; 22 400 hours of polishing. C) 8800 hours of moulding; 17 600 hours of polishing. D) 22 400 hours of moulding; 11 200 hours of polishing. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 91) Port Jackson Manufacturing expects to produce and sell 12 000 units of Big, its only product, for $30 each. Direct material cost is $3 per unit, direct labour cost is $10 per unit, and variable manufacturing overhead is $4 per unit. Fixed manufacturing overhead is $36 000 in total. Variable selling and administrative expenses are $1 per unit, and fixed selling and administrative costs are $3000 in total. According to generally accepted accounting principles, inventoriable cost per unit of Big would be: A) $22.00 per unit. B) $17.00 per unit. C) $20.00 per unit. D) $16.00 per unit. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 92) The
budget is finalised only after several rounds of discussions between top management
and the managers responsible for various business functions in the value chain. A) production B) master C) direct labour D) non-manufacturing Answer: B AACSB: Able to work effectively with others in team environments Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 93) Activity-based budgeting would separately estimate: A) the cost of a setup activity. B) the cost of overhead for a department. C) a plant-wide cost-driver rate. D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 94) Activity-based-costing analysis makes no distinction between: A) direct-materials inventory and work-in-process inventory. B) components of the value chain. C) short-run variable costs and short-run fixed costs. D) parts of the supply chain. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 95) The motive for creating a budget should guide a manager in choosing the A) cost B) degree of participation C) period D) urgency Answer: C AACSB: Able to analyse and frame problems
for the budget.
Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 96) Activity-based budgeting does NOT require: A) specialised expertise in financial management and control. B) the ability to see how the organisation’s different activities fit together. C) knowledge about how activities affect costs. D) knowledge of the organisation’s activities. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 97) A identifies how each product is manufactured, specifying all materials (and components), the sequence in which the materials are used, the quantity of materials in each finished unit, and the work centres where the operations are performed. A) packing slip B) time ticket C) sales invoice D) bill of materials Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 98) Activity-based budgeting includes all the following steps EXCEPT: A) computing the cost of performing activities. B) determining a separate cost-driver rate for each department. C) describing the budget as costs of activities rather than costs of functions. D) determining demands for activities from sales and production targets. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 99) To prepare the cash budget, all of the following budgets are required EXCEPT:
A) cost of goods sold budget. B) capital expenditures budget. C) revenue budget. D) budgeted balance sheet. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 100) The cash flow statement does NOT include: A) cash outflows paid toward raw material purchases. B) cash inflows from the collection of receivables. C) all sales revenues. D) interest paid and received. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 101) The cash budget is a schedule of expected cash receipts and disbursements that: A) is prepared immediately after the sales forecast. B) requires an ageing of accounts receivable and accounts payable. C) predicts the effect on the cash position at given levels of operations. D) is a self-liquidating cycle. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate TOPIC: Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: The following information pertains to Reef Producers Company: Month January February March
Sales $48 000 $64 000 $80 000
Purchases $16 000 $23 000 $38 000
∙
∙ ∙ ∙
Cash is collected from customers in the following manner: Month of sale 30% Month following the sale 70% 40% of purchases are paid for in cash in the month of purchase, and the balance is paid the following month. Labour costs are 20% of sales. Other operating costs are $15 000 per month (including $4000 of depreciation). Both of these are paid in the month incurred. The cash balance on 1 March is $4000. A minimum cash balance of $3000 is required at the end of the month. Money can be borrowed in multiples of $1000.
102) How much cash will be collected from customers in March? A) $80 000 B) $68 800 C) $57 000 D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 103) How much cash will be paid to suppliers in March? A) $29 000 B) $38 000 C) $44 000 D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 104) How much cash will be disbursed in total in March? A) $48 200 B) $21 000 C) $54 000 D) $38 000 Answer: C AACSB: Able to translate knowledge of business and management into practice
Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 105) What is the ending cash balance for March? A) $3000 B) $3200 C) ($25 000) D) $18 800 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: Footscray Company has the following sales budget for the last six months of 2018: July August September
$100 000 80 000 110 000
October November December
$90 000 100 000 94 000
Historically, the cash collection of sales has been as follows: 65% of sales collected in the month of sale 25% of sales collected in the month following the sale 8% of sales collected in the second month following the sale 2% of sales are uncollectible 106) Cash collections for September are: A) $102 000. B) $86 700. C) $99 500. D) $71 500. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules.
107) What is the ending balance of accounts receivable for September, assuming uncollectible balances are written off during the second month following the sale? A) $48 500 B) $44 900 C) $99 500 D) $46 500 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 108 Cash collections for October are: A) $58 500. B) $92 400. C) $88 200. D) $99 500. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: Wallaby Company has the following information: Month January February March April May
Budgeted Purchases $26 800 29 000 30 520 29 480 27 680
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 month after purchase 109) What is the expected balance in Accounts Payable as of 31 March?
A) $39 068 B) $18 312 C) $30 520 D) $2900 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 110) What is the expected balance in Accounts Payable as of 30 April? A) $26 532 B) $38 740 C) $17 688 D) $12 208 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 111) What is the expected Accounts Payable balance as of 31 May? A) $2948 B) $11 792 C) $36 704 D) $24 912 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Answer the following questions using the information below: The following information pertains to the January operating budget for Canberra Corporation. ∙ ∙ ∙ ∙
Budgeted sales for January $100 000 and for February $200 000. Collections for sales are 70% in the month of sale and 30% the next month. Gross margin is 30% of sales. Administrative costs are $10 000 each month.
∙ ∙ ∙ ∙ ∙
Beginning accounts receivable is $20 000. Beginning inventory is $14 000. Beginning accounts payable is $60 000. (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).
112) For January, budgeted cash collections are: A) $60 000. B) $20 000. C) $90 000. D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 113) At the end of January, budgeted accounts receivable is: A) $20 000. B) $30 000. C) $60 000. D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 114) For January, budgeted cost of goods sold is: A) $20 000. B) $30 000. C) $40 000. D) None of these answers are correct. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 115) For January, budgeted net profit is:
A) $20 000. B) $30 000. C) $40 000. D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 116) For January, budgeted cash payments for purchases are: A) $70 000. B) $14 000. C) $60 000. D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 117) At the end of January, budgeted ending inventory is: A) $40 000. B) $28 000. C) $20 000. D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 118) A four-quarter rolling budget encourages management to be thinking about the next 12 months. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules.
119) Businesses are increasingly using rolling budgets. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 120) It is necessary to prepare the cash budget and the budgeted income statement before the budgeted balance sheet and budgeted cash flow statement can be prepared. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 121) The best way to explain how to prepare an operating budget is with by walking through the steps a company would take to develop it. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 122) The sales forecast should primarily be based on statistical analysis with secondary input from sales managers and sales representatives. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 123) The usual starting point in budgeting is to forecast net profit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 124) A revenues budget is the usual last step in preparing the operating budget. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 125) The operating budget is that part of the master budget that includes the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted cash flow statement. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 126) Since fixed manufacturing overhead is fixed, it is not normally included in the operating budget. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 127) The manufacturing labour budget depends on wage rates, production methods, and hiring plans. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 128) The number of units to be produced is the key to computing the usage of direct materials in quantities and in dollars. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 129) If inventoriable costs in the operating budget are going to be in accordance with Generally Accepted Accounting Principles (GAAP), they include only variable manufacturing costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 130) Activity-based budgeting provides better decision-making information than budgeting based solely on output-based cost drivers (units produced, units sold, or revenues). Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 131) The use of activity-based cost drivers gives rise to activity-based budgeting. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 132) Activity-based budgeting (ABB) focuses on budgeting the cost of activities necessary to produce and sell products and services. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 133) Activity-based budgeting focuses on the budgeted cost of the activities necessary to produce and sell products and services. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 134) The self-liquidating cycle is the movement from cash to inventories to receivables and back to cash. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules.
Write the word or phrase that best completes each statement or answers the question. 135) 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 cash flow statement 5. Distribution costs budget 6. Marketing costs budget 7. Cash budget 8. Direct materials cost budget 9. Budgeted balance sheet 10. Budgeted income statement Answer: 1. F 2. O 3. O 4. F 5. O 6. O 7. F 8. O 9. F 10. O AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 136) Berowra Company sells three products with the following seasonal sales pattern:
Quarter 1 2 3 4
A 40% 30% 20% 10%
Products B 30% 20% 20% 30%
C 10% 40% 40% 10%
The annual sales budget shows forecasts for the different products and their expected selling price per unit
as follows: Product A B C
Units 50 000 125 000 62 500
Selling Price $4 10 6
Required: Prepare a sales budget, in units and dollars, by quarters for the company for the coming year. Answer: First Second Third Fourth Quarter Quarter Quarter Quarter Total Product A: Sales (units) Price Sales Product B: Sales (units) Price Sales Product C: Sales (units) Price Sales
20 000 × $4
15 000 × $4
10 000 × $4
5000 × $4
50 000 × $4
$80 000
$60 000
$40 000
$20 000
$200 000
37 500 × $10
25 000 × $10
25 000 × $10
37 500 × $10
125 000 × $10
$375 000
$250 000
$250 000
$375 000
$1 250 000
6250 × $6
25 000 × $6
25 000 × $6
6250 × $6
62 500 × $6
$37 500
$150 000
$150 000
$37 500
$375 000
Total $492 500 $460 000 $440 000 $432 500 $1 825 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 137) Bendigo Corporation has the following budgeted sales for the next six-month period: Month
Unit Sales
June July August September October November
90 000 120 000 210 000 150 000 180 000 120 000
Finished goods in inventory at the beginning of June was 30 000 units. Bendigo plans to have an inventory of finished products that equal 20% of the unit sales for the next month. Five kilos of materials, costing $8 per kilo, are required for each unit produced. Inventory levels for materials are equal to 30% of the needs for the next month. Materials inventory on 1 June was 15 000 kilos. Required: a. Prepare production budgets in units for July, August, and September. b. Prepare a purchases budget in kilos for July, August, and September, and give total purchases in both kilos and dollars for each month. Answer: a. July August September Budgeted sales 120 000 210 000 150 000 Add: Required ending inventory 42 000 30 000 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
Targeted ending inventory in kilos* 297 000 Production needs in kilos*** 690 000
234 000
**252 000
990 000
780 000
1 224 000
1 032 000
297 000
234 000
b.
Total requirements in kilos
987 000 Less: Beginning inventory in kilos****207 000
Purchases needed in kilos Cost ($8 per kilo)
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 kilos. × 0.3 *** 5 kilos times units to be produced, across row **** (690 000 × .3) = 207 000 kilos, across row AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules.
138) The following information is provided for Bathurst Company: Month March April May June July
Budgeted Sales $50 000 53 000 51 000 54 500 52 500
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 Total Desired ending inventory $9180 $9810 $9450 $9450 Plus COGS 31 800 30 600 32 700 95 100 Total needed 40 980 40 410 42 150 104 550 Less beginning inventory 9540 9180 9810 9540 Total purchases $31 440 $31 230 $32 340 $95 010 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 139) The following information is provided for Adelaide Company: Month June July August
Budgeted Sales $60 000 51 000 40 000
September October
70 000 72 000
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 Total Desired ending inventory $8400 $14 700 $15 120 $15 120 Plus COGS 35 700 28 000 49 000 112 700 Total needed 44 100 42 700 64 120 127 820 Less beginning inventory 10 710 8400 14 700 10 710 Total purchases $33 390 $34 300 $49 420 $117 110 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 140) Photoframers Inc. frame paintings and photographs. September sales are expected to be 10 000 units of various sizes. The average frame requires four metres of framing, one square metre of glass, and two square metres of backing. Beginning inventory includes 1500 metres of framing, 500 square metres of glass, and 500 square metres of backing. Current prices are $0.30 per metre of framing, $6.00 per square metre of glass, and $2.25 per square metre of backing. Ending inventory should be 150% of beginning inventory. Purchases are paid for in the month acquired. Required: a. Determine the quantity of framing, glass, and backing that is to be purchased during September. b. Determine the total costs of direct materials for the September purchases. Answer: a. Framing Glass Backing Desired ending inventory* 2250 750 750 Production needs (10 000 units)** 40 000 10 000 20 000
b.
Total needs Less: Beginning inventory
42 250 1500
10 750 500
20 750 500
Purchases planned
40 750
10 250
20 250
Cost of direct materials:
Framing (40 750 × $0.30) Glass (10 250 × $6.00) Backing (20 250 × $2.25) Total *
$12 225.00 61 500.00 45 562.50 $119 287.50
1500 × 1.5 = 2250 framing 500 × 1.5 = 750 glass 500 × 1.5 = 750 backing
** 10 000 × 4 = 40 000 framing 10 000 × 1 = 10 000 glass 10 000 × 2 = 20 000 backing AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 141) Echuca Enterprises reports the year-end information from 2017 as follows: Sales (100 000 units) Less: Cost of goods sold Gross profit Operating expenses (includes $20 000 of Depreciation) Net profit
$500 000 300 000 200 000 120 000 $80 000
Echuca is developing the 2018 budget. In 2018 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 2018. Answer: Echuca Enterprises Budgeted Income Statement For the Year 2018 Sales (95 000 × $5.50) Cost of goods sold (2018 sales × 62%) Gross profit
$522 500 323 950 198 550
Less: Operating expenses [($1.00 × 95 000] + $20 000) 115 000 Net profit $83 550 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 142) Russell Company has the following projected account balances for 30 June 2018: Accounts payable Accounts receivable Depreciation, factory Inventories (31/5 & 30/6) Direct materials used Office salaries Insurance, factory Plant wages Bonds payable
$40 000 100 000 24 000 180 000 200 000 80 000 4000 140 000 160 000
Sales Share capital Retained earnings Cash Equipment, net Buildings, net Utilities, factory Selling expenses Maintenance, factory
$800 000 400 000 ? 56 000 240 000 400 000 16 000 60 000 28 000
Required: a. Prepare a budgeted income statement for June 2018. b. Prepare a budgeted balance sheet as of 30 June 2018. Answer: a. Russell Company Income Statement For the Month of June 2018 Sales Cost of goods sold: Materials used Wages Depreciation Insurance Maintenance Utilities Gross profit Operating expenses: Selling expenses Office salaries
$800 000 $200 000 140 000 24 000 4000 28 000 16 000
$60 000 80 000
412 000 388 000
140 000
Net profit
$248 000
b. Russell Company Balance Sheet 30 June 2018 Assets: Cash Accounts receivable Inventories Equipment, net Buildings, net Total
$56 000 100 000 180 000 240 000 400 000 $976 000
Liabilities and Owners’ Equity: Accounts payable $40 000 Bonds payable 160 000 Share capital 400 000 Retained earnings* 376 000 Total
$976 000
*$976 000 - ($40 000 + $160 000 + $400 000) = $376 000 AACSB: Application of knowledge Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 143) Molonglo Manufacturing produces two products, Deluxe and Supreme. Molonglo expects to sell 20 000 units of Deluxe and 10 000 units of Supreme. Molonglo plans on having an ending inventory of 4000 units of Deluxe and 2000 units of Supreme. Currently, Molonglo has 1000 units of Deluxe in its inventory and 800 units of Supreme. Each product requires two labour operations: moulding and polishing. Product Deluxe requires one hour of moulding time and one hour of polishing time. Product Supreme requires one hour of moulding time and two hours of polishing time. The direct labour rate for moulders is $20 per moulding hour, and the direct labour rate for polishers is $25 per polishing hour. Required: Prepare a direct labour budget in hours and dollars for each product. Answer: Desired Production: Deluxe Supreme Expected sales 20 000 10 000 Desired ending inventory 4000 2000 Production needs 24 000 12 000 Less: beginning inventory 1000 800 Desired production 23 000 11 200
Total
Direct labour Budget for Deluxe: Moulding Desired Production of Deluxe 23 000 Hours of labour required per unit 1 Total Hours of labour required 23 000 Direct labour rate $20 Cost of Direct labour for Deluxe $460 000
Polishing 23 000 1 23 000 $25 $575 000
$1 035 000
Direct labour Budget for Supreme: Moulding Desired Production of Supreme 11 200 Hours of labour required per unit 1 Total Hours of labour required 11 200 Direct labour rate $20 Cost of Direct labour for Supreme $224 000
Polishing 11 200 2 22 400 $25 $560 000
$784 000
Total Direct labour Costs
$1 135 000
$1 819 000
$684 000
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 144) Darwin 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 Collections of credit sales from:
Total $64 000
Current month Previous month Two months ago
29 600 36 000 6800
36 800 33 300 8000
30 400 41 400 7400
96 800 110 700 22 200
Total collections $90 400 $102 100 $101 200 $293 700 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 145) Armidale Corporation has provided the following cash budget forecasts: 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
October $5100 19 000 12 348
November
December
5700 21 000 14 112
6300 24 000
December
17 640 $36 448
$40 812
$47 940
b. Cash disbursements Oct $14 800 + Nov $16 800 + Dec $18 800 = $50 400
September October November December
October 8400 6400
November
December
9600 7200
10 800 8000 ---------------$14 800 $16 800 $18 800 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Write your answer on a separate sheet of paper. 146) Describe operating and financial budgets and give at least two examples of each. Answer: Operating budgets specify the expected outcomes of any selling, manufacturing, purchasing, labour management, R&D, marketing, distribution, customer service, and administrative activities during the planning period. Operations personnel use these plans to guide and coordinate activities during the planning period. Examples of operating budgets include the revenues budget, production budget, direct materials costs budget, direct manufacturing labour costs budget, manufacturing overhead budget, and budgets for R&D, marketing, distribution, customer service, and administrative activities. Financial budgets are used to evaluate the financial consequences of a proposed decision. Examples of financial budgets include the capital expenditures budget, cash budget, budgeted balance sheet, and the budgeted cash flow statement. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. 147) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Steps in developing an operating budget Learning Objective: 11.3 Prepare the operating budget and its supporting schedules. Choose the one alternative that best completes the statement or answers the question. 148) Financial planning models: A) are mathematical representations of the relationships affecting the budget process. B) are not useful for sensitivity analysis. C) are used for non-financial aspects of budgeting. D) are not used in the budgeting process Answer: A AACSB: Able to use current technologies in business and management contexts Difficulty: Moderate Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 149) Vast quantities of information about the materials, machines and equipment, labour, power, maintenance and set-ups needed to manufacture different products can be stored in systems. A) ERP B) Sensitivity C) Responsibility D) Organisational Answer: A AACSB: Able to use current technologies in business and management contexts Difficulty: Moderate Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 150) uses a ‘what-if’ technique that examines how results will change if the originally predicted data changes. A) A sales forecast B) The cash flow statement C) A sensitivity analysis D) A pro forma financial statement Answer: C AACSB: Able to use current technologies in business and management contexts
Difficulty: Moderate Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 151) If the selling price per unit is increased, which of the following will result when performing a sensitivity analysis? A) Per unit fixed administrative costs will increase B) Total costs for sales commissions and other nonmanufacturing variable costs will increase C) Per unit direct materials purchase price will increase D) Total volume of sales will increase Answer: B AACSB: Able to use current technologies in business and management contexts Difficulty: Moderate Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 152) analysis is 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. A) Strategic B) Complex C) Sensitivity D) Non-financial Answer: C AACSB: Able to use current technologies in business and management contexts Difficulty: Moderate Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. Answer the following questions using the information below: Albury Enterprises reports year-end information from 2018 as follows: Sales (80 000 units) Cost of goods sold
$640 000 480 000
Gross margin Operating expenses
160 000 130 000
Operating profit
$30 000
Albury is developing the 2019 budget. In 2019 the company would like to increase selling prices by 8%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost. 153) What is budgeted sales for 2019? A) $432 000 B) $533 333 C) $622 080 D) $518 400 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 154) What is budgeted cost of goods sold for 2019? A) $345 600 B) $432 000 C) $480 000 D) $311 040 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 155) Should Albury increase the selling price in 2019? A) Yes, because operating profit is increased for 2019. B) No, because sales volume decreases for 2019. C) Yes, because sales revenue is increased for 2019. D) No, because gross margin decreases for 2019. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. Answer the following questions using the information below: Newcastle Enterprises reports the year-end information from 2018 as follows:
Sales (70 000 units) Cost of goods sold
$720 000 370 000
Gross margin Operating expenses
350 000 200 000
Operating profit
$150 000
Newcastle is developing the 2019 budget. In 2019 the company would like to increase selling prices by 4%, and as a result expects a decrease in sales volume of 10%. All other operating expenses are expected to remain constant. Assume that COGS is a variable cost and that operating expenses are a fixed cost. 156) What is budgeted sales for 2019? A) $504 000 B) $673 920 C) $582 400 D) $720 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 157) What is the budgeted cost of goods sold for 2019? A) $333 000 B) $370 000 C) $218 400 D) $196 560 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 158) Should Newcastle increase the selling price in 2019? A) No, because sales volume decreases for 2019. B) Yes, because operating profit is increased for 2019. C) Yes, because sales revenue is increased for 2019. D) No, because operating profit decreases for 2019.
Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 159) Financial analysts use the projected cash flow statement to do all of the following EXCEPT: A) project depreciation expense. B) plan for short-term cash investments. C) plan for when excess cash is generated. D) project cash shortages and plan a strategy to deal with the shortages. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 160) Computer-based financial planning models are mathematical statements of the interrelationships among operating activities, financial activities, and other factors that affect the budget. Answer: True AACSB: Able to use current technologies in business and management contexts Difficulty: Basic Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 161) Companies that use ERP systems, and other such budgeting tools, find that these systems simplify budgeting and increase the computational burden and time required to prepare budgets. Answer: False AACSB: Able to use current technologies in business and management contexts Difficulty: Basic Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 162) Sensitivity analysis is a ‘what-if’ technique that examines how a result will change if the original prediction or assumptions change. Answer: True AACSB: Able to use current technologies in business and management contexts Difficulty: Basic Topic: Financial planning models and sensitivity analysis
Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 163) ERP systems store vast quantities of information about the materials, machines and equipment, labour, power, maintenance and set-ups needed to manufacture different products. Answer: True AACSB: Able to use current technologies in business and management contexts Difficulty: Basic Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 164) If we increase the selling price of our product, we can always expect an increase in total revenue. Answer: False AACSB: Able to use current technologies in business and management contexts Difficulty: Basic Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. 165) A key use of sensitivity analysis is for cash-flow budgeting. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. Write your answer on a separate sheet of paper. 166) Explain what is meant by SENSITIVITY ANALYSIS in budgeting, and discuss how managers might use this technique 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. AACSB: Able to communicate effectively orally and in writing
Difficulty: Moderate Topic: Financial planning models and sensitivity analysis Learning Objective: 11.4 Use computer-based financial planning models in sensitivity analysis. Choose the one alternative that best completes the statement or answers the question. 167) Which of the following describes what a responsibility centre manager can do to a controllable cost for a period of time? A) Segregate B) Influence C) Control D) Exclude Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 168) A responsibility accounting system could: A) exclude all uncontrollable costs. B) exclude controllable costs. C) segregate uncontrollable costs from controllable costs. D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 169) Responsibility accounting: A) examines how a result will change if the original plan is not achieved. B) is an arrangement of lines of responsibility within the organisation. C) explicitly incorporates continuous improvement anticipated during the budget period. D) is a system that measures the plans, budgets, actions, and actual results of a responsibility centre. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 170) Responsibility centres include all of the following EXCEPT:
A) revenue B) cost C) customers D) investment Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 171) Variances between actual and budgeted amounts can be used to: A) signal that company strategies are ineffective. B) inform managers about how well the company has implemented its strategies. C) alert managers to potential problems and available opportunities. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 172) A maintenance manager is MOST likely responsible for a(n): A) revenue centre. B) cost centre. C) investment centre. D) profit centre. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 173) The regional sales office manager of a national firm is MOST likely responsible for a(n): A) investment centre. B) profit centre. C) revenue centre. D) cost centre. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 174) A regional manager of a restaurant chain in charge of finding additional locations for expansion is MOST likely responsible for a(n): A) profit centre. B) cost centre. C) revenue centre. D) investment centre. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 175) The manager of a hobby store that is part of a chain of stores is MOST likely responsible for a(n): A) cost centre. B) profit centre. C) revenue centre. D) investment centre. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 176) A manager of a revenue centre is responsible for all of the following EXCEPT: A) the acquisition cost of the product or service sold. B) price, product mix, and promotional activities. C) service quality and units sold. D) investments of excess cash. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 177) A manager of a profit centre is responsible for all of the following EXCEPT: A) the cost of merchandise purchased for resale. B) selling and marketing costs.
C) sales revenue. D) expanding into new geographic areas. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 178) With a long enough time-span, costs will come under somebody’s control. A) few B) all C) employee D) selling Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 179) Which one of the following does a variance do? A) Alert managers early to events not easily nor immediately evident. B) Reflect the degree of influence that a specific manager has over costs, revenues or related items for which he or she is responsible C) Describe the practice of underestimating budgeted revenues, or overestimating budgeted costs, to make budgeted targets more easily achievable D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 180) A PRIMARY consideration in assigning a cost to a responsibility centre is: A) who can best explain the change in that cost. B) where in the organisational structure the cost was incurred. C) whether the cost is direct or indirect. D) whether the cost is fixed or variable. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 181) Responsibility accounting focuses only on control, not on information and knowledge. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 182) The fundamental purpose of responsibility accounting is to fix blame when budgets are not achieved. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 183) A responsibility centre is a part, segment, or subunit of an organisation, whose manager is accountable for a specified set of activities. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 184) Performance reports for responsibility centres are sometimes designed to change managers’ behaviour in the direction top management desires even if the reports decrease controllability. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 185) In a profit centre, a manager is responsible for investments, revenues, and costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting.
186) Managers should think about controllability only in the context of performance evaluation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 187) Variances between actual and budgeted amounts inform management about performance relative to the budget. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 188) An organisation structure is an arrangement of lines of responsibility within the entity. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 189) A responsibility centre can be structured to promote better alignment of individual and company goals. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 190) Most costs can be easily controlled because they are under the sole influence of one manager. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 191) Few costs are clearly under the sole influence of one manager. Answer: True
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 192) If a cost is considered controllable, it indicates that all aspects of the cost are under the control of the manager of the responsibility centre to which that cost is assigned. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. 193) To create greater commitment to the budget, top-management should create the budget and then share it with lower-level managers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. Write your answer on a separate sheet of paper. 194) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Budgeting and responsibility accounting Learning Objective: 11.5 Describe responsibility centres and responsibility accounting. Choose the one alternative that best completes the statement or answers the question. 195) Building in budgetary slack includes: A) underestimating budgeted costs. B) overestimating budgeted revenues.
C) making budgeted targets more easily achievable. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 196) To reduce budgetary slack management may: A) incorporate challenging targets. B) reduce projected cost targets by 10% across all areas. C) award bonuses for achieving budgeted amounts. D) use external benchmark performance measures. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 197) Some companies use budgets primarily for which of the following purposes to avoid problems of budgetary slack? A) Controlling B) Planning C) Forecasting D) Evaluation Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 198) budgeting and budgeting for specific activities are key building blocks of the master budget. A) Master B) Kaizen C) Cash D) Capital Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Kaizen budgeting
Learning Objective: 11.6 Recognise the human aspects of budgeting. 199) KAIZEN refers to incorporating cost reductions: A) in each successive budgeting period. B) in all customer service centres. C) in each successive sales forecast. D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 200) Which of the following does Kaizen budgeting involve? A) Continual small cost reductions B) Continual small revenue increases C) Large cost reductions D) Management directed improvements Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. Answer the following questions using the information below: Margaret River Enterprises are using the kaizen approach to budgeting for 2018. The budgeted income statement for January 2018 is as follows: Sales (84 000 units) Less: Cost of goods sold
$700 000 500 000
Gross margin Operating expenses (includes $50 000 of fixed costs)
200 000 150 000
Operating profit
$50 000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to decline by 1% per month.
201) What is budgeted cost of goods sold for March 2018? A) $490 050 B) $500 000 C) $297 000 D) $294 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 202) What is budgeted gross margin for March 2018? A) $198 000 B) $196 020 C) $204 020 D) $209 950 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 203) Science-based carbon-reduction targets are stretched to: A) spur innovation. B) arrest the development of new technologies and business models. C) minimise exposure to foreign currency fluctuations. D) evaluate performance more subjectively. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting for reducing carbon emissions Learning Objective: 11.6 Recognise the human aspects of budgeting. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 204) Human factors are crucial parts of budgeting. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting.
205) Management will most likely behave the same way if a department is structured as a revenue centre or if the same department is structured as a profit centre. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 206) Budgetary slack provides management with a hedge against unexpected adverse circumstances. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 207) When the operating budget is used as a control device, managers are more likely to be motivated to budget higher sales than actually anticipated. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 208) Budgeting slack is most likely to occur when a firm uses the budget only as a planning device and not to evaluate performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 209) The kaizen approach means examining the effect of changes on the budgeted results. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 210) Sensitivity analysis incorporates continuous improvement into budgeted amounts.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 211) Kaizen budgeting does not make sense for profit centres. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 212) Kaizen budgeting encourages small incremental changes, rather than major improvements. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 213) Kaizen budgeting allows for budgeting of small incremental increases in costs each budgeting period to adjust for the effects of normal inflation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 214) Activity-based budgeting and kaizen budgeting are really equivalent in meaning. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 215) Budgeting is a very effective tool to motivate managers to reduce carbon emissions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting for reducing carbon emissions
Learning Objective: 11.6 Recognise the human aspects of budgeting. 216) In response to pressures from consumers, investors, governments and non-governmental organisations, many companies proactively manage and report on environmental performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting for reducing carbon emissions Learning Objective: 11.6 Recognise the human aspects of budgeting. Write the word or phrase that best completes each statement or answers the question. 217) Border Corporation is using the kaizen approach to budgeting for 2018. The budgeted income statement for January 2018 is as follows: Sales (240 000 units) Less: Cost of goods sold
$720 000 480 000
Gross margin Operating expenses (includes $64 000 of fixed costs)
240 000 192 000
Net profit
$48 000
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 2018. Answer: Sales $720 000 Less: Cost of goods sold ($480 000 × 0.99 × 0.99) 470 448 Gross margin Operating expenses [($128 000 × 0.99 × 0.99) + $64 000]
249 552 189 453
Net profit $60 099 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting.
218) The Rocks Company is developing its budgets for 2018 and, for the first time, will use the kaizen approach. The initial 2018 income statement, based on static data from 2017, is as follows: Sales (280 000 units) Less: Cost of goods sold
$840 000 560 000
Gross margin Operating expenses (includes $28 000 of depreciation)
280 000 224 000
Net profit
$56 000
Selling prices for 2018 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 2018. Answer: Sales (252 000 × $3.24) Less: COGS (252 000 × $1.80)
$816 480 453 600
Gross margin Operating expenses ($28 000 + $186 200)
362 880 214 200
Net profit $148 680 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. Write your answer on a separate sheet of paper. 219) Describe some of the drawbacks of using the operating budget as a control device. Answer: When the operating budget is used as a control device it can lead to behaviour that is actually detrimental to the organisation. The major problem with the budget performance report is not the report itself, but rather the way it is used. In general, managers are rewarded for favourable variances, and disciplined for unfavourable variances. This encourages managers to set lax standards for both sales and costs so favourable variances result. It can also lead to ‘budget games.’
Another drawback is that once the budget is established, if there is any variance between budget and actual, it is assumed to be because of actual. However, as we know, the budget will never be totally accurate due to the uncertainties of predicting the future. If used properly, however, the operating budget can be a tremendous benefit to any company. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 220) 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 organisation 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 organisation, then perhaps senior management may be more forgiving and view some slack-building as necessary to keep their employees from quitting. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Human aspects of budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. 221) 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, recognised, and rewarded. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Kaizen budgeting Learning Objective: 11.6 Recognise the human aspects of budgeting. Choose the one alternative that best completes the statement or answers the question. 222) Multinational companies find budgeting to be a valuable tool when operating in very environments. A) stable B) political C) certain D) uncertain Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting in multinational companies Learning Objective: 11.7 Identify the special challenges of budgeting in multinational companies. 223) All of the following statements about multinational companies are true EXCEPT: A) Management accountants in multinational companies need to budget in different currencies. B) Multinational companies earn revenues and incur expenses in one currency. C) Management accountants in multinational companies need to budget for foreign exchange rates. D) Besides currency issues, multinational companies need to understand the political, legal and, in particular, economic environments of the different countries in which they operate. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Budgeting in multinational companies Learning Objective: 11.7 Identify the special challenges of budgeting in multinational companies. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 224) Budgeting for a multinational company is made more complex due to the possibility of exchange rate fluctuations. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting in multinational companies Learning Objective: 11.7 Identify the special challenges of budgeting in multinational companies.
225) The possibility of exchange rate fluctuations does not influence the budgeting procedures in a multinational corporation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting in multinational companies Learning Objective: 11.7 Identify the special challenges of budgeting in multinational companies. 226) Because of the possibility of exchange rate fluctuations, managers of multinational corporations should ignore subjective factors in their performance evaluations. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Budgeting in multinational companies Learning Objective: 11.7 Identify the special challenges of budgeting in multinational companies. Write your answer in the space provided or on a separate sheet of paper. 227) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Budgeting in multinational companies Learning Objective: 11.7 Identify the special challenges of budgeting in multinational companies.
Chapter 12 Flexible budgets, direct cost variances and management control Choose the one alternative that best completes the statement or answers the question. 1) Managers focus on the most significant deviations (often the largest variances). This is called: A) target costing. B) target pricing. C) variance analysis. D) management by exception. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of variances Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 2) When budgets are not achieved, what may signal that the company should consider a change in strategy? A) Flowcharts B) Benchmarks C) Variances D) Management reports Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of variances Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 3) When budgets are not achieved, the variances may signal that the company should consider a change in: A) strategy. B) pricing. C) costing. D) staff. Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: The use of variances Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 4) The principles of analysis, such as monitoring the achievement of targets, can also help to achieve social and environmental goals. A) activity B) cost C) profit D) variance Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of variances Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 5) 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The use of variances Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. Choose the one alternative that best completes the statement or answers the question. 6) What is a variance? A) The required number of inputs for one standard output B) The gap between an actual result and a benchmark amount C) The difference between an actual result and a budgeted amount D) The difference between a budgeted amount and a standard amount Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 7) In a(n) A) ideal B) practical
standard there is no allowance for wastage or labour inefficiency.
C) theoretical D) actual Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 8) standards provide realistic expectations which make them more appropriate for planning, but ideal standards can stretch employees to continue to improve. A) Absolute B) Theoretical C) Actual D) Practical Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 9) In order to predict costs, it is important to have standard prices for each: A) input. B) variance. C) output. D) target. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 10) Importantly, not all variances need to be: A) calculated. B) investigated. C) labelled. D) known. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costs
Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 11) If actual costs are much higher than budgeted, the variances indicate that A) immediate B) management C) long-term D) corrective Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costs
action is needed.
Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 12) The essence of variance analysis is to capture a departure from what was expected. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 13) A VARIANCE is the difference between the actual cost for the current and previous year. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 14) All budgets are based on standard costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 15) Managers can learn to budget more accurately by identifying errors in their budgeting logic. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costs
Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. 16) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costs Learning Objective: 12.1 Explain how standard costs can be useful for planning and control. Choose the one alternative that best completes the statement or answers the question. 17) The master budget is: A) developed at the end of the period. B) based on the actual level of output. C) a static budget. D) a flexible budget. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 18) What does an unfavourable variance indicate? A) The actual amount decreased operating profit relative to the budgeted amount B) Actual costs are less than budgeted costs C) Actual revenues exceed budgeted revenues D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 19) What does a favourable variance indicate? A) Actual revenues exceed budgeted revenues B) The actual amount decreased operating profit relative to the budgeted amount C) Budgeted costs are less than actual costs D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 20) Which of the following reflects the static-budget variance? A) The difference between the static-budget amount and the sales volume variance B) The difference between the budget amount in the static budget and the amount in the flexible budget C) The difference between an actual result and the budget amount in the static budget D) The difference between an actual result and the flexible budget amount Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 21) By definition, costs are not determined by sales volume. A) estimated B) fixed C) variable D) total Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. Answer the following questions using the information below: Bland Corporation used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.
Units sold Variable costs Fixed costs
Actual 184 000 units $901 600 $190 000
Budgeted 180 000 units $864 000 $200 000
22) What is the static-budget variance of variable costs? A) $40 000 favourable B) $37 600 unfavourable C) $2400 unfavourable D) $2400 favourable
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 23) What is the static-budget variance of revenues? A) $40 000 favourable B) $4000 unfavourable C) $40 000 unfavourable D) $4000 favourable Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 24) What is the static-budget variance of operating profit? A) $12 400 unfavourable B) $7600 unfavourable C) $12 400 favourable D) $7600 favourable Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. Answer the following questions using the information below: Barossa Valley Wines used the following data to evaluate their current operating system. The company sells items for $10 each and used a budgeted selling price of $10 per unit.
Units sold Variable costs Fixed costs
Actual 495 000 units $1 250 000 $925 000
Budgeted 500 000 units $1 500 000 $900 000
25) What is the static-budget variance of revenues? A) $50 000 favourable B) $50 000 unfavourable
C) $5000 unfavourable D) $5000 favourable Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 26) What is the static-budget variance of variable costs? A) $200 000 favourable B) $250 000 unfavourable C) $250 000 favourable D) $50 000 unfavourable Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 27) What is the static-budget variance of operating profit? A) $175 000 favourable B) $325 000 unfavourable C) $195 000 unfavourable D) $225 000 favourable Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. Answer the following questions using the information below: V8 Engineering Pty used the following data to evaluate their current operating system. The company sells items for $14.50 each and had used a budgeted selling price of $15 per unit.
Units sold Variable costs Fixed costs
Actual 206 000 units $965 000 $53 000
Budgeted 200 000 units $950 000 $50 000
28) What is the static-budget variance of revenues?
A) $13 000 favourable B) $6000 favourable C) $13 000 unfavourable D) $90 000 favourable Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 29) What is the static-budget variance of variable costs? A) $13 000 unfavourable B) $15 000 favourable C) $13 000 favourable D) $15 000 unfavourable Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 30) What is the static-budget variance of operating profit? A) $31 000 unfavourable B) $28 000 favourable C) $28 000 unfavourable D) $26 000 favourable Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 31) For items, a favourable variance occurs when actual revenues exceed budgeted revenues. A) cost B) estimated C) budgeted D) revenue Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 32) The master budget is one type of flexible budget. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 33) The static budget, or master budget, is based on the level of output planned at the end of the budget period before actual sales are known. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 34) The master budget is called a static budget because it is developed around a several planned output levels and the standard costs found in the standard cost sheet. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 35) For revenue items, a favourable variance occurs when actual revenues exceed budgeted revenues. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 36) Unfavourable variances occur when costs are higher, or revenues lower, than budget. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances
Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 37) A favourable variance should be ignored by management. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 38) Some of the individual variances are favourable (F) and some variances are unfavourable (U). Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 39) The only difference between the static budget and flexible budget is that the static budget is prepared using planned output. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 40) The static-budget variance can be subdivided into the flexible-budget variance and the sales-volume variance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 41) An unfavourable variance is conclusive evidence of poor performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. 42) To prepare budgets based on actual data from past periods is preferred since past inefficiencies are
excluded. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Static budgets and static-budget variances Learning Objective: 12.2 Distinguish a static budget from a flexible budget. Choose the one alternative that best completes the statement or answers the question. 43) Regier Company had planned for operating profit of $10 million in the master budget but actually achieved operating profit of only $7 million. A) The flexible-budget variance for operating profit is $3 million favourable. B) The static-budget variance for operating profit is $3 million unfavourable. C) The flexible-budget variance for operating profit is $3 million unfavourable. D) The static-budget variance for operating profit is $3 million favourable. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 44) Which of the following is TRUE about a flexible budget? A) It is developed at the end of the period B) It is based on the budgeted level of output C) It provides favourable operating results D) It is another name for management by exception Answer: A Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 45) The budget uses the expected per unit costs found in the standard cost sheet, so the only difference to the static budget is that it is based on the actual sales volume. A) cost B) flexible C) direct materials D) direct labour Answer: B
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 46) What might be unfavourable flexible-budget variance for variable costs the result of? A) Using more input quantities than were budgeted B) Paying higher prices for inputs than were budgeted C) Selling output at a higher selling price than budgeted D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 47) All of the following are needed to prepare a flexible budget EXCEPT determining the: A) budgeted variable cost per output unit. B) budgeted fixed costs. C) actual quantity of output units. D) actual selling price per unit. Answer: D Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 48) Ballarat Box Corporation currently produces cardboard boxes in an automated process. Expected production per month is 20 000 units, direct-material costs are $0.60 per unit, and manufacturing overhead costs are $9000 per month. Manufacturing overhead is allocated based on units of production. What is the flexible budget for 10 000 and 20 000 units, respectively? A) $10 500; $16 500 B) $10 500; $21 000 C) $15 000; $21 000 D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 49) Sunshine Coast Corporation currently produces sun hats in an automated process. Expected production per month is 20 000 units, direct material costs are $3.00 per unit, and manufacturing overhead costs are $46 000 per month. Manufacturing overhead is allocated based on units of production. What is the flexible budget for 10 000 and 20 000 units, respectively? A) $53 000; $83 000 B) $53 000; $106 000 C) $76 000; $106 000 D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Answer the following questions using the information below: As part of the budgeting process, Lillee's Petanque Company developed the following static budget for August. Lillee is in the process of preparing the flexible budget and understanding the results. The actual results are for the month of August.
Sales volume (in units) Sales revenues Variable costs
Actual Results 20 000
Flexible Budget
Static Budget 25 000
$1 000 000 512 000
$ $
$1 250 000 600 000
Contribution margin
488 000
$
650 000
Fixed costs Operating profit
458 000 $30 000
$ $
450 000 $200 000
50) The flexible budget will report A) $640 000 B) $600 000
for variable costs.
C) $480 000 D) $512 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 51) The flexible budget will report for the fixed costs. A) $360 000 B) $450 000 C) $458 000 D) $572 500 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 52) The flexible-budget variance for variable costs is: A) $32 000 unfavourable. B) $32 000 favourable. C) $120 000 unfavourable. D) $120 000 favourable. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 53) The PRIMARY reason for low operating profits was: A) increased fixed costs. B) the variable-cost variance. C) a poor management accounting system. D) lower sales volume than planned. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Answer the following questions using the information below: As part of the budgeting process, Garden Gnomes Incorporated had developed the following static budget for the third quarter. Garden Gnomes is in the process of preparing the flexible budget and understanding the results. The actual information relates to the third quarter.
Sales volume (in units)
Actual Results 13 000
Flexible Budget
Static Budget 12 000
Sales revenues Variable costs
$257 500 154 000
$ $
$250 000 180 000
Contribution margin
103 500
$
70 000
Fixed costs Operating profit
50 500 $53 000
$ $
49 500 $20 500
54) The flexible budget will report for variable costs. A) $175 000 B) $195 000 C) $13 583 D) $154 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 55) The flexible budget will report A) $49 500 favourable B) $1000 unfavourable C) $49 500 D) $50 500 Answer: C
for the fixed costs.
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 56) The flexible-budget variance for variable costs is: A) $21 000 favourable. B) $41 000 unfavourable. C) $13 583 unfavourable. D) $41 000 favourable. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 57) The PRIMARY reason for high actual operating profits was: A) lower sales volume than planned. B) higher sales volume than planned. C) the variable-cost variance. D) increased fixed costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 58) The variance that is BEST for measuring operating performance is the: A) flexible-budget variance. B) sales-volume variance. C) selling-price variance. D) static-budget variance. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume
variances. 59) More insight into the static-budget variance can be gained by subdividing it into: A) a cost hierarchy. B) the flexible-budget variance and the sales-volume variance. C) the sales-mix variance and the sales-quantity variance. D) the market-share variance and the market-size variance. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 60) Which of the following variances LEAST affects cost control? A) Direct-material-price variance B) sales-volume variance C) Flexible-budget variance D) Direct manufacturing labour efficiency variance Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Answer the following questions using the information below: Tiger O'Reilly planned to use $85 of material per unit but actually used $82 of material per unit, and planned to make 1200 units but actually made 1000 units. 61) The flexible-budget amount is: A) $98 400 B) $85 000 C) $96 000 D) $82 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume
variances. 62) The flexible-budget variance is: A) $3000 favourable. B) $2400 favourable. C) $14 000 unfavourable. D) $16 400 unfavourable. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 63) The sales-volume variance is: A) $2400 favourable. B) $2000 favourable. C) $17 000 unfavourable. D) $14 000 unfavourable. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Answer the following questions using the information below: Wagga Wagga Printing Incorporated planned to use $12 of material per unit but actually used $14 of material per unit, and planned to make 1000 units but actually made 1200 units. 64) The flexible-budget variance is: A) $6000 favourable. B) $2400 unfavourable. C) $4800 favourable. D) $5000 unfavourable. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume
variances. 65) The sales-volume variance is: A) $2400 favourable. B) $1200 unfavourable. C) $6000 favourable. D) $5000 unfavourable. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Answer the following questions using the information below: Bradpon Incorporated planned to use $37.50 of material per unit but actually used $36.75 of material per unit, and planned to make 1800 units but actually made 1600 units. 66) The flexible-budget amount is: A) $60 000. B) $1200. C) $67 500. D) $58 800. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 67) The flexible-budget variance is: A) $7500 unfavourable. B) $7500 favourable. C) $1200 unfavourable. D) $1200 favourable. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume
variances. 68) The sales-volume variance is: A) $1200 favourable. B) $7500 unfavourable. C) $7500 favourable. D) $1200 unfavourable. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Answer the following questions using the information below: Some of Bondi Appliances financial data has been misplaced. Use the following information to replace the lost data:
Units sold Revenues Variable costs Fixed costs Operating profit
Actual Flexible-Budget Flexible Sales-Volume Results Variances Budget Variances 225 000 225 000 $84 160 $2000 F (A) $2800 U
Static Budget 206 250 (B)
(C) $16 560
$400 U $1720 F
$31 720 $18 280
$4680 F 0
$36 400 $18 280
$35 480
(D)
$32 160
(E)
$30 280
69) What amounts are reported for revenues in the flexible budget (A) and the static budget (B), respectively? A) $84 960; $88 960 B) $84 960; $83 360 C) $82 160; $84 960 D) $82 160; $79 360 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances.
70) What is the total static-budget variance? A) $5200 favourable B) $1880 favourable C) $3320 favourable D) $1880 unfavourable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 71) What are the actual variable costs (C)? A) $31 320 B) $32 120 C) $27 040 D) $36 400 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 72) What is the total flexible-budget variance (D)? A) $680 favourable B) $0 C) $3320 favourable D) $120 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 73) What is the total sales-volume variance (E)? A) $7480 favourable B) $1880 favourable C) $2800 unfavourable
D) $7480 unfavourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 74) More insight into the sales-volume variance can be gained by subdividing it into: A) the market-share variance and the market-size variance. B) a cost hierarchy. C) the sales-mix variance and the sales-quantity variance. D) the flexible-budget variance and the market-size variance. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 75) A flexible budget is calculated at the start of the budget period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 76) The flexible budget uses the expected per unit costs found in the standard cost sheet; so the only difference to the static budget is that it is based on the actual sales volume. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 77) The flexible-budget variance may be the result of inaccurate forecasting of units sold. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 78) Cost control is the focus of the sales-volume variance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Write your answer in the space provided or on a separate sheet of paper. 79) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 80) The CEO of Gold Coast Sun Umbrellas Company has come to you for help. Use the following data to prepare a flexible budget for possible sales/production levels of 10 000, 11 000, and 12 000 units. Show the contribution margin at each activity level. Sales price Variable costs: Manufacturing
$24 per unit $12 per unit
Administrative Selling Fixed costs: Manufacturing Administrative
$3 per unit $1 per unit $60 000 $20 000
Answer: Flexible Budget for Various Levels of Sales/Production Activity Units
10 000
11 000
12 000
Sales
$240 000
$264 000
$288 000
Variable costs: Manufacturing Administrative Selling
120 000 30 000 10 000
132 000 33 000 11 000
144 000 36 000 12 000
Total variable costs
160 000
176 000
192 000
Contribution margin
80 000
88 000
96 000
Fixed costs: Manufacturing Administrative
60 000 20 000
60 000 20 000
60 000 20 000
Operating profit/(loss)
$-0-
$8000
$16 000
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 81) Tyson's Hardware uses a flexible budget to develop planning information for its warehouse operations. For 2018, the company anticipated that it would have 96 000 sales units for 664 customer shipments. Average storage bin usage for various inventories was estimated to be 200 per day. The costs and cost drivers were determined to be as follows:
Item Product handling Storage Utilities Shipping clerks Supplies
Fixed $10 000 1000 1000
Variable $1.25 3.00 1.50 1.00 0.50
Cost driver per 100 units per storage bin per 100 units per shipment per shipment
During the year, the warehouse processed 90 000 units for 600 customer shipments. The workers used 225 storage bins on average each day to sort, store, and process goods for shipment. The actual costs for 2018 were: Item Product handling Storage Utilities Shipping clerks Supplies
Actual costs $10 900 465 2020 1400 340
Required: a. Prepare a static budget for 2018 with static-budget variances. b. Prepare a flexible budget for 2018 with flexible-budget variances.
Answer: a. Tyson's Hardware — Static Budget with Variances — 2018 Static Actual Budget Variances Product handling $10 900 $11 200 $300 Storage 465 600 135 Utilities 2020 2440 420 Shipping clerks 1400 1664 264 Supplies 340 332 8 Total $15 125 $16 236 $1111 b.
F F F F U F
Tyson's Hardware — Flexible Budget with Variances — 2018 Flexible Actual Budget Variances Product handling $10 900 $11 125 $225 F Storage 465 675 210 F
Utilities 2020 2350 330 F Shipping clerks 1400 1600 200 F Supplies 340 300 40 U Total $15 125 $16 050 $925 F AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 82) White Shark Surfboards Company manufactures tables for schools. The 2018 operating budget is based on sales of 20 000 units at $100 per table. Operating profit is anticipated to be $120 000. Budgeted variable costs are $64 per unit, while fixed costs total $600 000. Actual income for 2018 was a surprising $354 000 on actual sales of 21 000 units at $104 each. Actual variable costs were $60 per unit and fixed costs totalled $570 000. Required: Prepare a variance analysis report with both flexible-budget and sales-volume variances.
Answer: White Shark Surfboards Company Variance Analysis
Actual Results Units sold Sales Variable costs
Flexible Variances
21 000 $2 184 000 1 260 000
SalesFlexible Volume Budget Variances 21 000
Static Budget 20 000
$84 000 F $2 100 000 $100 000 F $2 000 000 84 000 F 1 344 000 64 000 U 1280 000
Contribution margin $924 000 Fixed costs 570 000
$168 000 F 30 000 F
$756 000 600 000
$36 000 F 0
$720 000 600 000
Operating profit
$198 000 F
$156 000
$36 000 F
$120 000
$354 000
Total flexible-budget variance = $198 000 favourable.
Total sales-volume variance = $36 000 favourable. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 83) Rosewall Company manufacturers tennis rackets. 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 profit
Actual Flexible Flexible SalesResults Variances Budget Volume Variances Static Budget 225 000 225 000 206 500 $84 160 $2000 F (A) $2800 U (B) (C) $400 U $31 720 $4680 F $36 400 $16 560 $1720 F $18 280 $18 280 $35 480 (D) $32 160 (E) $30 280
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. $84 160 − $2000 = $82 160 b. $82 160 + $2800 = $84 960 c.
$31 720 + $400 = $32 120
d. $35 480 − $32 160 = $3320 F e.
$4680 F + $2800 U = $1880 F
f. $35 480 − $30 280 = $5200 F AACSB: Able to analyse and frame problems
Difficulty: Complex Topic: Flexible budgets Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Choose the one alternative that best completes the statement or answers the question. 84) analysis provides suggestions for further investigation, not conclusive evidence of good or bad performance. A) Sensitivity B) Performance C) Variance D) Budget Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 85) A flexible-budget variance is $800 favourable for unit-related costs. This indicates that costs were: A) $800 less than the standard for the achieved level of activity. B) $800 more than the standard for the achieved level of activity. C) $800 more than the master budget. D) $800 less than for the planned level of activity. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 86) The sales-volume variance is due to: A) poor production performance. B) using a different selling price from that budgeted. C) inaccurate forecasting of units sold. D) Both A and B are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible-budget variances and sales-volume variances
Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 87) An unfavourable sales-volume variance could result from: A) customer dissatisfaction with the product. B) decreased demand for the product. C) competitors taking market share. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 88) If a sales-volume variance was caused by poor-quality products, then the would be in the best position to explain the variance. A) management accountant B) production manager C) purchasing manager D) sales manager Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 89) The sales-volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount (our initial prediction before actual results were known). Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 90) Additional insight can be gained by dividing the sales-mix variance into the flexible-budget variance and the sales-volume variance.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 91) The flexible-budget variance is the difference between a budgeted result and the corresponding flexible-budget amount that reflects the sales and production levels that are now known. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. 92) The sales-volume variance is the difference between a flexible-budget amount and the corresponding static-budget amount. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Flexible-budget variances and sales-volume variances Learning Objective: 12.3 Prepare flexible budgets and calculate flexible-budget variances and sales-volume variances. Choose the one alternative that best completes the statement or answers the question. 93) The flexible-budget variance for direct cost inputs can be further subdivided into a: A) sales-volume variance and an efficiency variance. B) static-budget variance and a price variance. C) static-budget variance and a sales-volume variance. D) price variance and an efficiency variance. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 94) A favourable price variance for direct materials indicates that: A) more material was used during production than planned for actual output.
B) a higher price than planned was paid for materials. C) less material was used during production than planned for actual output. D) a lower price than planned was paid for materials. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 95) From the perspective of control, all variances are isolated at the time. A) latest B) same C) best D) earliest possible Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 96) costing provides valuable information for the management and control of materials, labour and other activities related to production. A) Actual B) Target C) Performance D) Standard Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 97) A favourable efficiency variance for direct materials might indicate: A) a lower-priced supplier was used. B) that lower-quality materials were purchased. C) an over-skilled workforce. D) poor design of products or processes.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 98) Which type of costing do manufacturing firms as well as firms in the service sector find to be a useful tool. A) Standard B) Budgeted C) Actual D) Estimated Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 99) What might an unfavourable efficiency variance for direct manufacturing labour indicate? A) Budgeted time standards are too lax B) Machines were not properly maintained C) Work was efficiently scheduled D) More higher-skilled workers were scheduled than planned Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 100) Managers and management accountants use variances to evaluate are implemented. A) performance B) costs C) prices D) staff Answer: A AACSB: Able to analyse and frame problems
after decisions
Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Robert Jones Industries (RJ), developed standard costs for direct material and direct labour. In 2018, RJ estimated the following standard costs for one of their major products, the 10-litre wine barrel.
Direct materials Direct labour
Budgeted quantity 0.10 kg 0.05 hours
Budgeted price $30 per kg $15 per hour
During June, RJ produced and sold 5000 containers using 490 kg of direct materials at an average cost per kg of $32 and 250 direct manufacturing labour-hours at an average wage of $15.25 per hour. 101) June's direct material flexible-budget variance is: A) $980 unfavourable. B) $300 favourable. C) $680 unfavourable. D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 102) June's direct material price variance is: A) $980 unfavourable. B) $680 favourable. C) $300 favourable. D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
103) June's direct material efficiency variance is: A) $680 favourable. B) $300 favourable. C) $980 unfavourable. D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 104) June's direct manufacturing labour price variance is: A) $62.50 unfavourable. B) $62.50 favourable. C) $3811.75 unfavourable. D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 105) June's direct manufacturing labour efficiency variance is: A) $3811.75 unfavourable. B) $62.50 unfavourable. C) $62.50 favourable. D) None of these answers are correct. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Cootamundra Industries (CI), developed standard costs for direct material and direct labour. In 2018, CI estimated the following standard costs for one of their major products, the 30-litre heavy-duty plastic container.
Direct materials Direct labour
Budgeted quantity 0.20 kg 0.10 hours
Budgeted price $26 per kg $14 per hour
During July, CI produced and sold 10 000 containers using 2200 kg of direct materials at an average cost per kg of $24 and 1050 direct manufacturing labour hours at an average wage of $14.75 per hour. 106) July's direct material flexible-budget variance is: A) $800 unfavourable. B) $5000 unfavourable. C) $4400 favourable. D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 107) July's direct material price variance is: A) $800 favourable. B) $4400 favourable. C) $5200 unfavourable. D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 108) July's direct material efficiency variance is: A) $4400 favourable. B) $800 unfavourable. C) $5200 unfavourable. D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 109) July's direct manufacturing labour flexible-budget variance is: A) $787.50 favourable. B) $700.00 unfavourable. C) $1487.50 unfavourable. D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 110) July's direct manufacturing labour price variance is: A) $700.00 unfavourable. B) $787.50 unfavourable. C) $1487.50 favourable. D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 111) July's direct manufacturing labour efficiency variance is: A) $700.00 unfavourable. B) $487.50 favourable. C) $262.50 favourable. D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
Answer the following questions using the information below: Hunter Valley Orchards (HVO), developed standard costs for direct material and direct labour. In 2018, HVO estimated the following standard costs for one of their most well-loved products, the HVO classic Grandma's large apple pie which had a brown sugar coating on the top of the crust as well as including cranberry and mince ingredients in addition to the apples.
Direct materials Direct labour
Budgeted quantity 1.5 kg 0.25 hours
Budgeted price $7.25 per kg $14.00 per hour
During September, HVO produced and sold 1200 pies using 1875 kg of direct materials at an average cost per kg of $7.00 and 280 direct labour hours at an average wage of $14.25 per hour. 112) September's direct material flexible-budget variance is: A) $100.00 favourable. B) $100.00 unfavourable. C) $75.00 unfavourable. D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 113) September's direct material price variance is: A) $468.75 favourable. B) $75.00 unfavourable. C) $468.75 unfavourable. D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 114) September's direct material efficiency variance is: A) $468.75 favourable. B) $543.75 favourable.
C) $468.75 unfavourable. D) $543.75 unfavourable. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 115) September's direct labour flexible-budget variance is: A) $210.00 favourable. B) $210.00 unfavourable. C) $280.00 unfavourable. D) $280.00 favourable. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 116) September's direct labour price variance is: A) $70.00 favourable. B) $210.00 favourable. C) $70.00 unfavourable. D) $210.00 unfavourable. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 117) September's direct labour efficiency variance is: A) $280.00 favourable. B) $210.00 favourable. C) $210.00 unfavourable. D) $280.00 unfavourable. Answer: A AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 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. 118) The best label for the formula (AQ - BQ) BP is the: A) efficiency variance. B) total flexible-budget variance. C) price variance. D) spending variance. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 119) The best label for the formula (AP - BP) AQ is the: A) efficiency variance. B) spending variance. C) price variance. D) total flexible-budget variance. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 120) The best label for the formula [(AP)(AQ) - (BP)(AQ)] is the: A) price variance. B) total flexible-budget variance. C) efficiency variance. D) spending variance. Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 121) The best label for the formula [(AP)(AQ) - (BP)(BQ)] is the: A) spending variance. B) total flexible-budget variance. C) price variance. D) efficiency variance. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Shepparton Water Sports has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favourable variance and U denotes an unfavourable variance. Flexible Budget Material A $20 000 Material B 30 000 Direct manufacturing labour 40 000
Variances Price Efficiency $1000F $3000U 500U 1500F 500U 2500F
122) The MOST likely explanation of the above variances for Material A is that: A) the company used a higher-priced supplier. B) higher-quality raw materials were used than were planned. C) Material A used during September was $2000 less than expected. D) a lower price than expected was paid for Material A. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 123) The actual amount spent for Material B was:
A) $28 000. B) $29 000. C) $31 000. D) $30 000. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 124) The actual amount spent for direct manufacturing labour was: A) $42 000. B) $43 000. C) $40 000. D) $38 000. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 125) The MOST likely explanation of the above direct manufacturing labour variances is that: A) the company may have assigned more experienced employees this month than originally planned. B) management may have a problem with budget slack and might be using lax standards for both labour-wage rates and expected efficiency. C) employees did not work as efficiently as expected to accomplish the job. D) the average wage rate paid to employees was less than expected. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Bundaberg Bicycles has prepared the following flexible budget for September and is in the process of interpreting the variances. F denotes a favourable variance and U denotes an unfavourable variance.
Material A Material B Material C
Flexible Budget $20 000 30 000 40 000
Variances Price Efficiency $1000U $1200F 500F 800U 1400U 1000F
126) The actual amount spent for Material A was: A) $18 800. B) $21 000. C) $19 800. D) $20 200. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 127) The actual amount spent for Material B was: A) $29 700. B) $30 500. C) $30 800. D) $30 300. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 128) The explanation that lower-quality materials were purchased is MOST likely for: A) Material A. B) Material B. C) Material C. D) both Materials A and C. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct
labour. 129) To make sure that managers interpret variances correctly and make appropriate decisions based on them, managers need to recognise that variances can have cause(s). A) ambiguous B) unknown C) multiple D) one Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 130) Variance analysis is subject to the same test as all other phases of a management control system. A) performance B) reasonableness C) liquidity D) benefit–cost Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 131) Which of the following is TRUE about favourable direct manufacturing labour efficiency variances? A) Debited to the Work-in-Process Control account B) Always credits C) Always debits D) Debited to the Wages Payable Control account Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
132) For using which of the following, standard costing systems are useful tool? A) Total quality management B) Just-in-time systems C) Computer-integrated manufacturing systems D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 133) The budgeted contribution margin per composite unit for the budgeted mix can be calculated by dividing the: A) total budgeted contribution margin by the total budgeted units. B) actual total contribution margin by the total budgeted units. C) total budgeted contribution margin by the actual total units. D) actual total contribution margin by the total actual total units. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 134) The sales-mix variance results from a difference between the: A) actual market size in units and the budgeted market size in units. B) actual market share and the budgeted market share. C) budgeted contribution margin per composite unit for the actual mix and the budgeted contribution margin per composite unit for the budgeted mix. D) actual contribution margin and the budgeted contribution margin. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 135) From the perspective of control, the direct materials efficiency variance should be isolated at the time of:
A) purchase. B) use. C) sale of the product. D) completion of the entire product. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 136) When will be the sales-mix variance unfavourable? A) The composite unit for the actual mix is greater than for the budgeted mix B) Actual unit sales are less than budgeted unit sales C) The actual contribution margin is greater than the static-budget contribution margin D) The actual sales mix shifts toward the less profitable units Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 137) When will be the sales-mix variance favourable? A) The actual sales mix shifts toward the less profitable units B) The actual contribution margin is greater than the static-budget contribution margin C) The composite unit for the actual mix is greater than for the budgeted mix D) Actual unit sales are less than budgeted unit sales Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 138) An unfavourable sales-mix variance would MOST likely be caused by: A) a new competitor providing better service in the high-margin product sector. B) the company offering low-margin products at a higher price. C) a competitor having distribution problems with high-margin products. D) the company experiencing quality-control problems that get negative media coverage of low-margin
products. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 139) A shift towards a mix of products with a lower contribution margin per unit will MOST likely result in a(n): A) favourable sales-quantity variance. B) favourable sales-mix variance. C) unfavourable sales-mix variance. D) unfavourable sales-quantity variance. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 140) The sales-quantity variance will be favourable when: A) the actual sales mix shifts towards the less profitable units. B) the static budget contribution is greater than the actual contribution margin. C) budgeted units of all products sold exceed actual units of all products sold. D) actual units of all products sold exceed budgeted units of all products sold. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 141) The sales-quantity variance will be unfavourable when: A) the actual sales mix shifts toward the less profitable units. B) the actual contribution margin is greater than the static-budget contribution margin. C) actual unit sales are less than budgeted unit sales. D) the composite unit for the actual mix is greater than for the budgeted mix. Answer: C AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 142) What would a favourable sales-quantity variance MOST likely be caused by? A) A new competitor providing better service in the high-margin product sector B) The company offering low-margin products at a higher price C) A competitor having distribution problems with high-margin products D) The company experiencing quality-control problems that get negative media coverage of low-margin products Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 143) The formula, (Actual sales quantity in units - Static budget sales quantity in units) × Budgeted contribution margin per unit, is equal to the: A) sales-volume variance. B) market-share variance. C) sales-quantity variance. D) sales-mix variance Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 144) The sales-quantity variance results from a difference between: A) the actual sales mix and the budgeted sales mix. B) actual market size in units and the budgeted market size in units. C) the actual quantity of units sold and the budgeted quantity of unit sales in the static budget. D) actual contribution margin and the budgeted contribution margin. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs
Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Ceylon Tea Products has an exclusive contract with West Sydney Tea Importers Corporation. Calamine and Ceylon 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 Ceylon Sales in kg 1850 kg 1650 kg Price per kg $2.50 $2.50 Variable cost per kg 1.00 2.00 Contribution margin $1.50 $0.50
Budget Calamine Ceylon 2000 kg 1500 kg $2.00 $3.00 1.00 1.50 $1.00 $1.50
Budgeted and actual fixed corporate-sustaining costs are $1750 and $2000, respectively. 145) What is the actual contribution margin for the month? A) $4250 B) $3750 C) $4325 D) $3600 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 146) What is the contribution margin for the flexible budget? A) $3600 B) $4325 C) $3750 D) $4250 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
147) For the contribution margin, what is the total static-budget variance? A) $725 unfavourable. B) $300 favourable C) $500 favourable D) $650 unfavourable Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 148) For the contribution margin, what is the total flexible-budget variance? A) $500 favourable B) $725 unfavourable C) $650 unfavourable D) $300 favourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Hobart Garden Centre provides the following information for the month of May:
Sales in units Contribution margin per unit
Tulips 1950 $11
Actual Geraniums 1800 $18
Budget Tulips Geraniums 2250 1500 $10 $20
149) What is the budgeted contribution margin per composite unit for the actual mix? A) $14.00 B) $14.36 C) $13.80 D) $14.80 Answer: D AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 150) What is the budgeted contribution margin per composite unit for the budgeted mix? A) $14.80 B) $14.00 C) $14.36 D) $13.80 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 151) For May, Hobart will report a(n): A) favourable sales-mix variance. B) unfavourable sales-volume variance. C) unfavourable sales-mix variance. D) favourable sales-volume variance. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Hobart Garden Centre provides the following information for the month of May: Actual Fuchsia Dogwood Sales in units 10 000 2500 Contribution margin per unit $9 $7
Budget Fuchsia Dogwood 8000 2000 $10 $8
152) What is the budgeted contribution margin per composite unit for the actual mix? A) $9.00 B) $8.00
C) $8.60 D) $9.60 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 153) What is the budgeted contribution margin per composite unit for the budgeted mix? A) $8.60 B) $9.00 C) $8.00 D) $9.60 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 154) For May, Hobart will report a(n): A) favourable sales-mix variance. B) unfavourable sales-volume variance. C) favourable sales-volume variance. D) unfavourable sales-mix variance. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: The Tornado Dust Removers Corporation manufactures two vacuum cleaners, the Standard and the Supreme. The following information was gathered about the two products:
Budgeted sales in units Budgeted selling price
Standard 4000 $300
Supreme 1000 $850
Budgeted contribution margin per unit Actual sales in units Actual selling price
$210 3500 $325
$550 1500 $840
155) What is the budgeted sales-mix percentage for the Standard and the Supreme vacuum cleaners, respectively? A) 0.80 and 0.20 B) 0.20 and 0.80 C) 0.30 and 0.70 D) 0.70 and 0.30 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 156) What is the total sales-volume variance in terms of the contribution margin? A) $275 000 favourable B) $105 000 unfavourable C) $380 000 favourable D) $170 000 favourable Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 157) What is the total sales-quantity variance in terms of the contribution margin? A) $278 000 favourable B) $170 000 favourable C) $110 000 favourable D) Nil variance Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
158) What is the total sales-mix variance in terms of the contribution margin? A) $278 000 favourable B) $170 000 favourable C) $448 000 favourable D) $110 000 favourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 159) More insight into the sales-quantity variance can be gained by subdividing it into: A) the sales-mix variance and the sales-volume variance. B) the flexible-budget variance and the sales-volume variance. C) a cost hierarchy. D) the market-share variance and the market-size variance. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 160) The market-share variance is the difference between: A) actual market share and the budgeted market share. B) actual market size in units and the budgeted market size in units. C) budgeted contribution margin per composite unit for the actual mix and the budgeted contribution. margin per composite unit for the budgeted mix. D) actual contribution margin and the budgeted contribution margin. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 161) Which item is NOT used in the calculation of the market-share variance? A) actual sales-mix percentage.
B) budgeted contribution margin per composite unit for budgeted mix. C) actual market size in units. D) actual market share. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 162) The market-share variance will be favourable when: A) actual market size in units is less than budgeted market size in units. B) the actual market share is greater than the budgeted market share. C) the flexible-budget contribution margin is greater than the static-budget contribution margin. D) actual unit sales are less than budgeted unit sales. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 163) The market-share variance is MOST influenced by: A) shifts in consumer preferences that are outside of the manager's control. B) rates of inflation. C) how well managers perform relative to their peers. D) economic downturns in the economy. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 164) An unfavourable market-share variance would MOST likely be caused by: A) the company offering products at a lower price. B) the company experiencing quality-control problems that get negative media coverage. C) a competitor providing better service. D) a competitor having distribution problems. Answer: C
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: Bathurst Company manufactures remote control devices for garage doors. The following information was collected during June: Actual market size (units) Actual market share Actual average selling price Budgeted market size (units) Budgeted market share Budgeted average selling price Budgeted contribution margin per composite unit for budgeted mix
10 000 32% $10.00 11 000 30% $11.00 $4.00
165) What is the market-size variance? A) $1600 F B) $1200 U C) $1000 F D) $500 U Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 166) What is the market-share variance? A) $800 F B) $1500 U C) $500 U D) $1100 F Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs
Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 167) What is the sales-quantity variance? A) $800 F B) $1200 U C) $400 U D) The variance cannot be determined. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Answer the following questions using the information below: The Broken Hill Dustbusters Corporation manufactures two types of vacuum cleaners, the Terminator for commercial building use and the Dustmaid for residences. Budgeted and actual operating data for the year 2018 were as follows: Static Budget Number sold Contribution margin
Terminator 5000 $1 500 000
Dustmaid 20 000 $3 000 000
Total 25 000 $4 500 000
Actual Results Number sold Contribution margin
Terminator 4000 $1 280 000
Dustmaid 28 000 $3 920 000
Total 32 000 $5 200 000
Prior to the beginning of the year, a consulting firm estimated the total volume for vacuum cleaners of the Terminator and Dustmaid category to be 250 000 units, but actual industry volume was 256 000 units. 168) What is the total static-budget variance in terms of the contribution margin? A) $200 000 unfavourable B) $700 000 favourable C) $900 000 favourable D) $360 000 unfavourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 169) What is the total flexible-budget variance in terms of the contribution margin? A) $360 000 unfavourable B) $900 000 favourable C) $200 000 unfavourable D) $700 000 favourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 170) What is the total sales-volume variance in terms of the contribution margin? A) $900 000 favourable B) $360 000 unfavourable C) $200 000 unfavourable D) $1 260 000 favourable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 171) What is the total sales-quantity variance in terms of the contribution margin? A) $200 000 unfavourable B) $360 000 unfavourable C) $900 000 favourable D) $1 260 000 favourable Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
172) What is the total sales-mix variance in terms of the contribution margin? A) $1 260 000 favourable B) $360 000 unfavourable C) $900 000 favourable D) $200 000 unfavourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 173) What is the budgeted contribution margin per composite unit of the budgeted mix? A) $162.500 B) $180.000 C) $140.625 D) $208.000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 174) What is the market-size variance? A) $1 260 000 F B) $108 000 F C) $360 000 U D) $1 152 000 F Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 175) What is the market-share variance? A) $360 000 U B) $108 000 F C) $1 152 000 F
D) $1 260 000 F Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 176) The term EFFICIENCY VARIANCE is the direct-cost portion of the flexible-budget variance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 177) A price variance reflects the difference between the actual price paid and the standard price. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 178) The presumed cause of a material price variance will determine how a company responds. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 179) An efficiency variance reflects the difference between an actual quantity used and the quantity expected to be used, given the level of production. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct
labour. 180) 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 actual price. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 181) A price variance is sometimes called a rate variance, especially when referring to direct labour. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 182) The direct manufacturing labour price variance is likely to be favourable if higher-skilled workers are put on a job. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 183) Although computed separately, price variances and efficiency variances should not be analysed separately from each other. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 184) A favourable variance can be automatically interpreted as 'good news.' Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 185) Variances often affect each other. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 186) A variance within an acceptable range is considered to be an ‘in control occurrence’ and calls for investigation or action by managers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 187) Variance analysis is subject to the same benefit–cost test as all other phases of a management control system. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 188) Managers must not interpret variances in isolation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
189) The sales-quantity variance is favourable when budgeted unit sales exceed actual unit sales. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 190) Variances serve as an early warning system to alert managers to existing problems or prospective opportunities. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 191) To make sure that managers interpret variances correctly and make appropriate decisions based on them, managers need to recognise that variances cannot have multiple causes. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 192) A favourable market-size variance results with a decrease in market size. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 193) Standard costs complicate product costing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct
labour. 194) The market share variance is the difference in the budgeted contribution margin for actual market size in units caused solely by the actual market share being different from the budgeted market share. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 195) The market size variance is the difference in the budgeted contribution margin at budgeted market share caused solely by actual market size in units being different from budgeted market size in units. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 196) A difficulty with the market share and market size variances is that accurate measures of market share and market size often do not exist. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Write your answer in the space provided or on a separate sheet of paper. 197) Dandenong Draperies manufactures curtains. A certain window requires the following: Direct materials standard Direct manufacturing labour standard
10 square metres at $5 per metre 5 hours at $10
During the second quarter, the company made 1500 curtains and used 14 000 square metres of fabric costing $68 600. Direct labour totalled 7600 hours for $79 800. Required: a. Calculate the direct materials price and efficiency variances for the quarter.
b.
Calculate the direct manufacturing labour price and efficiency variances for the quarter.
Answer: a. Direct materials variances:
b.
Actual unit cost
= $68 600/14 000 square metres = $4.90 per square metre
Price variance
= 14 000 × ($5.00 − $4.90) = $1400 favourable
Efficiency variance
= $5.00 × [14 000 − (1500 × 10)] = $5000 favourable
Direct manufacturing labour variances: Actual labour rate
= $79 800/7600 = $10.50 per hour
Price variance
= 7600 × ($10.50 − $10.00) = $3800 unfavourable
Efficiency variance
= $10.00 × (7600 − 7500) = $1000 unfavourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 198) Kosciuszko Ski Products manufactures jackets and other winter sports clothing. A certain designed ski parka requires the following: Direct materials standard Direct manufacturing labour standard
2 square metres at $13.50 per metre 1.5 hours at $20.00 per hour
During the third quarter, the company made 1500 parkas and used 3150 square metres of fabric costing $39 375. Direct labour totalled 2100 hours for $45 150.
Required: a. Compute the direct materials price and efficiency variances for the quarter. b. Compute the direct manufacturing labour price and efficiency variances for the quarter.
Answer: a. Direct materials variances:
b.
Actual unit cost
= $39 375/3150 square metres = $12.50 per square metre
Price variance
= 3150 × ($13.50 − $12.50) = $3150 favourable
Efficiency variance
= $13.50 × [3150 − (1500 × 2)] = $2025 unfavourable
Direct manufacturing labour variances: Actual labour rate
= $45 150/2100 = $21.50 per hour
Price variance
= 2100 × ($21.50 − $20.00) = $3150 unfavourable
Efficiency variance
= $20.00 × [2100 − (1500 × 1.5)] = $3000 favourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 199) Blue mountains Pottery produced 1000 urns during August. Its costing systems showed the following: Direct Materials (all materials purchased were used): Standard cost: $6.00 per kg Total actual cost: $5600 Standard cost allowed for units produced was $6000
Materials efficiency variance was $120 unfavourable Direct Manufacturing labour: Standard cost is 2 urns per hour at $24.00 per hour Actual cost per hour was $24.50 Labour efficiency variance was $336 favourable Required: a. What is standard direct material amount per urn? b. What is the direct material price variance? c. What is the total actual cost of direct manufacturing labour? d. What is the labour price variance for direct manufacturing labour?
Answer: a. Standard cost per urn
= $6000/1000 = $6.00 per urn
Standard number of kg per urn
= $6.00/$6.00 = 1.0 kg per urn
b.
Materials price variance
= Total variance - efficiency variance = ($5600 − $6000) − $120 unfavourable = $520 favourable
c.
Total standard labour cost of actual hours = ((1000/2) × $24) − $336 favourable = $11 664 Actual hours = $11 664/$24 = 486 hours Total actual costs = 486 × $24.50 = $11 907
d. Labour price variance
= $11 907 − $11 664 = $243 unfavourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 200) Armidale Garden Supplies Company produced 2500 garden spades during March. The spade consists of a wooden handle and a forged metal blade that comes in contact with the ground. Its costing
systems showed the following: Direct Materials (all materials purchased were used): Standard cost: $1.00 per handle and $3.50 per metal tool Total actual cost: $11 350 Materials flexible-budget efficiency variance was $650 unfavourable Direct Manufacturing labour: Standard cost is 5 garden spades per hour at $20.00 per hour Actual cost per hour was $21.00 Labour efficiency variance was $400 favourable Required: a. What is the standard direct material amount per garden spade? b. What is the standard cost allowed for all units produced? c. What is the total direct materials flexible-budget variance? d. What is the direct material flexible-budget price variance? e. What is the total actual cost of direct manufacturing labour? f. What is the labour price variance for direct manufacturing labour?
Answer: a. Standard cost per garden spade
= $1.00 (handle) + $3.50 (tool) = $4.50 per garden spade
b.
Standard cost allowed for all units
= 2500 × $4.50 = $11 250
c.
Total materials variance = $100 unfavourable
= $11 250 − $11 350
d. Materials price variance
e.
= Total variance - efficiency variance = ($11 350 − $11 250) − $650 unfavourable = $550 favourable
Total standard labour cost of actual hours = ((2500/5) × $20) − $400 favourable = $9600 Actual hours = $9600/$20 = 480 hours Total actual costs = 480 × $21 = $10 080
f.
Labour price variance
= $9600 − $10 080 = $480 unfavourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 201) Mt Isa Copper Winders produced 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 kg at $4.00 per kg Total actual cost: b kg costing $9600 Standard cost allowed for units produced was $9000 Materials price variance: c Materials efficiency variance was $80 unfavourable Direct Manufacturing labour Standard cost is 3 hours per roll at $8.00 per hour Actual cost per hour was $8.25 Total actual cost: d Labour price variance: e Labour efficiency variance was $400 unfavourable Required: Calculate the missing elements in the report represented by the lettered items.
Answer: a. Standard cost per roll Standard number of kg per roll
= $9000/450 = $20.00 = $20/$4 = 5 kg per roll
b. Actual kg
= ($9000 + $80)/$4 = 2270 kg
c.
= $9600 − ($9000 + $80) = $520 unfavourable
Materials price variance
d. Total standard labour cost of actual hours= (450 × 3 × $8) + $400 = $11 200 Actual hours = $11 200/$8 = 1400 Total actual cost
= 1400 × $8.25 = $11 550
e. Labour price variance = $11 550 − $11 200 = $350 unfavourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 202) Mildura Company produces wine caskets and has determined the following direct cost categories and budgeted amounts:
Category Direct Materials Direct labour 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 labour: Labour costs Labour-hours of input Actual price per hour Direct Marketing labour: Labour costs Labour-hours of input Actual price per hour
4000 $30 225 3900 $7.75 $11 470 1240 $9.25 $5880 2100 $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 labour and the direct marketing labour, respectively? d. What is the efficiency variance for direct materials? e. What are the efficiency variances for direct manufacturing labour and direct marketing labour, respectively?
Answer: a. Actual Results Direct materials $30 225 Direct manufacturing labour 11 470 Direct marketing labour 5880 $47 575
Flexible Budget $30 000 10 800 6000 $46 800
Variances $225 U 670 U 120 F $775 U
b. ($7.75 - $7.50) × (3900) = $975 unfavourable c.
Manufacturing labour ($9.25 − $9.00) × 1240 = $310 unfavourable Marketing labour ($2.80 − $3.00) × 2100 = $420 favourable
d. [3900 - (4000 units × 1.00)] × $7.50 = $750 favourable e.
Manufacturing labour = [1240 hours − (4000 × 0.30 hours)] × $9.00 = $360 unfavourable Marketing labour = [2100 hours − (4000 × 0.50 hours)] × $3.00 = $300.00 unfavourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 203) The textbook, in a summary diagram, Figure 11-7, discusses four levels of variances. Briefly explain the meaning of levels 1, 2 and 3 and provide an example of a variance at each of those levels.
Answer: A Level 1 variance is simply the difference between actual operating profit and planned operating profit in the static budget. A Level 2 variance subdivides 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. 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 labour rate variance, and the variable overhead rate variance. Level 3 variances would also include efficiency variances that reflect the difference between an actual input quantity and a budgeted input quantity. Examples would include material quantity variances, labour efficiency variances, and variable overhead efficiency variances. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 204) During February the Mossman Engineering 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 favourable or unfavourable. The following information is for the manufacture of garage doors, its only product: 1. 2. 3. 4.
Direct materials price variance, $800 unfavourable. Direct materials efficiency variance, $1800 favourable. Direct manufacturing labour price variance, $4000 favourable. Direct manufacturing labour efficiency variance, $600 unfavourable.
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' unfavourable 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 labour's favourable 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' favourable efficiency variance may have been caused by: (1) employees/machinery working more efficiency and having less scrap and waste materials; (2) buying better-quality materials; or (3) changing the production process. Direct manufacturing labour's unfavourable efficiency variance may have been caused by: (1) poor working conditions; (2) changes in the production process (learning something new initially takes longer); (3) different types of direct materials to work with; or (4) poor attitudes on behalf of the workers.
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 205) Gosford Company had the following journal entries recorded for the end of June. Unfortunately, the company's only accountant quit on 10 July and the CEO is at a loss as to the company's performance for the month of June. Materials Control Direct Materials Price Variance Accounts Payable Control
150 000
Work-in-Process Control Direct Materials Efficiency Variance Materials Control
60 000 4000
5000 145 000
Work-in-Process Control 425 000 Direct Manufacturing Labour Price Variance 7500 Direct Manufacturing Labour Efficiency Variance Wages Payable Control
64 000
9000 423 500
Required: a. What kind of performance did the company have for June? Explain each variance. b. Why is Direct Materials given in two entries?
Answer: a. The first entry is for materials purchases. The credit entry indicates a favourable variance. This could be an indicator that either the purchasing agent did a good job or he/she bought inferior goods. Production was not as lucky in June. The debit entry for materials efficiency indicates that more materials were used than should have been under the operating plans for the month. For labour, the price was unfavourable, while the efficiency was favourable. This could have been caused by using higher-priced workers who were, in fact, better workers. Of course, there are many other possible causes. b. Recording variances for direct materials is completed with two separate entries since the price variance is isolated at the point of purchase, while the efficiency variance is isolated at the point of use. AACSB: Able to analyse and frame problems
Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 206) Canberra Welding Company 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 $300 000 Direct Manufacturing Materials Used 250 000 Direct Materials Price Variance 10 000 (at time of purchase) Direct Materials Efficiency Variance 15 000 Direct Manufacturing Labour Price Variance 6000 Direct Manufacturing Labour Efficiency Variance 4000 Direct Manufacturing Labour Payable 170 000
unfavourable favourable favourable favourable
Required: Record the necessary journal entries to close the accounts for the month.
Answer: Materials Control Direct Manufacturing Materials Price Variance Accounts Payable Control Work-in-Process Control Direct Materials Efficiency Variance Materials Control
300 000 10 000 310 000 265 000 15 000 250 000
Work-in-Process Control 180 000 Direct Manufacturing Labour Price Variance 6000 Direct Manufacturing Labour Efficiency Variance 4000 Wages Payable Control 170 000 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour.
207) Victoria Beverages sells two types of coffee: Colombian and Blue Mountain. The monthly budget for Australian 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 Australian market. The following information is provided for March: Actual Budget Sales in kg
Colombian Blue Mountain 9000 kgs 11 000 kgs
Colombian 10 000 kgs
Blue Mountain 10 0000 kgs
Price per kg Variable cost per kg
$25 11
$30 14
$25 12
$30 13
Contribution margin
$14
$16
$13
$17
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:
9000 × $14 = $126 000 11 000 × $16 = 176 000 $302 000
b.
Static-budget contribution margin:
10 000 × $13 = $130 0200 10 000 × $17 = 170 000 $300 000
c.
Flexible-budget contribution margin:
9000 × $13 = $117 000 11 000 × $17 = 187 000 $304 000
d. Static-budget variance is $2000 unfavourable = $300 000 - $302 000
Flexible-budget variance is $2000 favourable = $304 000 - $302 000 Sales-volume variance is $4000 unfavourable = $300 000 - $304 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 208) Geelong Electronics manufactures TVs and DVD players. During February, the following activities occurred:
Budgeted units sold Budgeted contribution margin per unit Actual units sold Actual contribution margin per unit
TVs 17 640 $90 20 000 $100
DVDs 66 360 $156 80 000 $158
Required: Compute the following variances in terms of the contribution margin. a. Determine the total sales-mix variance. b. Determine the total sales-quantity variance. c. Determine the total sales-volume variance.
Answer: a. TVs [(100 000 × 0.20) × $90] [(100 000 × 0.21) × $90]
DVDs [(100 000 × 0.80) × $156] [(100 000 × 0.79) × $156]
= =
$1 800 000 1 890 000 $90 000 unfavourable
= $12 480 000 = 12 324 000 $156 000 favourable
Total sales-mix variance = $90 000 unfavourable + $156 000 favourable = $66 000 favourable. b. TVs {[(100 000 - 84 000) × 0.21] × $90} DVDs {[(100 000 - 84 000) × 0.79] × $156} Total sales-quantity variance c.
= =
$302 400 favourable 1 971 840 favourable $2 274 240 favourable
Total sales-volume variance = $66 000 favourable + $2 274 240 favourable = $2 340 240 favourable.
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 209) Speedy Printing publishes sports biographies. For January, the following information is available: Budgeted market size (units) Budgeted market share Budgeted average contribution margin per unit Actual market size (units) Actual market share Actual average contribution margin per unit
250 000 18% $1.20 225 000 19% $1.20
Required: Compute the market-share variance, the market-size variance, and the sales-quantity variance in terms of the contribution margin.
Answer: 225 000 × 0.19 × $1.20 = $51 300
225 000 × 0.18 × $1.20 = $48 600
Market-share variance $2700 F
250 000 × 0.18 × $1.20 = $54 000
Market-size variance $5400 U
Sales-quantity variance $2700 U AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 210) The Omega Corporation manufactures two types of dishwashers: the ZENITH for commercial use and the House-Helper for homes. Budgeted and actual operating data for the year 2018 are as follows: Static Budget Number sold Contribution margin
ZENITH 15 000 $3 750 000
House-Helper 60 000 $12 000 000
Total 75 000 $15 750 000
Actual Results Number sold Contribution margin
ZENITH 16 500 $6 200 000
House-Helper 38 500 $10 200 000
Total 55 000 $16 400 000
Required: a. Calculate the contribution margin for the flexible budget. b. Determine the total static-budget variance, the total flexible-budget variance, and the total sales-volume variance in terms of the contribution margin.
Answer: Budgeted contribution margin per unit: ZENITH = $3 750 000/15 000 = $250 a.
Flexible-budget contribution margin:
House-Helper = $12 000 000/60 000 = $200 16 500 × $250 = $4 125 000 38 500 × $200 = 7 700 000 $11 825 000
b.
Static-budget variance is $650 000 favourable = $15 750 000 - $16 400 000 Flexible-budget variance is $4 575 000 favourable = $11 825 000 - $16 400 000 Sales-volume variance is $3 925 000 unfavourable = $15 750 000 - $11 825 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 211) The Omega Corporation manufactures two types of dishwashers: the ZENITH for commercial use and the House-Helper for homes. Budgeted and actual operating data for the year 2018 are as follows: Static Budget Number sold Contribution margin
ZENITH 15 000 $3 750 000
House-Helper 60 000 $12 000 000
Total 75 000 $15 750 000
Actual Results Number sold Contribution margin
ZENITH 16 500 $6 200 000
House-Helper 38 500 $10 200 000
Total 55 000 $16 400 000
Required: Calculate the sales-mix variance and the sales-quantity variance by type of dishwasher, and in total (in
terms of the contribution margin).
Answer: Budgeted sales-mix percentage: ZENITH = 15 000/75 000 = 20%
House-Helper = 60 000/75 000 = 80%
Actual sales-mix percentage: ZENITH = 16 500/55 000 = 30%
House-Helper = 38 500/55 000 = 70%
Budgeted contribution margin per unit: ZENITH = $3 750 000/15 000 = $250
House-Helper = $12 000 000/60 000 = $200
Sales-mix variance
Actual units of Actual sales-mix % all products Budgeted sold sales-mix % ZENITH 55 000 × (0.3 − 0.2) × House-Helper 55 000 × (0.7 − 0.8) × Total
Budgeted CM per unit
$250 $200
Sales-mix variance
= $1 375 000 F = $1 100 000 U $275 000 F
Sales-quantity Actual units of all Budgeted Budgeted Sales-quantity variance products sold sales-mix % CM per unit variance Budgeted units of all products sold ZENITH (55 000 − 75 000) × 0.2 × $250 = $1 000 000 U House-Helper (55 000 − 75 000) × 0.8 × $200 = $3 200 000 U Total $4 200 000 U AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 212) The Omega Corporation manufactures two types of dishwashers: the ZENITH for commercial use and the House-Helper for homes. Budgeted and actual operating data for the year 2018 are as follows: Static Budget Number sold
ZENITH 15 000
House-Helper 60 000
Total 75 000
Contribution margin
$3 750 000
$12 000 000
$15 750 000
Actual Results Number sold Contribution margin
ZENITH 16 500 $6 200 000
House-Helper 38 500 $10 200 000
Total 55 000 $16 400 000
Prior to the beginning of the year, a consulting firm estimated the total volume for dishwashers of the Zenith and House-Helper category to be 300 000 units, but actual industry volume was only 275 000 units. Required: Compute the market-share variance and market-size variance in terms of the contribution margin. Answer: Actual market share: = 55 000/275 000 = 0.20 Budgeted market share:
=
75 000/300 000
= 0.25
Budgeted contribution margin per composite unit of budgeted mix: ZENITH = $250 × 0.2 = $50 House-Helper = $200 × 0.8 = 160 OR $15 750 000/75 000 = $210 Market-share variance
Omega Corp Market-size variance
Actual market Actual market size in units share Budgeted market share 275 000 × (0.2 − 0.25) ×
Budgeted CM Market-shareva per composite riance unit for budgeted mix $210 = $2 887 500 U
Actual market size in Budgeted units - Budgeted market market size in units share
Budgeted CM Market-sizevari per composite ance unit for budgeted mix $210 = $1 312 500 U
Omega Corp (275 000 − 300 000) ×
0.25 ×
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 213) The Chair Company produces 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 2018 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
During 2017, an office products research firm estimated the industry volume for residential and office chairs of the type sold by the Chair Company to be 2 400 000. Actual industry volume for the year 2018 was only 2 200 000 chairs. Required: Calculate the following variances in terms of contribution margin: a. Calculate the total static-budget variance, the total flexible-budget variance, and the total sales-volume variance. b. Calculate the sale-mix variance and the sales-quantity variance by type of chair, and in total. c. Calculate the market-share variance and market-size variance.
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 unfavourable =$37 200 000 − $35 604 000 Sales-volume variance is $888 000 favourable =$37 200 000 − $38 088 000 Flexible-budget variance is $2 484 000 unfavourable =$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 Sales-quantity variance
c.
Actual units of all products sold 414 000 × 414 000 ×
Actual sales – mix% − Budgeted sales-mix%
Budgeted CM per unit
(0.6 − 0.65) × (0.4 − 0.35) ×
$100 $80
Actual units of all products sold – Budgeted units of all products sold (414 000 – 400 000) × (414 000 – 400 000) ×
Budgeted sales-mix%
Budgeted CM per unit
0.65 × 0.35 ×
Sales-mix variance = $2 070 000 U = $1 656 000 F $414 000 U Sales-quantity variance
Residential Office Total Actual market share
$100 $80
= 414 000/2 200 000 = 18.81818% or 0.1881818
Budgeted market share
= 400 000/2 400 000 = 16.66667% or 0.1666667
= $910 000 F = $392 000 F $1 302 000 U
Budgeted contribution margin per composite unit of budgeted mix: Residential = $100 × .65 =$65 Office = $80 × .35 = 28 OR $37 200 000/400 000 $93
Market-share variance Chair Company
Market-size variance
Actual market size in units 2 200 000 ×
Actual market size in units – Budgeted
Actual market share − Budgeted market share (0.1881818− 0.1666667) ×
Budgeted CM per composite unit for budgeted mix $93
Market-share variance
Budgeted CM per composite unit for
Market-size variance
Budgeted market share
= $4 402 000 F (Answers may vary due to rounding)
Chair Company
market size in units (2 200 000 – 2 400 000) ×
budgeted mix 0.1666667 ×
$93
= $3 100 000 U (Answers may vary due to rounding)
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 214) Why would a manager want to calculate the sales-mix and the sales-quantity variances, the market-share and market-size variances?
Answer: To manage effectively and make proper decisions, a manager must keep informed on whether organisational initiatives are progressing as planned. Variances help to inform managers about the reasons (whether favourable or unfavourable) for the differences between the actual result and the budgeted result. Specifically, the sale-mix and the sales-quantity variances help to explain the sales-volume variance, and the market-share and market-size variances help to explain the sales-quantity variance. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Price variances and efficiency variances for direct cost inputs Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 215) Standard costing provides valuable information for the management and control of materials, labour and other activities related to production. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Implementing standard costing Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 216) Manufacturing firms as well as firms in the service sector find standard costing to be a useful tool.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Implementing standard costing Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 217) Employees logging into production floor terminals and other modern technologies greatly facilitate the use of a standard costing system. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Implementing standard costing Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. 218) Companies implementing total quality management programs use standard costing to control materials costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Implementing standard costing Learning Objective: 12.4 Calculate price variances and efficiency variances for direct materials and direct labour. Choose the one alternative that best completes the statement or answers the question. 219) A purchasing manager's performance is BEST evaluated using the: A) effect the manager's action has on total costs for the entire company. B) direct materials flexible-budget variance. C) direct materials price variance. D) direct manufacturing labour flexible-budget variance. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 220) The relative amount of inputs used to achieve a given output level is called: A) economy. B) effectiveness.
C) benchmarking. D) efficiency. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 221) The degree to which a predetermined objective or target is met is called: A) economy. B) benchmarking. C) effectiveness. D) efficiency. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 222) The variances that should be investigated by management include: A) only favourable variances. B) only unfavourable variances. C) all variances, both favourable and unfavourable. D) both favourable and unfavourable variances considered significant in amount for the company. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 223) Managers benefit from variance analysis because it highlights individual aspects of: A) costs. B) profit. C) prices. D) performance. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement.
224) A(n) on performance evaluation may also cause managers to take actions to achieve the budget and avoid an unfavourable variance, even if such actions could hurt the company in the long run. A) underemphasis B) focus C) overemphasis D) emphasis Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 225) What type of analysis can managers use to create a cycle of continuous improvement? A) Variance B) Profit C) Cost D) Sales Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 226) can be assumed and factored into changes in standards so they continue to provide challenging, but achievable, targets. A) Performance evaluation B) Performance measurement C) Continuous improvement D) Benchmarking Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 227) What type of performance measures for planning and control do almost all companies use in addition to financial measures? A) Innovative
B) Traditional C) Non-financial D) Complex Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 228) To control a production process, supervisors cannot wait for an accounting report with variances reported in: A) units. B) kilometres. C) foreign currencies. D) dollars. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 229) Effectiveness is the relative amount of inputs used to achieve a given output level. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 230) Managers often use variance analysis when evaluating the performance of their subordinates. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 231) Efficiency refers to the relative amount of inputs used to achieve a given output level. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 232) Very few companies use a combination of financial and non-financial performance measures for planning and control. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 233) Managers must be sure they understand the causes of a variance before using it for performance evaluation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 234) Variance analysis should be a tool to ‘play the blame game.’ Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 235) An underemphasis on performance evaluation and meeting individual variance targets can undermine learning and continuous improvement. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 236) Sometimes a favourable direct materials efficiency variance may signal a need to change product strategy, perhaps because the product cannot be made at a low enough cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management uses of variances
Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 237) Managers benefit from variance analysis because it highlights individual aspects of performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. Write your answer in the space provided or on a separate sheet of paper. 238) NSW Hospital Supplies Corporation 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 $3.00 per gram. During February, 22 000 grams were purchased for $3.20 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 × ($3.20 − $3.00) = $4400 unfavourable b.
Material price variance = 20 000 × ($3.20 − $3.00) = $4000 unfavourable
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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 239) Give at least three good reasons why an unfavourable efficiency variance for direct manufacturing labour might be reported.
Answer: Any three of the following: a. More lower-skilled workers were scheduled than planned. b. Work was inefficiently scheduled. c. Machines were not properly maintained. d. Budgeted time standards were too tight. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 240) 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.' AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. 241) Give at least three good reasons why a favourable price variance for direct materials might be reported.
Answer: Any three of the following: a. The purchasing manager skilfully 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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Management uses of variances Learning Objective: 12.5 Use variance analysis to focus and direct continuous improvement. Choose the one alternative that best completes the statement or answers the question. 242) Activity-based costing systems focus on individual as the fundamental cost objects. A) costs B) products C) product lines D) activities Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 12.6 Perform variance analysis in activity-based costing systems. 243) ABC systems classify the costs of various activities into a cost: A) system. B) classification. C) hierarchy. D) driver. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 12.6 Perform variance analysis in activity-based costing systems. 244) Flexible-budget quantity calculations focus at the appropriate level of the cost: A) structure. B) system. C) category. D)hierarchy. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Variance analysis and activity-based costing Learning Objective: 12.6 Perform variance analysis in activity-based costing systems. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 245) Performance variance analysis can be used in activity-based costing systems. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Variance analysis and activity-based costing Learning Objective: 12.6 Perform variance analysis in activity-based costing systems. 246) A company that has an ABC system and batch level direct costs cannot benefit from variance analysis. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variance analysis and activity-based costing Learning Objective: 12.6 Perform variance analysis in activity-based costing systems. Write your answer in the space provided or on a separate sheet of paper. 247) How does variance analysis help with activity-based costing.
Answer: Activity-based costing systems focus on individual activities as the fundamental cost objects. As a result, the cost hierarchy of output unit-level costs, batch-level costs, product-sustaining costs, and facility-sustaining costs can benefit from variance analysis. When an ABC costing system is in place and there is a focus on the detailed level of cost hierarchy, obtaining flexible budgeting information to compare the actuals to the flexible budgeted amount can provide information to assist in the decision-making process. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Variance analysis and activity-based costing Learning Objective: 12.6 Perform variance analysis in activity-based costing systems. Choose the one alternative that best completes the statement or answers the question. 248) Which of the following is the process by which a company's products or services are measured relative to the best possible levels of performance? A) Benchmarking B) Variance analysis C) A standard costing system
D) Efficiency Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. 249) might be found in competing companies in the same industry or in companies in other industries that have similar processes. A) Benchmarking B) Continuous improvement C) Best practice D) Target costing Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. 250) Companies develop benchmarks and calculate on items that are the most important to their businesses. A) costs B) profits C) goals D) variances Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. 251) When benchmarking, management accountants are MOST valuable when they: A) provide insight into why costs or revenues differ across companies. B) highlight differences in the benchmarking data to management. C) provide complex mathematical analysis. D) present differences in the benchmarking data to management. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Benchmarking and variance analysis
Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 252) Benchmarking is the continuous process of measuring products, services, and activities against the best possible levels of performance, either inside or outside the organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. 253) When benchmarking, the best levels of performance are typically found in companies that are totally different. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. 254) If benchmarks based on best practice are achieved, managers and management accountants can be sure that the company will be competitive in the marketplace. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. 255) When benchmarking, it is best when management accountants simply analyse the costs and allow management to provide the insight as to why the revenues and costs differ between companies. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management. Write your answer in the space provided or on a separate sheet of paper. 256) 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. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Benchmarking and variance analysis Learning Objective: 12.7 Describe benchmarking and explain its role in cost management.
Chapter 13 Flexible budgets, overhead cost variances and management control Choose the one alternative that best completes the statement or answers the question. 1) To plan variable overhead costs effectively for a product or service, managers must eliminate the activities that do not add to the product or service. A) value B) cost C) profit D) features Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 2) Effective planning of fixed overhead costs is similar to effective planning for costs. A) direct material B) direct labour C) variable overhead D) salary Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 3) At the start of a budget period, management will have made most of the decisions that determine the level of to be incurred. A) direct labour costs B) direct materials
C) fixed overhead costs D) variable overhead costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 4) ‘Fixed overhead costs’ include: A) energy costs. B) the cost of sales commissions. C) indirect materials. D) property taxes paid on plant facilities. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 5) Day-to-day, ongoing operating decisions mainly determine the level of costs incurred in that period. A) fixed overhead B) variable overhead C) direct labour D) direct materials Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 6) Which of the following is not included in the effective planning of variable overheads? A) Choosing the appropriate level of capacity B) Redesigning products to use fewer resources C) Eliminating nonvalue-adding costs D) Redesigning the plant layout for more efficient processing Answer: A
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 7) Choosing the appropriate level of capacity: A) may lead to idle capacity if underestimated. B) is a key strategic decision. C) may lead to loss of sales if overestimated. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 8) What is the MAJOR challenge when planning fixed overheads? A) Calculating total costs B) Choosing the appropriate level of capacity C) Calculating the cost-allocation rate D) Choosing the appropriate planning period Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 9) Overhead costs are a major part of costs for most companies. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 10) The planning of fixed overhead costs differs from the planning of variable overhead costs in one
important respect: timing. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 11) To plan variable overhead costs effectively for a product or service, managers must eliminate the activities that do not add value to the product or service. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. 12) Variable overhead costs are, by definition, a lump sum of costs that remain unchanged in total for a given period despite changes in the level of total activity or volume related to those overhead costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. Write your answer in the space provided or on a separate sheet of paper. 13) Wollongong Equipment uses a flexible budget for its indirect manufacturing costs. For 2018, the company anticipated that it would produce 18 000 units with 3500 machine-hours and 7200 employee days. The expected costs and cost drivers are:
Product handling Inspection Utilities Maintenance Supplies
Fixed $30 000 8000 400 1000
Variable $0.40 8.00 4.00 0.20 5.00
Cost driver per unit per 100 unit batch per 100 unit batch per machine-hour per employee day
During the year, the company processed 20 000 units, worked 7500 employee days, and had 4000 machine-hours. The actual costs for 2018 were:
Product handling Inspection Utilities Maintenance Supplies
Actual costs $36 000 9000 1600 1200 37 500
Required: a. Prepare the static budget using the overhead items above and then calculate the static-budget variances. b. Prepare the flexible budget using the overhead items above and then calculate the flexible-budget variances.
Answer: a.
Product handling Inspection Utilities Maintenance Supplies Total b.
Product handling Inspection Utilities Maintenance Supplies
Wollongong Equipment Overhead Static Budget with Variances 2018
Actual $36 000 9000 1600 1200 37 500 $85 300
Static Budget $37 200 9440 1120 1700 36 000 $85 460
Variances $1200 F 440 F 480 U 500 F 1500 U $160 F
Wollongong Equipment Overhead Flexible Budget with Variances 2018
Actual $36 000 9000 1600 1200 37 500
Flexible Budget $38 000 9600 1200 1800 37 500
Variances $2000 600 400 600 0
F F U F
Total $85 300 $88 100 $2800 F AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Planning of variable and fixed overhead costs Learning Objective: 13.1 Explain the similarities and differences in planning variable overhead costs and fixed overhead costs. Choose the one alternative that best completes the statement or answers the question. 14) A cost-allocation base links an indirect cost or group of costs to a cost object. A) indirect B) direct C) overhead D) direct labour Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 15) For calculating the costs of products and services, a standard costing system: A) does not have to keep track of actual costs. B) uses standard costs to determine the cost of products. C) only requires a simple recording system. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 16) The variable overhead flexible-budget variance measures the difference between: A) actual variable overhead costs and the flexible budget for variable overhead costs. B) actual variable overhead costs and the static budget for variable overhead costs. C) the static budget for variable overhead costs and the flexible budget for variable overhead costs. D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 17) A $5000 unfavourable flexible-budget variance indicates that: A) the standard variable manufacturing overhead exceeded the flexible-budget amount by $5000. B) the actual variable manufacturing overhead exceeded the flexible-budget amount by $5000. C) the flexible-budget amount exceeded actual variable manufacturing overhead by $5000. D) the flexible-budget amount exceeded standard variable manufacturing overhead by $5000. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 18) The term cost-allocation base can be used interchangeably with rate when dealing with indirect costs. A) cost-driver B) activity C) allocation D) target Answer: A Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. Answer the following questions using the information below: Alice Springs Corporation manufactures industrial-sized water coolers 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 20 000 units
20 000 units 6000 hours $161 250
Actual output units produced Actual machine-hours used
24 000 units 7200 hours
Actual variable manufacturing overhead costs
$242 000
19) What is the budgeted variable overhead cost rate per output unit? A) $8.06 B) $11.00 C) $48.40 D) $32.25 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 20) What is the flexible-budget amount for variable manufacturing overhead? A) $165 000 B) $193 500 C) $242 000 D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 21) What is the flexible-budget variance for variable manufacturing overhead? A) $5500 favourable B) $5500 unfavourable C) $4300 favourable D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 22) Once standards have been set, the costs of using using actual costing or normal costing.
costing are low relative to the costs of
A) activity B) inventory C) standard D) budgeted Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. Answer the following questions using the information below: Chappell Brothers Corporation manufactures promotional cricket hoodies 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 25 000 units
25 000 units 30 000 hours $360 000
Actual output units produced Actual machine-hours used Actual variable manufacturing overhead costs
20 000 units 28 000 hours $342 000
23) What is the budgeted variable overhead cost rate per output unit? A) $12.00 B) $12.21 C) $14.40 D) $19.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 24) What is the flexible-budget amount for variable manufacturing overhead? A) $288 000 B) $342 000 C) $380 000
D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 25) What is the flexible-budget variance for variable manufacturing overhead? A) zero B) $54 000 unfavourable C) $54 000 favourable D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 26) Variable-manufacturing overhead costs were for actual output. A) lower than expected B) higher than expected C) the same as expected D) indeterminable Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. Answer the following questions using the information below: Fearless Frank's Fertiliser Farm produces fertiliser and distributes the product by using his tanker trucks. Frank's 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 kilos of fertiliser
450 truckloads 350 hours 12 000 000 kilos
Budgeted variable manufacturing overhead costs for 450 loads Actual output units produced and delivered Actual fleet hours Actual kilos of fertiliser produced and delivered Actual variable manufacturing overhead costs
$50 000 470 truckloads 327 hours 12 600 000 kilos $52 250
27) What is the budgeted variable overhead cost rate per output unit? A) $120.00 B) $111.11 C) $175.00 D) $166.67 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 28) What is the flexible-budget amount for variable manufacturing overhead? A) $52 250 B) $52 222 C) $50 000 D) $40 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 29) What is the flexible-budget variance for variable manufacturing overhead? A) $27.78 favourable B) $27.78 unfavourable C) zero D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Standard costing at Webb Ltd
Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 30) Variable-manufacturing overhead costs were for actual output. A) higher than expected B) lower than expected C) the same as expected D) indeterminable Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 31) Fixed costs are usually included in budgets, but they remain the same total amount within the relevant range of activity regardless of the output level chosen to ‘flex’ the variable costs and revenues. A) static B) activity C) flexible D) monthly Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 32) The budget period for fixed overhead costs is typically months to help smooth out seasonal effects. A) 6 B) 3 C) 24 D) 12 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates.
Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 33) Fixed costs are usually included in flexible budgets, but they remain the same total amount within the relevant range of activity regardless of the output level chosen to ‘flex’ the variable costs and revenues. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 34) A ‘cost-allocation base’ links an indirect cost or group of indirect costs to a cost object; the term can be used interchangeably with ‘cost-driver rate’ when dealing with indirect costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 35) Managers can reduce fixed overhead costs by, say, selling equipment or laying off employees. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 36) In the long run, the amount of labour-hours used is the only cost driver of fixed overhead costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 37) As with variable overhead costs, the budget period for fixed overhead costs is typically three months to help smooth out seasonal effects. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Standard costing at Webb Ltd Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. Choose the one alternative that best completes the statement or answers the question. 38) Which of the following is NOT a step in developing budgeted variable overhead rates? A) Selecting the cost-allocation bases to use B) Estimating the budgeted denominator level based on expected utilisation of available capacity C) Identifying the variable overhead costs associated with each cost-allocation base D) Choosing the period to be used for the budget Answer: B Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Developing budgeted variable overhead cost rates Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 39) Managers can reduce costs by, say, selling equipment or laying off employees. A) variable overhead B) production C) fixed overhead D) head office Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Developing budgeted fixed overhead rates Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates. 40) Which of the following costs do not automatically increase or decrease with the level of activity within the relevant range? A) Variable B) Fixed C) Direct materials D) Direct labour Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Developing budgeted fixed overhead rates Learning Objective: 13.2 Develop budgeted variable overhead cost rates and budgeted fixed overhead cost
rates. Choose the one alternative that best completes the statement or answers the question. 41) What may the variable overhead flexible-budget variance be further subdivided into? A) Static-budget variance and sales-volume variance B) Spending variance and the efficiency variance C) Sales-volume variance and the spending variance D) Price variance and the efficiency variance Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 42) When machine-hours are used as an overhead cost-allocation base, the MOST likely cause of a favourable variable overhead spending variance is: A) the production scheduler efficiently scheduled jobs. B) a decline in the cost of energy. C) strengthened demand for the product. D) excessive machine breakdowns. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 43) When machine-hours are used as an overhead cost-allocation base and the unexpected purchase of a new machine results in fewer expenditures for machine maintenance, the MOST likely result would be to report a(n): A) unfavourable variable overhead efficiency variance. B) unfavourable production-volume variance. C) favourable variable overhead spending variance. D) favourable fixed overhead flexible-budget variance. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead
efficiency variance and the variable overhead spending variance. Answer the following questions using the information below: Harvey Corporation manufactured 1500 chairs during June. The following variable overhead data pertain to June: Budgeted variable overhead cost per unit Actual variable manufacturing overhead cost Flexible-budget amount for variable manufacturing overhead Variable manufacturing overhead efficiency variance
$12.00 $20 800 $18 000 $360 unfavourable
44) What is the variable overhead flexible-budget variance? A) $2800 unfavourable B) $2800 favourable C) $1560 favourable D) $360 unfavourable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 45) What is the variable overhead spending variance? A) $1560 favourable B) $840 unfavourable C) $2440 unfavourable D) $3160 favourable Answer: C Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. Answer the following questions using the information below: Patel Corporation manufactured 1000 coolers during October. The following variable overhead data pertain to October: Budgeted variable overhead cost per unit
$9.00
Actual variable manufacturing overhead cost Flexible-budget amount for variable manufacturing overhead Variable manufacturing overhead efficiency variance
$8400 $9000 $180 unfavourable
46) What is the variable overhead flexible-budget variance? A) $600 favourable B) $600 unfavourable C) $780 favourable D) $420 unfavourable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 47) What is the variable overhead spending variance? A) $420 unfavourable B) $600 unfavourable C) $600 favourable D) $780 favourable Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. Answer the following questions using the information below: PlasticsRus Pty Ltd manufactured 100 000 buckets during February. The 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 100 000 units 9800 hours $5.25
48) What is the actual variable overhead cost? A) $49 000 B) $50 000
Budgeted 100 000 units 10 000 hours $5.00
C) $51 450 D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 49) What is the flexible-budget amount? A) $49 000 B) $50 000 C) $51 450 D) None of these answers are correct. Answer: B Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 50) What is the variable overhead spending variance? A) $1000 favourable B) $1450 unfavourable C) $2450 unfavourable D) None of these answers are correct. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 51) What is the variable overhead efficiency variance? A) $1000 favourable B) $1450 unfavourable C) $2450 unfavourable D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice
Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. Answer the following questions using the information below: Wagga Wagga Corporation manufactured 30 000 eskies during September. The overhead cost-allocation base is $12.50 per machine-hour. The following variable overhead data pertain to September:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 30 000 units 15 000 hours $12.00
Budgeted 24 000 units 10 800 hours $12.50
52) What is the actual variable overhead cost? A) $121 500 B) $151 875 C) $180 000 D) $168 750 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 53) What is the flexible-budget amount? A) $121 500 B) $151 875 C) $180 000 D) $168 750 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 54) What is the variable overhead spending variance? A) $7500 favourable
B) $13 125 unfavourable C) $16 875 unfavourable D) $30 375 unfavourable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 55) What is the variable overhead efficiency variance? A) $13 125 unfavourable B) $18 750 unfavourable C) $30 375 unfavourable D) $7500 favourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. Answer the following questions using the information below: Hobart Corporation manufactured 20 000 heaters during November. The overhead cost-allocation base is $15.75 per machine-hour. The following variable overhead data pertain to November:
Production Machine-hours Variable overhead cost per machine-hour:
Actual 20 000 units 7875 hours $15.50
Budgeted 22 000 units 9000 hours $15.75
56) What is the actual variable overhead cost? A) $122 063 B) $124 031 C) $125 000 D) $139 500 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances
Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 57) What is the flexible-budget amount? A) $124 031.30 B) $128 863.64 C) $139 500.00 D) $124 000.00 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 58) What is the variable overhead spending variance? A) $1968.75 unfavourable B) $2250 unfavourable C) $2250 favourable D) $1968.75 favourable Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 59) What is the variable overhead efficiency variance? A) $4832.39 favourable B) $4832.39 unfavourable C) $2250 unfavourable D) $2250 favourable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 60) What is the total variable overhead variance?
A) $1968.75 favourable B) $6801.14 unfavourable C) $6801.14 favourable D) $1968.75 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 61) Tucker Company uses a standard cost system. In March, $133 000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $150 000. Which of the following variable manufacturing overhead entries would have been recorded for March? A) Variable Manufacturing Overhead Control 133 000 Accounts Payable Control and other accounts 133 000 B) Variable Manufacturing Overhead Allocated 150 000 Accounts Payable and other accounts 150 000 C) Work-in-Process Control 133 000 Accounts Payable Control and other accounts 133 000 D) Accounts Payable Control and other accounts 150 000 Work-in-Process Control 150 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 62) Alvarado Company made the following journal entry: Variable Manufacturing Overhead Allocated 100 000 Variable Manufacturing Overhead Efficiency Variance 30 000 Variable Manufacturing Overhead Control 125 000 Variable Manufacturing Overhead Spending Variance 5000 A) Work-in-Process is currently overstated. B) This entry may be recorded yearly to provide timely feedback to managers. C) Alvarado over-allocated variable manufacturing overhead. D) A $5000 favourable spending variance was recorded. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 63) Jovana Partners uses a standard cost system. In March, $117 000 of variable manufacturing overhead costs were incurred and the flexible-budget amount for the month was $120 000. Which of the following variable manufacturing overhead entries would have been recorded for March? A) Accounts Payable Control and other accounts 120 000 Work-in-Process Control 120 000 B) Accounts Payable Control and other accounts 117 000 Variable Manufacturing Overhead Control 117 000 C) Work-in-Process Control 117 000 Accounts Payable Control and other accounts 117 000 D) Work-in-Process Control 120 000 Variable Manufacturing Overhead Allocated 120 000 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 64) Tate Company makes the following journal entry: Variable Manufacturing Overhead Allocated 150 000 Variable Manufacturing Overhead Efficiency Variance 5000 Variable Manufacturing Overhead Control 125 000 Variable Manufacturing Overhead Spending Variance 30 000 A) A $25 000 favourable flexible-budget variance was recorded. B) Tate under-allocated variable manufacturing overhead. C) A $30 000 unfavourable spending variance was recorded. D) Work-in-Process is currently understated. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 65) When machine-hours are used as a cost-allocation base, the item MOST likely to contribute to a
favourable variable overhead efficiency variance is: A) excessive machine breakdowns. B) strengthened demand for the product. C) the production scheduler's impressive scheduling of machines. D) a decline in the cost of energy. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 66) The budget period for variable-overhead costs is typically less than three months. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 67) The variable overhead flexible-budget variance measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 68) The variable overhead efficiency variance is computed in a different way than the efficiency variance for direct-cost items. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 69) The variable overhead flexible-budget variance measures the difference between standard variable
overhead costs and flexible-budget variable overhead costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 70) A favourable variable overhead spending variance is not always desirable. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 71) The variable overhead efficiency variance can be interpreted the same way as the efficiency variance for direct-cost items. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 72) An unfavourable variable overhead efficiency variance indicates that variable overhead costs were wasted and inefficiently used. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 73) Causes of a favourable variable overhead efficiency variance might include using lower-skilled workers than expected. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Variable overhead cost variances
Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 74) If the production planners set the budgeted machine hours standards too tight, one could anticipate there would be an unfavourable variable overhead efficiency variance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 75) The efficiency variance for variable overhead cost is based on the efficiency with which the cost-allocation base is used. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. Write your answer in the space provided or on a separate sheet of paper. 76) Swandow Pillow Company manufactures pillows. The 2018 operating budget is based on production of 40 000 pillows with 0.5 machine-hour allowed per pillow. Variable manufacturing overhead is anticipated to be $220 000. Actual production for 2018 was 36 000 pillows using 19 000 machine-hours. Actual variable costs were $10 per machine-hour. Required: Calculate the variable overhead spending and efficiency variances.
Answer: Budgeted variable overhead per hour = $220 000/(40 000 × 0.5) machine-hours = $11 Spending variance = ($11 - $10) × 19 000 = $19 000 favourable Efficiency variance = [19 000 - (40 000 × 0.5)] × $11 = $11 000 unfavourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Variable overhead cost variances
Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 77) Leongatha Rustic Letterboxes Company manufactures rustic letterboxes. The 2018 operating budget is based on the production of 10 000 rustic letterboxes with 1.5 machine-hours allowed per weathervane. Variable manufacturing overhead is anticipated to be $300 000. Actual production for 2018 was 11 000 rustic letterboxes using 12 100 machine-hours. Actual variable costs were $18.50 per machine-hour. Required: Calculate the variable overhead spending and the efficiency variances. Answer: Budgeted variable overhead per hour = $300 000/(10 000 × 1.5) machine-hours = $20 Spending variance = ($20 - $18.50) × 12 100 = $18 150 favourable Efficiency variance = [12 100 - (11 000 × 1.5)] × $20 = $88 000 unfavourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 78) Explain the meanings 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 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.
AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 79) Why is a favourable variable overhead spending variance not always 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. If a favourable 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead efficiency variance and the variable overhead spending variance. 80) Can the variable overhead efficiency variance be: a. COMPUTED the same way as the efficiency variance for direct-cost items? b. INTERPRETED the same way as the efficiency variance for direct-cost items? Explain.
Answer: a. Yes, the variable overhead efficiency variance can be computed the same way as the efficiency variance for direct-cost items. b. No, the interpretations are different. The variable overhead efficiency variance focuses on the quantity of allocation-base used, while the efficiency variance for direct-cost items focuses on the quantity of materials and labour-hours used. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Variable overhead cost variances Learning Objective: 13.3 Calculate the variable overhead flexible-budget variance, the variable overhead
efficiency variance and the variable overhead spending variance. Choose the one alternative that best completes the statement or answers the question. 81) Which of the following is TRUE about variable overhead costs? A) Variable overhead costs never have any unused capacity. B) Variable overhead costs allocated are always the same as the flexible-budget amount. C) Variable overhead costs have no production-volume variance. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 82) Which of the following is TRUE about fixed overhead cost? A) Fixed overhead cost should be unitised for planning purposes. B) Fixed overhead costs are unaffected by the degree of operating efficiency in a given budget period. C) Fixed overhead costs never have any unused capacity. D) Both A and B are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 83) Generally Accepted Accounting Principles require that unitised fixed manufacturing costs be used for: A) pricing decisions. B) external reporting. C) costing decisions. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 84) John's Football Manufacturing Company reported:
Actual fixed overhead Fixed manufacturing overhead spending variance Fixed manufacturing production-volume variance
$800 000 $20 000 favourable $30 000 unfavourable
To isolate these variances at the end of the accounting period, John would debit Fixed Manufacturing Overhead Allocated for: A) $780 000 B) $790 000 C) $800 000 D) $810 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 85) Brandon's Basketball Manufacturing Company reported: Actual fixed overhead $1 000 000 Fixed manufacturing overhead spending variance $60 000 unfavourable Fixed manufacturing production-volume variance $40 000 unfavourable To isolate these variances at the end of the accounting period, Brandon would: A) debit Fixed Manufacturing Overhead Spending Variance for $60 000. B) credit Fixed Manufacturing Control Allocated for $900 000. C) credit Fixed Manufacturing Production-Volume Variance for $40 000. D) debit Fixed Manufacturing Overhead Allocated for $1 000 000. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 86) Jeremy's Golfball Manufacturing Company reported: Actual fixed overhead $500 000 Fixed manufacturing overhead spending variance $30 000 favourable Fixed manufacturing production-volume variance $20 000 unfavourable To isolate these variances at the end of the accounting period, Jeremy would debit Fixed Manufacturing Overhead Allocated for:
A) $480 000 B) $490 000 C) $500 000 D) $510 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 87) Kristin's Basketball Manufacturing Company reported: Actual fixed overhead Fixed manufacturing overhead spending variance Fixed manufacturing production-volume variance
$800 000 $60 000 favourable $40 000 favourable
To isolate these variances at the end of the accounting period, Kristin would debit: A) Fixed Manufacturing Overhead Allocated for $900 000. B) Fixed Manufacturing Production-Volume Variance for $40 000. C) Fixed Manufacturing Overhead Spending Variance for $60 000. D) All of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 88) The flexible-budget amount for a fixed-cost item is also the amount included in the static budget prepared at the start of the period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. Write your answer in the space provided or on a separate sheet of paper. 89) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 90) Lungren has budgeted construction overhead for August of $260 000 for variable costs and $435 000 for fixed costs. Actual costs for the month totalled $275 000 for variable and $445 000 for fixed. Allocated fixed overhead totalled $440 000. The company tracks each item in an overhead control account before allocations are made to individual jobs. Spending variances for August were $10 000 unfavourable for variable and $10 000 unfavourable for fixed. The production-volume overhead variance was $5000 favourable. Required: a. Make journal entries for the actual costs incurred. b. Make journal entries to record the variances for August. Answer: a. Variable Overhead Control Accounts Payable and other accounts To record actual variable construction overhead Fixed Overhead Control Accumulated Depreciation, etc. To record actual fixed construction overhead
445 000
b. Variable Overhead Allocated Variable Overhead Spending Variance Variable Overhead Efficiency Variance* Variable Overhead Control To record variances for the period
260 000 10 000 5000
445 000
275 000
*Arrived at this number by $275 000 - $260 000 - $10 000 Fixed Overhead Allocated Fixed Overhead Spending Variance
275 000 275 000
440 000 10 000
Fixed Overhead Production-Volume Variance 5000 Fixed Overhead Control 445 000 To record variances for the period AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Fixed overhead cost variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 91) The production-volume variance arises only for fixed costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: basic Topic: Production-volume variance Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. 92) At the end of the financial year, the variance accounts are written off to cost of goods sold if immaterial in amount. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Journal entries for fixed overhead costs and variances Learning Objective: 13.4 Calculate the fixed overhead flexible-budget variance, the fixed overhead spending variance and the fixed overhead production volume variance. Choose the one alternative that best completes the statement or answers the question. 93) 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) favourable variable overhead efficiency variance. B) unfavourable fixed overhead flexible-budget variance. C) unfavourable variable overhead spending variance. D) favourable production-volume variance. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period.
94) What can the fixed overhead cost variance be further subdivided into? A) Flexible-budget variance and the production-volume variance B) Price variance and the efficiency variance C) Spending variance and flexible-budget variance D) Production-volume variance and the efficiency variance Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 95) The amount reported for fixed overhead on the static budget is also reported: A) on the flexible budget. B) as actual fixed costs. C) as allocated fixed overhead. D) Both B and C are correct. Answer: A Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 96) What does an unfavourable fixed overhead spending variance indicate? A) The fixed overhead cost-allocation base was not used efficiently. B) There was more excess capacity than planned. C) The price of fixed overhead items cost more than budgeted. D) The denominator level was more than planned. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 97) What might a favourable fixed overhead spending variance indicate? A) More capacity was used than planned. B) The denominator level was less than planned.
C) A plant expansion did not proceed as originally planned. D) The fixed overhead cost-allocation base was not used efficiently. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 98) For fixed manufacturing overhead, there is no: A) efficiency variance. B) production-volume variance. C) spending variance. D) flexible-budget variance. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. Answer the following questions using the information below: Healesville Animal Products manufactured 32 000 horse grooming kits during 2018. The fixed-overhead cost-allocation rate is $20.00 per machine-hour. The following fixed overhead data pertain to 2018:
Production Machine-hours Fixed overhead costs for 2018
Actual 32 000 units 6100 hours $123 000
Static Budget 30 000 units 6000 hours $120 000
99) What is the flexible-budget amount? A) $120 000 B) $122 000 C) $123 000 D) $125 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead
incurred with the overhead amounts allocated during the period. 100) What is the amount of fixed overhead allocated to production? A) $120 000 B) $122 000 C) $123 000 D) $128 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 101) What is the fixed overhead spending variance? A) $1000 unfavourable B) $5000 favourable C) $3000 unfavourable D) $2000 favourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 102) What is the fixed overhead production-volume variance? A) $3000 unfavourable B) $1000 unfavourable C) $2000 favourable D) $8000 favourable Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. Answer the following questions using the information below: Melbourne Corporation manufactured 57 000 door jambs during September. The fixed-overhead
cost-allocation rate is $50.00 per machine-hour. The following fixed overhead data pertain to September:
Production Machine-hours Fixed overhead costs for September
Actual 57 000 units 985 hours $54 300
Static Budget 60 000 units 1200 hours $60 000
103) What is the flexible-budget amount? A) $54 300 B) $51 750 C) $60 000 D) $100 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 104) What is the amount of fixed overhead allocated to production? A) $57 000 B) $54 300 C) $60 000 D) $100 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 105) What is the fixed overhead spending variance? A) $4100 unfavourable B) $5750 favourable C) $5700 favourable D) $5750 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances
Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. Answer the following questions using the information below: Norman & Appleby Corporation manufactured 15 000 golf bags during March. The fixed overhead cost-allocation rate is $20.00 per machine-hour. The following fixed overhead data pertain to March:
Production Machine-hours Fixed overhead cost for March
Actual 15 000 units 7650 hours $122 000
Static Budget 18 000 units 9000 hours $120 000
106) What is the flexible-budget amount? A) $100 000 B) $102 000 C) $120 000 D) $122 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 107) What is the amount of fixed overhead allocated to production? A) $150 000 B) $153 000 C) $120 000 D) $122 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 108) What is the fixed overhead production-volume variance? A) $27 000 favourable B) $33 000 unfavourable C) $30 000 unfavourable
D) $3000 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 109) Fixed overhead is: A) under-allocated by $3000. B) over-allocated by $3000. C) over-allocated by $28 000. D) under-allocated by $28 000. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 110) costs never have any unused capacity. A) Fixed B) Direct materials C) Direct labour D) Variable Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 111) Detailed 4-variance analyses are most common in A) small, simple B) large, complex C) manufacturing D) small, complex Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate
businesses.
Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 112) An unfavourable production-volume variance of $40 000 indicates that the company has: A) an economic loss of $40 000 from selling fewer products than planned. B) over-allocated $40 000 of fixed manufacturing overhead costs. C) unused fixed manufacturing overhead capacity. D) $40 000 more capacity than needed. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. Answer the following questions using the information below: ProductionVariances Spending Efficiency Variable manufacturing overhead $4500 F $15 000 U Fixed manufacturing overhead $10 000 U (A)
Volume (B) $40 000 U
113) Above is a: A) 4-variance analysis B) 3-variance analysis C) 2-variance analysis D) 1-variance analysis Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 114) In the above chart, the amounts for (A) and (B), respectively, are: A) Zero; $55 000 U B) Zero; Zero C) $10 500 U; $55 000 U D) $10 500 U; Zero Answer: B
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 115) In a 3-variance analysis, the spending variance should be: A) $4500 F. B) $10 500 U. C) $5500 U. D) $10 000 U. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 116) In a 2-variance analysis, the flexible-budget variance and the production-volume variance should be , respectively. A) $10 500 U; $50 000 U B) $20 500 U; $40 000 U C) $5500 U; $55 000 U D) $60 500 U; Zero Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 117) In a 1-variance analysis the total overhead variance should be: A) $20 500 U. B) $60 500 U. C) $121 000 U. D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Integrated analysis of overhead cost variances
Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 118) Fixed overhead has no efficiency variance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 119) Detailed 4-variance analyses are most common in large, complex businesses. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 120) Managers of small businesses understand their operations better based on personal observations and non-financial measures. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 121) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 122) Caution is appropriate before interpreting the production-volume variance as a measure of the economic cost of unused capacity.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 123) Fixed costs are unaffected by changes in the output level within the relevant range. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 124) Because there is no efficiency variance, the fixed overhead spending variance is the same amount as the fixed overhead flexible-budget variance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 125) A favourable production-volume variance arises when manufacturing capacity planned for is not used. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 126) The fixed overhead flexible-budget variance is the difference between actual fixed overhead costs and fixed overhead costs in the flexible budget. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead
incurred with the overhead amounts allocated during the period. 127) An unfavourable production-volume variance always infers that management made a bad planning decision regarding the plant capacity. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 128) Favourable overhead variances are always recorded with credits in a standard cost system. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 129) Under activity-based costing, the flexible-budget amount equals the static-budget amount for fixed overhead costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 130) Managers should use unitised fixed manufacturing overhead costs for planning and control. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 131) For purposes of allocating fixed overhead costs to products, managers may view the fixed overhead costs as if they had a variable-cost behaviour pattern. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 132) A favourable fixed overhead flexible-budget variance indicates that actual fixed costs exceeded the lump-sum amount budgeted. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. Write your answer in the space provided or on a separate sheet of paper. 133) Windup Time Company makes clocks. The fixed overhead costs for 2018 total $720 000. The company uses direct labour-hours for fixed overhead allocation and anticipates 240 000 hours during the year for 480 000 units. An equal number of units are budgeted for each month. During June, 42 000 clocks were produced and $63 000 was spent on fixed overhead. Required: a. Determine the fixed overhead rate for 2018 based on units of input. b. Determine the fixed overhead static-budget variance for June. c. Determine the production-volume overhead variance for June.
Answer: a. Fixed overhead rate = $720 000/240 000 = $3.00 per hour b.
Fixed overhead static budget variance = $63 000 - ($720 000/12) = $3000 unfavourable
c.
Budgeted fixed overhead rate per output unit = $720 000/480 000 = $1.50
Denominator level in output units = (40 000 - 42 000) × $1.50 = $3000 favourable AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period.
134) Accurate-time Company makes watches. The fixed overhead costs for 2018 total $444 000. The company uses direct labour-hours for fixed overhead allocation and anticipates 14 800 hours during the year for 780 000 units. An equal number of units is budgeted for each month. During October, 58 000 watches were produced and $28 000 was spent on fixed overhead. Required: a. Determine the fixed overhead rate for 2018 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 = $444 000/14 800 = $30.00 per hour b.
Fixed overhead static budget variance = $28 000 - ($444 000/12) = $9000 favourable
c.
Budgeted fixed overhead rate per output unit = $444 000/780 000 = $0.57
Denominator level in output units = (65 000 - 58 000) × $0.57 = $3990 unfavourable AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 135) McGrath Company manufactured 1000 units during April with a total overhead budget of $12 400. However, while manufacturing the 1000 units, the microcomputer that contained the month's cost information broke down. With the computer out of action, the accountant has been unable to complete the variance analysis report. The information missing from the report is lettered in the following set of data: Variable overhead: Standard cost per unit: 0.4 labour hour at $4 per hour Actual costs: $2100 for 376 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: $500 favourable Required: Compute the missing elements in the report represented by the lettered items.
Answer: a. 1000 × 0.40 × $4 = $1600 b. $2100 - $1600 = $500 unfavourable c. $2100 - (376 × $4) = $596 unfavourable d. $1504 - $1600 = $96 favourable e. $12 400 - $1600 = $10 800 f. $10 800 - $500 favourable = $10 300 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 136) Different management levels in Echuca Pty Ltd require varying degrees of managerial accounting information. Because of the need to comply with the managers' requests, four different variances for manufacturing overhead are computed each month. The information for the September overhead expenditures is as follows: Budgeted output units Budgeted fixed manufacturing overhead Budgeted variable manufacturing overhead Budgeted direct manufacturing labour hours Fixed manufacturing costs incurred Direct manufacturing labour hours used Variable manufacturing costs incurred Actual units manufactured
6400 units $40 000 $10 per direct labour hour 1 hour per unit $52 000 7200 $71 200 6800
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 CEO.
Answer: a. 4-variance analysis: Variable overhead spending variance = $71 200 - (7200 × $10) = $800 favourable Variable overhead efficiency variance = $10 × (7200 - 6800*) = $4000 unfavourable — *6800 units × 1 hour = 6800 hours Fixed overhead spending variance = $52 000 - $40 000 = $12 000 unfavourable Fixed overhead production-volume variance = $40 000 - (6800 × 1 × $6.25*) = $2500 favourable *$40 000/(6400 units × 1 hour) = $6.25 b.
3-variance analysis: Spending variance = $800 favourable + $12 000 unfavourable = $11 200 unfavourable Efficiency variance = $4000 unfavourable Production-volume variance = $2500 favourable
c.
2-variance analysis: Flexible-budget variance = $800 F + $4000 U + $12 000 U = $15 200 unfavourable Production-volume variance = $2500 favourable
d. 1-variance analysis: Fixed overhead Variable overhead Flexible-budget variance
Actual
Flexible Budget
$52 000 71 200
$42 500 * 68 000 **
Variances $9500 U 3200 U $12 700 U
*$6.25 × 6800 × 1 = $42 500 **6800 × 1 × $10 = $68 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 137) Explain what each of the variances presented under the level 4-, 3-, 2-, and 1-variance analysis methods shows about overhead costs.
Answer: Under the 4-VARIANCE ANALYSIS, there is a spending variance shown for the variable manufacturing
overhead, a spending variance for the fixed overhead component, an efficiency variance for the variable overhead, and a production-volume variance for the fixed overhead. When the firm uses a 3-VARIANCE approach, the fixed and variable spending variance is combined into a single variance, while the variable overhead efficiency is still shown separately and the fixed overhead production-volume variance is singled out. In the 2-VARIANCE method, the fixed and variable spending variances are combined into one amount along with the variable efficiency, and then the fixed production-volume is shown as a separate variance. The 1-VARIANCE method shows the difference between the actual costs incurred and the flexible-budget amount for the output level achieved. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 138) 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. Difficulty: Complex AACSB: Able to communicate effectively orally and in writing Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 139) How is a budgeted fixed overhead cost rate calculated?
Answer: The budgeted fixed overhead cost rate is calculated by dividing the budgeted fixed overhead costs by the denominator level of the cost-allocation base. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 140) Kim Hughes 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 84 000 units a month, although it generally produces only 74 000 units. However, in any given month the actual production is probably something other than 74 000. Required: a. Does the production-volume overhead variance measure the difference between the 84 000 and 74 000, or the difference between the 74 000 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 74 000 and the actual production level for the period. The difference between the 84 000 and the 74 000 is the unused capacity that was planned for the period. The difference between the 74 000 and the actual level was not planned. b. When actual outputs are less than the denominator level, the production-volume variance is unfavourable. This is opposite the label given other variances that have a favourable label when costs are less than the budgeted amount; therefore, caution is needed. The production-volume variance is favourable when actual production exceeds what was planned for the period. This actually provides for a cost per unit amount that was less than budgeted using the planned denominator. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 141) Explain the meaning of a favourable production-volume variance.
Answer: The production-volume variance is favourable when actual production exceeds that which is planned for the period. When this happens, it results in a fixed cost per unit that is less than the budgeted amount used in the planned production. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead
incurred with the overhead amounts allocated during the period. 142) 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 profits. 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 profit based on the choice of the denominator level. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. 143) Explain two concerns when interpreting the production-volume variance as a measure of the economic cost of unused capacity.
Answer: The first concern would be the fact that management might have maintained some extra capacity to meet uncertain demand surges that are important to satisfy. If these surges are not occurring in a given year, an unfavourable production-volume variance might occur. The second concern would be to note that this variance only focuses on fixed overhead costs and ignores the possibility that price decreases might have been necessary to spur the extra demand to make use of any idle capacity. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Integrated analysis of overhead cost variances Learning Objective: 13.5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period. Choose the one alternative that best completes the statement or answers the question. 144) The production-volume variance is a component of the variance. A) overhead B) static budget
C) sales-volume D) sales-price Answer: C Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Production-volume variance and sales-volume variance Learning Objective: 13.6 Explain the relationship between sales-volume variance and production-volume variance. 145) In standard costing, fixed overhead cost is treated as if it is a(n) cost. A) indirect B) direct C) variable D) denominator Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Production-volume variance and sales-volume variance Learning Objective: 13.6 Explain the relationship between sales-volume variance and production-volume variance. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 146) The production-volume variance is a component of the sales-price variance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Production-volume variance and sales-volume variance Learning Objective: 13.6 Explain the relationship between sales-volume variance and production-volume variance. 147) A crucial point to keep in mind is that in standard costing, fixed overhead cost is treated as if it is a variable cost. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Production-volume variance and sales-volume variance Learning Objective: 13.6 Explain the relationship between sales-volume variance and production-volume variance. Write your answer in the space provided or on a separate sheet of paper. 148) Explain why sales-volume variance could be helpful to managers.
Answer: The sales-volume variance is comprised of the operating profit volume variance and the production-volume variance. 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Production-volume variance and sales-volume variance Learning Objective: 13.6 Explain the relationship between sales-volume variance and production-volume variance. Choose the one alternative that best completes the statement or answers the question. Answer the following questions using the information below: OzPlastic Co. produces a special line of plastic toy racing cars. OzPlastic produces the cars in batches. To manufacture a batch of the cars, OzPlastic must set up the machines and moulds. Set-up costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Set-up Department is responsible for setting up machines and moulds for different styles of car. Set-up overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of set-up-hours. The following information pertains to June 2018:
Units produced and sold Batch size (number of units per batch) Set-up-hours per batch Variable overhead cost per set-up-hour Total fixed setup overhead costs
Actual Amounts 30 000 250 5 $40 $14 400
Static-budget Amounts 22 500 225 5.25 $38 $14 000
149) Calculate the efficiency variance for variable set-up overhead costs. A) $600 favourable B) $600 unfavourable C) $3800 favourable D) $3800 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 150) Calculate the spending variance for variable set-up overhead costs. A) $3800 favourable B) $3800 unfavourable C) $1200 unfavourable D) $1200 favourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 151) Calculate the flexible-budget variance for variable set-up overhead costs. A) $1200 unfavourable B) $2600 favourable C) $2600 unfavourable D) $1200 favourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 152) Calculate the spending variance for fixed set-up overhead costs. A) $3600 unfavourable B) $400 unfavourable C) $400 favourable D) $3200 unfavourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 153) Calculate the production-volume variance for fixed set-up overhead costs. A) $400 unfavourable B) $400 favourable C) $4666.67 favourable
D) $4666.67 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. Answer the following questions using the information below: Coober Pedy Industries produces air purifiers. Coober Pedy produces the air purifiers in batches. To manufacture a batch of the purifiers, Coober Pedy must set up the machines and assembly line tooling. Set-up costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Set-up Department is responsible for setting up machines and tooling for different models of the air purifiers. Set-up overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of set-up-hours. The following information pertains to June 2018:
Units produced and sold Batch size (number of units per batch) Set-up-hours per batch Variable overhead cost per set-up-hour Total fixed set-up overhead costs
Budget Amounts 10 000 400 6 $50 $18 000
Actual Amounts 9000 375 5.5 $52 $17 750
154) Calculate the efficiency variance for variable set-up overhead costs. A) $150 favourable B) $264 unfavourable C) $114 favourable D) $264 favourable Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 155) Calculate the spending variance for variable set-up overhead costs. A) $264 favourable B) $150 favourable C) $264 unfavourable
D) $150 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 156) Calculate the flexible-budget variance for variable set-up overhead costs. A) $264 unfavourable B) $114 favourable C) $264 favourable D) $114 unfavourable Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 157) Calculate the spending variance for fixed set-up overhead costs. A) $150 unfavourable B) $150 favourable C) $250 favourable D) $250 unfavourable Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 158) Calculate the production-volume variance for fixed set-up overhead costs. A) $250 unfavourable B) $1800 unfavourable C) $250 favourable D) $1800 favourable Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing.
159) Fixed and variable cost variances can be applied to activity-based costing systems. A) seldom B) most times C) never D) always Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 160) set-up costs consist of wages paid to direct set-up labour and indirect support labour, costs of maintenance of set-up equipment, and costs of indirect materials and energy used during set-ups. A) Fixed B) Activity-based C) Overhead D) Variable Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 161) What type of systems may the basic principles and concepts for variable overhead costs and fixed overhead costs be applied to? A) ABC B) Computer C) Organisational D Financial accounting Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 162) Which of the following are costs of activities that are related to a group of units of products or services rather than to each individual unit? A) Batch-level B) Organisational-level
C) Capacity-level D) Set-up-level Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 163) Which type of costs are overhead costs of products, and consist of some costs that are variable and some that are fixed with respect to the number of set-up hours? A) Batch-level B) Capacity-level C) Individual-level D) Set-up Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 164) The basic principles and concepts for variable overhead costs and fixed overhead costs can be applied to ABC systems. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 165) An unfavourable fixed set-up overhead spending variance could be due to higher lease costs of new set-up equipment. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. 166) A favourable variable set-up overhead efficiency variance could be due to actual set-up-hours exceeding the set-up-hours planned for the units produced. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Variance analysis and activity-based costing Learning Objective: 13.7 Calculate overhead variances in activity-based costing. Write your answer in the space provided or on a separate sheet of paper. 167) Winton Corporation produces a special line of basketball hoops. Winton Corporation produces the hoops in batches. To manufacture a batch of the basketball hoops, Winton Corporation must set up the machines and moulds. Set-up costs are batch-level costs because they are associated with batches rather than individual units of products. A separate Set-up Department is responsible for setting up machines and moulds for different styles of basketball hoops. Set-up overhead costs consist of some costs that are variable and some costs that are fixed with respect to the number of set-up-hours. The following information pertains to January 2018.
Basketball hoops produced and sold Batch size (number of units per batch) Set-up-hours per batch Variable overhead cost per set-up-hour Total fixed set-up overhead costs
Static-budget Amounts 40 000 200 5 $10 $22 500
Actual Amounts 38 000 250 4 $9 $21 000
Required: a. Calculate the efficiency variance for variable set-up overhead costs. b. Calculate the spending variance for variable set-up overhead costs. c. Calculate the flexible-budget variance for variable set-up overhead costs. d. Calculate the spending variance for fixed set-up overhead costs. e. Calculate the production-volume variance for fixed set-up overhead costs.
Answer: a. ((38 000/250) × 4 × $10) - ((38 000/200) × 5 × $10) = $3420 (F) b. (38 000/250) × 4 × ($9 - $10) = $608 (F) c. $3420 (F) + $608 (F) = $4028 (F) d. $22 500 - $21 000 = $1500 (F) e. Normal set-up-hours = (40 000/200) × 5 = 1000 hours OH rate = $22 500/1000 = $22.50 per set-up-hour $22 500 - ((38 000/200) × 5 × $22.50) = $11 250 (U) AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Variance analysis and activity-based costing
Learning Objective: 13.7 Calculate overhead variances in activity-based costing. Choose the one alternative that best completes the statement or answers the question. 168) A non-financial measure of performance evaluation is: A) increased sales. B) energy used per machine-hour. C) reducing distribution costs. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Overhead variances in non-manufacturing and service settings Learning Objective: 13.8 Examine the use of overhead variances in non-manufacturing settings. 169) Variance information regarding non-manufacturing costs can be used to: A) determine the most profitable services offered by a bank. B) plan capacity in the service sector. C) control distribution costs in the retail sector. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Overhead variances in non-manufacturing and service settings Learning Objective: 13.8 Examine the use of overhead variances in non-manufacturing settings. 170) performance measures, like financial variances, can be described as signals to direct managers’ attention to problems. A) Classic B) Non-financial C) Traditional D) Activity Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Overhead variances in non-manufacturing and service settings Learning Objective: 13.8 Examine the use of overhead variances in non-manufacturing settings. 171) Both financial and of managers. A) non-financial
performance measures are used to evaluate the performance
B) historic C) estimated D) activity-based Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Overhead variances in non-manufacturing and service settings Learning Objective: 13.8 Examine the use of overhead variances in non-manufacturing settings. 172) measures evaluate the overall effect of and the trade-offs between different non-financial performance measures. A) Historic B) Activity C) Financial D) Organisational Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Overhead variances in non-manufacturing and service settings Learning Objective: 13.8 Examine the use of overhead variances in non-manufacturing settings. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 173) Companies often use variable-cost information pertaining to non-manufacturing, as well as manufacturing, costs in pricing and product mix decisions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Overhead variances in non-manufacturing and service settings Learning Objective: 13.8 Examine the use of overhead variances in non-manufacturing settings. 174) Managers consider variance analysis of all variable overhead costs when making such decisions and when managing costs. Answer: True Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Overhead variances in non-manufacturing and service settings Learning Objective: 13.8 Examine the use of overhead variances in non-manufacturing settings.
Chapter 14 Allocation of support-department costs, common costs and revenues Choose the one alternative that best completes the statement or answers the question. 1) What is the name of the method that allocates costs in each cost pool using the same rate per unit? A) Dual-rate cost-allocation method B) Reciprocal cost-allocation method C) Incremental cost-allocation method D) Single-rate cost allocation method Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 2) The dual-rate cost-allocation method classifies costs in each cost pool into a: A) direct-cost pool and a reciprocal-cost pool. B) used-capacity-cost pool and a practical-capacity-cost pool. C) budgeted-cost pool and an actual-cost pool. D) variable-cost pool and a fixed-cost pool. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 3) If costs are used as a basis for pricing, then charging user divisions for unused capacity could result in: A) chaos. B) confusion. C) the downward demand spiral. D) misallocations. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments
Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 4) When using the single-rate method, what should the fixed cost allocation be based? A) Budgeted usage B) Actual usage C) Incremental cost allocation D) Either A or B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 5) The single-rate method makes no distinction between costs. A) past and present B) direct and indirect C) fixed and variable D) labour and overhead Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 6) Benefits of the dual-rate method include: A) information that leads to outsourcing decisions that benefit the organisation as a whole B) variable costs that are transformed into fixed costs for user decision making C) avoidance of expensive analysis for categorising costs as either fixed or variable D) the low cost of implementation Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 7) When the and fixed-cost pools. A) single-rate B) piece-rate C) dual-rate
method is used, cost-allocation bases must be chosen for both the variable-cost
D) activity-rate Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. Answer the following questions using the information below: The Launceston Copy Corporation has a central copying facility. The copying facility has only two users, the Marketing Department and the Operations Department. The following data apply to the coming budget year: Budgeted costs of operating the copying facility for 200 000 to 300 000 copies: Fixed costs per year $40 000 Variable costs 3 cents (.03) per copy Budgeted long-run usage in copies per year: Marketing Department 75 000 copies Operations Department 210 000 copies Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Marketing Department was 40 000 copies and by the Operations Department was 180 000 copies. 8) If a single-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Marketing Department? A) $12 776 B) $8400 C) $7200 D) $3800 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 9) If a single-rate cost-allocation method is used, what amount of copying facility costs will be allocated to the Marketing Department? Assume actual usage is used to allocate copying costs. A) $6000 B) $8400 C) $9000 D) $6800
Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 10) If a dual-rate cost-allocation method is used, what amount of copying facility costs will be budgeted for the Operations Department? A) $35 774 B) $28 200 C) $29 945 D) $30 245 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 11) 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) $28 500 B) $29 945 C) $30 245 D) $34 874 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. Answer the following questions using the information below: The Outback Aerial Medicorp has a central materials area (CMA). The CMA 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 CMA for 10 000 to 20 000 technician hours per year: Fixed costs per year $600 000 Variable costs $100 per technician hour Budgeted long-run usage in hours per year: Large Plane Department 9000 technician hours
Small Plane Department
7000
technician hours
Budgeted amounts are used to calculate the allocation rates. Actual usage for the year by the Large Plane Department was 7500 technician hours and by the Small Plane Department was 6500 technician hours. 12) If a single-rate cost-allocation method is used, what is the allocation rate per hour used? A) $100.00 B) $137.50 C) $80.00 D) $146.67 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 13) If a dual-rate cost-allocation method is used, what amount of CMA costs will be budgeted for the Large Plane Department? A) $1 237 500 B) $1 880 000 C) $1 600 000 D) $822 500 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 14) If a single-rate cost-allocation method is used, what amount of CMA costs will be allocated to the Large Plane Department? A) $822 500 B) $763 750 C) $1 057 500 D) $1 031 250 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method.
15) If a dual-rate cost-allocation method is used, what amount of CMA costs will be allocated to the Large Plane Department? Assume budgeted usage is used to allocate fixed CMA costs and actual usage is used to allocate variable CMA costs. A) $822 500 B) $1 087 500 C) $782 500 D) $705 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 16) If a dual-rate cost-allocation method is used, what amount of CMA costs will be budgeted for the Small Plane Department? A) $705 000 B) $1 057 500 C) $763 750 D) $962 500 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 17) If a dual-rate cost-allocation method is used, what amount of CMA costs will be allocated to the Small Plane Department? Assume budgeted usage is used to allocate CMA costs and actual usage is used to allocate variable CMA costs. A) $763 750 B) $912 500 C) $822 500 D) $817 500 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. Answer the following questions using the information below: Woolloongabba Lighting operates one central plant that has two divisions, the Night Light Division and
the HalfLight Division. The following data apply to the coming budget year: Budgeted costs of operating the plant for 2000 to 3000 hours: Fixed operating costs per year $900 000 Variable operating costs $1200 per hour Budgeted long-run usage per year: Night Light Division 2000 hours HalfLight Division 500 hours Practical capacity 3000 hours Assume that practical capacity is used to calculate the allocation rates. Actual usage for the year by the Night Light Division was 1400 hours and by the HalfLight Division was 600 hours. 18) If a single-rate cost-allocation method is used, what amount of operating costs will be budgeted for the Night Light Division? A) $3 000 000 B) $2 280 000 C) $3 120 000 D) $2 820 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 19) If a single-rate cost-allocation method is used, what amount of cost will be allocated to the Night Light Division? Assume actual usage is used to allocate operating costs. A) $3 000 000 B) $2 280 000 C) $2 400 000 D) $2 100 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 20) If a dual-rate cost-allocation method is used, what amount of operating costs will be budgeted for the HalfLight Division? A) $870 000
B) $780 000 C) $750 000 D) $900 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 21) If a dual-rate cost-allocation method is used, what amount of cost will be allocated to the HalfLight Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs. A) $750 000 B) $870 000 C) $900 000 D) $780 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 22) The advantage of using practical capacity to allocate costs is that it focuses management’s attention on managing unused capacity Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 23) One benefit of the dual-rate method is the low cost to implement it. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 24) When the dual-rate method is used, cost-allocation bases must be chosen for both the variable-cost and fixed-cost pools
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 25) The single-rate cost-allocation method provides better information for decision making than the dual-rate method. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 26) A big benefit of the single-rate method is that it signals to division managers how variable costs and fixed costs behave differently. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. Write your answer in the space provided or on a separate sheet of paper. 27) The fixed costs of operating the maintenance facility of Yarra Hospital are $4 500 000 annually. Variable costs are incurred at the rate of $40 per maintenance-hour. The facility averages 40 000 maintenance-hours a year. Budgeted and actual hours per user for 2017 are as follows: Budgeted hours Actual hours Building and grounds 10 000 12 000 Operating and emergency 8000 8000 Patient care 21 000 22 000 Administration 1000 1200 Total 40 000 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? Based on budgeted rate. 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?
Answer: a. Total costs + $4 500 000 + ($40 × 40 000) = $6 100 000 Single rate = $6 100 000/40 000 mh = $152.50 per maintenance-hour Single-rate budgeted amounts: Building and grounds $152.50 × 10 000 = $1 525 000 a. Operating and emergency $152.50 × 8000= $1 220 000 b. Patient care $152.50 × 21 000 = $3 202 500 Administration $152.50 × 1000 = $152 500 b. Total costs + $4 500 000 + ($40 × 40 000) = $6 100 000 Single rate = $6 100 000/40 000 mh = $152.50 per maintenance-hour Single-rate allocated amounts: Building and grounds $152.50 × 12 000 = $1 830 000 Operating and emergency $152.50 × 8000 = $1 220 000 Patient care $152.50 × 22 000 = $3 355 000 Administration $152.50 × 1200 = $183 000 c. Dual-rate budgeted amounts: Building and grounds: Fixed ($4 500 000 × 10/40) $1 125 000 Variable ($40 × 10 000) 400 000 Total $1 525 000 Operating and emergency: Fixed ($4 500 000 × 8/40) $900 000 Variable ($40 × 8000) 320 000 Total $1 220 000 Patient care: Fixed ($4 500 000 × 21/40) $2 362 500 Variable ($40 × 21 000) 840 000 Total $3 202 500 Administration: Fixed ($4 500 000 × 1/40) $112 500
d.
Variable ($40 × 1000) 40 000 Total $152 500 Dual-rate allocated amounts: Building and grounds: Fixed ($4 500 000 × 10/40) $1 125 000 Variable ($40 × 12 000) 480 000 Total $1 605 000 Operating and emergency: Fixed ($4 500 000 × 8/40) $900 000 Variable ($40 × 8000) 320 000 Total $1 220 000 Patient care: Fixed ($4 500 000 × 21/40) $2 362 500 Variable ($40 × 22 000) 880 000 Total $3 242 500
Administration: Fixed ($4 500 000 × 1/40) $112 500 Variable ($40 × 1200) 48 000 Total $160 500 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 28) The Homebush Tennis Corporation operates one central plant that has two divisions, the Spot Light Division and the Lamp Division. The following data apply to the coming budget year: Budgeted costs of the operating the plant for 10 000 to 20 000 hours: Fixed operating costs per year $240 000 Variable operating costs $10 per hour Practical capacity20 000 hours per year Budgeted long-run usage per year: Lamp Division 800 hours × 12 months =9600 hours per year Spot Light Division 450 hours × 12 months = 5400 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 Spot Light 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 Spot Light 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 Spot Light 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 Spot Light 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 Spot Light Division? Assume budgeted usage is used to allocate fixed operating costs and actual usage is used to allocate variable operating costs.
Answer: a. Fixed costs $240 000/20 000 practical capacity hours = $12/hour Single-rate cost-allocation = $12 + $10 = $22 per hour Lamp Division 800 × $22/hour =$17 600 per month Spot Light Division 450 × $22/hour =$9900 per month b. Lamp Division 700 × $22/hour =$15 400 per month Spot Light Division 400 × $22/hour =$8800 per month c. Fixed costs $240 000/20 000 practical capacity hours = $12/hour Budgeted costs — Lamp Division (800 × $12/hour) + (800 × $10/hour) = $17 600 per month Budgeted costs — Spot Light Division (450 × $12/hour) + (450 × $10/hour) = $9900 per month d. Allocated costs for June — Lamp Division (800 × $12/hour) + (700 × $10/hour) = $16 600 per month Allocated costs for June — Spot Light Division (450 × $12/hour) + (400 × $10/hour) = $9400 per month AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 29) 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 calculated and compared to the price of the outside supplier. The price of the outside supplier was lower, so the outside bid was accepted.
Required: Explain 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. Therefore, Pitt may be spending more funds in total than if the work was still performed in-house. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. 30) South Australian Fig Company has substantial fluctuations in its production costs because of the seasonal nature of fig production. 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Allocating costs of a support department to operating departments Learning Objective: 14.1 Distinguish the single-rate method from the dual-rate method. Choose the one alternative that best completes the statement or answers the question. 31) When usage is the allocation base, user divisions know their allocated costs in advance. A) actual B) estimated C) budgeted D) targeted Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments
Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 32) When actual cost-allocations rates are used: A) managers of the supplier division are motivated to improve efficiency B) user divisions do not know allocated amounts until the end of the accounting period C) user divisions pay for costs that exceed budgeted amounts D) managers of the user divisions may be tempted to underestimate planned usage Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 33) Allocating fixed costs on the basis of long-term usage may tempt some managers to underestimate their planned usage. A) actual B) average C) projected D) budgeted Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 34) When allocations are based on usage, user divisions will not know their fixed-cost allocations until the end of the budget period. A) actual B) budgeted C) estimated D) historic Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 35) Companies commit to infrastructure costs (e.g. the fixed costs of a support department) on the basis of a planning period. A) short-term
B) projected C) long-term D) situational Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 36) What is the biggest advantage of using practical capacity to allocate costs? A) It is a value that is readily available B) It focuses management’s attention on unused capacity C) It burdens the user divisions with the costs of unused capacity D) It never causes over- or under-allocated overhead Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 37) The practical capacity method of allocating costs is: A) based on the practical capacity supplied B) based on the using departments negotiating the charges they will accept C) based on actual capacity used D) based on the budgeted capacity demanded Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 38) When budgeted cost-allocation rates are used, user-division managers face uncertainty about the allocation rates for that budget period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 39) The choice between actual usage and budgeted usage for allocating fixed costs can affect a manager’s
decisions. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 40) When budgeted cost-allocation rates are used, variations in actual usage by one division affect the costs allocated to other divisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 41) The only choices that a firm has for support department cost-allocation rates are to use either a budgeted rate or an actual rate. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 42) When actual usage is the allocation base, user divisions know their allocated costs in advance. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. Write your answer in the space provided or on a separate sheet of paper. 43) Flinders Street Drive-In is a fast-food restaurant that sells burgers and hot dogs in a 1950s environment. The fixed operating costs of the company are $5000 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: BurgersHot Dogs Sales for January Sales for February
4000 6400
2400 2400
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 $5000 × 4000/(4000 + 2400) = $3125 Hot dogs $5000 × 2400/(4000 + 2400) = $1875 February sales: Burgers Hot dogs
$5000 × 6400/(6400 + 2400) = $3636.36 $5000 × 2400/(6400 + 2400) = $1363.64
b. Even though hot dog sales remained constant for both months, the allocation of fixed operating costs decreased by more than $500. The reason is that fixed overhead costs are allocated based on actual sales. The dollar amount is fixed, and since burger sales increased, more of the fixed costs were allocated to the burgers. Another observation is that burger sales increased by more than 50% from January to February, while the fixed operating costs assigned to burgers increased by only 16%. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 44) Nisota Motors is a small motor supply outlet that sells motors to companies that make various small motorised appliances. The fixed operating costs of the company are $300 000 per year. The controlling shareholder, interested in product profitability and pricing, wants all costs allocated to the motors and wants to review the company status on a quarterly basis. The shareholder is trying to determine whether the costs should be allocated each quarter based on the 25% of the annual fixed operating costs ($75 000) or by using an annual forecast budget to allocate the costs. The following information is provided for the operations of the company: Forecast Actual Sales for First Quarter 5000 4850 Sales for Second Quarter 8000 7900 Sales for Third Quarter 8000 8125 Sales for Fourth Quarter 3000 3125
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 $75 000/4850 = $15.46 per motor Q2 $75 000/7900 = $9.49 per motor Q3 $75 000/8125 = $9.23 per motor Q4 $75 000/3125 = $24.00 per motor b. $75 000 cost is recovered each quarter. c. Quarterly Cost Recovery using Annual Forecast of Sales: Forecast Sales for the year = 5000 + 8000 + 8000 + 3000 = 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 4850 × $12.50 = $60 625 Q2 7900 × $12.50 = $98 750 Q3 8125 × $12.50 = $101 563 Q4 3125 × $12.50 = $39 062 e. The budgeted rate based on an annualised forecast of sales is more appropriate to use. The fluctuation 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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Basic Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 45) Mac Fleetwood has managed a downtown store in Sydney for several years. The firm has 10 stores in several locations around the city. In the past, senior management noticed Mac Fleetwood’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 growing rapidly, while four other stores are having operating difficulties. Required: From the information presented, what do you think is the cause of Mac Fleetwood’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 Mac Fleetwood’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 be worth considering. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. 46) Explain why organisations use budgeted rates instead of actual rates to allocate the costs of support departments to each other and to user departments and divisions.
Answer: The method of using actual rates based on costs realised 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 unfavourable 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Allocating costs of a support department to operating departments Learning Objective: 14.2 Budgeted usage, actual usage and capacity-level allocation bases. Choose the one alternative that best completes the statement or answers the question. 47) When do special cost-allocation problems arise? A) Practical capacity is used as the allocation base B) There is more than one operating department C) Support department costs exceed budgetary estimates D) Support departments provide reciprocal services to other support departments Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 48) The method requires the support departments to be ranked (sequenced) in the order in which the step-down allocation is to proceed. A) direct B) reciprocal C) incremental D) step-down Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 49) A popular sequence begins with the support department that renders the highest percentage of its total services to other support departments. A) direct B) step-down C) reciprocal D) incremental Answer: B AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 50) Which of the following is the method that allocates costs by explicitly including all the services rendered among all support departments? A) Step-down method B) Reciprocal method C) Sequential method D) Direct method Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 51) A way to implement the method is to formulate and solve linear equations. A) stand-alone B) reciprocal C) direct D) step-down Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 52) A disadvantage of the method is that it ignores information about reciprocal services provided between support departments and can therefore lead to inaccurate estimates of the cost of operating departments. A) indirect B) step-down C) reciprocal D) direct Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 53) The step-down allocation method: A) allocates complete reciprocated costs. B) recognises the total amount of services that support departments provide to each other. C) typically begins with the support department that provides the highest percentage of its total services to other support departments. D) offers key input for outsourcing decisions. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 54) 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) results in allocating more support costs to operating departments than actually incurred. D) is conceptually the most precise. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 55) Complete reciprocated costs: A) include the support department’s costs plus any interdepartmental cost-allocations. B) are used for step-down allocations. C) are less than the support department’s own costs. D) are also referred to as budgeted costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method.
Answer the following questions using the information below: Murray River Cruises Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $160 000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $40 000 are allocated based on the number of employees. The costs of operating departments A and B are $80 000 and $120 000, 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 $160 000 $40 000 NA 200 10 NA
Production Departments A
B
$80 000 $120 000 480 320 80 240
56) Using the direct method, what amount of Maintenance Department costs will be allocated to Department B? A) $96 000 B) $64 000 C) $48 000 D) $78 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 57) Using the direct method, what amount of Personnel Department costs will be allocated to Department B? A) $24 000 B) $10 000 C) $16 000 D) $30 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method.
58) Using the step-down method, what amount of Maintenance Department cost will be allocated to Department B if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up.) A) $57 334 B) $51 200 C) $64 000 D) $32 000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 59) Using the direct method, what amount of Maintenance Department costs will be allocated to Department A? A) $78 000 B) $48 000 C) $64 000 D) $96 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 60) Using the direct method, what amount of Personnel Department costs will be allocated to Department A? A) $10 000 B) $30 000 C) $24 000 D) $16 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method.
61) Using the step-down method, what amount of Maintenance Department cost will be allocated to Department A if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up.) A) $57 334 B) $42 667 C) $32 000 D) $64 000 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. Answer the following questions using the information below: Tamworth Country & Western Store has two service departments, Warehouse and Data centre. Warehouse Department costs of $200 000 are allocated on the basis of budgeted warehouse-hours. Data centre Department costs of $90 000 are allocated based on the number of computer log-on hours. The costs of operating departments Music and Books are $125 000 and $150 000, respectively. Data on budgeted warehouse-hours and number of computer log-on hours are as follows: Production Support Departments Departments Warehouse Data centre Music Books Department Department Budgeted costs $200 000 $90 000 $125 000 $150 000 Budgeted warehouse-hours NA 250 500 750 Number of computer hours 100 NA 400 500 62) Using the direct method, what amount of Warehouse Department costs will be allocated to Department Books? A) $90 000 B) $120 000 C) $70 000 D) $87 500 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method.
63) Using the direct method, what amount of Data centre Department costs will be allocated to Department Music? A) $30 000 B) $40 000 C) $90 000 D) $41 667 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 64) Using the step-down method, what amount of Data centre Department cost will be allocated to the Warehouse Department if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up.) A) $90 000 B) $7500 C) $25 000 D) $0 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 65) 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? (Round up.) A) $66 667 B) $121 667 C) $116 667 D) $60 833 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method.
66) Using the step-down method, what amount of Data centre Department cost will be allocated to Department Music if the service department with the highest percentage of interdepartmental support service is allocated first? (Round up.) A) $41 667 B) $58 671 C) $54 844 D) $33 333 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. Answer the following questions using the information below: Mark, owner of Waugh Fiberglass Fabricators 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)
$350 000 $75 000 $225 000 $125 000
Services furnished: By Plant Maintenance (budgeted labour-hours): to Data Processing 3500 to Machining 5000 to Capping 8200 By Data Processing (budgeted computer time): to Plant Maintenance 600 to Machining 3500 to Capping 600 67) Which of the following linear equations represents the complete reciprocated cost of the Data Processing Department? A) DP = $350 000 + (600/16 700) DP B) DP = $75 000 + (600/4700) PM C) DP = $75 000 + (3500/16 700) PM D) DP = $75 000 × (600/4700) + $350 000 × (3340/16 700)
Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 68) What is the complete reciprocated cost of the Plant Maintenance Department? A) $365 000 B) $369 459 C) $375 773 D) $393 750 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 69) What is the complete reciprocated cost of the Data Processing Department? A) $122 971 B) $90 000 C) $118 750 D) $152 432 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. Answer the following questions using the information below: Dawn, owner of Fraser Fabric Pty Ltd 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) Colourising C (Colourising Dept)
$150 000 $65 000 $325 000 $175 000
Services furnished: By Maintenance (budgeted labour-hours): to Personnel 500 to Weaving 3500 to Colourising 2000 By Personnel (number of employees serviced): Plant Maintenance 5 Weaving 15 Colourising 10 70) Which of the following linear equations represents the complete reciprocated cost of the Personnel Department? A) P = $65 000 B) P = (500/6000) M C) P = $65 000 + (500/6000) M D) P = $150 000 - $65 000 (500/6000) M Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 71) What is the complete reciprocated cost of the Maintenance Department? A) $163 098 B) $150 000 C) $160 833 D) $0 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 72) What is the complete reciprocated cost of the Personnel Department? A) $105 000 B) $78 592 C) $65 000 D) $92 500
Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 73) Which of the following departments is not an operating (or value-added) department? A) Finishing B) Assembly C) Accounting D) Machining Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 74) Which of the following is NOT one of the three methods of allocating support department costs to operating departments? A) Direct method B) Incremental method C) Reciprocal method D) Step-down method Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 75) The cost-allocation method that allocates support department costs only to production departments is the: A) sequential method. B) reciprocal method. C) step-down method. D) direct method. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 76) The direct allocation method highlights recognition of services rendered by support departments to other support departments. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 77) The direct method does not allocate support-department costs to other support departments. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 78) An equivalent approach to implementing the direct method involves calculating a budgeted rate for each support department’s costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 79) Budgeted amounts for a support department will always exceed complete reciprocated costs for that department. Answer: False Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method.
80) The direct allocation method provides key information for outsourcing decisions regarding support services. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 81) The direct method allocates each support department’s costs to operating departments and to support departments. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 82) Under the step-down method, once a support department’s costs have been allocated, no subsequent support-department costs are allocated back to it. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 83) The reciprocal method of support department cost-allocation is the most precise method and therefore is used most often. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. Write your answer in the space provided or on a separate sheet of paper. 84) Armidale University offers only high-tech graduate-level programs. Armidale 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 $500 000, while the Enrollment Services budget is $1 200 000. The following chart summarises budgeted amounts and allocation-base amounts used by each department: Services Provided (Annually) Computer F&T Enrollment Engineering Sciences Maintenance Services
Budget F&T $500 000 Maintenance (in hours) Enrollment $1 200 000 Services (in credit hrs)
2000
5000
Zero
1000
24 000
36 000
2000
Zero
Required: Use the direct method to allocate support costs to each of the two principal operating departments, Engineering and Computer Sciences. Prepare a schedule showing the support costs allocated to each department.
Answer:
F&T Maintenance Enrollment Service
$500 000 × 2/7 = $500 000 × 5/7 = $1 200 000 × 24/60 = $1 200 000 × 36/60 =
Engineering $142 857
Computer Sciences $357 143
$480 000
$720 000 Total $622 857 $1 077 143 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 85) Armidale University offers only high-tech graduate-level programs. Armidale 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 $500 000,
while the Enrollment Services budget is $1 200 000. The following chart summarises budgeted amounts and allocation-base amounts used by each department:
Budget F&T Maintenance (in hours) Enrollment Services (in credit hrs)
Services Provided (Annually) Computer F&T Enrollment Engineering Sciences Maintenance Services
$500 000
1000
2000
Zero
5000
$1 200 000
24 000
36 000
2000
Zero
Required: Prepare a schedule which allocates service department costs using the step-down method with the sequence of allocation based on the highest-percentage support concept. Compute the total amount of support costs allocated to each of the two principal operating departments, Engineering and Computer Sciences.
Answer: F&T Maintenance provided to enrollment services = 5000/8000 Enrollment Services provided to maintenance = 2000/62 000 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 × 5/8 = $312 500 to Engineering = $500 000 × 1/8 = $62 500 to Computer Science = $500 000 × 2/8 = $125 000 Enrollment Services costs of $1 200 000 + $312 500 = $1 512 500 are allocated to Engineering and Computer Sciences to Engineering = $1 512 500 × 24/60 = $605 000 to Computer Sciences = $1 512 500 × 36/60 = $907 500 F&T Maintenance $500 000 ($500 000) $0 Totals
Enrollment Services $1 200 000 $312 500 ($1 512 500) $0
Engineering
Computer Sciences
$62 500 $605 000 $667 500
$125 000 $907 500 $1 032 500
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 86) Armidale University offers only high-tech graduate-level programs. Armidale 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 $500 000, while the Enrollment Services budget is $1 200 000. The following chart summarises budgeted amounts and allocation-base amounts used by each department:
Budget Engineering $3 500 000 Computer $1 400 000 Sciences F&T Maintenance $500 000 (in hours) Enrollment $1 200 000 Services (in credit hrs)
Services Provided (Annually) Computer F&T Enrollment Engineering Sciences Maintenance Services
2000
1000
Zero
5000
24 000
36 000
2000
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 Services = ES)
Answer: a. Eng = $1 400 000 + 2/8 (FTM) + 24/62 (ES) CS = $3 500 000 + 1/8 (FTM) + 36/62 (ES) FTM = $500 000 + 2/62 (ES) ES = $1 200 000 + 5/8 (FTM)
b.
Enrollment Services = $1 200 000 + 0.625 (FTM) ES = $1 200 000 + .625 (500 000 + 2/62 ES) ES = $1 200 000 + $312 500 + .02 ES 0.98 ES = $1 512 500 ES = $1 543 367 FTM = $500 000 + 2/62 ($1 543 367) = $549 786 Engineering = $1 400 000 + 2/8 ($549 786) + 24/62 ($1 543 367) $1 400 000 + 97 118 + 461 652 = $1 958 770
CS = $3 500 000 + 1/8 ($549 786) + 36/62 ($1 543 367) = $3 500 000 + $68 723 + $896 149 = $4 467 872 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 87) Frenhs Forest Publishing Company has two service departments, S1 and S2, and two production departments, P1 and P2. The data for May were as follows:
Activity S1 S2 P1 P2
Costs $90 000 $60 000 Fixed Costs $360 000 $520 000
Services provided to: S1 S2 P1 P2 10% 40% 50% 20% 55% 25%
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 = $90 000 + 0.20 (S2) S2 = $60 000 + 0.10 (S1) P1 = $360 000 + 0.40 (S1) + 0.55 (S2) P2 = $520 000 + 0.50 (S1) + 0.25 (S2) b.
S1 = $90 000 + 0.20 ($60 000 + 0.10 (S1)) S1 = $90 000 + $12 000 + 0.02 (S1) 0.98 (S1) = $102 000 = $104 082
S2 = $60 000 + (0.10 × $104 082) = $70 408 P1 = $360 000 + (0.40 × $104 082) + (0.55 × $70 408) = $440 357 P2 = $520 000 + (0.50 × $104 082) + (0.25 × $70 408) = $589 643 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. 88) Describe methods which may be used to allocate support costs within organisations containing multiple support departments. What are the advantages and disadvantages of these 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 recognised 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 recognises 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. Advantage: It provides more accuracy than the direct method. Disadvantage: There is an added level of complexity in the process.
The reciprocal method allocates support department costs to operating departments by fully recognising the mutual services provided among all support departments. This method is complicated in that it either requires a 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. Advantage: It provides the highest level of accuracy. Disadvantage: It is complex to implement. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Allocating costs of multiple support departments Learning Objective: 14.3 Allocate support-department costs using the direct method, the step-down method and the reciprocal method. Choose the one alternative that best completes the statement or answers the question. 89) The cost-allocation method determines the weights for cost allocation by considering each user of the cost as a separate entity. A) stand-alone B) reciprocal C) direct D) incremental Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 90) If incremental users are newly formed companies or subunits, such as a new product line or a new sales territory, the method may enhance their chances for survival in the short run by assigning them a low allocation of the common costs. A) reciprocal B) stand-alone C) incremental D) step-down Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method.
91) Under the incremental method, the party typically receives the highest allocation of the common costs. A) first incremental B) primary C) second incremental D) tertiary Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. Answer the following questions using the information below: The Carpentaria Corporation currently uses a manufacturing facility costing $550 000 per year; 80% of the facility’s capacity is currently being used. A start-up business has proposed a plan that would utilise the other 20% of the facility and increase the overall costs of maintaining the space by 5%. 92) If the stand-alone method were used, what amount of cost would be allocated to the start-up business? A) $440 000 B) $20 000 C) $80 000 D) $115 500 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 93) If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $27 500 B) $80 000 C) $84 000 D) $100 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental
method. Answer the following questions using the information below: The Darwin Harbour Corporation currently leases a corporate suite in an office building for a cost of $90 000 a year. Only 70% of the corporate suite is currently being used. A start-up business has proposed a plan that would use the other 30% of the suite and increase the overall costs of maintaining the space by $10 000. 94) If the stand-alone method were used, what amount of cost would be allocated to the start-up business? A) $10 000 B) $37 000 C) $30 000 D) $27 000 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 95) If the incremental method were used, what amount of cost would be allocated to the start-up business? A) $10 000 B) $30 000 C) $27 000 D) $37 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 96) The stand-alone method of allocating common costs emphasises fairness and equity among users. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method.
97) Under the incremental method, the first incremental user usually receives the highest allocation of the common costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 98) The incremental method of allocating common costs often creates the incentive to be the first-ranked user. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 99) The goal is to allocate common costs to each user in a reasonable way. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 100) Allocating common costs is clear-cut and can best be achieved by using the stand-alone cost-allocation method. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 101) The incremental cost-allocation method determines the weights for cost allocation by considering each user of the cost as a separate entity. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 102) Common costs exist because each user obtains a lower cost by sharing than the separate cost that would result if such user were an independent entity. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. Write your answer in the space provided or on a separate sheet of paper. 103) The Maintenance Department has been servicing Bondi Production for four years. Beginning next year, the company is adding a Scrap-Processing Department to recycle the materials from Bondi Production. As a result, maintenance costs are expected to increase from $480 000 per year to $500 000 per year. The Scrap-Processing Department will use 25% of the maintenance efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of maintenance cost that will be allocated to Bondi 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 Bondi Production and the Scrap-Processing Department next year.
Answer: a. Bondi Production = $500 000 × 0.75 = $375 000 Scrap-Processing Department = $500 000 × 0.25 = $125 000 b. Bondi Production would receive $480 000. Scrap-Processing Department would receive $20 000, the incremental amount. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 104) The Product Data centre has been servicing the Billabong Casting Department for five years. Beginning next year, the company is adding a Billabong Moulding Department to complement the materials produced by the Billabong Casting Department. As a result, data centre costs are expected to
increase from $950 000 per year to $1 150 000 per year. The Billabong Moulding Department will use 20% of the data centre efforts. Required: a. Using the stand-alone cost-allocation method, identify the amount of data centre cost that will be allocated to Billabong Casting and the Billabong Moulding Department next year. b. Using the incremental cost-allocation method, identify the amount of data centre cost that will be allocated to Billabong Casting and the Billabong Moulding Department next year.
Answer: a. Billabong Casting Department = $1 150 000 × 0.80 = $920 000 Billabong Moulding = $1 150 000 × 0.20 = $230 000 b. Billabong Casting Department would receive $950 000. Billabong Moulding Department would receive $200 000, the incremental amount. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. 105) What is a ‘common cost?’ What are two methods that a manager can use to allocate common costs to two or more users?
Answer: A common cost is the cost of a cost object that is shared by two or more users. Two ways to allocate common costs would be the stand-alone method and the incremental method. The stand-alone method uses information pertaining to each user of the cost object to determine the cost allocation weights. The incremental method ranks individual users of the cost object and allocates common costs first to the primary user, and then to the other incremental users. AACSB: Able to communicate effectively orally and in writing Difficulty: Basic Topic: Allocating common costs Learning Objective: 14.4 Allocate common costs using the stand-alone method and the incremental method. Choose the one alternative that best completes the statement or answers the question. 106) Contract disputes regarding cost-allocation can be reduced by defining:
A) the cost items allowed. B) permissible cost-allocation bases. C) the terms used, such as what constitutes direct labour. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. 107) Cost-based prices: A) provide an inherent incentive for the producer to control costs. B) pass the majority of risk to the buyer. C) are a good way of setting prices in a competitive market. D) All of the above. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. 108) Which of the following is a cost that contract parties typically agree to include in the costs to be reimbursed? A) An unallowable cost B) A stand-alone cost C) An incremental cost D) An allowable cost Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. 109) Many commercial contracts include clauses based on A) financial B) cost C) internal
accounting information.
D) international Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. 110) Contract disputes often arise with respect to: A) personalities. B) revenue sharing. C) cost allocation. D) cost-cutting. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 111) Contract disputes often arise with respect to cost allocation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. 112) The areas of dispute between the contracting parties regarding cost allocation can be reduced by making the ‘rules of the game’ explicit and in writing at the time the contract is signed. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. Write your answer in the space provided or on a separate sheet of paper. 113) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Cost allocations and contracts Learning Objective: 14.5 Explain the importance of explicit agreement between contracting parties when the reimbursement amount is based on costs incurred. Choose the one alternative that best completes the statement or answers the question. 114) Which of the following is an example of a revenue object? A) Division of a company B) Customer C) Specific product D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation. 115) AAA offers towing services, auto routing, travel brochures, and other travel services for one annual fee. This is an example of: A) revenue tracing. B) a bundled product. C) a joint product. D) revenue allocation. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation. 116) The price of a(n) products sold separately.
product is typically less than the sum of the prices of the individual
A) stand-alone B) composite C) incremental D) bundled Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation. Write your answer in the space provided or on a separate sheet of paper. 117) Give examples of bundled products for each of the following industries: a. Resort hotel b. Bank c. Restaurant d. Computer store e. Service station/convenience store f. Software manufacturer
Answer: a. Hotel room plus meals, free drinks, use of athletic facilities, morning newspaper b. Checking account, safe deposit box, wire transfers, certified cheques, travellers cheques c. Fixed-price meal includes a beverage, appetiser, entree, and dessert d. Computer, keyboard, monitor, printer, software, 1-year contract for the repair and maintenance of the computer e. Petrol, car wash, coffee f. Two (or more) software products AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation. 118) Why would businesses want to sell bundled products? What benefits, if any, are there for the consumer?
Answer: Businesses seek to sell bundled products as a means of increasing total revenues and spreading fixed costs across a larger dollar amount of revenues. The result is usually an increase in overall corporate
profitability. For a company to sell more goods, customers must believe that they are getting value for their money. Receiving additional goods or services for what is likely only a marginal increase in price over the price of the primary product could entice consumers to buy the bundled package rather than foregoing the purchase altogether. While not strictly a bundled product, a motor car provides a good example. Car dealers sell cars that are ‘loaded with options.’ The price is less than the basic car with the options added separately. Consumers believe they are getting a benefit even though the car might have more options than they would have purchased. The manufacturer has greater revenue than would be the case without the ‘bundle.’ A benefit for the consumer is an extra product for only a marginal increase in price that is probably less than the separate price of the multiple products. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 119) A revenue object is anything for which a separate measurement of revenue is desired. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation. 120) A bundled product is a package of two or more products (or services) that is sold for a single price although the individual components may be sold as separate items at their own ‘stand-alone’ prices. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation. 121) Similar to cost allocation, revenue allocation occurs when costs are related to a particular revenue object but cannot be traced to it in an economically feasible (cost-effective) way. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Revenue allocation and bundled products Learning Objective: 14.6 Explain the way in which bundling of products affects revenue allocation.
Choose the one alternative that best completes the statement or answers the question. 122) Which of the following methods is LEAST likely to cause disputes among product managers? A) The direct revenue-allocation method B) Incremental revenue-allocation method C) Stand-alone revenue-allocation method D) All of these answers are correct Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 123) Which of the following methods ranks individual products in a bundle for revenue allocation? A) Stand-alone revenue-allocation method B) Physical-unit weighting method C) Incremental revenue-allocation method D) Unit-cost weighting method Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 124) Approaches used to rank products for revenue allocation might include: A) surveying customers on the importance of each product. B) having managers use their knowledge and intuition. C) using recent data on stand-alone sales performance. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 125) To give more emphasis to the product that most likely drives the sales of the bundled product, the revenue allocation should be weighted using: A) physical units.
B) unit costs. C) stand-alone product revenues. D) selling prices. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 126) When may the revenue allocation be weighted using physical units? A) Selling prices are unstable and unit costs are difficult to calculate. B) The individual products within the bundle have approximately the same value. C) Other methods cannot be used for various reasons. D) All of these answers are correct. Answer: D Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. Answer the following questions using the information below: Adelaide 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 Reading Fun $55 Math Fun $65 Science $95
Cost
Package
$7.20 $8.00 $10.00
1. Reading Fun & Math Fun 2. Reading Fun & Science 3. All three
Packaged Price $98 $122 $162
127) Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Reading Fun in the first package (Reading Fun & Math Fun)? A) $38.50 B) $44.91 C) $55 D) $40 Answer: B
AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 128) 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 Science. A) $40 B) $38 C) $44 D) $55 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 129) Using the stand-alone method with selling price as the weight for revenue allocation, what amount of revenue will be allocated to Math Fun in the package that contains all three products? A) $50.67 B) $48.25 C) $48.98 D) $65.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 130) 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 Science. A) $50.67 B) $65.00 C) $45.60 D) $48.25
Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. Answer the following questions using the information below: Canberra Home Appliances sells a refrigerator and a freezer as a single package for $1100. Other data are in the chart below.
Selling price Manufacturing cost per unit Stand-alone product revenues
Refrigerator $925 $620 $1 225 000
Full-size Freezer Packaged Price $450 $1100 $220 $775 000
131) Using the stand-alone method with selling price as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $500.00 B) $625.00 C) $740.00 D) $925.00 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 132) Using the stand-alone method with stand-alone product revenues as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $625.00 B) $673.75 C) $825.00 D) $687.50 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that
bundle. 133) Using the stand-alone method with manufacturing cost per unit as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $620.00 B) $500.00 C) $612.50 D) $811.90 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 134) Using the stand-alone method with physical units as the weight for revenue allocation, what amount will be allocated to the refrigerator? A) $550 B) $20 C) $825 D) $775 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 135) The only methods available when allocating the revenues across a bundled product offering are: 1) the stand-alone revenue-method; and 2) the incremental revenue-allocation method. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. Write your answer in the space provided or on a separate sheet of paper. 136) Wentworth Video Parlour encounters revenue-allocation decisions with its bundled product sales.
Here, two or more of the movie DVDs are sold as a single package. Managers at Wentworth 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 DVDs using the stand-alone revenue-allocation method. b. Allocate the $25 packaged price of ‘All Three’ to the three types of DVDs 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 New $15/$33 × $25 Old $10/$33 × $25 Classics $8/$33 × $25 Total $25.00
= $33.00
= $11.36 = $7.58 = $6.06
b. Product
Revenue Allocated
Revenue Remaining to be Allocated $25 -15 = $10 $25 - $15 - $10 = $0 none
New Releases $15 Older Releases $10 Classics $0 Total revenue allocated $25 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 137) 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: Stand-alone Selling Price Word Processing (WP) $125 Spreadsheet (SS) $150 Accounting Software $225 (AS)
Cost
Package
Packaged Price
$18 $20
WP & SS WP & AS
$220 $280
$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.
Answer: a1. WP $125 + SS $150 + AS $225 = $500 WP $125/$500 × $380 = $95 SS $150/$500 × $380 = $114 AS $225/$500 × $380 = $171 Total $380 a2.
WP $18 + SS $20 + AS $25 = $63 WP $18/$63 × $380 = $108.57 SS $20/$63 × $380 = $120.64 AS $25/$63 × $380 = $150.79 Total $380.00
a3.
1/(1+ 1 + 1) × $380 = $126.67 per software package
b. Product
Revenue Allocated
Revenue Remaining to be Allocated
WP $125 $380 -125 = $255 SS $150 $380 - $125 - $150 = $105 AS $105 none Total revenue allocated $380 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle. 138) Explain the two methods of allocating revenues of a bundled package to the individual products in that package. Describe any special problems associated with each 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 be ranked first so that as much of the revenue as possible is allocated to their product. This can result in disputes between managers. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Revenue-allocation methods Learning Objective: 14.7 Allocate the revenues of a bundled product to the individual products in that bundle.
Chapter 15 Strategy formation, strategic control and the balanced scorecard Choose the one alternative that best completes the statement or answers the question. 1) describes how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. A) Planning B) Strategy C) Customer perspective D) Learning and growth perspective Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 2) In general, profit potential with greater competition, stronger potential entrants, products that are similar, and more-demanding customers and suppliers. A) increases B) increases exponentially C) stays constant D) decreases Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 3) Which of these statements is NOT true? A) Product differentiation increases the willingness of customers to pay higher prices. B) Cost leadership can be sustained through economies of scale. C) It is not necessary to choose between the strategies of product differentiation or cost leadership, most companies can have both.
D) No statement is untrue, i.e. all are true statements. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 4) What is an organisation's ability to offer products or services that are perceived by its customers as being superior and unique relative to those of its competitors called? A) Cost leadership B) The balanced scorecard C) Product differentiation D) Strategy Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 5) is an organisation's ability to achieve low costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. A) Strategy B) Product differentiation C) The balanced scorecard D) Cost leadership Answer: D Topic: Forming strategy Difficulty: Moderate AACSB: Able to analyse and frame problems Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 6) An organisation would do one of the following actions in demonstrating using the cost leadership approach. Which one? A) Heavily emphasise developing new products. B) Bring products to market rapidly. C) Focus on productivity through efficiency improvements. D) Provide products at a higher cost than competitors. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 7) is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed and customer satisfaction. A) Strategy B) Re-engineering C) Learning and growth perspective D) Customer perspective Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. Answer the following questions using the information below: TasiAudio Corporation plans to grow by offering an audio-visual system, the AV-5000 which is superior and unique from the competition. TasiAudio believes that putting additional resources into R&D and staying ahead of the competition with technological innovations is critical to implementing its strategy. 8) TasiAudio's strategy is: A) re-engineering. B) downsizing. C) cost leadership. D) product differentiation. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 9) To further company strategy, measures on the balanced scorecard would MOST likely include: A) an increase in operating profit from productivity gains. B) manufacturing quality. C) yield. D) number of process improvements. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. Answer the following questions using the information below: Barrier Reef Corporation manufactures jet skis. It plans to grow by producing high-quality jet skis at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar jet skis. Barrier Reef believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy. 10) Barrier Reef's strategy is: A) cost leadership. B) product differentiation. C) downsizing. D) re-engineering. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 11) 'Strategy' describes how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 12) One of the five forces of industry analysis is understanding the bargaining power of your customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 13) One of the two basic strategies for a business is achieving market leadership. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
14) Re-engineering is the fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance such as cost, quality, service, speed and customer satisfaction. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 15) Re-engineering benefits are most significant when they focus on one business function rather than crossing functional lines of the business process. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 16) A product differentiation strategy is probably best for a company if the engineering team is more skilled at making process improvements than at creatively designing new products. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 17) In general, profit potential increases with greater competition, stronger potential entrants, products that are similar, and tougher customers and suppliers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 18) The balanced scorecard uses only financial performance measures to evaluate short-run and long-run performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Forming strategy
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. Write your answer in the space provided or on a separate sheet of paper. 19) Bosely Corporation is reviewing its business strategy. The first step for Bosely 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 Bosely focus on and give at least one example of how Bosely can effectively deal with each area.
Answer: The industry analysis is composed of five areas: 1. Competitors - How competitive is the industry for Bosely'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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. 20) Explain the product differentiation and the cost leadership strategies.
Answer: PRODUCT DIFFERENTIATION is an organisation's ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors. COST LEADERSHIP is an organisation's ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
21) What is re-engineering? Explain.
Answer: Re-engineering is the rethinking of business processes, such as the order delivery process, to improve critical performance measures such as cost, quality, or customer satisfaction. AACSB: Able to communicate effectively orally and in writing Difficulty: Easy Topic: Forming strategy Learning Objective: 15.1 Given the context and as far as the data allow, form strategy for an organisation. Choose the one alternative that best completes the statement or answers the question. 22)
companies set aggressive environmental goals, and measure and report their
performance against them. A) Modern B) Innovative C) Socially responsible D) Traditional Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. 23) control systems diagnose whether or not performance is up to expectations. A) Management B) Financial C) Diagnostic D) Innovative Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. 24) What does senior management most often use to exercise diagnostic control? A) staff B) variances C) computers D) budgets
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. 25) Interactive control systems relate to uncertainties and focus managers’ attention and learning on key strategic issues. A) strategic B) operational C) staffing D) environmental Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. 26) Excessive emphasis on control systems and critical performance variables has the potential to cause an organisation to ignore emerging threats and opportunities. A) diagnostic B) boundary C) beliefs D) interactive Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 27) Interactive control systems force busy managers to step back from the actions needed to manage the business today and to shift their focus forward to positioning the organisation for the opportunities and threats of tomorrow. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
28) Managers can coordinate beliefs and boundary systems to simultaneously stimulate search activity and avoid risks, while communicating vision and strategic domain. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. 29) Interactive control systems relate to strategic uncertainties and focus managers’ attention and learning on key strategic issues. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. 30) Diagnostic control systems diagnose whether or not performance is up to expectations. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The four levers of control Learning Objective: 15.2 Describe the four levers of control and show how they inter-relate. Choose the one alternative that best completes the statement or answers the question. 31) Although the benefits of these long-run changes might not show up immediately in short-run earnings, strong improvements in non-financial measures usually presage the creation of future economic value. A) organisational B) systematic C) fringe D) financial Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 32) A is a diagram that shows how an organisation creates value by connecting strategic objectives in explicit cause-and-effect relationships with one another in the financial, customer, internal-business-process and learning-and-growth perspectives.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
A) balanced scorecard B) diagnostic control C) boundary control D) strategy map Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 33) are the causal links between strategic objectives, and can be qualified as strong, moderate or weak. A) Beliefs B) Boundaries C) Maps D) Ties Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 34) An opportunity to evaluate the contribution that the strategic objective brings to the overall strategy is known as: A) orphan. B) balanced. C) strategic. D) environmental. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 35) In contrast to a focal point, a point is a strategic objective out of which many ties spur, resulting in the achievement of many strategic objectives. A) trigger B) balanced C) strategic D) boundary
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 36) Managers need to evaluate the success of a strategy by: A) linking the sources of operating-profit increases to the strategy. B) doing a cost-benefit analysis. C) evaluating budget-to-actual variances. D) evaluating the level of bonus compensation. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 37) The balanced scorecard reduces managers’ emphasis on short-run performance (such as quarterly earnings) because the key strategic non-financial and operational indicators (such as product quality and customer satisfaction) measure changes that a company is making for the long run. A) financial B) organisational C) non-financial D) environmental Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 38) Strategic objectives that distinguish an organisation from its competitors, based on the organisation’s strategy, are distinctive objectives. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 39) In contrast to a focal point, a trigger point is a strategic objective out of which many ties spur, resulting
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
in the achievement of many strategic objectives. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 40) A strategic objective that has a hub-and-spoke quality with multiple ties flowing into or out of it is referred to as a ‘focal point’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 41) A ‘strategy map’ is a diagram that shows how an organisation creates value by connecting strategic objectives in explicit cause-and-effect relationships with one another in the financial, customer, internal-business-process, and learning-and-growth perspectives. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. 42) Orphan status represents an opportunity to evaluate the contribution that the strategic objective brings to the overall strategy. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy maps Learning Objective: 15.3 Construct a strategy map and analyse its structure. Choose the one alternative that best completes the statement or answers the question. 43) translates an organisation's mission and strategy into a comprehensive set of performance measures that provide the framework for implementing its strategy. A) Product differentiation B) Cost leadership C) Productivity component D) The balanced scorecard Answer: D
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 44) The purpose of the balanced scorecard is BEST described as helping an organisation: A) mobilise employee skills for continuous improvements in processing capabilities, quality and response times B) introduce innovative products and services desired by target customers C) develop customer relations D) translate an organisation's mission and strategy into a set of performance measures that help to implement the strategy Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 45) Which of the following need to be clarified FIRST for successful balanced scorecard implementation? A) Elements that pertain to value-added aspects of the business B) Owner's expectations about return on investment C) Objectives of all four balanced scorecard measurement perspectives D) Organisation's vision and strategy Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 46) The balanced scorecard is said to be 'balanced' because it measures: A) internal and external objectives. B) short-term and long-term objectives. C) financial and non-financial objectives. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
47) Which of the following statements concerning the balanced scorecard is TRUE? A) It broadens management's attention to short-run AND long-run performance. B) The aim is to always show an improvement over the previous year. C) Debits must equal credits. D) All of the statements are true. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 48) The internal business processes perspective of the balanced scorecard comprises three sub-processes that address all of the following EXCEPT: A) providing service and support to the customer after the sale. B) delivering existing products and services to best meet the needs of customers. C) motivating current employees. D) innovative processes used to create new products, services, and processes. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 49) Identify the BEST description of the balanced scorecard's internal business processes perspective. To achieve our firm's vision and strategy: A) how do we lower costs? B) what processes will increase value to our customers? C) how can we obtain greater profits? D) how do we motivate employees? Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 50) Which of the following is a measure of the balanced scorecard's financial perspective? A) Defect rates B) Revenue growth C) Number of new patents D) Information system availability
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 51) Which of the following is NOT a measure of the balanced scorecard's financial perspective? A) Customer satisfaction B) Cost reductions C) Gross profit percentage D) Operating profit Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 52) Measures of the balanced scorecard's customer perspective include: A) market share. B) employee satisfaction ratings. C) revenue growth. D) number of process improvements. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 53) Measures of the balanced scorecard's customer perspective include all of the following EXCEPT: A) customer satisfaction. B) number of new customers. C) customer training on new products. D) market share. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 54) Measures of the balanced scorecard's internal-business-process perspective include:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
A) return on investment. B) market share. C) new product development time. D) employee education. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 55) Measures of the balanced scorecard's internal-business-process perspective include all of the following EXCEPT: A) operating capabilities. B) number of new customers. C) number of new products. D) defect rates. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 56) Measures of the balanced scorecard's learning-and-growth perspective include: A) employee satisfaction ratings. B) time taken to deliver a product to customers. C) economic value added. D) customer-retention percentage. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 57) Measures of the balanced scorecard's learning-and-growth perspective include all of the following EXCEPT: A) employee education and skill level. B) time taken to replace defective products. C) employee-satisfaction ratings. D) percentage of processes with advanced controls. Answer: B
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 58) Which of the following is NOT true of a good balanced scorecard? A) It identifies all measures, whether significant or small, that helps to implement strategy. B) It helps to communicate corporate strategy to all members of the organisation. C) It tells the story of a company's strategy by articulating a sequence of cause-and-effect relationships. D) It uses non-financial measures to serve as leading indicators of future financial performance. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 59) Which of the following is NOT true of the balanced scorecard? A) Successful implementation requires commitment and leadership from top management. B) Cause-and-effect linkages may not be precise and should evolve over time. C) Different strategies call for different scorecards. D) Only objective measures should be used and subjective measures should be avoided. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 60) The return-on-investment ratio is an example of a balanced-scorecard measure of the: A) internal business process perspective. B) customer perspective. C) learning and growth perspective. D) financial perspective. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 61) The number of complaints about a product is an example of a balanced-scorecard measure of the: A) internal business process perspective.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
B) customer perspective. C) learning and growth perspective. D) financial perspective. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 62) Manufacturing cycle efficiency is an example of a balanced-scorecard measure of the: A) internal business process perspective. B) customer perspective. C) learning and growth perspective. D) financial perspective. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 63) Survey of employee satisfaction is an example of a balanced-scorecard measure of the: A) internal business process perspective. B) customer perspective. C) learning and growth perspective. D) financial perspective. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. Answer the following questions using the information below: Barrier Reef Corporation manufactures jet skis. It plans to grow by producing high-quality jet skis at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar jet skis. Barrier Reef believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy. 64) To further company strategy, measures on the balanced scorecard would MOST likely include: A) an increase in operating profit from increased profit margins. B) a number of process improvements.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
C) price premium earned. D) longer cycle times. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 65) The primary purpose of the balanced scorecard is to obtain increased operating profits for the current year. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 66) One valuable measure of the customer perspective of the balanced scorecard is market share. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 67) Employee satisfaction is a measure of the internal business perspective of the balanced scorecard. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 68) When evaluating managers and employees under the balanced scorecard approach, only financial measures should be considered. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. Write your answer in the space provided or on a separate sheet of paper.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
69) 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. economic value added 9. employee education 10. manufacturing downtime _ 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 70) What is the primary purpose of the balanced scorecard?
Answer: The primary purpose of the balanced scorecard is to translate an organisation's mission and strategy into a set of performance measures that put that strategy into action with clearly-stated objectives, measures, targets, and initiatives. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Designing and applying a balanced scorecard
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 71) What are the four key perspectives in the balanced scorecard?
Answer: The four key perspectives in the balanced scorecard are: i. the financial perspective ii. the customer perspective iii. the internal business processes perspective, and iv. the learning and growth perspective. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 72) Bledisloe Corporation plans to grow by offering an audio-visual training programme, the Rugger2018 that is superior and unique from the competition. Bledisloe 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 Bledisloe's strategy one of product differentiation or cost leadership? Explain briefly. b. Identify at least one key element that you would expect to see included in the balanced scorecard: - for the financial perspective. - for the customer perspective. - for the internal business process perspective. - for the learning and growth perspective.
Answer: a. Bledisloe'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. b. Key elements should include: - Operating profit growth from charging higher margins for Rugger2018 for the financial perspective. - Market share in the high-end monitor market, customer satisfaction, and new customers for the customer perspective. - Manufacturing quality, new product features added, and order delivery time for the internal business perspective. - Development time for new features, improvements in manufacturing technologies, employee education
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
and skill levels, and employee satisfaction for the learning and growth perspective. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. 73) Evans Corporation manufactures carbon bicycle frames. It plans to grow by producing high-quality carbon frames at a low cost that are delivered in a timely manner. There are a number of other manufacturers who produce similar carbon frames. Evans believes that continuously improving its manufacturing processes and having satisfied employees are critical to implementing its strategy. Required: a. Is Evans's strategy one of product differentiation or cost leadership? Explain briefly. b. Identify at least one key element that you would expect to see included in the balanced scorecard: - for the financial perspective. - for the customer perspective. - for the internal business process perspective. - for the learning and growth perspective.
Answer: a. Evans's strategy is one of cost leadership because there are a number of other manufacturers who produce similar carbon frames. To succeed, Evans 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. b. Key elements should include: - Operating profit growth from productivity gains and growth for the financial perspective. - Growth in market share, new customers, customer responsiveness, and customer satisfaction for the customer perspective. - Yield, time to complete customer jobs, and order delivery time for the internal business perspective. - Number of process improvements, hours of employee training, and employee satisfaction for the learning and growth perspective. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Designing and applying a balanced scorecard Learning Objective: 15.4 Given the context, design and apply a balanced scorecard. Choose the one alternative that best completes the statement or answers the question. 74) Which component of strategy measures the changes in operating profit attributed solely to an increase in the quantity of output between Year 1 and Year 2?
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
A) The growth component B) The price-recovery component C) The cost leadership component D) The productivity component Answer: A Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 75) When analysing the change in operating profit, the strategy component of productivity will increase when: A) less capacity is used in the current year to produce the same output as in the previous year. B) selling prices are increased. C) quality is enhanced. D) more units are produced and sold. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 76) An operating profit analysis of ACT Incorporated revealed the following: Operating profit for 2017 Add growth component Deduct price-recovery component Add productivity component Operating profit for 2018
$500 000 25 000 (15 000) 60 000 $570 000
ACT's operating profit gain is consistent with the: A) product differentiation strategy. B) cost leadership strategy. C) re-engineering strategy. D) downsizing strategy. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 77) An operating profit analysis of Deb Schmidt Ltd revealed the following: Operating profit for 2017 Add growth component Add price-recovery component Deduct productivity component Operating profit for 2018
$500 000 15 000 100 000 (8000) $607 000
Schmidt's operating profit gain is consistent with the: A) re-engineering strategy. B) cost leadership strategy. C) downsizing strategy. D) product differentiation strategy. Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. Answer the following questions using the information below: Mitsufugi Company makes a kitchen appliance with model number KA450. The goal for 2018 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 KA450 units that can be produced. The industry market size for appliances increased 5% from 2017 to 2018. The following additional data are available for 2017 and 2018:
Units of KA450 produced and sold Selling price Direct materials (square metres) Direct material costs per square metre Manufacturing capacity for KA450 (units) Total conversion costs Conversion costs per unit of capacity
2017 10 000 $150 30 000 $12 12 500 $250 000 $20
2018 10 300 $145 29 000 $13 12 000 $240 000 $20
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
78) What is operating profit for 2017? A) $890 000 B) $1 500 000 C) $700 000 D) $750 000 Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 79) What is operating profit for 2018? A) $678 500 B) $997 500 C) $876 500 D) $428 500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 80) Which strategy is Mitsufugi Corporation pursuing? A) Cost leadership, because the selling price decreased. B) Product differentiation, because total conversion costs decreased. C) Product differentiation, because the units produced and sold increased. D) Cost leadership, because direct material costs per square metre increased. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 81) Overall, was Mitsufugi's strategy successful in 2018? A) Yes, because less direct materials were used. B) No, because operating profit decreased. C) No, because the selling price per unit decreased.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
D) Yes, because more units were produced and sold. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 82) What is the revenue effect of the growth component? A) $47 500 F B) $2500 U C) $52 500 U D) $45 000 F Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 83) What is the cost effect of the growth component for direct materials? A) $10 800 U B) $16 500 F C) $10 000 F D) $10 000 U Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 84) What is the cost effect of the growth component for conversion costs? A) $10 000 U B) Zero C) $10 000 F D) $12 500 U Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. Answer the following questions using the information below: Mitsufugi Company makes a kitchen appliance with model number KA450. The goal for 2018 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 KA450 units that can be produced. The industry market size for appliances increased 5% from 2017 to 2018. The following additional data are available for 2017 and 2018:
Units of KA450 produced and sold Selling price Direct materials (square metres) Direct material costs per square metres Manufacturing capacity for KA450 (units) Total manufacturing conversion costs Manufacturing conversion costs per unit of capacity
2017 10 000 $150 30 000 $12 12 500 $250 000 $20
2018 10 300 $145 29 000 $13 12 000 $240 000 $20
85) What is the revenue effect of the price-recovery component? A) $47 500 F B) $51 500 U C) $50 000 F D) $2500 U Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 86) What is the cost effect of the price-recovery component? A) $30 000 U B) $29 000 F C) $1000 F D) $30 900 U Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 87) What is the net effect on operating profit as a result of the price-recovery component? A) Decreased operating profit due to decreased selling price and inability to recover increased costs. B) Increased operating profit due to the increased number of units produced and sold. C) Decreased operating profit due to the inability to recover increased costs. D) Increased operating profit due to the revenue effect of the price-recovery component. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 88) What is the net effect on operating profit as a result of the productivity component? A) Decreased operating profit due to direct material inefficiencies and capacity reduction. B) Increased operating profit due to direct material efficiencies only. C) Increased operating profit due to direct material efficiencies and capacity reduction. D) Decreased operating profit due to direct material inefficiencies only. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. Answer the following questions using the information below: Following a strategy of product differentiation, Platypus Company makes a high-end appliance, AP15. Platypus Company presents the following data for the years 2017 and 2018:
Units of AP15 produced and sold Selling price Direct materials (square metres) Direct materials costs per square metre Manufacturing capacity in units of AP15 Total conversion costs Conversion costs per unit of capacity
2017 2018 20 000 21 000 $200 $220 60 000 61 500 $20 $22 25 000 25 000 $1 000 000 $1 110 000 $40 $44
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Selling and customer-service capacity (customers) Total selling and customer-service costs Selling and customer-service capacity cost per customer
60 $360 000 $6000
58 $362 500 $6250
Platypus Company produces no defective units but it wants to reduce direct materials usage per unit of AP15 in 2019. Manufacturing conversion costs in each year depend on production capacity defined in terms of AP15 units that can be produced. Selling and customer-service costs depend on the number of customers that the customer and service functions are designed to support. Platypus Company has 46 customers in 2017 and 50 customers in 2018. The industry market size for high-end appliances increased 5% from 2017 to 2018. 89) What is operating profit for 2017? A) $200 000 B) $1 804 500 C) $1 440 000 D) $364 500 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 90) What is operating profit in 2018? A) $200 000 B) $1 804 500 C) $1 440 000 D) $364 500 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 91) What is the change in operating profit from 2017 to 2018? A) $1 804 500 F B) $1 440 000 F C) $364 500 F D) $200 000 F
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 92) What is the revenue effect of the growth component? A) $220 000 F B) $400 000 F C) $420 000 F D) $200 000 F Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 93) What is the cost effect of the growth component? A) $60 000 U B) $200 000 F C) $140 000 F D) $60 000 F Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 94) What is the net effect on operating profit as a result of the growth component? A) $60 000 F B) $140 000 F C) $60 000 U D) $200 000 F Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 95) What is the revenue effect of the price-recovery component? A) $400 000 F B) $420 000 F C) $220 000 F D) $200 000 F Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 96) What is the cost effect of the price-recovery component? A) $179 000 U B) $420 000 F C) $241 000 U D) $179 000 F Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 97) What is the net effect on operating profit as a result of the price-recovery component? A) $179 000 F B) $179 000 U C) $420 000 F D) $241 000 U Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 98) What is the net effect on operating profit as a result of the productivity component?
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
A) $420 000 F B) $45 500 F C) $179 000 F D) $241 000 U Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 99) An analysis of Kookaburra Ltd's operating profit for the last two years showed the following: Operating profit for 2017 Add growth component Add price-recovery component Deduct productivity component Operating profit for 2018
$600 000 15 000 100 000 (8000) $707 000
This gain in operating profit is consistent with a: A) re-engineering strategy B) cost leadership strategy C) product differentiation strategy D) downsizing strategy Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 100) What is the direct manufacturing labour partial productivity, assuming 10 000 widgets were produced during 2018 and 40 000 direct manufacturing labour-hours were used? A) 0.25 unit per direct manufacturing labour-hour B) 0.50 unit per direct manufacturing labour-hour C) 1.00 unit per direct manufacturing labour-hour D) 0.75 unit per direct manufacturing labour-hour Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 101) What is the direct manufacturing labour partial productivity, assuming 40 000 units were produced during 2018 and 160 000 direct manufacturing labour-hours were used? A) 0.25 unit per direct manufacturing labour-hour B) 0.75 unit per direct manufacturing labour-hour C) 0.50 unit per direct manufacturing labour-hour D) 1.00 unit per direct manufacturing labour-hour Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 102) Total factor productivity will increase if: A) the company incurs fewer costs per input. B) current technology becomes obsolete. C) the company uses more total inputs per output. D) outputs increase. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 103) is the ratio of the quantity of output produced to the costs of all inputs used, where the inputs are combined on the basis of current period prices. A) Productivity B) Total factor productivity C) Partial productivity D) Product yield variance Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
operating profit. 104) The partial productivity of overhead resources can be measured by considering the cost driver as: A) the denominator. B) budgeted input. C) the fixed input. D) the numerator. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 105) Which of the following statements about productivity measures is FALSE? A) The key is the identification of cost drivers. B) It may be stated in terms of dollars. C) It provides a convenient and easily interpreted means of aggregating across different physical outputs. D) The productivity measure may not be made for companies with multiple products. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 106) The average number of student credit hours taught per department member is an example of a(n): A) partial productivity measure. B) budgeted productivity measure. C) expected performance measure. D) standard productivity measure. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 107) Grebe Company provided the following information: Budgeted input
39 000 litres
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Actual input Budgeted production Actual production
35 800 litres 40 000 units 38 000 units
What is the partial productivity ratio? A) 1.02 units per litre B) 0.97 units per litre C) 1.06 units per litre D) 1.12 units per litre Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 108) Coogee Company provided the following information: Budgeted input 19 500 litres Actual input 17 900 litres Budgeted production 20 000 units Actual production 19 000 units What is the partial productivity ratio? A) 1.12 units per litre B) 0.97 units per litre C) 1.06 units per litre D) 1.02 units per litre Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 109) Manly Company provided the following information: Budgeted input 24 000 litres Actual input 30 000 litres Budgeted production 10 000 units
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Actual production 9500 units What is the partial productivity ratio? A) 0.32 units per litre B) 3.16 units per litre C) 0.40 units per litre D) 0.33 units per litre Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 110) An increase of operating profit from one year to the next indicates a company's strategy was successful. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 111) The price-recovery component measures the increase in operating profit from selling more units of a product. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 112) Productivity measures the relationship between actual inputs used (both quantities and costs) and standard outputs produced. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
operating profit. Write your answer in the space provided or on a separate sheet of paper. 113) Following a strategy of product differentiation, Jitsubishi Corporation makes a high-end flat screen television monitor, TV04. Jitsubishi Corporation presents the following data for the years 2017 and 2018:
Units of TV04 produced and sold Selling price Direct materials (kilos) Direct materials costs per kilo Manufacturing capacity for TV04 (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
2017 2018 5000 5500 $400 $440 15 000 15 375 $40 $44 10 000 10 000 $1 000 000 $1 100 000 $100 $110 60 58 $360 000 $362 500 $6000 $6250
Jitsubishi Corporation produces no defective units but it wants to reduce direct materials usage per unit of TV04 in 2019. Manufacturing conversion costs in each year depend on production capacity defined in terms of TV04 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. Jitsubishi Corporation has 46 customers in 2017 and 50 customers in 2018. The industry market size for high-end flat screen television monitors increased 5% from 2017 to 2018. Required: a. What is operating profit for 2017? b. What is operating profit in 2018? c. What is the change in operating profit from 2017 to 2018?
Answer: a. ($400 × 5000) - [($40 × 15 000) + ($100 × 10 000) + ($6000 × 60)] = $40 000 b. ($440 × 5500) - [($44 × 15 375) + ($110 × 10 000) + ($6250 × 58)] = $281 000 c. $40 000 - $281 000 = $241 000 F AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
114) Following a strategy of product differentiation, Jitsubishi Corporation makes a high-end flat screen television monitor, TV04. Jitsubishi Corporation presents the following data for the years 2017 and 2018:
Units of TV04 produced and sold Selling price Direct materials (kilos) Direct materials costs per kilo Manufacturing capacity for TV04 (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
2017 2018 5000 5500 $400 $440 15 000 15 375 $40 $44 10 000 10 000 $1 000 000 $1 100 000 $100 $110 60 58 $360 000 $362 500 $6000 $6250
Jitsubishi Corporation produces no defective units but it wants to reduce direct materials usage per unit of TV04 in 2019. Manufacturing conversion costs in each year depend on production capacity defined in terms of TV04 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. Jitsubishi Corporation has 46 customers in 2017 and 50 customers in 2018. The industry market size for high-end flat screen television monitors increased 5% from 2017 to 2018. 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 profit as a result of the growth component?
Answer: a. (5500 - 5000) × $400 = $200 000 F b. 15 000 × 5500/5000 = 16 500; [(16 500 - 15 000) × $40] + [(10 000 - 10 000) × $100] + [(60 - 60) × $6000] = $60 000 U c. $200 000 F + $60 000 U = $140 000 F AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 115) Following a strategy of product differentiation, Jitsubishi Corporation makes a high-end flat screen
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
television monitor, TV04. Jitsubishi Corporation presents the following data for the years 2017 and 2018: 2017 2018 Units of TV04 produced and sold 5000 5500 Selling price $400 $440 Direct materials (kilos) 15 000 15 375 Direct materials costs per kilo $40 $44 Manufacturing capacity for TV04 (units) 10 000 10 000 Conversion costs $1 000 000 $1 100 000 Conversion costs per unit of capacity $100 $110 Selling and customer-service capacity (customers) 60 58 Total selling and customer-service costs $360 000 $362 500 Selling and customer-service capacity cost per customer $6000 $6250 Jitsubishi Corporation produces no defective units but it wants to reduce direct materials usage per unit of TV04 in 2019. Manufacturing conversion costs in each year depend on production capacity defined in terms of TV04 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. Jitsubishi Corporation has 46 customers in 2017 and 50 customers in 2018. The industry market size for high-end flat screen television monitors increased 5% from 2017 to 2018. 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 profit as a result of the price-recovery component? d. What is the net effect on operating profit as a result of the productivity component?
Answer: a. ($440 - $400) × 5500 = $220 000 F b. 15 000 × 5500/5000 = 16 500; [($44 - $40) × 16 500] + [($110 - $100) × 10 000] + [($6250 - $6000) × 60] = $181 000 U c. $220 000 F + $181 000 U = $39 000 F d. 15 000 × 5500/5000 = 16 500; [(15 375 - 16 500) × $44] + [(10 000 - 10 000) × $110] + [(58 - 60) × 6250] = $62 000 F AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
116) Identify and describe the three key components in performing a strategic analysis of operating profit.
Answer: The three key components in performing a strategic analysis of operating profit are: a. The GROWTH component, which measures the change in operating profit attributable solely to an increase in the quantity of output sold from one year to the next. b. The PRICE-RECOVERY component, which measures the change in operating profit attributable solely to changes in the prices of the inputs and the outputs from one year to the next. c. The PRODUCTIVITY component, which measures the change in costs attributable to a change in the quantity of inputs used in the current year relative to the quantity of inputs that would have been used in the previous year to produce current year output. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 117) An analysis of Yarra Corporation's operating profit changes between 2017 and 2018 show the following: Operating profit for 2017 Add growth component Deduct price-recovery component Add productivity component Operating profit for 2018
$1 000 000 50 000 (30 000) 120 000 $1 140 000
Required: Is Yarra's operating profit gain consistent with the product differentiation or cost leadership strategy? Explain briefly.
Answer: Yarra's operating profit gain is consistent with the cost leadership strategy because the increase in operating profit was driven by the $120 000 gain in productivity. It appears that Yarra took advantage of its productivity gain to reduce prices and to fuel growth. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
operating profit. 118) An analysis of Didgeridoo Corporation's operating profit changes between 2017 and 2018 show the following: Operating profit for 2017 Add growth component Add price-recovery component Deduct productivity component Operating profit for 2018
$1 000 000 30 000 200 000 (10 000) $1 220 000
Required: Is Didgeridoo's operating profit gain consistent with the product differentiation or cost leadership strategy? Explain briefly.
Answer: Didgeridoo's operating profit gain is consistent with the product differentiation strategy because the increase in operating profit was driven by the $200 000 gain in the price-recovery component. It appears that Didgeridoo's superior quality stimulated slight growth and allowed it to charge a price premium for its products. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 119) Cabramurra Tools 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 non-financial results of operations. The following information relates to the manufacture of remote control units for televisions, radios and stereo components:
Remote control units produced and sold Direct manufacture labour-hours Direct materials used (sets) Direct manufacture cost per hour Direct materials cost per set
2017 80 000 12 000 80 600 $18 $31
2018 100 000 13 200 100 500 $20 $32
Required:
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
a. b. c. d.
What is the partial productivity of direct materials for each year? What is the partial productivity of direct manufacturing labour for each year? Did each area improve between 2017 and 2018? Explain. What will be the projected direct material and labour needs for 2019 if remote control units increase by 12 000 units, assuming Cabramurra Tools Company applies the constant returns to scale technology?
Answer: a. 2017 Partial productivity of direct materials = 80 000/80 600 = 0.993 2018 Partial productivity of direct materials = 100 000/100 500 = 0.995 b. 2017 Partial productivity direct manufacturing labour = 80 000/12 000 = 6.67 2018 Partial productivity direct manufacturing labour = 100 000/13 200 = 7.58 c.
Yes, both areas showed improvement because the ratios went up.
d. Production increase = 12 000/100 000 = 12% Projected direct material sets = 100 500 × 1.12 = 112 560 sets Projected direct manufacturing labour = 13 200 × 1.12 = 14 784 hours AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 120) Mt Pilbara Bicycles Company manufactures mountain bikes. Because its managers all have engineering backgrounds, they prefer non-financial information for their decision-making models. Therefore, they require the accountants gather data to assist in the examination of non-financial results of operations. The following information relates to the manufacture of the bicycles:
Units produced and sold Direct manufacture labour-hours Direct materials used (tonnes) Direct manufacture cost per hour Direct materials cost per tonne
2017 6800 68 000 14 500 $21 $431
2018 5600 57 600 12 200 $22 $443
Required: a. What is the partial productivity for direct materials for each year? b. What is the partial productivity for direct manufacturing labour for each year?
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
c.
What is the total factor productivity for each year?
Answer:
a.
Partial productivity of direct materials 2017= 6800/14 500 = 0.469 Partial productivity of direct materials 2018 = 5600/12 200 = 0.459
b.
2017 Partial productivity for direct manufacturing labour 2018= 6800/68 000 = 0.100 2018 Partial productivity for direct manufacturing labour = 5600/57 600 = 0.097
c. 2017 Direct materials = 14 500 × $431 = $6 249 500 Direct manufacturing labour = 68 000 × $21 = 1 428 000 Total $7 677 500 2018 Direct materials = 12 200 × $443 = $5 404 600 Direct manufacturing labour = 57 600 × $22 = 1 267 200 Total $6 671 800 2017 Total factor productivity = 6800/$7 677 500 = 0.00089 2018 Total factor productivity = 5600/$6 671 800 = 0.00084 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 121) Tumut Snow Equipment manufactures snow boards. The following information relates to the manufacture of boards in its Bredbo plant:
Units produced and sold Direct manufacture labour-hours Direct materials used (square metres) Direct manufacture cost per hour Direct materials cost per metre
2017 21 500 11 000 65 000 $16 $10
2018 26 300 13 000 76 000 $17 $11
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Required: Prepare an analysis of change in annual costs from 2017 to 2018 including direct materials, direct manufacturing labour and total inputs.
Answer: Direct materials: Actual 2017 costs: 65 000 × $10 2017 input for 2018 output: 65 000 × 26 300/21 500 × $10 Output adjustment
= $650 000 = 795 116 $145 116 U
2017 input for 2018 output: $795 116 2017 input with 2018 costs: 65 000 × 26 300/21 500 × $11 = 874 628 Input price change $79 512 U 2017 input with 2018 costs: $874 628 2018 costs: 76 000 × $11 = 836 000 Productivity change $38 628 F Direct manufacturing labour: Actual 2017 costs: 11 000 × $16 = $176 000 2017 input for 2018 output: 11 000 × 26 300/21 500 × $16 = 215 293 Output adjustment $39 293 U 2017 input for 2018 output: $215 293 2017 input with 2018 costs: 11 000 × 26 300/21 500 × $17 = 228 749 Input price change $13 456 U 2017 input with 2018 costs: $228 749 2018 costs: 13 000 × $17 = 221 000 Productivity change $7749 F All inputs: Output adjustment: $145 116 U + $39 293 U = $184 409 U Input price change: $79 512 U + $13 456 U = $92 968 U Productivity change: $38 628 F + $7749 F = $46 377 F AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 122) Parramatta Company has been aggressively developing various types of financial and non-financial measurement schemes to help with the evaluation of its eel processing facility. It appears that the decision-making processes of some of the managers are geared for their department's benefit, leading to the detriment of the organisation as a whole. Required: What changes in the evaluation system could the company make to help minimise the suboptimisation of the managers' decision-making processes?
Answer: The company could implement a total factor productivity concept. Its major advantage is that it measures the combined productivity of all inputs to produce outputs and, therefore, explicitly evaluates substitution among inputs. For example, if buying a cheap material makes the cost of materials look favourable but causes more labour-hours, therefore causing labour costs to be unfavourable, suboptimisation may be occurring. The total factor productivity takes into account both the materials costs and the labour costs and if they offset each other, that is fine, but if they do not offset, then the variance will be so noted. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in operating profit. 123) Total factor productivity (TFP) is easy to calculate for a single-product company. When dealing with a multi-product company, one of two adjustments must be made. What are these 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategic analysis of operating profit: evaluating the formation of strategy and its implementation Learning Objective: 15.5 Evaluate strategy formation and implementation by analysing changes in
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
operating profit. Choose the one alternative that best completes the statement or answers the question. 124) Engineered costs: A) include R&D and human resource costs. B) arise from periodic (usually annual) decisions. C) include a high level of certainty. D) often incur a delay between when the resource is acquired and when it is used. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 125) Discretionary costs: A) result from a cause-and-effect relationship between the output and the input. B) pertain to processes that are detailed. C) can be variable or fixed in the short run. D) include advertising and executive training costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 126) A high level of uncertainty is represented in: A) discretionary costs. B) engineered costs. C) both engineered and discretionary costs. D) neither engineered nor discretionary costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 127) A high level of precision between resources used and output produced exists with: A) discretionary costs. B) engineered costs. C) both engineered and discretionary costs. D) neither engineered nor discretionary costs.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 128) Discretionary costs: A) are physically observable activities. B) possess a high level of certainty. C) are usually large total amounts. D) have detailed processes. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 129) Engineered costs: A) are from physically observable activities. B) have processes that are sketchy or unavailable. C) possess a high level of uncertainty. D) are non-repetitive. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 130) Conversion costs are an example of: A) direct engineered costs. B) discretionary costs. C) indirect engineered costs. D) unused capacity costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 131) Which of the following do managers need to measure and manage to reduce capacity-based fixed
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
costs? A) Variable costs B) Engineered costs C) Unused capacity D) Discretionary costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 132) Unused capacity is difficult to determine for: A) discretionary costs. B) engineered costs. C) both engineered and discretionary costs. D) neither engineered nor discretionary costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 133) Which of the following needs to happen in order to deal with unused capacity effectively? A) May downsize. B) May retain some unused capacity for future growth. C) Should consider it a waste of resources and eliminate all unused capacity. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 134) Downsizing: A) is most difficult with discretionary costs. B) may include eliminating jobs. C) should be done within the context of a company's overall strategy. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 135) What is rightsizing another term for? A) Price recovery analysis B) Growth management C) Downsizing D) Cost recovery analysis Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 136) When unused capacity is identified, what actions can management take? A) Eliminate the unused capacity. B) Attempt to grow to utilise the unused capacity. C) Both A and B are correct. D) Neither A nor B are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 137) Engineered costs contain a higher level of uncertainty than discretionary costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 138) ‘Unused capacity’ is the amount of productive capacity available over and above the productive capacity employed to meet customer demand in the current period. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it.
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
139) Managers interested in measuring environmental and social performance incorporate these factors into their balanced scorecards to set priorities for initiatives, guide decisions and actions, and fuel discussions about strategies and business models to improve performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 140) Engineered costs may be variable or fixed in the short-run. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 141) Research and development cost is an example of an engineered cost. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 142) It is relatively easy to identify unused capacity for discretionary costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 143) One way to eliminate unused capacity is to downsize. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 144) Downsizing discretionary costs is easier than downsizing engineered costs. Answer: False
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Difficulty: Basic AACSB: Able to analyse and frame problems Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 145) Downsizing can often mean eliminating jobs, which can have an adverse effect on employee morale. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. Write your answer in the space provided or on a separate sheet of paper. 146) 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. Examples of a discretionary cost would be the cost of advertising for a product, the amount spent on researching new products, or employee training expenses. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. 147) Can a company identify unused capacity and, if so, how can unused capacity be managed?
Answer: It is relatively easy for a company to recognise unused capacity for engineered costs, but it is more difficult for a company to recognise 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Topic: Strategies relating to unused capacity Learning Objective: 15.6 Identify unused capacity and recommend strategies to manage it. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 148) Managements of profit-seeking companies identify measures that are part of a cause-and-effect chain leading to financial outcomes. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating the balanced scorecard Learning Objective: 15.7 Evaluate the balanced scorecard. 149) Excluding non-financial measures when evaluating performance might reduce the significance and importance that managers give to non-financial measures reflected in the balanced scorecard. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating the balanced scorecard Learning Objective: 15.7 Evaluate the balanced scorecard. 150) Managements of not-for-profit organisations design the cause-and-effect chain to achieve their strategic service objectives. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating the balanced scorecard Learning Objective: 15.7 Evaluate the balanced scorecard. 151) Some managers use statistical methods, such as regression analysis, to test the anticipated cause-and-effect relationships between various non-financial measures and financial measures. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating the balanced scorecard Learning Objective: 15.7 Evaluate the balanced scorecard. 152) Limiting the number of measures focuses managers’ attention on those that most affect strategy implementation. Answer: True AACSB: Able to analyse and frame problems
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Difficulty: Basic Topic: Evaluating the balanced scorecard Learning Objective: 15.7 Evaluate the balanced scorecard. Write your answer in the space provided or on a separate sheet of paper. 153) Managers at Chipset need to make strategic decisions. What are the five steps that the managers use to make the decision?
Answer: Five steps guide for making strategic decisions are: 1. Identify the problem. 2. Gather relevant information. 3. Identify and evaluate potential courses of action. 4. Make and implement decisions. 5. Evaluate performance, and learn. AACSB: Able to communicate effectively orally and in writing Difficulty: Basic Topic: Applying the five-step guide to making strategic decisions Learning Objective: 15.7 Evaluate the balanced scorecard. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 154) Engineered costs have no measurable cause-and-effect relationship between output and resources used. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sustainability and the balanced scorecard Learning Objective: 15.8 Design and apply a balanced scorecard to embrace sustainability (social, economic and environmental strategies). 155) Managements of organisations are increasingly recognising that they must earn the right to operate in the communities and countries in which they do business. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sustainability and the balanced scorecard Learning Objective: 15.8 Design and apply a balanced scorecard to embrace sustainability (social, economic and environmental strategies).
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
156) Many managers recognise that good environmental and social performance helps to attract and inspire outstanding employees, improves employee safety and health, increases productivity and lowers operating costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sustainability and the balanced scorecard Learning Objective: 15.8 Design and apply a balanced scorecard to embrace sustainability (social, economic and environmental strategies). 157) Organisations with a long-run orientation emphasise environmental and social performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sustainability and the balanced scorecard Learning Objective: 15.8 Design and apply a balanced scorecard to embrace sustainability (social, economic and environmental strategies).
Copyright © 2018 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781488612640/Horngren/Cost Accounting 3e
Chapter 16 Quality, time and the balanced scorecard Choose the one alternative that best completes the statement or answers the question. 1) Quality of design measures how closely the characteristics of products or services match the needs and wants of customers. Conformance quality: A) focuses on fitness of uses from a customer perspective. B) measures the same things. C) is the performance of a product or service according to design and product specifications. D) is making the product according to design, engineering and manufacturing specifications. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Quality as a competitive tool Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 2) Which of the following fail to satisfy conformance quality? A) Machines that break down B) Machines that fail to meet the needs of customers C) Depositing a customer's cheque into the correct account D) All of these answers are correct Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Quality as a competitive tool Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 3) 'Design quality' refers to the performance of a product or service relative to its design and product specification. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
[Type here]
Topic: Quality as a competitive tool Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 4) Conformance quality is the performance of a product or service relative to its design and product specifications. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Quality as a competitive tool Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. Write your answer in the space provided or on a separate sheet of paper. 5) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Quality as a competitive tool Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. Choose the one alternative that best completes the statement or answers the question. 6) The largest COQ items are frequently those related to: A) prevention. B) internal failure. C) appraisal. D) external failure. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing
[Type here]
program and make recommendations accordingly. 7) What are costs incurred to prevent making products that do not conform to specifications known as? A) Prevention costs B) Appraisal costs C) Internal failure costs D) External failure costs Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 8) Costs incurred to find individual units of products that do not conform to specifications are: A) prevention costs. B) appraisal costs. C) internal failure costs. D) external failure costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 9) What are costs incurred to find a nonconforming product before it is shipped to customers known as? A) Prevention costs B) Appraisal costs C) Internal failure costs D) External failure costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 10) Preventive equipment maintenance is an example of: A) prevention costs.
[Type here]
B) appraisal costs. C) internal failure costs. D) external failure costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 11) Spoilage is an example of: A) prevention costs. B) appraisal costs. C) internal failure costs. D) external failure costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 12) What is a liability claim an example of? A) Prevention costs B) Appraisal costs C) Internal failure costs D) External failure costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 13) Design engineering is an example of: A) prevention costs. B) appraisal costs. C) internal failure costs. D) external failure costs. Answer: A
[Type here]
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 14) What is scrap an example of? A) Prevention costs B) Appraisal costs C) Internal failure costs D) External failure costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. Answer the following questions using the information below: Mount Tamborine Furniture manufactures high quality 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 10 000 tables varnished in September totalled 2500 hours by 16 employees. Eight litres of varnish were used, on average, for each table. The standard amount of varnish per table is nine litres. The cost of inspection for September was equal to the budgeted amount of $76 000. 15) The $76 000 represents a(n): A) internal failure cost. B) possible cost-allocation base. C) activity cost pool. D) work-in-process control. Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 16) What is the inspection cost per unit? A) $3800
[Type here]
B) $7.60 C) $30.40 D) $4000 Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 17) Cost of quality reports usually do not consider: A) internal failure costs. B) opportunity costs. C) external failure costs. D) appraisal costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 18) Examples of opportunity costs include: A) forgone contribution margin. B) lost sales. C) lower production. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 19) The cost of quality measure has all of the following advantages EXCEPT: A) being in existence in almost every production circumstance. B) being a useful measure of comparing different quality improvement projects. C) focusing on how costly poor quality can be. D) serving as a common denominator for evaluating trade-offs among prevention and failure costs. Answer: A
[Type here]
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 20) Shortening delivery times is a minor part of the quality improvement process. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 21) A company that doesn’t invest in quality improvement while competitors are doing so is likely to suffer a decline in its market share, revenues and profits, even to the extent of losses. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 22) Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 23) In the banking industry, depositing a customer's cheque into the wrong bank account is an example of quality of design failure. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing
[Type here]
program and make recommendations accordingly. 24) Costs of quality (COQ) reports usually do not consider opportunity costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 25) Costs of Quality (COQ) are classified into four categories: prevention costs, appraisal costs, inspection costs and warranty costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 26) The costs relating to product testing are classified as prevention costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 27) The costs relating to new materials testing are classified as appraisal costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 28) The largest COQ items are frequently those related to external failure, which comprises mainly the opportunity costs of the contribution margin and profit forgone from lost sales, lost production and lower prices resulting from poor quality. Answer: True AACSB: Able to analyse and frame problems
[Type here]
Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 29) Allocated cost amounts are an important determinant of the costs of a quality improvement program. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 30) Most companies spend a large amount of money measuring the financial costs of design quality. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. Write your answer in the space provided or on a separate sheet of paper. 31) Briefly explain how a manufacturer of personal computers such as Dell Computer can benefit from the introduction of a quality improvement program.
Answer: A quality improvement program for Dell would result in substantial savings in operating costs and higher revenues. Operating costs would be reduced since fewer funds would be spent checking output and correcting defective products. Higher revenues would result since existing customers would likely increase their orders and the higher quality output would attract additional customers. In addition, a number of competitors will likely be implementing quality programs. Dell must meet the competition to succeed. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 32) Classify each of the following quality costs as prevention costs, appraisal costs, internal failure costs or
[Type here]
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. Supplier evaluation questionnaire h. Rework direct manufacturing labour 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. Re-entering data because of keypunch errors Prevention costs Appraisal costs Internal failure costs External failure costs Answer: g, j
Prevention costs
d, l, k
Appraisal costs
a, b, c, h, i, m
Internal failure costs
e, f External failure costs AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 33) Dawn and Kim recently bought the Katoomba Bed and Breakfast Inn. The business had been doing poorly. Before reopening the inn for business, they attended a seminar called 'Operating a High Quality Business.' They are now ready to open the inn and 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.
[Type here]
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 AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 34) Lithgow Design Products Quality Control Manager works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 2018, the company has budgeted $1 000 000 for prevention costs and $800 000 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, $2 per unit of appraisal costs will be saved, up to a level of 200 000 tests. No additional savings are expected past the 200 000 level. The new method involves $110 000 in training costs and $60 000 in yearly testing supplies. Traditionally, 3% 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
[Type here]
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 2018? b. How much do internal failure costs change, assuming 600 000 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 Additions: Training Additions: Supplies Savings: 200 000 × $2 Adjusted budget b. Current budget $100 × 0.03 × 600 000 = Savings rate Net savings (reduction in internal failure costs)
$800 000 $110 000 60 000
170 000 (400 000) $570 000
$1 800 000 × 0.40 $720 000
c. Current budget $120 × 0.01 × 600 000 = $720 000 Savings rate × 0.60 Net savings (reduction in external failure cost) $432 000 AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 35) Carpentaria Language School produces CDs and DVDs to teach English as a Second Language to new migrants. Carpentaria has just prepared a Cost of Quality Report which shows a decline in prevention costs as a percentage of total sales over a three-year period. What changes might Carpentaria expect to see in (i) appraisal costs as a percentage of sales, (ii) internal failure costs as a percentage of sales, and
[Type here]
(iii) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. 36) 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 organisation 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 costs of quality areas will be almost certain to have lower profits, revenues and market share. (Answers may vary.) AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: The financial perspective of quality Learning Objective: 16.1 Given the context, design a costs-of-quality program or evaluate an existing program and make recommendations accordingly. Choose the one alternative that best completes the statement or answers the question. 37) With control charts, observations that fall outside the control limits are regarded as
[Type here]
and
worth investigating. A) random B) non-random C) costly D) strategic Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 38) Managers must improve business processes because they affect many of the quality-related factors that influence customer satisfaction and improve financial performance. A) external B) strategic C) internal D) customer Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 39) To implement , companies use techniques such as control charts, Pareto diagrams and cause-and-effect diagrams to define, measure, analyse, improve and control processes to minimise variability in manufacturing and achieve almost zero defects. A) Six Sigma B) Pareto C) fishbones D) control charts Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 40) Observations outside control limits serve as inputs for
[Type here]
diagrams.
A) fishbone B) Six Sigma C) control D) Pareto Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 41) When using a control chart, when would a manager NOT investigate an activity? A) Some observations are outside the preset range. B) Almost all observations are within the range of two standard deviations. C) All observations are outside the preset range. D) All observations are within the range of preset standard deviations. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 42) What is the tool which indicates how frequently each type of defect occurs? A) Cause-and-effect diagram B) Pareto diagram C) Control chart D) Fishbone diagram Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 43) A tool which identifies potential causes of failures or defects is a: A) control chart. B) cause-and-effect diagram. C) Pareto diagram D) None of these answers are correct.
[Type here]
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 44) When considering customer needs and wants, only financial measures can be used because they are easily measured. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. Topic: accordingly. 45) The balanced scorecard includes both financial and non-financial measures of customer satisfaction. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 46) Management accountants are usually not responsible for maintaining and presenting non-financial measures. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 47) The number of defects shipped to customers as a percentage of total units shipped is a type of non-financial quality measure. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
[Type here]
Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 48) An example of a non-financial balanced scorecard measure concerning internal business processes would be average manufacturing time for key products. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 49) Managers must improve internal business processes because they affect many of the quality-related factors that influence customer satisfaction and improve financial performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 50) A control chart identifies potential causes of failures or defects. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 51) Observations outside control limits serve as inputs for Pareto diagrams. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 52) A cause-and-effect diagram is used to help identify potential causes of defects. Answer: True AACSB: Able to analyse and frame problems
[Type here]
Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 53) Critics of Six Sigma argue that it emphasises incremental rather than dramatic or disruptive innovation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. Write your answer in the space provided or on a separate sheet of paper. 54) The Custom Shirt House is concerned about its declining sales, especially the reduction in the number of customers despite that its shirts have won industry awards for high quality and trend-setting styles. At the latest executive managers' meeting, everyone was blaming everyone else for the decline. After much discussion and 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 (not on time); accounting problems (poor billing and collection procedures); or poor returns and allowance policies. The causes may be detected by comparing non-financial measures of the company with those found in the industry. These might include measures of: number of shipments incorrect or not on time; number of customer complaints about certain areas (billing, shipping, etc.); response time to customer complaints; or a questionnaire about why former customers quit buying from the company. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 55) Discuss the methods used to identify quality problems.
[Type here]
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, to distinguish random from non-random variations in the operating process. 2. A PARETO DIAGRAM indicates how frequently each type of failure (defect) occurs. 3. A CAUSE-AND-EFFECT diagram helps to identify potential causes of failures or defects. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 56) 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 non-random 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. 57) Three tools used to detect quality problems include control charts, Pareto charts and cause-and-effect diagrams. Briefly explain each of these tools.
[Type here]
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. A Pareto diagram indicates how frequently each type of failure (defect) occurs. Usually Pareto diagrams use a bar-chart format. A cause-and-effect diagram helps to identify potential causes of failures or defects. It is also known as a fishbone diagram, and groups the various causes into categories of similar causes. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Non-financial measures and methods Learning Objective: 16.2 Evaluate non-financial quality performance and make recommendations accordingly. Choose the one alternative that best completes the statement or answers the question. 58) Regarding the means by which relevant costs and benefits are evaluated when evaluating quality improvement, the key question is: A) Will the employees of the company be able to implement the change? B) How long will it take for the improvement program to be fully functional? C) How will total costs and total revenues change under each alternative solution? D) Which alternative solution will make the customer happiest? Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Answer the following questions using the information below: Barossa Manufacturing expects to spend $500 000 in 2018 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 $50 000 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $70 000 in training costs and an additional $170 000 in annual equipment rental. It takes four units of material for each finished product. Internal failure costs average $80 per failed unit of finished goods. During 2013, 5% of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures is 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. 59) What is the net effect on appraisal costs for 2018, assuming the new receiving method is implemented
[Type here]
and that 800 000 material units are received? A) $20 000 increase B) $240 000 increase C) $220 000 decrease D) $20 000 decrease Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 60) How much will internal failure costs change, assuming 800 000 units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by 10%? A) $25 000 decrease B) $170 000 decrease C) $80 000 decrease D) $20 000 increase Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 61) How much will external failure costs change assuming 800 000 units of materials are received and that product failures with customers are cut in half with the new receiving method? A) $500 000 decrease B) $200 000 decrease C) $10 000 increase D) $320 000 decrease Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Answer the following questions using the information below:
[Type here]
Nurioopta Products has a budget of $900 000 in 2018 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $65 000 in variable costs. The new method will require $24 000 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 170 000 units. Appraisal costs for the year are budgeted at $600 000. The new prevention procedures will save appraisal costs of $30 000. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 3% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories. 62) What is the net change in the budget of prevention costs if the procedures are automated in 2018? Will management agree with the changes? A) $134 000 increase, no B) $69 000 increase, yes C) $65 000 increase, no D) $65 000 decrease, yes Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 63) How much will appraisal costs change assuming the new prevention methods reduce material failures by 40% in the appraisal phase? A) $12 000 decrease B) $65 000 increase C) $30 000 decrease D) $240 000 decrease Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 64) How much will internal failure costs change if the internal product failures are reduced by 50% with the new procedures? A) $38 250 decrease
[Type here]
B) $750 000 decrease C) $76 500 decrease D) $500 000 decrease Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 65) 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) $137 700 decrease B) $243 000 decrease C) $137 700 increase D) None of these answers are correct. Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 66) 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? A) $(121 500) B) $69 000 C) $(136 950) D) $(33 750) Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Answer the following questions using the information below: Mildura Products has a budget of $1 200 000 in 2018 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $75 000 in variable costs. The new method will require $24
[Type here]
000 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 210 000 units. Appraisal costs for the year are budgeted at $500 000. The new prevention procedures will save appraisal costs of $35 000. Internal failure costs average $20 per failed unit of finished goods. The internal failure rate is expected to be 4% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $48 per failed unit. The company's average external failures average 2.5% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories. 67) What is the net change in the budget of prevention costs if the procedures are automated in 2018? Will management agree with the changes? A) $75 000 increase, no B) $75 000 decrease, yes C) $94 000 decrease, yes D) $94 000 increase, yes Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 68) How much will appraisal costs change assuming that the new prevention methods reduce material failures by 30% in the appraisal phase? A) $35 000 increase B) $150 000 decrease C) $229 000 decrease D) $35 000 decrease Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 69) How much will internal failure costs change if the internal product failures are reduced by 50% with the new procedures? A) $84 000 increase B) $126 000 decrease C) $84 000 decrease
[Type here]
D) $168 000 decrease Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 70) How much do external failure costs change if all the changes are as the new prevention procedures anticipated? Assume all units produced are sold and there are no ending inventories. A) $126 000 decrease B) $151 200 decrease C) $100 800 decrease D) None of these answers are correct. Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 71) 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? A) $(125 200) B) $(176 200) C) $176 200 D) $(270 200) Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 72) Many companies believe that they should eliminate all failure costs and have _ A) minimal B) controllable C) zero D) primary
[Type here]
defects.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 73) An important difference between financial measures of quality and non-financial measures of quality is that: A) financial measures of quality tend to be useful indicators of future long-term performance, while non-financial measures have more of a short-term focus. B) non-financial measures are generally too subjective to have any long-term value. C) non-financial 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. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 74) Which of the following is an example of non-financial measures of quality? A) Percentage of defective units shipped to customers as a percentage of total units shipped B) Percent of products that experience early or excessive failure C) Number of customer complaints D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 75) Without late. A) non-financial B) throughput C) financial D) balanced
[Type here]
quality measures, quality problems might not be identified until it is too
Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Topic: Evaluating quality performance using benefit–cost analysis 76) In which perspective of the balanced scorecard, reported COQ numbers are affected for making improvements in internal business processes? A) Financial B) Customer C) Internal process D) Learning Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 77) Manufacturing cycle efficiency relates to activities. A) production B) sales C) production and sales D) strategic Answer: A AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 78) Without financial quality measures, companies could be spending more money on improving non-financial quality measures than it is worth. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial
[Type here]
measures and make recommendations accordingly. 79) Making improvements in internal business processes affects the COQ numbers reported in the financial perspective of the balanced scorecard. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 80) Without non-financial quality measures, quality problems might not be identified until it is too late. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 81) Cost of quality financial measures will usually deteriorate when non-financial measures of quality are emphasised and improved. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 82) COQ measures assist in problem solving by comparing costs and benefits of different quality-improvement programs and setting priorities for cost reduction. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 83) Non-financial methods and measures are useful indicators of long-term future performance (e.g. through measures of customer satisfaction and employee satisfaction). Answer: True
[Type here]
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 84) Management should always look for opportunities to generate higher revenues, not only cost reductions, from quality improvements. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Write your answer in the space provided or on a separate sheet of paper. 85) 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. 2. The managers 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 non-financial 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. 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 86) A corporation can measure its quality performance by using financial or non-financial measures of quality. Discuss the merits of each method and whether the use of one precludes the use of the other.
[Type here]
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. Non-financial 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). Non-financial measures tend to be long-term and are useful in terms of estimating trends. Financial performance measures are more readily available than non-financial measures, but they are no more important to the overall goals of the organisation. By considering non-financial measures, the organisation can improve operational control. Superior financial performance usually follows from superior non-financial performance. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 87) Describe the implications of not having financial and non-financial quality measures.
Answer: Without financial quality measures, companies could be spending more money on improving non-financial quality measures than it is worth. Without non-financial quality measures, quality problems might not be identified until it is too late. As a result, most organisations use both types of measure to gauge quality performance. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Evaluating quality performance using benefit–cost analysis Learning Objective: 16.3 Evaluate quality performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Choose the one alternative that best completes the statement or answers the question. 88) To manage and on-time performance, managers must understand the causes and costs of delays. A) control charts
[Type here]
B) appraisal costs C) customer-response time D) prevention costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 89) The average waiting time is very sensitive to the shrinking of A) used B) bottlenecked C) time-driven D) unused Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool
capacity.
Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Choose the one alternative that best completes the statement or answers the question. 90) 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 is referred to as: A) bottleneck. B) customer-response time. C) manufacturing lead time. D) a time driver. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 91) How is the amount of time from when an order is ready to start on the production line to when it becomes a finished good referred to as? A) Bottleneck B) A time driver
[Type here]
C) Manufacturing lead time D) Customer-response time Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 92) Companies that use manufacturing lead time as the base for allocating manufacturing costs to products consider that it has the following benefit(s): A) operating profit rises. B) total overhead costs decrease. C) managers are motivated to reduce the time taken to manufacture products. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 93) Inventory carrying costs are the costs of investment tied up in inventory. A) opportunity B) external failure C) internal failure D) prevention Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 94) Increasing the capacity of a A) bottleneck B) strategic C) complex D) Pareto Answer: A
[Type here]
resource reduces manufacturing cycle times and delays.
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 95) In the formula to calculate the average waiting time, the manufacturing time is squared because: A) the shorter the manufacturing time, the less the chance that the machine will be in use when an order arrives. B) the longer the manufacturing time, the greater the chance that the machine will be in use when an order arrives. C) the longer the manufacturing time, the less the chance the machine will be in use when an order arrives. D) the shorter the manufacturing time, the greater the chance that the machine will be in use when an order arrives. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 96) For a fast-food restaurant, the average waiting time might be formulated as: A) [(average number of customers) × (average serving time)2] 2 × [serving capacity – (avg. # of customers × avg. serving time)] B) [(average number of customers) × (average serving time)] 2 (60 minutes) × [number of workers] C) [(average number of customers) × (average serving time)2]/capacity D) (average number of customers) × (average serving time)]2 60 minutes Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial
[Type here]
measures and make recommendations accordingly. Answer the following questions using the information below: O'Grady's Cycle Repairs shop has a variable demand. Historically, its demand has ranged from 20 to 25 bicycle repairs per day with an average of 20. Evan, the mechanic, works eight hours a day, five days a week. Each order is one bicycle repair and each bicycle repair takes 20 minutes. 97) What is the average waiting time, in minutes? A) 4.4 B) 1.6 C) 28.2 D) 50.0 Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 98) What is the cycle time for an order? A) 56.4 minutes per bicycle repair B) 20 minutes per bicycle repair C) 70 minutes per bicycle repair D) 520 minutes per day Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 99) O'Grady's plans to add skateboards to its product line and anticipates that they will average five skateboard repairs per day. Each skateboard takes 12 minutes to repair. What is the average waiting time, in minutes, if Evan continues to be the only mechanic? A) 410.0 minutes B) 112.4 minutes C) 218.0 minutes D) 38.0 minutes Answer: C AACSB: Able to translate knowledge of business and management into practice
[Type here]
Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Answer the following questions using the information below: The tool crib at a large manufacturing company is responsible for providing tools to the factory workers on demand. The tool crib has a variable demand. Historically, its demand has ranged from 150 to 250 small tools per day with an average of 200. Diane, the tool crib attendant, works eight hours a day, five days a week. Each order is for one small tool and each small tool takes Diane 2 minutes to retrieve from the bins. 100) What is the average waiting time, in minutes? A) 7 B) 3 C) 5 D) 2 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 101) What is the cycle time for an order? A) 2 minutes per tool B) 5 minutes per tool C) 3 minutes per tool D) 7 minutes per tool Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 102) Diane has been asked to consider plans to add the retrieval of larger tooling fixtures to her duties. She anticipates that there would be an average of 12 tooling fixtures per day requested. Each tooling fixture would take Diane 4 minutes to retrieve. What is the average waiting time, in minutes, if Diane continues to be the only worker that would retrieve
[Type here]
the small tools as well as the larger tooling fixtures? A) 10 minutes B) 5 minutes C) 15.5 minutes D) 18.5 minutes Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 103) When demand uncertainty is , some unused capacity is desirable. A) low B) non-existent C) average D) high Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 104) One way to increase is to reduce the time it takes for set-ups and processing. A) capacity B) cycle time C) uncertainty D) opportunities Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Answer the following questions using the information below: Gourmet Baking Shop has two departments, mixing and baking. The mixing department is limited by the speed of operating the mixing machine. Baking is limited by the speed of the workers. Baking normally waits for work from mixing. Each department works an eight-hour day. If mixing begins work two hours
[Type here]
earlier than baking 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 240 units. All units produced can be sold even though the change increases inventory stock by 20% from 400 units. The cost of operating the mixing department two more hours each day is $1600. The contribution margin of the finished products is $8 each. Inventory carrying costs are $0.40 per unit per day. 105) What is the total production per day if the change is made? A) 2400 units B) 1200 units C) 6400 units D) 880 units Answer: B AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 106) What is the change in the daily contribution margin if the change is made? A) $(634) B) $(608) C) $272 D) $800 Answer: C Difficulty: Moderate AACSB: Able to translate knowledge of business and management into practice Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Answer the following questions using the information below: Kosciuszko Landscapes produces Landscape photographs for sale through catalogues. 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 Kosciuszko Landscapes 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. This eliminates the bottleneck, and increases finished units produced each day by 300 units. All units produced can be sold. The cost of operating the photo production department four more hours each day is $2800. The contribution margin of the finished products is $15 each.
[Type here]
107) What is the total production per day if the change is made? A) 600 units B) 50 units C) 300 units D) 900 units Answer: D AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 108) What is the change in the daily contribution margin if the change is made? A) $800 B) $2800 C) $1700 D) $250 Answer: C AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 109) Two common operational measures of time are customer-response time and manufacturing lead time. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 110) Customer-response time is a measure of how long it takes for the customer to return a call. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool
[Type here]
Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 111) Conducting business correctly and quickly helps increase revenues and decrease costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 112) Bottlenecks can also occur on the internet when many people try to view a company’s website at the same time, or on a mobile network when too many people are trying to transfer data at the same time. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 113) Two important drivers of time are limited capacity and bottlenecks. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 114) 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 AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 115) A time-driver is any factor that causes a change in the speed of an activity when the factor changes. Answer: True
[Type here]
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 116) When a firm has a bottleneck machine, a good way to manage the bottleneck is to make sure that prior machines produce more units for the bottleneck machine to increase its throughput. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Write your answer in the space provided or on a separate sheet of paper. 117) Acme Cleaning Products has always taken pride in the fact that it had one of the highest customer response times in the home cleaning industry. However, as the products manufactured for this industry have become more complex, the company's customer-response time has declined. Required: Why do you think that response time declined if all other quality factors have remained the same?
Answer: If quality production was one of the other control factors, and the products became more complex, it probably takes more time to inspect and verify the quality of the finished products. Therefore, to maintain the same level of quality, additional time had to be put into the product cycle. Apparently this was not allowed for in setting the production times of the newer, more complex products. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 118) Max's Fastfood Takeaways has a variable demand. The daily demand ranges from 100 to 150 customers a day who average purchasing 5 items each. The average daily demand is 125 customers. The convenience store currently operates 6 hours a day. Each order takes approximately 2 minutes. Required:
[Type here]
a. What is the average customer waiting time, in minutes? b. What is the cycle time for an order? c. Ralph has decided that the waiting time is too long and has increased his workday to 7.5 hours. What is the waiting time now?
Answer: a.
Waiting minutes = [125 × (2)2]/{2 × [360 minutes per day − (125 × 2)]} = 4.54 minutes
b.
Cycle time = waiting time + processing time = 4.54 + 2 = 6.54 minutes
c. Waiting minutes = [125 × (2)2]/{2 × [450 minutes per day − (125 × 2)]} = 1.25 minutes AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 119) Freemantle Laundry has a variable demand. The daily demand ranges from 60 to 100 customers a day with an average of 5 items. The average daily demand is 75 customers. The laundry operates 7 hours a day. Each wash cycle 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 8 hours. What is the waiting time now? Will the customers be any happier?
Answer: a.
Waiting minutes = [75 × (5)2]/{2 × [420 minutes per day − (75 × 5)]} = 20.8 minutes
b.
Cycle time = waiting time + processing time = 20.8 + 5 = 25.8 minutes
c.
Waiting minutes = [75 × (5) 2]/{2 × [480 minutes per day − (75 × 5)]} = 8.9 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 8-hour day, the new reduced waiting time will be a definite improvement. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex
[Type here]
Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 120) Glenelg Motorcycles Company 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?
Answer: a.
Waiting time = [92 × (1.5)2]/{2 × [300 hrs 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)
$64 400
[Type here]
Scooter sales (20 × $450) Total expected sales Manufacturing costs: Motorcycles (92 × $400) Scooters (20 × $200) Expected margin
9000 73 400
$36 800 4000
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
40 800 $32 600
$69 000 10 000 79 000
$46 000 4800
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 $4400 higher without the new assembly line ($32 600 - $28 200). AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 121) Botany Frozen Foods Company prepares frozen food for fast-food restaurants. It has two workstations: cooking and packing. The cooking station is limited by the cooking time of the food. Packing is limited by the speed of the workers. Packing normally waits on food from cooking. Because the demand has increased in recent months to 3200 dozen units, management is considering adding another cooking station or else having the cooks start work earlier. The monthly cost of operating the cooking station one more hour each day is $2800. 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 $9 per dozen. Inventory carrying costs average $2.50 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:
[Type here]
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 = 3200 + (22 × 20) = 3640 b. Current product contribution margin (3200 × $9) costs (200 × $2.50) Current net contribution More hours: Expected product contribution margin (3240 × $9) Carrying costs (280 × $2.50) Increased cost Expected net product contribution
$28 800 (500) $28 300
$29 160 $700 2800
Increase = $28 300 - $25 660 = New cooking station: Expected product contribution margin (3240 × $9) Carrying costs (280 × $2.50) Increased costs ($10 × 22 × 8) Expected net product contribution Increase = $28 300 - $26 700 =
(3500) $25 660 $2640
$29 160 $700 1760
(2460) $26 700 $1600
AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 122) Aunt Lydia's Biscuits prepares frozen gourmet biscuits for shipment to upscale grocery stores as well as mailing to web and catalogue customers. The company has two workstations: cooking and distribution.
[Type here]
The cooking station is limited by the cooking time of the food. Distribution is limited by the speed of the workers. Distribution normally waits on food from cooking. Because the demand has increased in recent months to 4000 dozen biscuits, management is considering adding another oven in the cooking station or else having the cooks start work earlier. The monthly cost of operating the cooking station one more hour each day is $1500. The cost of adding another cooking station would add an average of $8 per hour. The current operating hours total eight hours a day, 24 days a month. The contribution margin of the finished products is currently $2 per dozen. Inventory carrying costs average $0.50 per dozen per month. Either the extra hour or the new cooking station would increase production by 50 dozen a day, with a long-run increase of 100 dozen units in finished goods inventory to 500 dozen. Required: a. What is the total production per month if the change is made? b. What is the increase in the expected monthly product contribution for each of the possible changes? Assume long-run production equals sales. c. What course of action would you recommend?
Answer: a. Total dozen per month = 4000 + (24 × 50) = 5200 b. Current product contribution margin (4000 × $2) Carrying costs (400 × $0.50) Current net contribution More hours: Expected unit contribution margin (5200 × $2) Carrying costs (500 × $0.50) Increased costs Expected net product contribution
$8000 (200) $7800
$10 400 $250 1500
Increase = $8650 - $7800 = New oven in the cooking station: Expected unit contribution margin (5200 × $2) Carrying costs (500 × $0.50) Increased costs ($8 × 24 × 8) Expected net product contribution
[Type here]
(1750) $8650 $850
$10 400 $250 1536
(1786) $8614
Increase = $8614 - $7800 =
$814
c. The most cost-effective option is to have the cooks start to work an hour earlier and work an extra hour each day. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. 123) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Time as a competitive tool Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly. Write your answer in the space provided or on a separate sheet of paper. 124) The last step of the 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:
[Type here]
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 non-financial 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Balanced scorecard and time-related measures Learning Objective: 16.4 Evaluate time-related performance in terms of both financial and nonfinancial measures and make recommendations accordingly.
[Type here]
Chapter 17 Inventory management, just-in-time and simplified costing methods Choose the one alternative that best completes the statement or answers the question. 1) Which of the following industries is likely to have the highest cost of goods sold percentage relative to sales? A) Drug manufacturers B) Computer manufacturers C) Retail organisations D) The percentage will usually depend on the success of a particular company Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 2) In managing inventory, what are the costs of goods acquired from suppliers including incoming freight or transportation costs known as? A) Carrying costs B) Ordering costs C) Stockout costs D) Purchasing costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 3) In managing inventories, the costs of preparing, issuing, and paying purchase orders, plus receiving and inspecting the items included in orders are known as: A) carrying costs. B) purchasing costs. C) ordering costs.
D) stockout costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 4) What are the costs that result from the theft of inventory known as in the managing of inventory? A) Costs of quality B) Stockout costs C) External failure costs D) Shrinkage costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 5) In managing inventory, the costs that result when a company runs out of a particular item for which there is a customer demand are known as: A) shortage costs. B) stockout costs. C) EOQ estimation costs. D) shrinkage costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 6) In managing inventory, the costs that result when features and characteristics of a product or service are not in conformance with the specifications are known as: A) inspection costs. B) design costs. C) costs of quality. D) purchasing costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations
Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 7) In managing inventory, what are the costs that result when a company holds an inventory of goods for sale, known as? A) Interest costs B) Opportunity costs C) Purchasing costs D) Carrying costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 8) In managing inventory, what is a category of costs pertaining to quality? A) Ordering costs B) Purchasing costs C) Prevention costs D) Stockout costs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 9) In managing inventory, the costs associated with inventory obsolescence are included in which of these cost categories? A) Ordering costs B) Labour costs C) Quality costs D) Carrying costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 10) In managing inventory, in which of these categories are the costs associated with inventory storage included in? A) Ordering costs
B) Labour costs C) Quality costs D) Carrying costs Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 11) Retailers generally have a high percentage of net profit to revenues. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 12) The planning, organising, and controlling activities that focus on the flow of materials into, through, and from the organisation is called inventory management. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 13) The freight and transportation costs on goods acquired from suppliers are generally included in purchasing costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 14) The costs of expediting an order from a supplier in response to a stockout include the additional ordering costs, plus any associated transportation costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale.
15) While holding inventory for sale, the costs that arise are called carrying costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 16) In relation to inventory management, shrinkage costs result from water damage to clothing and other soft goods. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 17) In managing inventory, shrinkage is measured by comparing the cost of inventory on the books to the cost of inventory physically counted. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 18) All inventory costs are recorded in the financial accounting system. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. 19) More 'rush' orders occur when inventory data is shared throughout the supply chain. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. Write your answer in the space provided or on a separate sheet of paper. 20) Managing inventories to increase net profit 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. spoilage of stored items f. costs of lost sales as a result of not having an item requested by a customer g. costs of incoming freight h. costs of matching invoices received to the items and the purchase orders i. costs of wages for work-in-process inspections j. costs that result from 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.1 Identify the costs associated with purchasing and holding goods for sale. Choose the one alternative that best completes the statement or answers the question. 21) An assumption of the economic-order-quantity (EOQ) decision model is that: A) no stockouts occur. B) the quantity ordered can vary at each reorder point. C) demand ordering costs and carrying costs fluctuate. D) there will be timely labour costs. Answer: A AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 22) The economic order quantity (EOQ) (EOQ) ignores: A) purchasing costs. B) relevant ordering costs. C) stockout costs. D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 23) The purchase-order lead time is the: A) difference between the products ordered and the products received. B) difference between the times an order is placed and its delivery. C) discrepancies in purchase orders. D) time required to correct errors in the products received. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 24) Which of the following statements about the economic-order-quantity (EOQ) decision model is FALSE? A) It assumes quality costs are irrelevant if quality is unaffected by the number of units purchased. B) It assumes stockout costs are irrelevant if no stockouts occur. C) It assumes purchasing costs are relevant when the cost per unit changes due to the quantity ordered. D) It assumes ordering costs and carrying costs are relevant. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model.
25) Relevant total costs in the economic-order-quantity (EOQ) decision model equal relevant ordering costs plus relevant: A) purchasing costs. B) carrying costs. C) quality costs. D) stockout costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 26) Armidale Distributors is a distributor of DVDs. El Cheapo Electronics is a local retail outlet which sells blank and recorded DVDs. El Cheapo Electronics purchases DVDs from Armidale Distributors at $0.50 per DVD; DVDs are shipped in packages of 100. Armidale Distributors pays all incoming freight, and El Cheapo Electronics does not inspect the DVDs due to Armidale Distributors' reputation for high quality. Annual demand is 104 000 DVDs at a rate of 2000 DVDs per week. El Cheapo Electronics earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available: Relevant ordering costs per purchase order Carrying costs per package per year: Relevant insurance, materials handling, breakage, etc., per year
$45.50
$2.50
What is the required dollar annual return on investment per package? A) $2.50 B) $50.00 C) $10.00 D) $0.50 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Answer the following questions using the information below: Computer Supplies is a distributor of DVDs. Music 4U is a local retail outlet which sells blank and recorded DVDs. Music 4U purchases DVDs from Computer Supplies at $0.25 per DVD; DVDs are shipped
in packages of 100. Computer Supplies pays all incoming freight, and Music 4U does not inspect the DVDs due to Computer Supplies' reputation for high quality. Annual demand is 416 000 DVDs at a rate of 8000 DVDs per week. Music 4U 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 $3.50
$94.50
27) What is the economic order quantity (EOQ)? A) 200 packages B) 874 packages C) 652 packages D) 330 packages Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 28) What are the relevant total costs? A) $1951.70 B) $3583.77 C) $6150.50 D) $2560.20 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 29) How many deliveries will be made during each time period? A) 12.6 deliveries B) 32.0 deliveries C) 26.0 deliveries D) 29.4 deliveries Answer: A
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Answer the following questions using the information below: Appleby Incorporated is a distributor of golf balls. Kel's Golf Supplies is a local retail outlet which sells golf balls. Kel's purchases the golf balls from Appleby Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Appleby Incorporated pays all incoming freight, and Kel's Golf Supplies does not inspect the balls due to Appleby' reputation for high quality. Annual demand is 172 800 golf balls at a rate of 3322 balls per week. Kel'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
$125.00
$0.77
30) If Kel's makes an order (1/12 of annual demand) once per month, what are the relevant total costs? A) $2085.67 B) $1500 C) $2225.00 D) $3000.00 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 31) What is the economic order quantity (EOQ)? A) 200 cartons B) 288 cartons C) 388 cartons D) 300 cartons Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organizations
Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 32) Purchasing at the EOQ recommended level, how many deliveries will be made during each time period? A) 2 deliveries B) 12 deliveries C) 8.3 deliveries D) 6.0 deliveries Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 33) Purchasing at the EOQ recommended level, what are the relevant total costs? A) $3000.00 B) $2085.67 C) $1500.00 D) $2225.00 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Answer the following questions using the information below: The Katoomba Furniture company produces a specialty dining table, and has the following information available concerning its inventory items: Relevant ordering costs per purchase order Relevant carrying costs per year: Required annual return on investment Required other costs per year
$250 10% $14.00
Annual demand is 1000 tables per year. The purchase price per table is $1600. 34) What is the economic order quantity (EOQ)?
A) 150 units B) 54 units C) 100 units D) 75 units Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 35) What are the relevant total costs at the economic order quantity (EOQ)? A) $3500 B) $1000 C) $9328 D) $1500 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 36) What are the total relevant costs, assuming the quantity ordered equals 50 units? A) $4000 B) $3500 C) $5000 D) $9350 Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 37) How many deliveries will be required at the economic order quantity (EOQ)? A) 5.1 deliveries B) 8.2 deliveries C) 1.0 delivery D) 18.5 deliveries
Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 38) The annual relevant total costs are at a minimum when relevant: A) carrying costs are equal to relevant ordering costs. B) ordering costs are greater than the relevant carrying costs. C) carrying costs are greater than the relevant ordering costs. D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 39) The reorder point is simplest to compute when: A) the safety stock amount never varies. B) the number of units sold varies. C) the relevant ordering costs and the relevant carrying costs are equal. D) both demand and purchase-order lead times are known with certainty. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 40) Tamworth Country Music sells 250 DVDs per week. Purchase-order lead time is 1.5 weeks and the economic-order quantity is 550 units. What is the reorder point? A) 1125 units B) 375 units C) 750 units D) 250 units Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 41) Bendigo Deli sells 25 hams per week. Purchase-order lead time is 2 weeks and the economic-order quantity is 75 hams. What is the reorder point? A) 75 hams B) 30 hams C) 50 hams D) 25 hams Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Answer the following questions using the information below: North Ryde Optics sells optical equipment. Vision Lenses manufactures special glass lenses. North Ryde Optics orders 10 400 lenses per year, 200 per week at $20 per lens. Vision Lenses covers all shipping costs. North Ryde Optics earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. North Ryde Optics sells 250 lenses per week. The following data are available: Relevant ordering costs per purchase order $21.25 Relevant insurance, materials handling, breakage, and so on, per year $2.50 42) What is the economic order quantity (EOQ) for North Ryde Optics? A) 325 lenses B) 210 lenses C) 297 lenses D) 228 lenses Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 43) What is the reorder point?
A) 415.5 lenses B) 625 lenses C) 397.5 lenses D) 441 lenses Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Answer the following questions using the information below: The following information applies to Dental Labs Plus, which supplies dental burs (used in dental drills) to dentists throughout Victoria. Dental Labs Plus purchases the dental burs 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
31 200 units 25 20 days $100
44) What are the annual relevant carrying costs, assuming each order was made at the economic-order-quantity (EOQ) amount? A) $1000 B) $6000 C) $2500 D) $200 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 45) What is the economic order quantity (EOQ) assuming each order was made at the economic-order-quantity (EOQ) amount? A) 1560 units B) 1040 units C) 1248 units D) 500 units
Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 46) What is the reorder point? A) 1560 units B) 1714 units C) 780 units D) 1680 units Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 47) The major relevant costs in maintaining safety stock are: A) ordering costs and stockout costs. B) stockout costs and carrying costs. C) ordering costs and purchasing costs. D) carrying costs and purchasing costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 48) The optimal safety stock level is the quantity of safety stock that minimises the sum of the annual relevant: A) ordering costs and purchasing costs. B) stockout costs and carrying costs. C) ordering costs and carrying costs. D) ordering costs and stockout costs. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 49) What are the annual relevant carrying costs of inventory comprised of? A) Incremental costs plus the carrying costs B) Incremental costs plus the opportunity costs of capital C) Ordering costs and carrying costs D) Stockout costs and carrying costs Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 50) Decreases in the ordering cost per purchase order and increases in the carrying result in: A) larger relevant total costs. B) smaller relevant total costs. C) smaller EOQ amounts. D) larger EOQ amounts. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 51) The simplest version of the economic order quantity (EOQ) model incorporates only ordering costs, carrying costs and purchasing costs into the calculation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 52) To determine the Economic Order Quantity, the relevant ordering costs are minimised and the relevant carrying costs are maximised.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 53) The Economic Order Quantity decreases with carrying costs, and increases with demand and ordering costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 54) The annual relevant total costs are at a minimum where relevant ordering costs of inventory and relevant carrying costs are equal. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 55) Retailers often hold a fixed level of safety stock to make sure they will be able to fulfil customers’ needs, when they are uncertain about demand for their products or availability of their products from the suppliers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Write your answer in the space provided or on a separate sheet of paper. 56) The only product of a company has an annual demand of 2000 units. The cost of placing an order is $40 and the cost of carrying one unit in inventory for one year is $16. Required:
Determine the economic order quantity (EOQ). Answer: The square root of [(2 × 2000 × $40)/$16] = 100 units AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 57) Cool Enterprises has one particular product that has an annual demand of 1000 units. Total manufacturing costs per unit total $40 and setup costs per batch are $15. Direct material ordering costs for the product total $10 per order. Currently, the carrying costs per unit are 25% of manufacturing costs. Required: Determine the economic manufacturing order quantity. Answer: The square root of [(2 × 1000 × $25)/$10] = 70.71 units AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 58) Sports Uniforms Ltd has an average annual demand for blue, medium polo shirts of 20 000 units. The cost of placing an order is $70 and the cost of carrying one unit in inventory for one year is $25. Required: a. Use the economic-order-quantity (EOQ) 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 × 20 000 × $70)/25] = 335 units b.
Daily demand = 20 000/250 = 80 units Reorder point = 80 units per day × 10 days = 800 units
c. Maximum demand per day
125 units
Maximum lead time Maximum lead time demand Reorder point without safety stocks Safety stock
× 20 days 2500 units 800 units 1700 units
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 59) Sports Uniforms Ltd has an average annual demand for red, large polo shirts of 30 000 units. The cost of placing an order is $75 and the cost of carrying one unit in inventory for one year is $30. Required: a. Use the economic-order-quantity (EOQ) 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 × 30 000 × $75)/$30] = 388 units b. Daily demand = 30 000/250 = 120 units Reorder point = 120 units per day × 10 days =1200 units c. Maximum demand per day Maximum lead time Maximum lead time demand Reorder point without safety stocks Safety stock
125 units × 20 days 2500 units 1200 units 1300 units
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 60) An inventory item of Nullabor Manufacturing has an average daily demand of 20 units with a
maximum daily demand of 24 units. The economic order quantity (EOQ) is 200 units. Without safety stocks, the reorder point is 50 units. Safety stocks are set at 94 units. Required: a. Determine the reorder point with safety stocks. b. Determine the maximum inventory level. c. Determine the average lead time. d. Determine the maximum lead time.
Answer: a. Reorder point without safety stocks Safety stock Reorder point with safety stocks
50 units 94 units 144 units
b. Economic-order quantity Safety stocks Maximum inventory level
200 units 94 units 294 units
c.
Average lead time = 50 units at reorder point/20 units a day = 2.5 days
d. Reorder point with safety stocks is 144 Maximum demand is 24 Maximum lead time = 144/24 = 6 days AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 61) An inventory item of Kalgoorie Manufacturing has an average daily demand of 30 units with a maximum daily demand of 27 units. The economic order quantity (EOQ) is 250 units. Without safety stocks, the reorder point is 50 units. Safety stocks are set at 112 units. Required: a. Determine the reorder point with safety stocks. b. Determine the maximum inventory level. c. Determine the average lead time.
d. Determine the maximum lead time.
Answer: a. Reorder point without safety stocks Safety stock Reorder point with safety stocks
50 units 112 units 162 units
b. Economic-order quantity Safety stocks Maximum inventory level
250 units 112 units 362 units
c.
Average lead time = 50 units at reorder point/30 units a day = 1.67 days
d. Reorder point with safety stocks is 162 Maximum demand is 27 Maximum lead time = 162/27 = 6 days AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 62) Flinders Apiary Company has been ordering 125 units of Beejuice 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 (EOQ) 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
730 365 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 × 730 × $100)/$20] = 85.4 Average inventory
= 85.4/2 = 42.7
Orders per year = 730/85.4 = 8.54 Average daily demand = 730/365 = 2 unit Reorder point
= 10 × 2 = 20 units
Annual ordering costs = 8.54 × $100 = $854 Annual carrying costs = 42.7 × $20 = $854 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 63) Katoomba Horticulture Company has been ordering 150 units of Liquifeed on the recommendation of the salesperson who calls on the company each month. A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity (EOQ) 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
850 365 12 $110 $25
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 × 850 × $110)/$25] = 86.5
Average inventory
= 86.5/2 = 43.25
Orders per year = 850/86.5 = 9.83 Average daily demand = 850/365 = 2.33 units Reorder point
= 12 × 2.33 = 28 units
Annual ordering costs = 9.83 × $110 = $1081.30 Annual carrying costs = 43.25 × $25 = $1081.25 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management in retail organisations Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Choose the one alternative that best completes the statement or answers the question. 64) If Freemantle Ferry Company has a safety stock of 240 units and the average daily demand is 30 units, how many days can be covered if the shipment from the supplier is delayed by 12 days? A) 12.0 days B) 6.7 days C) 8.0 days D) 10.0 days Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 65) If Freemantle Engineering Company has a safety stock of 36 units of a particular item and the average monthly demand is 270 units, how many days can be covered if the shipment from the supplier is delayed by 12 days? Assume a 360 day year. A) 8.0 days B) 12.0 days C) 4.0 days D) 6.7 days Answer: C AACSB: Able to analyse and frame problems
Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 66) If Ballart Collectibles Inc. has a safety stock of 70 units and the average weekly demand is 21 units, how many days can be covered if the shipment from the supplier is delayed? A) 21 days B) 23.3 days C) 35 days D) 3.3 days Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 67) Healesville Toys sells stuffed koalas. Products Inc. manufactures many different stuffed animals. Healesville Toys orders 15 600 koalas per year, 300 per week, at $25 per koala. The manufacturer covers all shipping costs. Healesville Toys earns 12% on its cash investments. The purchase-order lead time is 3 weeks. Healesville Toys sells 210 koalas per week. The following data are available (based on management's estimates): Estimated ordering costs per purchase order $10 Estimated insurance, materials handling, breakage, and so on, per year $3 Actual ordering costs per order $15 What is the economic order quantity (EOQ) using the estimated amounts? A) 325 stuffed koalas B) 361 stuffed koalas C) 119 stuffed koalas D) 273 stuffed koalas Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model.
68) Taronga Toys sells stuffed wombats. Products Inc. manufactures many different stuffed animals. Taronga Toys orders 10 400 wombats per year, 200 per week, at $35 per koala. The manufacturer covers all shipping costs. Taronga Toys earns 10% on its cash investments. The purchase-order lead time is 3 weeks. Taronga Toys sells 185 wombats per week. The following data are available (based on management's estimates): Estimated ordering costs per purchase order $10 Estimated insurance, materials handling, breakage, and so on, per year $3 Actual ordering costs per order $15 Using the estimated amounts above, what is the economic order quantity (EOQ)? A) 119 stuffed wombats B) 335 stuffed wombats C) 325 stuffed wombats D) 273 stuffed wombats Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 69) A conflict between the EOQ model's optimal order quantity and the order quantity the purchasing manager, evaluated on conventional accounting numbers, regarded as optimal is considered a(n): A) problem for the performance evaluation system to resolve. B) goal congruence. C) problem for the chief financial officer to resolve. D) opportunity cost. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Difficulty: Moderate Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Topic: Estimating inventory-related relevant costs and their effects.
AACSB: Able to translate knowledge of business and management into practice Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 70) The annual relevant carrying costs of inventory consist of incremental costs plus the opportunity cost of capital. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 71) The return foregone by investing capital in inventory rather than elsewhere is referred to as the relevant opportunity cost of capital in relation to inventory. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Write your answer in the space provided or on a separate sheet of paper. 72) 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 73) Rockhampton Company 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 QBJ, he was able to recover the following: Average inventory level of QBJ 400 Orders per year 80 Average daily demand 96 Working days per year 250 Annual ordering costs $4000 Annual carrying costs $6000 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 (EOQ).
Answer: Annual demand
= 96 × 250 = 24 000
Cost of placing an order = $4000/80 = $50 per order Carrying cost of one unit = $6000/400 = $15 per unit EOQ = The square root of (2 × 24 000 × $50)/15 = 400 units AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model.
74) Redfern Butchery orders most of its items in lot sizes of 10 units. Average annual demand per side of venison is 720 units per year. Ordering costs are $32.50 per order with an average purchasing price of $130. Annual inventory carrying costs are estimated to be 40% of the unit cost. Required: a. Determine the economic order quantity (EOQ). b. Determine the annual cost savings if the shop changes from an order size of 10 units to the economic order quantity (EOQ). c. Since the shelf life is limited, the Redfern Butchery 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 × $32.50)/$52] = 30 units b. Current 10-unit order: Ordering costs ($32.50 × 720/10) Carrying costs ($130 × 0.40 × 10/2) EOQ 30-unit order: Ordering costs ($32.50 × 720/30) Carrying costs ($130 × 0.40 × 30/2) Annual savings c.
$2340 260 780 780
$2600
1560 $1040
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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 75) Gosford Fruit & Vegetables orders most of its items in lot sizes of 15 units. Average annual demand per kilo of kumara is 900 units per year. Ordering costs are $34.15 per order with an average purchasing price of $150. Annual inventory carrying costs are estimated to be 40% of the unit cost. Required:
a. b. c.
Determine the economic order quantity (EOQ). Determine the annual cost savings if the shop changes from an order size of 15 units to the economic order quantity (EOQ). Since the shelf life is limited, the Gosford Fruit & Vegetables 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 × 900 × $34.15)/$60] = 32 units b. Current 15-unit order: Ordering costs ($34.15 × 900/15) Carrying costs ($150 × 0.40 × 15/2) EOQ 30-unit order: Ordering costs ($34.15 × 900/32) Carrying costs ($150 × 0.40 × 32/2) Annual savings c.
$2049 450 960.47 960.00
$2499.00
1920.47 $578.53
Average daily demand = 900/360 = 2.5 per day
Average days supply in EOQ = 32/2 .5 = 12.8 days (1) 20-day shelf life allows for up to 50 units (20 × 2.5), EOQ is acceptable. (2) 10-day shelf life allows for up to 25 units (10 × 2.5), EOQ is not acceptable. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 76) The CEO of Robotics Limited 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 CEO 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. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. 77) Which essential costs should be considered when developing inventory-related relevant costs for use in an economic order quantity (EOQ) model? Why?
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 be the other most beneficial use of the money 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 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. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Estimating inventory-related relevant costs and their effects Learning Objective: 17.2 Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model. Choose the one alternative that best completes the statement or answers the question.
78) As it pertains to purchase orders, what are requirements of just-in-time systems? A) Larger and more frequent purchase orders B) Larger and less frequent purchase orders C) Smaller and less frequent purchase orders D) Smaller and more frequent purchase orders Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Just-in-time purchasing Learning Objective: 17.3 Discuss the rationales underlying just-in-time (JIT) systems. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 79) Placing smaller purchase orders with suppliers is a principle defining a Just-in-time inventory system: . Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Just-in-time purchasing Learning Objective: 17.3 Discuss the rationales underlying just-in-time (JIT) systems. 80) The economic order quantity (EOQ) model solely guides just-in-time purchasing. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Just-in-time purchasing Learning Objective: 17.3 Discuss the rationales underlying just-in-time (JIT) systems. Choose the one alternative that best completes the statement or answers the question. 81) The describes 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) supply chain C) enterprise requirements plan (ERP) D) material requirements plan (MRP) Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Just-in-time purchasing Learning Objective: 17.4 Explain how supply chain analysis and JIT can be used to coordinate activities, achieve synergies and reduce inventories.
82) When using a vendor-managed inventory system to enhance the features of supply chain management, a challenging issue is: A) the sharing of accurate, timely, and relevant information about sales forecasts. B) problems of communication and trust. C) potentially incompatible information systems. D) All of the above. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Just-in-time purchasing Learning Objective: 17.4 Explain how supply chain analysis and JIT can be used to coordinate activities, achieve synergies and reduce inventories. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 83) The social and environmental performance of their suppliers is generally not considered relevant by their customers. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Just-in-time purchasing Learning Objective: 17.4 Explain how supply chain analysis and JIT can be used to coordinate activities, achieve synergies and reduce inventories. 84) 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 organisation or in other organisations. Answer: False AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Just-in-time purchasing Learning Objective: 17.4 Explain how supply chain analysis and JIT can be used to coordinate activities, achieve synergies and reduce inventories. Write your answer in the space provided or on a separate sheet of paper. 85) 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 organisation or in other organisations. Utilising supply chain analysis allows companies to coordinate their activities and reduce inventories throughout the supply chain. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Just-in-time purchasing Learning Objective: 17.4 Explain how supply chain analysis and JIT can be used to coordinate activities, achieve synergies and reduce inventories. 86) Earthmovers Corporation produces bucket loader assemblies for the tractor industry. The product has a long-term life expectancy. Earthmovers, who has a traditional manufacturing and inventory system, is considering the installation of a just-in-time inventory system to improve its cost structure. After a full study by its manufacturing engineering team, industry JIT experts and the main vendors and suppliers of the components used to manufacture the bucket loader assemblies, Earthmovers has developed the following incremental cost-benefit relevant information: - Earthmovers cost of investment capital hurdle rate is 15%. - One-time cost to rearrange the shop floor to create the manufacturing cell workstations is $325 000. - One-time cost to retrain the existing workforce for the JIT required skills is $160 000. - Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $200 000 per year. - The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are $270 000 per year. - Earthmovers 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 $200 000 per year. Required: Determine whether it is in the best interest of Earthmovers Corporation to install a JIT system.
Answer: 1. Initial Investment = $325 000 + 160 000 = $485 000 2. Annual Savings: Defect Cost Reduction = 40% of $200 000 = $80 000 Setup Cost Reduction = 67% of $270 000 = $180 000
Carrying Cost Reduction = $200 000 Total Savings = (80 000 + 180 000 + 200 000) = $460 000 3. Annual Increased Costs: Vendor Premium = 15% of $2 000 000 = $300 000 4. Net Annual Savings = (460 000 - 300 000) = $160 000 5. Savings/Initial Investment = (160 000/485 000) = 33% Since the net savings is returning 33% per year on the initial investment (which is far in excess of the companies hurdle rate of 15%), the JIT project should be implemented. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Just-in-time purchasing Learning Objective: 17.4 Explain how supply chain analysis and JIT can be used to coordinate activities, achieve synergies and reduce inventories. 87) Wheels Company produces wheel assemblies for the Trucking industry. The product has a long-term life expectancy. Earthmovers, who has a traditional manufacturing and inventory system, is considering the installation of a just-in-time inventory system to improve its cost structure. After a full study by its manufacturing engineering team, industry JIT experts and the main vendors and suppliers of the components used to manufacture the wheel assemblies, Wheels Company has developed the following incremental cost-benefit relevant information: - Wheels Company cost of investment capital hurdle rate is 15%. - One-time cost to rearrange the shop floor to create the manufacturing cell workstations is $450 000. - One-time cost to retrain the existing workforce for the JIT required skills is $190 000. - Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $200 000 per year. - The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are $360 000 per year. - Wheels Company 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 $2 500 000 per year. Required:
Determine whether it is in the best interest of Wheels Company to install a JIT system.
Answer: 1. Initial Investment = $450 000 + 190 000 = $640 000 2. Annual Savings: Defect Cost Reduction = 40% of $200 000 = $80 000 Setup Cost Reduction = 67% of $360 000 = $240 000 Carrying Cost Reduction = $200 000 Total Savings = (80 000 + 240 000 + 200 000) = $520 000 3. Annual Increased Costs: Vendor Premium = 15% of $2 500 000 = $375 000 4. Net Annual Savings = (520 000 - 3750 000) = $145 000 5. Savings/Initial Investment = (145 000/640 000) = 22.6% Since the net savings is returning 22.6% per year on the initial investment (which is well in excess of the companies hurdle rate of 15%), the JIT project should be implemented. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Just-in-time purchasing Learning Objective: 17.4 Explain how supply chain analysis and JIT can be used to coordinate activities, achieve synergies and reduce inventories. Choose the one alternative that best completes the statement or answers the question. 88) A push-through system that manufactures finished goods for inventory on the basis of demand forecasts is referred to as: A) just-in-time purchasing. B) economic order quantity (EOQ). C) materials requirements planning. D) relevant total costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Inventory management and MRP Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for
manufacturing. 89) In which way does a management accountant aid in MRP? A) Contacting vendors to make sure they can deliver the materials in time B) Preparing plant appropriation requests C) Maintaining accurate records of inventory and its costs D) Doing journal entries as requested Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Inventory management and MRP Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect 90) A financial benefit of a just-in-time system is that inventory carrying costs are reduced. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and MRP Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. Choose the one alternative that best completes the statement or answers the question. 91) 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 purchasing. B) materials requirements planning. C) economic order quantity (EOQ). D) relevant total costs. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 92) What is a grouping of all the different types of equipment used to make a given product referred to as? A) Total quality management B) Economic order quantity
C) Manufacturing cells D) Material requirements planning Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 93) What is the time required to get equipment, tools, and materials ready to start production called? A) Pass-through time B) Set-up time C) Manufacturing lead time D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 94) The time from when an order is received by manufacturing until it becomes a finished good is called: A) pass-through time. B) work-in-process time. C) manufacturing lead time. D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 95) All of the following are potential financial benefits of just-in-time EXCEPT: A) lower investments in plant space for inventories. B) lower investments in inventories. C) reducing the risk of obsolescence of products. D) reducing manufacturing lead time. Answer: C AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 96) A system that has a single database that collects data and feeds it into software applications supporting all of a company's business activities is a(n): A) economic order quantity (EOQ) (EOQ) system. B) material requirements planning (MRP) system. C) enterprise resource planning (ERP) system. D) just-in-time (JIT) system. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 97) What is considered one disadvantage of an enterprise resource planning (ERP) system? A) The use of standard costing systems is not allowed B) The systems increase lead times when purchasing material from a supplier C) The systems must often be customised to fit the strategic needs of the user D) These systems are not in accordance with Generally Accepted Accounting Principles (GAAP) Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 98) In a just-in-time inventory system, there is less emphasis on the need to eliminate scrap and rework problems. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing.
99) 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 100) An Enterprise Resource Planning (ERP) System is a single database that collects data and feeds it into software applications supporting all of a company's business activities. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 101) Costs of setting up a production run are analogous to ordering costs in the Economic Order Quantity (EOQ) model. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 102) A materials requirement planning system that manufactures finished goods for inventory on the basis of demand forecasts can be described as a 'demand-pull' system. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 103) Just-in-time systems are similar to materials requirement planning systems in that both systems are demand-pull systems. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. Write your answer in the space provided or on a separate sheet of paper. 104) 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 modern equipment, well-trained employees, engineered work and assembly stations, and a controlled environment. During the first two years, the evaluation results were very good with almost all cost variances being favourable. However, recently, things have turned negative. Now everything seems to be operating in a crisis management mode. Although most cost variances remain favourable, the plant's segment contribution is declining and customers are complaining about poor quality and slow delivery. Several customers have suggested that they may take their business elsewhere if things do not improve. The shop floor is in continual turmoil. In-process inventory is everywhere, production employees have difficulty finding jobs that need to be worked on, and scheduling has requested a larger computer to keep track of work-in-process. The sales manager 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 organised to be efficient. A beginning recommendation is to implement 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for
manufacturing. 105) Bathurst Engineering Ltd makes extensive use of financial performance reports for each of its departments. Most departments have been reporting favourable cost variances with the company's current inventory system. However, 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 Quantity Used Average Inventory 2013 60 000 12 000 2014 90 000 22 500 2015 90 000 30 000 2016 75 000 18 750 2017 81 000 27 000 2018 87 000 34 800
Price Variance $1000 F 10 000 F 12 000 F 30 000 U 8000 F 9750 F
Required: a. Calculate 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 2013 60 000 divided by 2014 90 000 divided by 2015 90 000 divided by 2016 75 000 divided by 2017 81 000 divided by 2018 87 000 divided by
Average inventory 12 000 22 500 30 000 18 750 27 000 34 800
Turnover 5.0 4.0 3.0 4.0 3.0 2.5
Favourable purchase prices appear to be associated with decreases in inventory turnover and increases in average inventory levels. Decreases in inventory turnover are a possible signal of the build-up 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 favourable materials price variances, purchasing may be ordering excess inventory, thereby increasing subsequent storage, obsolescence, and handling costs. To obtain a low price, purchasing may be ordering from a supplier whose goods have inferior quality which may, in turn, lead to increased inspection, rework, and perhaps dissatisfied customers.
c.
It appears that two approaches 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. Secondly, additional measures should be used in the evaluation of the purchasing department. Either different financial measures should be used or the addition of non-financial measures should be implemented. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management and JIT production. Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 106) Coffs Fabricators Ltd makes extensive use of financial performance reports for each of its departments. Most departments have been reporting favourable cost variances with the company's current inventory system. However, 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 Quantity Used Average Inventory 2013 6000 1000 2014 10 000 2500 2015 9000 3000 2016 7500 1875 2017 8100 2700 2018 7000 2800
Price Variance $1000 F 10 000 F 12 000 F 30 000 U 8000 F 9750 F
Required: a. Calculate 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 2013 2014 2015 2016 2017 2018
Quantity used 6000 divided by 10 000 divided by 9000 divided by 7500 divided by 8100 divided by 7000 divided by
Average inventory 1000 2500 3000 1875 2700 2800
Turnover 6.0 4.0 3.0 4.0 3.0 2.5
Favourable purchase prices appear to be associated with increases in inventory turnover and decreases in average inventory levels. Increases in inventory turnover are a possible signal of the build-up 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 favourable materials price variances, purchasing may be ordering excess inventory, thereby increasing subsequent storage, obsolescence, and handling costs. To obtain a low price, purchasing may be ordering from a supplier whose goods have inferior quality which may, in turn, lead to increased inspection, rework, and perhaps dissatisfied customers.
c.
It appears that two approaches 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. Secondly, additional measures should be used in the evaluation of the purchasing department. Either different financial measures should be used or the addition of non-financial measures should be implemented. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Inventory management and JIT production Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 107) WA Ore Company mines iron ore for production into various metal products. During recent years, the company has had large fluctuations in its inventories of metal ingots. Much of the volatility of the inventory levels is due to the variability of demand by the company's largest customers. For large orders, the company has the technology to quickly shift production from one product to another. Required: Explain how the company can improve its inventory control system and give the advantages of whatever you recommend.
Answer:
The company can probably benefit from changing to a just-in-time system for inventory control. This would allow the company to be responsive to actual needs rather than finished goods inventory building. The advantages would be: 1. Lower inventory requirements 2. Reductions in carrying and handling costs of inventories 3. Reduction in risks of obsolete inventories 4. Reduction in total manufacturing costs; and 5. Reductions in paperwork. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Inventory management and JIT production Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. 108) What are five features of a just-in-time manufacturing system?
Answer: A just-in-time (JIT) system has many positive features. It organises production in manufacturing cell groups which allow for all equipment used for a given product to be grouped together. This reduces material handling costs and sequences the production process. A second feature of a JIT system is that workers are trained to be multi-skilled. They are trained to operate various machines as well as to do light maintenance and repairs on the machines. A third feature of JIT is that it aggressively works to eliminate defects. Because there is a tight link between the steps, defects are quickly noticed in the next step and addressed before large numbers of units become backlogged. A fourth feature of a JIT system is that it reduces setup time and manufacturing lead time. Reduced setup costs make it more practical to produce smaller batches and react faster to changes in customer demand. A fifth feature of a JIT system is the firm only uses suppliers who are capable of meeting delivery demands in a timely fashion. This also causes an increase in the quality of the goods being received by the firm. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Inventory management and JIT production Learning Objective: 17.5 Distinguish materials requirements planning (MRP) systems from JIT systems for manufacturing. Choose the one alternative that best completes the statement or answers the question. 109) Traditional normal and standard costing systems use: A) backflush costing. B) post-deduct costing. C) sequential tracking.
D) delayed costing. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 110) 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) synchronous costing. B) sequential costing. C) backflush costing. D) dependent costing. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. Answer the following questions using the information below: Bondi Surfers Inc. manufactures surf and boogie boards. 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
$1 200 000 $3 210 000 176 400 125 400
111) Which of the following journal entries properly records the purchase of direct materials? A) Inventory: Raw and In-Process Control 3 210 000 Conversion Costs 3 210 000 B) Conversion Costs 3 210 000 Inventory: Raw and In-Process Control 3 210 000 C) Accounts Payable Control 3 210 000 Inventory: Raw and In-Process Control 3 210 000 D) Inventory: Raw and In-Process Control 3 210 000 Accounts Payable Control 3 210 000 Answer: D
AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 112) The following entry properly records conversion costs: A) Conversion Costs 1 200 000 Inventory: Direct Materials 1 200 000 B) Conversion Costs 1 200 000 Various Accounts 1 200 000 C) Inventory: Direct Materials 1 200 000 Conversion Costs 1 200 000 D) Various Accounts 1 200 000 Conversion Costs 1 200 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 113) The following entry properly records the cost of goods sold for the month: A) Cost of Goods Sold 3 135 000 Work-in-Process 3 135 000 B) Finished Goods 3 135 000 Cost of Goods Sold 3 135 000 C) Cost of Goods Sold 3 135 000 Finished Goods 3 135 000 D) Finished Goods 3 135 000 Work-in-Process 3 135 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. Answer the following questions using the information below: Complete Microfilm Products manufactures microfilm cameras. For October, 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 - October $90 400 Direct materials purchased - October $250 400 Units produced - October 80 000 units Units sold - October 75 000 units Selling price $10 each 114) The following journal entry properly reflects the purchase of materials in a JIT environment: A) Inventory: Raw and In-Process 250 400 Accounts Payable Control 250 400 B) Allocated Costs: Direct Materials 250 400 Inventory: Raw and Material 250 400 C) Accounts Payable Control 250 400 Materials Inventory 250 400 D) Accounts Payable Control 250 400 Allocated Costs: Direct Materials 250 400 Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 115) Which of the following journal entries would be recorded when units are sold for the month? A) Cost of Goods Sold 319 500 Inventory: Raw and In-Process 229 500 Conversion Costs Allocated 90 000 B) Cost of Goods Sold 319 500 Inventory: Raw and In-Process 234 750 Conversion Costs Allocated 84 750 C) Cost of Goods Sold 319 500 Inventory: Raw and In-Process 319 500 D) Inventory: Raw and In-Process 234 750 Conversion Costs Allocated 84 750 Cost of Goods Sold 319 500 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 116) Which of the following entries would occur if the only trigger point is the production of finished
units? A) Inventory: Raw and In-Process Control 234 750 Conversion Costs Allocated 84 750 Cost of Goods Sold 319 500 B) Accounts Payable Control 250 400 Conversion Costs Allocated 90 400 Finished Goods 340 800 C) Finished Goods 340 800 Accounts Payable Control 250 400 Conversion Costs Allocated 90 400 D) Cost of Goods Sold 319 500 Inventory: Raw and In-Process Control 229 500 Conversion Costs Allocated 90 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 117) Which type of companies would benefit from backflush costing? Companies : A) that require audit trails. B) whose inventories vary from period to period. C) which have fast manufacturing lead times. D) Both A and B are correct. Answer: C AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Moderate Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 118) The implications of JIT and backflush costing systems for activity-based costing systems include: A) more of the costs are direct B) overhead cost allocations are reduced C) Neither of these answers are correct. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Moderate
Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 119) Lean accounting: A) does not compute costs for individual products. B) is much simpler than traditional product costing. C) Neither of these answers are correct. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.8 Explain the principles of lean accounting. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 120) In a backflush-costing system, no record of work-in-process appears in the accounting records. Answer: True AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Complex Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 121) Backflush costing is a costing system that omits recording some or all of the journal entries relating to the stages from purchase of direct materials to the sales of finished goods. Answer: True AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Moderate Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 122) In inventory management a trigger point refers to the inventory level at which a reorder is generated. Answer: False AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Moderate Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems.
123) A firm using a backflush costing system will always use actual costs rather than standard costs. Answer: False AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Moderate Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 124) The 'flush' in backflush refers to the fact that there are no variances in a backflush costing system using standard costs. Answer: False AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Moderate Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 125) Companies that have fast manufacturing lead times usually find that a version of backflush costing will report cost numbers similar to what a sequential costing approach would report. Answer: True AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Complex Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 126) Backflush costing is usually restricted to companies adopting JIT production methods. Answer: False AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Complex Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 127) A positive aspect of backflush costing is the presence of the visible audit trail. Answer: False AACSB: Able to analyse and frame problems Topic: Backflush costing Difficulty: Complex Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional
inventory costing systems. 128) 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. Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Backflush costing Learning Objective: 17.8 Explain the principles of lean accounting. Write your answer in the space provided or on a separate sheet of paper. 129) Bendigo Visual Corporation manufactures screens for laptop computers. 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
$1 740 000 $230 $170 23 700 22 800
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
1 740 000 1 740 000
To record finished goods: Finished Goods (23 700 × $400) 9 480 000 Inventory - Materials and In-process Control (23 700 × 230) Conversion Costs Allocated (23 700 × 170)
5 451 000 4 029 000
To record sale of 22 800 units: Cost of Finished Goods Sold (22 800 × 400) Finished Goods
9 120 000 9 120 000
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 130) Satellite Access Corporation manufactures set-top 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
$870 000 $115 $85 11 850 11 200
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
870 000 870 000
To record finished goods: Finished Goods (11 850 × $200) 2,370 000 Inventory - Materials and In-process Control (11 850 × 115) Conversion Costs Allocated (11 850 × 85)
1 362 750 1 007 250
To record sale of 11 400 units: Cost of Finished Goods Sold (11 400 × 200) 2 280 000 Finished Goods 2 280 000 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 131) Queensland 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
$464 000 $90 $210 4800 4200
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
464 000 464 000
To record finished goods: Finished Goods (4800 × $300) Accounts Payable Control (4800 × 90) Conversion Costs Allocated (4800 × 210) To record sale of 4200 units:
1 440 000 432 000 1 008 000
Cost of Finished Goods Sold (4200 × 300) 1 260 000 Finished Goods 1 260 000 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 132) 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 $2.60 Conversion costs 4.20 Total $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, 3000 filters were produced and shipped. Materials were purchased at a cost of $8450 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 Accounts Payable Conversion Costs Various Credits Cost of Goods Sold Materials Inventory Conversion Costs
8450 8450 13 650 13 650 22 100 8450 13 650
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.6 Describe the journal entries required in backflush costing. 133) Explain why backflush costing does not strictly adhere to generally accepted accounting principles and 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 recognised in the accounting records. Work-in-process consists of unfinished goods. Substantial business resources were dedicated to their production, and should be recognised 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 minimise inventories thus minimising 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. AACSB: Able to translate knowledge of business and management into practice and written and oral communication Topic: Backflush costing Difficulty: Complex Learning Objective: 17.7 Describe different ways in which backflush costing can simplify traditional inventory costing systems. 134) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Backflush costing Learning Objective: 17.8 Explain the principles of lean accounting.
Chapter 18 Capital budgeting and cost analysis Choose the one alternative that best completes the statement or answers the question. 1) involves significant financial investments in projects to develop new products, expand production capacity or remodel current production facilities. A) Capital budgeting B) Working capital C) Project-cost budgeting D) Master budgeting Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Two dimensions of cost analysis Learning Objective: 18.1 Explain how capital budgeting incorporates the time value of money into multiyear analysis. 2) What is the accounting system that corresponds to the project dimension in capital budgeting called? A) Accrual accounting rate-of-return B) Net present value method C) Life-cycle budgeting and costing D) Internal rate-of-return Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Two dimensions of cost analysis Learning Objective: 18.1 Explain how capital budgeting incorporates the time value of money into multiyear analysis. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 3) Capital budgeting focuses on projects over their entire lives to consider all the cash flows or cash savings from investing in a single project. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Two dimensions of cost analysis Learning Objective: 18.1 Explain how capital budgeting incorporates the time value of money into multiyear analysis.
4) A capital budget spans only a one-year period. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Two dimensions of cost analysis Learning Objective: 18.1 Explain how capital budgeting incorporates the time value of money into multiyear analysis. Write your answer in the space provided or on a separate sheet of paper. 5) Explain why a corporation's customer base is considered an intangible asset.
Answer: A corporation's customer base is considered an intangible asset because if it is handled properly, a corporation's existing customers will be a source of revenues for an indefinite time period. One could make the case that the customer base is like an annuity — a steady source of revenues and earnings. Thus it is an asset, although an intangible one. An existing customer usually will stay with a corporation if he or she is handled properly. Usually there is minimal marginal cost in retaining a customer other than producing a satisfactory product. In contrast, attracting new customers takes time, effort, and most times substantial marketing dollars. Thus, it is much easier to retain a current customer than to obtain a new one. This is why the existing customer base is considered an asset. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Two dimensions of cost analysis Learning Objective: 18.1 Explain how capital budgeting incorporates the time value of money into multiyear analysis. Choose the one alternative that best completes the statement or answers the question. 6) During which stage of the capital budgeting process is the type of capital expenditure project identified as being necessary to accomplish organisation objectives? A) Make decisions by choosing among alternatives stage B) Collect information stage C) Implement the decision stage D) Identify the problem stage Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting
Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 7) During which stage of the capital budgeting process does marketing query the potential revenue numbers? A) Implement the decision stage B) Make decisions by choosing among alternatives stage C) Identify the problem stage D) Collect information stage Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 8) The stage of the capital budgeting process that considers the expected costs and the expected benefits of alternative capital investments is the: A) evaluate each possible course of action stage. B) collect information stage. C) identify the problem stage. D) make decisions by choosing among alternatives stage. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 9) What stage of the capital budgeting process involves choosing the projects for implementation? A) Make decisions by choosing among alternatives stage B) Management-control stage C) Evaluate each possible course of action stage D) Identify the problem stage Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 10) The stage of the capital-budgeting process in which projects get underway and performance is monitored is the: A) identify problems stage.
B) collect relevant information stage. C) implement the decision, evaluate performance, and learn stage. D) evaluate each possible course of action stage. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 11) What are the two factors capital budgeting emphasises? A) Qualitative and non-financial B) Quantitative and non-financial C) Qualitative and financial D) Quantitative and financial Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 12) The following are included in the formal financial analysis of a capital budgeting program except for: A) safety of employees. B) quality of the output. C) cash flow. D) both A and B. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 13) During which stage of the capital budgeting process does a firm obtain funding for the project? A) Make decisions by choosing among alternatives stage B) Implement the decision, evaluate performance and learn stage C) Evaluate each possible course of action stage D) Collect relevant information stage Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting
Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 14) The 'identify the problem' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 15) The 'collect relevant information' stage of capital budgeting gathers information from all parts of the value chain to evaluate alternative projects. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 16) The 'evaluate each possible course of action and select the best one' stage of the capital budgeting process consists of determining which investment yields the greatest benefit and the least cost to the organisation. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 17) The 'determine possible courses of action and consider the consequences of each' stage of the capital budgeting process consists of forecasting all potential net profit additions that are attributable to the alternative projects. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 18) The very last step in the final stage in the capital budgeting process is to make the investment identified previously. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. Write your answer in the space provided or on a separate sheet of paper. 19) 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 Stages
Examples a. Issuing shares for the funds to purchase new equipment b. Learning that 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 is considered too high f. Will introducing the new product substantially upgrade our image as a producer of quality products? g. Research indicates there are five machines on the market capable of producing our product at a competitive cost h. Use of the internal rate of return for each alternative
Answer: a. Implement the Decision, Evaluate Performance and Learn b. Obtain Information c. Identify Projects d. Implement the Decision, Evaluate Performance and Learn e. Identify Projects f. Obtain Information g. Obtain Information h. Make Decisions by Choosing Among Alternatives AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project.
20) Explain capital budgeting and 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 organisation objectives and strategies. Stage 2 is the obtain information stage in which a firm gathers information from all parts of the value chain to analyse 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 organisation. 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 realised cash flows, compare against the forecast numbers and revise plans if necessary. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. 21) Aluminum Casting Company wants to buy a moulding machine that can be integrated into its computerised manufacturing process. It has received three bids, and related manufacturer's specifications, for the machine. 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 $8000 of each other. The CEO just doesn't know which vendor to choose since all of the selection criteria are so close together. Required: What suggestions do you have for the CEO?
Answer: The CEO needs to consider non-financial 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate
Topic: Stages of capital budgeting Learning Objective: 18.2 Describe the five stages of capital budgeting for a project. Choose the one alternative that best completes the statement or answers the question. 22) The following capital budgeting technique(s) measure all expected future cash inflows and outflows as if they occurred at a single point in time: A) internal rate-of-return B) net present value C) payback D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 23) What do discounted cash flow methods for capital budgeting focus on? A) Cash outflows B) Operating profit C) Cash inflows D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 24) What rate of return is used in calculating net present value of a project? A) Internal rate of return B) Rate of return required by the investment bankers C) Required rate of return D) None of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method.
25) Which of the following methods is not one used by management in analysing the expected results of capital budgeting decisions? A) Payback method B) Future-value cash-flow method C) Discounted cash-flow method D) Accrual accounting rate-of-return method Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 26) Which of the following capital budgeting methods 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) Net present value method B) Accrual accounting rate-of-return method C) Payback method D) Sensitivity method Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 27) 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 6% and you have a 20-year work life? A) $120 102 B) $27 184 C) $376 476 D) $14 565 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method.
28) Assume your goal in life is to retire with 1.5 million dollars. How much would you need to save at the end of each year if interest rates average 5% and you have a 25-year work life? A) $33 754 B) $27 798 C) $31 429 D) $24 555 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 29) 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 investment rates average 9% and you have a 15-year work life? A) $41 286 B) $34 059 C) $37 853 D) $25 554 Answer: B Difficulty: Complex Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. Topic: Discounted cash flow AACSB: Able to analyse and frame problems Answer the following questions using the information below: Cronulla Cleaners is 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. The machine may be sold for $50 000 now. The new machine will cost $200 000 and an additional cash investment in working capital of $50 000 will be required. The new machine will reduce the average time required to wash clothing and will decrease labour costs. The investment is expected to net $45 000 in additional cash inflows during the year of acquisition and $135 000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will occur throughout the year but will be recognised 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. 30) 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) $53 800; yes
B) $45 000; no C) $(53 800); no D) $(45 000); yes Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 31) What is the net present value of the investment, assuming the required rate of return is 24%? Would the company want to purchase the new machine? A) $32 800; no B) $(5240); no C) $(32 800); yes D) $5240; yes Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. Answer the following questions using the information below: Footscray Hospital is considering purchasing a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. The machine may be sold for $45 000 now. The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required. The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital. The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will occur throughout the year but are recognised at the end of each year. Ignore income taxes. The working capital investment will not be recovered at the end of the asset's life. 32) What is the net present value of the investment, assuming the required rate of return is 12%? Would the hospital want to purchase the new machine? A) $83 415; yes B) $25 715; no C) $62 235; yes D) $(62 235); no
Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 33) What is the net present value of the investment, assuming the required rate of return is 20%? Would the hospital want to purchase the new machine? A) $(6170); yes B) $(6170); no C) $6170; yes D) $25 350; yes Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 34) 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) the company will be able to pay the necessary payments on any loans secured to finance the project. C) a positive net present value on a particular project guarantees company profitability. D) Both A and B are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 35) The 'required rate-of-return’ can also be expressed as: A) cost of capital. B) discount rate. C) hurdle rate. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 36) Which of the following results of the net present value method in capital budgeting is the LEAST acceptable? A) $0 B) $(18 000) C) $(7000) D) $(10 000) Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 37) What is the definition of an ANNUITY? A) A series of equal cash flows at regular intervals B) Similar to the definition of a life insurance policy C) An investment product whose funds are invested in the stock market D) Both A and B are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 38) What does the net present value method focus on? A) Cash outflows B) Accrual-accounting net income C) Cash inflows D) Both A and C are correct Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net
present value (NPV) method and the internal rate-of-return (IRR) method. 39) What does it mean when the net present value for a project is zero or positive? A) Project should be accepted B) Expected rate of return is below the required rate of return C) Project should not be accepted D) Both A and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 40) Nullabor Park Department is considering buying a new grass mowing machine. The cost of the machine will be $150 000 and will provide annual cost savings of $40 000. The machine will have a five-year life, at which time the terminal disposal value is expected to be $20 000. Nullabor Park Department is assuming no tax consequences. If Nullabor Park Department has a required rate of return of 10%, which of the following is closest to the present value of the project? A) $1632 B) $150 000 C) $14 060 D) $12 418 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 41) Alice Springs Tailors wants to purchase a new cutting machine for its sewing plant. The investment is expected to generate annual cash inflows of $400 000. The required rate of return is 12% and the current machine is expected to last for four years. What is the maximum dollar amount Alice Springs Tailors would be willing to spend for the machine, assuming its life is also four years? Ignore income taxes. A) $820 600 B) $991 740 C) $607 000 D) $1 214 800 Answer: D AACSB: Able to analyse and frame problems
Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 42) Bendigo Gold Extrusions Corporation wants to purchase a new machine for its factory operations at a cost of $770 000. The investment is expected to generate $290 000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50 000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Ignore income taxes. A) $124 770; yes B) $844 770; yes C) $69 550; no D) $126 750; no Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 43) Wet'n'Wild Water Company provides white water rafting experiences to outdoor enthusiasts. The company is in the process of analysing the purchase of new inflatable rafts and jet boats. 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
$130 000 $32 000 $150 000 $88 000 $10 000 20%
What is the net present value of the investment? Assume there is no recovery of working capital. A) $(2140) B) $8456 C) $86 336 D) $42 362
Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 44) The capital budgeting method calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows. A) internal rate of return B) payback method C) accrual accounting rate-of-return method D) net present value method Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 45) In capital budgeting, a project is accepted only if the internal rate of return equals or: A) exceeds the net present value. B) is less than the required rate of return. C) exceeds the accrual accounting rate of return. D) exceeds the required rate of return. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 46) Bendigo Gold Extrusions Corporation recently purchased a new machine for its factory operations at a cost of $521 250. The investment is expected to generate $141 452 in annual cash flows for a period of six years. The required rate of return is 14%. The old machine has a remaining life of six years. The new machine is expected to have zero value at the end of the six-year period. The disposal value of the old machine at the time of replacement is zero. What is the internal rate of return? A) 15% B) 16% C) 17%
D) 18% Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 47) Coolangatta Corporation recently purchased a new machine for $485 650 with a 10-year life. The old equipment has a remaining life of 10 years and no disposal value at the time of replacement. Net cash flows will be $85 956 per year. What is the internal rate of return? A) 12% B) 16% C) 20% D) 24% Answer: A Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 48) Mildura 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 three years and the new equipment has a value of $73 250 with a three-year life. The expected additional cash inflows are $34 782 per year. What is the internal rate of return? A) 20% B) 16% C) 10% D) 8% Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 49) Gold Coast Glass Company provides glassware 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 has a value of $117 320 with a five-year life. The expected additional cash inflows total $35 000 per year. What is the internal rate of return? A) 10% B) 12% C) 15% D) 20% Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 50) Hunter Valley Horticulture Company provides flowers and other nursery products for decorative purposes in medium to large restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $62 755 with a seven-year life. The expected additional cash inflows total $13 750 per year. What is the internal rate of return? A) 10% B) 12% C) 15% D) 20% Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 51) What is an important advantage of the net present value method of capital budgeting over the internal rate-of-return method? A) The net present values of individual projects can be added to determine the effects of accepting a combination of projects B) The net present value method is expressed as a percentage C) There is no advantage. D) Both A and B are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net
present value (NPV) method and the internal rate-of-return (IRR) method. 52) It is advantageous to use in situations where the required rate of return is not constant for each year of the project. A) the net present value method B) the internal rate-of-return method C) the adjusted rate-of-return method D) sensitivity analysis Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 53) Investment A requires a net investment of $800 000 today. If you require an annuity for the next four years and the required rate of return is 12%, what are the annual cash flows if the net present value (rounded) equals 0? A) $189 483 B) $263 418 C) $295 733 D) $274 848 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 54) What is the minimum annual acceptable rate of return on an investment called? A) Hurdle rate B) Accrual accounting rate of return C) Internal rate of return D) Net present value Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method.
55) Nullabor Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $144 192. The annual cost savings if the new machine is acquired will be $40 000. The machine will have a five-year life, at which time the terminal disposal value is expected to be zero. What is the internal rate of return for Nullabor Park Department? Ignore taxes. A) 10% B) 12% C) 14% D) 16% Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. Answer the following questions using the information below: Footscray Hospital is considering purchasing a new x-ray machine. The existing machine is operable for five more years and will have a zero disposal price. The machine may be sold for $45 000 now. The new machine will cost $325 000 and an additional cash investment in working capital of $10 000 will be required. The new machine will reduce the average time required to take x-rays and will allow additional business to be done at the hospital. The investment is expected to net $30 000 in additional cash inflows during the year of acquisition and $120 000 each additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows will occur throughout the year but are recognised at the end of each year. Ignore income taxes. The working capital investment will not be recovered at the end of the asset's life. 56) What is the net present value of the investment, assuming the required rate of return is 14%? Would the hospital want to purchase the new machine? A) $25 715; no B) $(62 235); no C) $42 910; yes D) $83 415; yes Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method.
57) If the net cash inflows were $20 000 in the first year and $110 000 in the following years, should the X-ray machine be purchased? What is the net present value of the investment, assuming the required rate of return is 14%? Would the hospital want to purchase the new machine? A) $25 350; yes B) $8590; yes C) $8590; no D) $(8590); yes Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 58) If the net cash inflows were $20 000 in the first year and $100 000 in the following years, should the X-ray machine be purchased? What is the net present value of the investment, assuming the required rate of return is 14%? Would the hospital want to purchase the new machine? A) $(16 960); yes B) $(16 960); no C) $16 960; yes D) $25 350; yes Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 59) Discounted cash flow methods measure all the expected future cash inflows and outflows of a project as if they occurred at equal intervals over the life of the project. Answer: False AACSB: Able to analyse and frame problems Topic: Discounted cash flow Difficulty: Moderate Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 60) Discounted cash flow methods focus on operating profit. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 61) The common discounted cash flow methods are net present value, internal rate of return, and payback. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 62) The net present value method calculates the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the hurdle rate. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 63) Internal rate-of-return is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 64) A capital budgeting project is accepted if the required rate-of-return equals or exceeds the internal rate-of-return. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method.
65) 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 66) The net present value method can indicate erroneous decisions as it implicitly assumes that project cash flows can be reinvested at the project's rate-of-return. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. Write your answer in the space provided or on a separate sheet of paper. 67) Adelaide Machine Company is evaluating a capital expenditure proposal that requires an initial investment of $83 840 and has predicted cash inflows of $20 000 per year for 10 years. It will have no salvage value. Required: a. Using a required rate of return of 16%, determine the net present value of the investment proposal. b. Determine the proposal's internal rate of return.
Answer: a.
Initial investment Annual cash flows Net present value
Predicted Cash Flows Year(s) PV Factor $(83 840) 0 1.000 20 000 10 4.833
PV of Cash Flows $(83 840) 96 660 $12 820
b. Present value factor of an annuity of $1.00 = $83 840/$20 000 = 4.192. From the annuity table, the 4.192 factor is closest to the 10-year row at the 20% column. Therefore, the IRR is 20%. AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 68) Network Service centre is considering purchasing a new computer network for $82 000. It will require additional working capital of $13 000. Its anticipated eight-year life will generate additional client revenue of $33 000 annually with operating costs, excluding depreciation, of $15 000. At the end of eight years, it will have a salvage value of $9500 and return $5000 in working capital. Ignore taxes. 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.
Initial investment Annual operations, net Salvage value, work cap Net present value
Predicted Cash Flows Year(s) PV Factor $(95 000) 0 1.000 18 000 1-8 4.639 14 500 8 0.351
PV of Cash Flows $(95 000) 83 502 5090 $(6408)
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%. Predicted PV of Cash Cash Flows Year(s) PV Factor Flows Initial investment $(95 000) 0 1.000 $(95 000) Annual operations, net 18 000 1-8 4.968 89 424 Salvage value, work cap 14 500 8 0.404 5858 Net present value $282 The (almost) zero net present value indicates an internal rate of return of approximately 12%. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method.
69) Darwin Dental Services is considering purchasing a new dental chair for $727 000. It will require additional working capital of $63 000. Its anticipated eight-year life will generate additional client revenue of $303 000 annually with operating costs, excluding depreciation, of $150 000. At the end of eight years, it will have a salvage value of $59 500 and return $15 000 in working capital. Ignore taxes. 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.
Initial investment Annual operations, net Salvage value, work cap Net present value
Predicted Cash Flows Year(s) PV Factor $(790 000) 0 1.000 153 000 1-8 4.639 74 500 8 0.351
PV of Cash Flows $(790 000) 709 767 26 150 $(54 083)
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%. Predicted PV of Cash Cash Flows Year(s) PV Factor Flows Initial investment $(790 000) 0 1.000 $(790 000) Annual operations, net 153 000 1-8 4.968 760 104 Salvage value, work cap 74 500 8 0.404 29 957 Net present value $61 The (almost) zero net present value indicates an internal rate of return of approximately 12%. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 70) Rockhampton Engineering needs to overhaul its drill press or buy a new one. The facts have been gathered, and they are as follows:
Purchase Price, New
Current Machine New Machine $80 000 $100 000
Current book value Overhaul needed now Annual cash operating costs Current salvage value Salvage value in five years
30 000 40 000 70 000 20 000 5000
40 000 20 000
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 Salvage value Net present value
Predicted Cash Flows Year(s) PV Factor $(40 000) 0 1.000 (70 000) 1-5 2.991 5000 5 0.402
PV of Cash Flows $(40 000) (209 370) 2010 $(247 360)
Predicted Cash Flows Year(s) PV Factor $(100 000) 0 1.000 20 000 0 1.000 (40 000) 1-5 2.991 20 000 5 0.402
PV of Cash Flows $(100 000) 20 000 (119 640) 8040 $(191 600)
Present value of new system:
Investment Salvage value, old Annual operations Salvage value Net present value
Buying the new equipment is the most desirable by $55 760 ($247 360 - $191 600). AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 71) The Rockhampton Chronicle needs to overhaul its printing press or buy a new one. The facts have been
gathered, and they are as follows:
Purchase Price, New Current book value Overhaul needed now Annual cash operating costs Current salvage value Salvage value in five years
Current Machine New Machine $240 000 $450 000 90 000 120 000 210 000 120 000 60 000 15 000 60 000
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 Salvage value Net present value
Predicted Cash Flows Year(s) PV Factor $(120 000) 0 1.000 (210 000) 1-5 2.991 15 000 5 0.402
PV of Cash Flows $(120 000) (628 110) 6030 $(742 080)
Present value of new system: Predicted Cash Flows Year(s) PV Factor $(100 000) 0 1.000 60 000 0 1.000 (120 000) 1-5 2.991 60 000 5 0.402
PV of Cash Flows Investment $(450 000) Salvage value, old 60 000 Annual operations (358 920) Salvage value 24 120 Net present value $(724 800) Buying the new equipment is the most desirable by $17 280 ($742 080 - $724 800). AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net
present value (NPV) method and the internal rate-of-return (IRR) method. 72) Maremount Tyre Company needs to overhaul its auto lift system or buy a new one. The facts have been gathered, and they are as follows:
Purchase Price, New Current book value Overhaul needed now Annual cash operating costs Current salvage value Salvage value in five years
Current Machine New Machine $112 500 $148 000 33 500 27 500 63 000 48 000 40 000 8000 35 000
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 operations Salvage value Net present value
Predicted Cash Flows Year(s) PV Factor $(27 500) 0 1.000 (63 000) 1-5 3.352 8000 5 0.497
PV of Cash Flows $(27 500) (211 176) 3976 $(234 700)
Present value of new system: Predicted Cash Flows Year(s) PV Factor $(148 000) 0 1.000 40 000 0 1.000 (48 000) 1-5 3.352 35 000 5 0.497
PV of Cash Flows Investment $(148 000) Salvage value, old 40 000 Annual operations (160 896) Salvage value 17 395 Net present value $(251 501) Overhauling the existing system is the most desirable by $16 801 [$(234 700) - $(251 501)]. AACSB: Able to analyse and frame problems
Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 73) Townsville Optical needs to overhaul its vision tester or buy a new one. The facts have been gathered, and they are as follows:
Purchase Price, New Current book value Overhaul needed now Annual cash operating costs Current salvage value Salvage value in five years
Current Machine New Machine $112 500 $248 000 33 500 82 500 70 000 40 000 50 000 18 000 70 000
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: Predicted Cash Flows Year(s) PV Factor $(82 500) 0 1.000 (70 000) 1-5 3.352 18 000 5 0.497
Overhaul Annual operations Salvage value Net present value Present value of new system:
Investment Salvage value, old Annual operations Salvage value Net present value
Predicted Cash Flows Year(s) PV Factor $(248 000) 0 1.000 50 000 0 1.000 (40 000) 1-5 3.352 70 000 5 0.497
PV of Cash Flows $(82 500) (234 640) 8946 $(308 194)
PV of Cash Flows $(248 000) 50 000 (134 080) 34 790 $(297 290)
Purchasing the new system is the most desirable by $10 904 [$(308 194) - $(297 290)]. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. 74) Lake Torrens Boating Company is interested in replacing a moulding machine with a new improved model. The old machine has a salvage value of $20 000 now and a predicted salvage value of $4000 in six years, if rebuilt. If the old machine is kept, it must be rebuilt in one year at a predicted cost of $40 000. The new machine costs $160 000 and has a predicted salvage value of $24 000 at the end of six years. If purchased, the new machine will allow cash savings of $40 000 for each of the first three years, and $20 000 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 Cash Flows Year(s) PV Factor PV of Cash Flows Initial investment $(160 000) 0 1.000 $(160 000) Salvage of old 20 000 0 1.000 20 000 Annual operations 40 000 1-3 2.322 92 880 Annual operations 20 000 4-6 (3.889-2.322) 31 340 Save by not rebuilding 40 000 1 0.877 35 080 Salvage of new 24 000 6 0.456 10 944 Net present value $30 244 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. Write your answer in the space provided or on a separate sheet of paper. 75) Retail Outlet is looking for a new location near a shopping centre. It is considering purchasing a building rather than leasing, as it has done in the past. Three retail buildings near a new shopping centre 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Discounted cash flow Learning Objective: 18.3 Use and evaluate the two main discounted cash flow (DCF) methods: the net present value (NPV) method and the internal rate-of-return (IRR) method. Choose the one alternative that best completes the statement or answers the question. 76) 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) adjusted rate-of-return analysis. B) sensitivity analysis. C) internal rate-of-return analysis. D) net present value analysis. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sensitivity analysis Learning Objective: 18.4 Evaluate the sensitivity of net present value calculations to assumed cash flows and required rate of return. Choose the one alternative that best completes the statement or answers the question. 77) 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 is called:
A) the accrued accounting rate-of-return method. B) the book-value method. C) internal rate-of-return method. D) payback method. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 78) The net initial investment for a piece of construction equipment is $1 000 000. Annual cash inflows are expected to increase by $200 000 per year. The equipment has an eight-year useful life. The payback period is : A) 8 years B) 7 years C) 6 years D) 5 years Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 79) What does the payback method of capital budgeting approach highlight? A) the liquidity of the investment B) cash flow over the life of the investment C) having as lengthy payback time as possible D) the tax savings of the depreciation amounts Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 80) Nullabor Park Department is considering a new capital investment. The following information is available on the investment. The cost of the machine will be $144 192. The annual cost savings if the new machine is acquired will be $40 000. The machine will have a five-year life, at which time the terminal disposal value is expected to be zero. Nullabor Park is assuming no tax consequences. Nullabor Park has a 10% required rate of return. What is the payback period on this investment? A) 3 years
B) 3.6 years C) 4.2 years D) 5 years Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 81) Gold Coast Glass 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 has a value of $115 500 with a five-year life. The expected additional cash inflows are $35 000 per year. What is the payback period on this investment? A) 2.5 years B) 3 years C) 3.3 years D) 5 years Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 82) Hunter Valley Horticulture Company provides flowers and other nursery products for decorative purposes in medium to large restaurants and businesses. The company has been investigating the purchase of a new specially equipped van for deliveries. The van has a value of $61 875 with a seven-year life. The expected additional cash inflows total $13 750 per year. What is the payback period on this investment? A) 3 years B) 4.5 years C) 6 years D) NA - project not feasible Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect.
83) Unlike the net present value method and the internal rate-of-return method, the payback method does not distinguish between the origins of the cash flows. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 84) The payback method takes into account cash flows over the whole life of the project. Answer: False AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 85) The payback method allows for managers to highlight liquidity. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. Write your answer in the space provided or on a separate sheet of paper. 86) Terrain Vehicle has received three proposals for its new vehicle-painting machine. Information on each proposal is as follows: Proposal X Proposal Y Proposal Z Initial investment in equipment $180 000 $120 000 $190 000 Working capital needed 0 0 10 000 Annual cash saved by operations: Year 1 75 000 50 000 80 000 Year 2 75 000 48 000 80 000 Year 3 75 000 44 000 80 000 Year 4 75 000 8000 80 000 Salvage value end of year: Year 1 100 000 80 000 60 000 Year 2 80 000 60 000 50 000 Year 3 40 000 40 000 30 000 Year 4 10 000 20 000 15 000 Working capital returned 0 0 10 000 Required:
Determine each proposal's payback.
Answer: Proposal X payback = $180 000/$75 000 = 2.4 years Proposal Y Year 0 Year 1 Year 2 Year 3
Cash Savings Savings Accumulated $50 000 48 000 44 000
To be Recovered $120 000 $50 000 70 000 98 000 22 000 142 000 0
Proposal Y payback = 2 years plus $22 000/$44 000 or 2.5 years Proposal Z payback = ($190 000 + $10 000)/$80 000 = 2.5 years AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 87) Central Trailer Supply has received three proposals for its new trailer assembly line. Information on each proposal is as follows:
Initial investment in equipment Working capital needed Annual cash saved by operations: Year 1 Year 2 Year 3 Year 4 Salvage value end of year: Year 1 Year 2 Year 3 Year 4 Working capital returned: Required:
Proposal X Proposal Y Proposal Z $115 000 $130 000 $145 000 0 0 15 000 55 000 55 000 55 000 55 000
60 000 40 000 40 000 10 000
60 000 60 000 60 000 60 000
30 000 25 000 20 000 15 000 0
25 000 20 000 15 000 10 000 0
45 000 40 000 35 000 25 000 15 000
Determine each proposal's payback.
Answer: Proposal X payback = $115 000/$55 000 = 2.09 years Proposal Y Year 0 Year 1 Year 2 Year 3
Cash Savings Savings Accumulated
To be Recovered $130 000 $60 000 70 000 100 000 30 000 140 000 0
$60 000 40 000 25 000
Proposal Y payback = 2 years plus $30 000/$40 000 or 2.75 years Proposal Z payback = ($145 000 + $15 000)/$60 000 = 2.67 years AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 88) Supply the missing data for each of the following proposals:
Initial investment Annual net cash inflow Life, in years Salvage value Discounted payback period in years Internal rate of return
Answer: a. Annual cash inflow Present value factor for 10 years Initial investment
Proposal A (a) $60 000 10 $0
Proposal B $62 900 (c) 6 $10 000
Proposal C $226 000 (e) 10 $0
(b) 12%
(d) 24%
5.65 (f)
$60 000 × 5.650 $339 000
b. Discounted payback period = $339 000/$60 000 = 5.65 years c.
Initial investment $62 900 PV of salvage value ($10 000 × 0.275) (2750) Net PV of annual net cash inflow $60 150 Annual cash inflow = $60 150/3.020 = $19 917.22 d. Discounted payback period = $62 900/$19 917.22 = 3.158 e.
Annual net cash inflow = $226 000/5.650 = $40 000
f.
PV factor for 10 years = $226 000/$40 000 = 5.650
Look up value 5.650 in PV of annuity table under 10 years and the internal rate of return is 12%. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 89) Supply the missing data for each of the following proposals: Proposal A Proposal B Initial investment (a) $75 000 Annual net cash inflow $90 000 (c) Life, in years 10 6 Salvage value $0 $10 000 Discounted payback period in years (b) (d) Internal rate of return 12% 24%
Answer: a. Annual cash inflow Present value factor for 10 years Initial investment
$90 000 × 5.650 $508,500
b. Discounted payback period = $508,500/$90 000 = 5.65 years c. Initial investment PV of salvage value ($10 000 × 0.275) Net PV of annual net cash inflow
$75,000 (2750) $72,250
Proposal C $255 000 (e) 10 $0 5.65 (f)
Annual cash inflow = $72,250/3.020 = $23,923.84 d. Discounted payback period = $75,000/$23,923.84 = 3.135 e. Annual net cash inflow = $255,000/5.650 = $45,132.74 f.
PV factor for 10 years = $255,000/$45,132.74 = 5.650
Look up value 5.650 in PV of annuity table under 10 years and the internal rate of return is 12%. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 90) 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 $4000. Its estimated useful life is five years and will have a salvage value of $4000. Recovery of working capital will be $4000 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 discounted payback period of the investment.
Answer: a.
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value
Predicted Cash Flows Year(s) PV Factor $(36 586) 0 1.000 (4000) 0 1.000 10 000 1-5 3.433 4000 5 0.519 4000 5 0.519
PV of Cash Flows $(36 586) (4000) 34 330 2076 2076 $(2104)
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%. Predicted
Year(s)
PV Factor
PV of Cash
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value
Cash Flows $(36 586) (4000) 10 000 4000 4000
0 0 1-5 5 5
1.000 1.000 3.605 0.567 0.567
Flows $(36 586) (4000) 36 050 2268 2268 $-0-
With a zero net present value, the internal rate of return is 12%. c. Discounted payback period = ($36 586 + $4000)/$10 000 = 4.06 years. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 91) Lake Torrens Minimarket desires to buy a new coding machine to help control inventories. The machine sells for $73 172 and requires working capital of $8000. Its estimated useful life is five years and will have a salvage value of $8000. Recovery of working capital will be $8000 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 14% required rate of return. b. Compute the internal rate of return. c. Determine the discounted payback period of the investment.
Answer: a.
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value
Predicted Cash Flows Year(s) PV Factor $(73 172) 0 1.000 (8000) 0 1.000 20 000 1-5 3.433 8000 5 0.519 8000 5 0.519
PV of Cash Flows $(73 172) (8000) 68 660 4152 4152 $(4208)
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 Cash Flows Year(s) PV Factor $(73 172) 0 1.000 (8000) 0 1.000 20 000 1-5 3.605 8000 5 0.567 8000 5 0.567
PV of Cash Flows $(73 172) (8000) 72 100 4536 4536 $-0-
With a zero net present value, the internal rate of return is 12%. c. Discounted payback period = ($73 172 + $8000)/$20 000 = 4.06 years. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 92) 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 discounted payback period of the investment.
Answer: a. Predicted Cash Flows Year(s) PV Factor $(75 000) 0 1.000 (10 000) 0 1.000 20 000 1-6 4.111 10 000 6 0.507 17 560 6 0.507
PV of Cash Flows Investment $(75 000) Working capital needed (10 000) Annual operations 82 220 Working capital returned 5070 Salvage value 8903 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: Predicted Cash Flows Year(s) PV Factor $(75 000) 0 1.000 (10 000) 0 1.000 20 000 1-6 3.685 10 000 6 0.410 17 560 6 0.410
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value With a zero net present value, the internal rate of return is 16%.
PV of Cash Flows $(75 000) (10 000) 73 700 4100 7200 $-0-
c. Discounted payback period = ($75 000 + $10 000)/$20 000 = 4.25 years. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. 93) Westaus Instant Scaffolding desires to buy a new crane and accessories to help install and remove scaffoldings at building sites. The machine sells for $150 000 and requires working capital of $20 000. Its estimated useful life is six years and it will have a salvage value of $35 120. Recovery of working capital will be $20 000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $40 000. Required: a. Calculate the net present value at a 14% required rate of return. b. Calculate the internal rate of return. c. Determine the discounted payback period of the investment.
Answer: a.
Investment Working capital needed Annual operations Working capital returned Salvage value Net present value
Predicted Cash Flows Year(s) PV Factor $(150 000) 0 1.000 (20 000) 0 1.000 40 000 1-6 3.889 20 000 6 0.456 35 120 6 0.456
PV of Cash Flows $(150 000) (20 000) 155 560 9120 16 015 $10 695
b. Trial and error is required. Because net present value is negative in Part a, the internal rate of return is greater than 14%. Start by trying any % above 14% 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) PV Factor $(150 000) 0 1.000 (20 000) 0 1.000 40 000 1-6 3.685 20 000 6 0.410 35 120 6 0.410
PV of Cash Flows $(150 000) (20 000) 147 400 8200 14 399 $-1-
With a zero net present value, the internal rate of return is 16%. c. Discounted payback period = ($150 000 + $20 000)/$40 000 = 4.25 years. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Payback method Learning Objective: 18.5 Use and evaluate the payback and discounted payback methods. Choose the one alternative that best completes the statement or answers the question. 94) The method for capital budgeting divides an accounting measure of income by an accounting measure of investment. A) accrual accounting rate of return B) net present value C) payback D) internal rate of return Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 95) For capital budgeting decisions, the use of the accrual accounting rate of return for evaluating performance is often a stumbling block to the implementation of the: A) most effective tax strategy. B) discounted cash flow method for capital budgeting. C) most effective goal-congruence choice. D) net cash flow. Answer: A
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 96) The accrual accounting rate of return is the method of capital budgeting that is based most closely on the information in the financial statements. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 97) The accrual accounting rate-of-return method is similar to the internal rate-of-return method in that both methods calculate a rate-of-return percentage. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 98) Managers using discounted cash flow methods to make capital budgeting decisions make the same decisions that they would make if they used the accrual accounting rate-of-return methods. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 99) 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. Write your answer in the space provided or on a separate sheet of paper. 100) Kalgoorlie Productions is considering buying an automated machine that costs $250 000. It requires
working capital of $25 000. Annual cash savings are anticipated to be $103 000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $10 000. The working capital will be recovered at the end of the machine's life. Required: Calculate the accrual accounting rate of return based on the initial investment.
Answer: Accrual accounting income
= $103 000 - (($250 000 - $10 000)/5) = $103 000 - $48 000 = $55 000
AARR with initial investment
= $55 000/($250 000 + $25 000) = $55 000/$275 000 = 0.20 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 101) Port Phillip Fisheries need a new navigation system for their fishing boat. 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?
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:
Predicted Cash Flows $ (90 000)
Year (s)
80 000 10 000 45 000
Predicted Cash Flows $ (90 000)
0
1.000
1 2 3
0.877 0.769 0.675
Year (s)
45 000 45 000 45 000
Predicted Cash Flows
PV Factor
Year (s)
PV Factor 0
1.000
1 2 3
0.877 0.769 0.675
PV Factor
PV of Cash Flows $ (90 000) 70 160 7690 30 375 $ 18 225
PV of Cash Flows $ (90 000) 39 465 34 605 30 375 $ 14 445 PV of Cash Flows
Investment Annual Operations Year 1 Net Present Value
$ (90 000)
0
1.000
$ (90 000)
90 000
1
0.877
78 930 $ (11 070)
Accrual Accounting Rate of Return: ($80 000+ $10 000 + $ 45 000)/3 – ($90 000/3) Proposal A:
= 0.167 $90 000
Proposal B: ($45 000 - $30 000)/$90 000 = 0.167 Proposal C: ($90 000 - $90 000) = 0.0 b.
Summary:
Method Payback method ranks Net present value AARR
Proposal A
Proposal B 2.5 1.0 1.5
Proposal C 2.5 2.0 1.5
1.0 3.0 3.0
Even though Proposal C is Number 1 for payback, it came 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 102) Mt Isa Building Company is considering buying an automated machine that costs $500 000. It requires working capital of $50 000. Annual cash savings are anticipated to be $206 000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be working capital will be recovered at the end of the machine's life. Required: Calculate the accrual accounting rate of return based on the initial investment.
Answer:
. The
Accrual accounting income
= $206 000 - (($500 000 - $20 000)/5) = $206 000 - $96 000 = $110 000
AARR with initial investment
= $110 000/($500 000 + $50 000) = $110 000/$550 000 = 0.20 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 103) 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 Difficultyicult to use when the project has uneven cash flows. The payback method 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 method 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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. 104) 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 Proposal 2 Proposal 3 Proposal 4 4 years 4.5 years 6 years 7 years $80 000 $178 000 $166 000 $308 000 12% 14% 11% 13% 8%
6%
4%
7%
Required: How can this information be used in the decision-making process for the new loading facilities? Does it cause any confusion?
Answer: The managers can use the information to determine which proposal is best under the various alternatives. This may be accomplished by ranking each alternative. Also, the managers must determine the factors that are the most important to the company. For example, if short-run risk is high, a short payback period may be highly desirable. In this case, Proposal 1 is best. However, if total cash returned is critical to the company's operations, then Proposal 4 is probably best. Any time that multiple measures are used there may be confusion because very seldom will one proposal appear to be the best with all models. In this case, payback ranks Proposal 1 the best, NPV ranks Proposal 4 the best, IRR ranks Proposal 2 the best, and AARR ranks Proposal 1 the best. The importance of each ranking will depend upon the circumstances of the organisation and the managers must be attuned as to what is most favourable. The net present value and the internal rate-of-return methods are superior because they consider the time-value of money. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method. Write your answer in the space provided or on a separate sheet of paper. 105) Botany Bay Fisheries needs a new refrigeration system on their trawler. They have received three proposals, with related facts as follows:
Initial investment in equipment Annual cash increase in operations: Year 1 Year 2
Proposal A $180 000
Proposal B $180 000
Proposal C $180 000
160 000 20 000
90 000 90 000
180 000 0
Year 3 Salvage value Estimated life
90 000 0 3 yrs
90 000 0 3 yrs
0 0 1 yr
The company uses straight-line depreciation for all capital assets. Required: a. Calculate 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?
Answer: Payback Method Payback for Proposal A:
Year 1 Year 2
$160 000 20 000 $180 000
Year 1 Year 2
$90 000 90 000 $180 000
Year 1
$180 000
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:
Predicted Cash Flows
Year(s)
PV Factor
PV of Cash Flows
$(180 000)
0
1.000
$(180 000)
160 000 20 000 90 000
1 2 3
0.877 0.769 0.675
140 320 15 380 60 750 $36 450
Predicted Cash Flows
Year(s)
PV Factor
PV of Cash Flows
Investment Annual operations Year 1 Year 2 Year 3 Net present value
Proposal C: Investment Annual operations Year 1 Net present value
$(180 000)
0
1.000
$(180 000)
90 000 90 000 90 000
1 2 3
0.877 0.769 0.675
78 930 69 210 60 750 $28 890
Predicted Cash Flows
Year(s)
PV Factor
PV of Cash Flows
$(180 000)
0
1.000
$(180 000)
180 000
1
0.877
157 860 $(22 140)
Accrual Accounting Rate of Return: Proposal A: [(160 000 + $20 000 + $90 000)/3 - ($180 000/3)]/ $180 000 = 0.167 Proposal B: ($90 000 - $60 000)/$180 000 = 0.167 Proposal C: ($180 000 - $180 000)/$180 000 = 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Accrual accounting rate of return method Learning Objective: 18.6 Use and evaluate the accrual accounting rate-of-return (AARR) method.
Choose the one alternative that best completes the statement or answers the question. 106) The most significant manager evaluation and goal congruence issues arise because of inconsistencies between the following methods of choosing among alternatives for capital budgeting purposes: A) payback method and the internal rate-of-return method B) net present value method and the internal rate-of-return method C) payback method and the net present value method D) net present value method and the accrual accounting rate-of-return method Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluation of managers and goal-congruence issues Learning Objective: 18.7 Identify and reduce conflicts from using DCF for capital budgeting decisions and accrual accounting for performance evaluation. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 107) A manager who uses discounted cash flow methods to make capital budgeting decisions does not face goal-congruence issues if the accrual accounting rate of return is used for performance evaluation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluation of managers and goal-congruence issues Learning Objective: 18.7 Identify and reduce conflicts from using DCF for capital budgeting decisions and accrual accounting for performance evaluation. 108) There is an inconsistency in using the net present value method as best for capital budgeting decisions and then using a different method to evaluate performance. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Evaluation of managers and goal-congruence issues Learning Objective: 18.7 Identify and reduce conflicts from using DCF for capital budgeting decisions and accrual accounting for performance evaluation. Write your answer in the space provided or on a separate sheet of paper. 109) 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 profit 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Evaluation of managers and goal-congruence issues Learning Objective: 18.7 Identify and reduce conflicts from using DCF for capital budgeting decisions and accrual accounting for performance evaluation. Choose the one alternative that best completes the statement or answers the question. 110) There no after-tax consequences in capital budgeting for the following items: A) gain or loss on the disposal of the asset B) reduction of working capital balances at the end of the useful life of the capital asset C) cash flow from operations D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 111) The Alpha Beta Corporation sells a capital asset with an original cost of $85 000 and accumulated depreciation of $54 500 for $25 000. Alpha Beta's tax rate is 40%. Calculate the after-tax cash inflow from the disposal of the capital asset. A) ($2200) B) $31 500 C) $27 200 D) $2200 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 112) The Shepparton Corporation sells a capital asset with an original cost of $230 000 and accumulated depreciation of $205 000 for a salvage price of $36 000. Shepparton's tax rate is 30%. Calculate the after-tax cash inflow from the disposal of the capital asset. A) $36 000 B) $2070 C) $11 000
D) $32 700 Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 113) The Silver Shades Corporation sells a capital asset with an original cost of $115 000 and accumulated depreciation of $62 500 for a salvage price of $18 000. Silver Shades's tax rate is 30%. Calculate the after-tax cash inflow from the disposal of the capital asset. A) $18 000 B) $1035 C) $19 035 D) $28 350 Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 114) Echidna Corporation has an annual cash inflow from operations from its investment in a capital asset of $50 000 each year for five years. The corporation's income tax rate is 40%. Calculate the five years' total after-tax cash inflow from operations. A) $175 000 B) $50 000 C) $150 000 D) $250 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 115) The Launceston Corporation has an annual cash inflow from operations from its investment in a capital asset of $11 000 each year for five years. The corporation's income tax rate is 25%. Calculate the five years' total after-tax cash inflow from operations. A) $55 000 B) $41 250 C) $5000 D) $44 000
Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 116) All of the following are major categories of cash flows in capital investment decisions EXCEPT: A) the initial working capital investment B) the initial investment in machines and working capital C) depreciation expense reported on the income statement D) recurring operating cash flows Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 117) An example of a sunk cost in a capital budgeting decision for new equipment is: A) the book value of the old equipment B) an increase in working capital required by a particular investment choice C) the necessary transportation costs on the new equipment D) All of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 118) Depreciation is usually not considered an operating cash flow in capital budgeting because: A) depreciation usually does not result in an increase in working capital B) depreciation is usually a constant amount each year over the life of the capital investment C) deducting depreciation from operating cash flows would be counting the lump-sum amount twice D) depreciation usually has no effect on the disposal price of the machine Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 119) Which of the following statements concerning depreciation and capital budgeting is true? A) Depreciation can reduce cash outflows through savings in income tax.
B) The tax effects of depreciation are mostly irrelevant as capital budgeting analysis is generally done with before tax information. C) Some depreciation charges can affect cash flows both directly and through effects on income tax. D) Because depreciation is a non-cash item, it can never affect cash flows. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 120) Post-investment audits are held because: A) they are a means by which actual results can be compared to the costs and benefits expected. B) they help alert senior management to problems in the implementation of the project. C) they discourage mid-level managers from making overly optimistic estimates during the early stages of the capital budgeting process. D) All of the above are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Managing the project Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 121) The four categories of cash flow for an investment project are: (1) net initial investment; (2) net income; (3) after tax cash flow from operations; and (4) after tax cash flow from terminal disposal of an asset. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 122) Depreciation tax deductions result in tax savings that partially offset the cost of acquiring the capital asset. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 123) The use of an accelerated method of depreciation for tax purposes would usually increase the present value of the investment.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 124) Relevant cash flows are expected future cash flows that differ among the alternative uses of investment funds. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 125) Deducting depreciation from operating cash flows would result in counting the initial investment twice in a discounted cash flow analysis. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 126) In determining whether to keep a machine or replace it, the original cost of the machine is always a relevant factor. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. Topic: Relevant cash flows in discounted cash flow analysis 127) In using the net present value (NPV) method for capital budgeting after-tax cash flows should be used instead of pre-tax cash flows when taxes are a consideration. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 128) In calculating the net initial investment cash flows for capital budgeting analysis any increase in working capital required for the project should be included.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 129) Cash received from the disposal of old equipment is not relevant to a decision to buy replacement equipment. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 130) A decrease in the tax rate will decrease the net present value (NPV) for a given capital budgeting project. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 131) A post-investment audit of capital budgeting projects provides management with feedback about the performance of a project so management can compare actual results to the costs and benefits expected at the time the project was selected. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing the project Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. Write your answer in the space provided or on a separate sheet of paper. 132) How does accelerated depreciation result in greater savings in cash outflows.
Answer: Depreciation tax deductions result in tax savings which offset the cost of acquiring the capital equipment. The more rapidly for tax purposes the assets’ costs can be written off, the earlier the reductions in taxes can be realised and the greater the savings in cash outflows. AACSB: Able to communicate effectively orally and in writing
Difficulty: Moderate Topic: Relevant cash flows in discounted cash flow analysis Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. Choose the one alternative that best completes the statement or answers the question. 133) Comparison of the actual results for a project to the costs and benefits expected at the time the project was selected is called: A) management control. B) the audit trail. C) a cost-benefit analysis. D) a post-investment audit. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing the project Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. 134) Post-investment audits: A) provide management with feedback about the performance of a project. B) 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. C) include obtaining appropriation requests so that the funding will be authorised to purchase the equipment. D) should be done as soon as possible after the investment is made. Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Managing the project Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 135) The tendency to be influenced by sunk costs and to continue to pour money into unviable projects is a common psychological phenomenon, which is called ESCALATION OF COMMITMENT. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Managing the project Learning Objective: 18.8 Identify relevant cash inflows and outflows for capital budgeting decisions. Choose the one alternative that best completes the statement or answers the question.
136) A capital budgeting tool that management can use to summarise the difference in the future net cash inflows from an intangible asset at two different points in time is referred to as: A) the net present value method. B) the payback method. C) the accrual accounting rate-of-return method. D) sensitivity analysis. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic considerations in capital budgeting Learning Objective: 18.9 Explain how strategic issues influence the capital budgeting process. 137) The focus in capital budgeting should be on: A) expected future cash flows that differ between alternatives B) the internal rate of return of different strategies C) the tax consequences of different investment strategies D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategic considerations in capital budgeting Learning Objective: 18.9 Explain how strategic issues influence the capital budgeting process. 138) Capital investment decisions that are strategic in nature: A) are often referred to as 'real options' B) are easily handled by the capital budgeting process when the accrual accounting rate-of-return method is used as the tool to analyse the alternatives C) require managers to consider a broad range of factors that may be difficult to estimate D) All of the above are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Strategic considerations in capital budgeting Learning Objective: 18.9 Explain how strategic issues influence the capital budgeting process. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 139) The purchase of a corporation's customer base is an investment in an intangible asset. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Strategic considerations in capital budgeting Learning Objective: 18.9 Explain how strategic issues influence the capital budgeting process. 140) It is possible to use the net present value in an analysis of customer profitability. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Learning Objective: 18.9 Explain how strategic issues influence the capital budgeting process. Topic: Strategic considerations in capital budgeting Write your answer in the space provided or on a separate sheet of paper. 141) 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 judgment and sometimes intuition when trying to incorporate and quantify their effects as part of the capital budgeting process. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Strategic considerations in capital budgeting Learning Objective: 18.9 Explain how strategic issues influence the capital budgeting process. 142) 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.
AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Strategic considerations in capital budgeting Learning Objective: 18.9 Explain how strategic issues influence the capital budgeting process.
Chapter 19 Management control systems, transfer pricing and multinational considerations Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is NOT a characteristic of a management control system? A) It motivates individuals throughout the organisation to act in concert. B) It encourages short-term profitability. C) It aids and coordinates the process of making decisions. D) It coordinates forecasting sales and cost-driver activities, budgeting, and measuring and evaluating performance. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 2) The formal management control system includes: A) incentive plans. B) mutual commitments. C) performance measures. D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 3) What would be considered exertion towards a goal? A) Incentive B) Goal congruence C) Motivation D) Effort Answer: D
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 4) If an oil refinery used refinery down-time as a Balanced Scorecard control measure, it would represent the perspective. A) customer B) learning and growth C) financial D) internal business process Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 5) If a computer manufacturer used its share price as a Balanced Scorecard control measure, it would represent the perspective. A) learning and growth B) customer C) financial D) internal business process Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 6) The goal of a management control system is to improve the collective decisions in an organisation in an economically feasible way. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 7) Management control systems reflect only financial data. Answer: False
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 8) The ‘unified reporting method’ presents financial and non-financial information in a single report. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 9) The desire to attain a selected goal combined with the resulting drive or pursuit toward that goal is referred to as ‘motivation’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 10) The freedom for managers at lower levels of the organisation to make decisions is referred to as ‘decentralisation’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 11) A management control system would include both formal as well as informal control mechanisms. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 12) One benefit of centralisation is an increase in the development of an experienced pool of management talent to fill higher-level management positions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 13) A well-designed management control system obtains all of its information from within the company. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 14) Absenteeism would be an example of a Balanced Scorecard control measure from a customer perspective. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 15) Goal congruence exists when individuals work toward achieving one goal, and groups work toward achieving a different goal. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 16) Achievement of a goal is the definition of ‘effort’. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. 17) ‘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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system.
18) Management control systems motivate managers and other employees to exert effort through a variety of rewards tied to the achievement of goals. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system. Write your answer in the space provided or on a separate sheet of paper. 19) 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. Four Perspectives
Balanced Scorecard a. On-time delivery of petrol from refineries to retail stations b. Customer satisfaction c. Share 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 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Management control systems Learning Objective: 19.1 Evaluate a management control system.
Choose the one alternative that best completes the statement or answers the question. 20) What is the degree of freedom to make decisions referred to as? A) Motivation B) Centralisation C) Decentralisation D) Autonomy Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 21) means minimum constraints and maximum freedom for managers at the lowest levels of an organisation to make decisions and to take actions. A) Total decentralisation B) Use of negotiated transfer pricing C) Use of market-based transfer pricing D) Total centralisation Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 22) Which of the following is an advantage of decentralisation? A) Focuses managers' attention on the organisation as a whole B) Does not result in a duplication of activities C) Reduces the cost of gathering information D) Creates greater responsiveness to local needs Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 23) A disadvantage of decentralisation is that it: A) creates greater responsiveness to local needs. B) does not result in a duplication of activities. C) encourages suboptimal decision making. D) focuses managers' attention on the organisation as a whole.
Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 24) Which of the following is NOT a benefit of decentralisation? A) Sharpens the focus of managers B) Leads to quicker decision making C) Decreases management and worker morale D) Creates greater responsiveness to local needs Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 25) What is the term used to describe the situation when a manager's decision, which benefits one subunit, is more than offset by the costs to the organisation as a whole? A) Suboptimal decision making B) Dysfunctional decision making C) Congruent decision making D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 26) All of the following statements are correct, EXCEPT for: A) The extent to which decisions are pushed downward, and the types of decisions that are pushed down, provide a measure of the level of centralisation/decentralisation in an organisation. B) A decentralised structure forces top management to lose some control over the organisation. C) Decentralisation slows responsiveness to local needs for decision making. D) A centralised structure does not empower employees to handle customer complaints directly. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation.
27) Area(s) which is/are usually appropriate for decentralised decision making is/are: A) sources of supplies and materials. B) long-term financing. C) product advertising. D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 28) The benefits of a decentralised organisation are greater when a company: A) is facing great uncertainties in their environment. B) has few interdependencies among divisions. C) is large and unregulated. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 29) A benefit of decentralisation should be increased motivation of subunit managers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 30) A profit centre is related to a decentralised unit, whereas a cost centre is related to a centralised unit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 31) Suboptimal decision making is also called ‘congruent decision making’. Answer: False AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Organisation structure and decentralization Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 32) Surveys indicate that decisions made most frequently at the corporate level are related to sources of supplies and products to manufacture. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 33) Improving corporate control is an important advantage of decentralised operations. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 34) DECENTRALISATION is defined as the degree of freedom to make decisions: Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. Write your answer in the space provided or on a separate sheet of paper. 35) For each of the following activities, characteristics, and applications, identify whether they can be found in a centralised organisation, a decentralised organisation, or both types of organisations. Organisation Type(s)
Activities a. Freedom for managers at lower organisational 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. Maximisation of benefits over costs g. Minimisation of duplicate functions h. Minimum of suboptimisation
i. j.
Multiple responsibility centres with various reporting units Profit centres
Answer: a. decentralisation b. decentralisation c. decentralisation d. decentralisation e. centralisation f. both g. centralisation h. centralisation i. both j. both AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation 36) Discuss the possible problems a corporation might have if its operations are totally decentralised.
Answer: (Answers may vary.) Senior management has the ultimate responsibility for the business. In a totally decentralised operation, senior executive management has little say about the conduct of the business. Another problem could be caused by the appointment of managers who are not capable of running their business. The lack of senior management control might result in problems developing and resulting in even bigger problems before anyone was aware of the incompetent managers. Some specific types of activities belong in a centralised grouping, such as gathering information and certain human resource functions. AACSB: Application of knowledge and written and oral communication Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. 37) Bathurst Company's CEO has just returned from a series of professional development courses and is very excited that she can have responsibility centres with the organisation's system of centralised structure. However, she is somewhat confused about how responsibility centres relate to centralised organisations where a few managers have most of the authority. Required:
Explain how a centralised organisation might allow for responsibility centres.
Answer: It does not make any difference what type of organisational structure exists when it comes to defining responsibility centres. If a centralised organisation 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 centralised organisation, each manager may have more items to control than are reasonably possible. AACSB: Application of knowledge and written and oral communication Difficulty: Moderate Topic: Organisation structure and decentralisation Learning Objective: 19.2 Explain the benefits and costs of decentralisation. Choose the one alternative that best completes the statement or answers the question. 38) A product may be passed from one subunit to another subunit in the same organisation. The product is known as a(n): A) subunit product B) intermediate product C) transfer product D) interdepartmental product Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Transfer pricing Learning Objective: 19.3 Explain the nature of, and rationale for, transfer prices, and outline four criteria by which to evaluate transfer-pricing methods. 39) A transfer-pricing method leads to goal congruence when managers: A) act in their own best interest and the decision is in the short-term best interest of the company. B) act in their own best interest and the decision is in the long-term best interest of the company. C) act in their own best interest and the decision is in the long-term best interest of the manager's subunit. D) always act in their own best interest. Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Transfer pricing Learning Objective: 19.3 Explain the nature of, and rationale for, transfer prices, and outline four criteria by which to evaluate transfer-pricing methods.
Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 40) Products transferred between subunits within an organisation are considered intermediate products. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Transfer pricing Learning Objective: 19.3 Explain the nature of, and rationale for, transfer prices, and outline four criteria by which to evaluate transfer-pricing methods. Write your answer in the space provided or on a separate sheet of paper. 41) Explain what transfer prices are, and identify the four criteria used to evaluate them.
Answer: Transfer prices are the prices that one subunit of the firm charges another subunit of the firm for a good or service. Transfer prices are evaluated based on firm goal congruence, management efforts, subunit performance evaluations, and the subunit autonomy. AACSB: Application of knowledge and written and oral communication Difficulty: Moderate Topic: Transfer pricing Learning Objective: 19.3 Explain the nature of, and rationale for, transfer prices, and outline four criteria by which to evaluate transfer-pricing methods. Choose the one alternative that best completes the statement or answers the question. 42) Hybrid (negotiated) transfer prices are often employed when: A) market prices are stable B) market prices change by a regular percentage each year C) market prices are volatile D) goal congruence is not a major objective Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. 43) The Fruit Drink Company makes internal transfers at 160% of full cost. The Soda Refining Division purchases 40 000 containers of carbonated water per day, on average, from a local supplier who delivers the water for $40 per container via an external shipper. To reduce costs, the company located an independent supplier in Victoria who is willing to sell 40 000 containers at $30 each, delivered to The Fruit Drink Company's Shipping Division in Tasmania. The company's Shipping Division in Tasmania has
excess capacity and can ship the 40 000 containers at a variable cost of $4.50 per container. What is the total cost of purchasing the water from the Victorian supplier and shipping it to the Soda Refining Division? A) $180 000 B) $1 380 000 C) $1 600 000 D) $1 200 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. 44) The Fruit Drink Company makes internal transfers at 180% of full cost. The Soda Refining Division purchases 30 000 containers of carbonated water per day, on average, from a local supplier who delivers the water for $30 per container via an external shipper. To reduce costs, the company located an independent supplier in Tasmania who is willing to sell 30 000 containers at $20 each, delivered to The Fruit Drink Company's Shipping Division in Tasmania. The company's Shipping Division in Tasmania has excess capacity and can ship the 30 000 containers at a variable cost of $2.50 per container. What is the total cost to The Fruit Drink Company if the carbonated water is purchased from the local supplier? A) $900 000 B) $1 501 000 C) $1 200 000 D) $1 620 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. 45) Penrith Chocolate Company makes internal transfers at 160% of full cost. The Dairy Milk Division purchases 4000 litres of milk per day, on average, from a local supplier who delivers the milk for $2.00 per litre via an external shipper. To reduce costs, the company located an independent supplier in Victoria who is willing to sell 4000 litres at $1.50 per litre, delivered to Penrith Chocolate Company's Shipping Division in Penrith. The company's Shipping Division in Penrith has excess capacity and can ship the 4000 litres at a variable cost of $0.45 per litre. What is the total cost of purchasing the milk from the Victorian supplier and shipping it to the Dairy Milk Division? A) $12 480 B) $7800 C) $6000 D) $8000
Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. 46) Penrith Chocolate Company makes internal transfers at 180% of full cost. The Dairy Milk Division purchases 3000 litres of milk per day, on average, from a local supplier who delivers the milk for $3 per litre via an external shipper. To reduce costs, the company located an independent supplier in Tasmania who is willing to sell 3000 litres at $2 each, delivered to Penrith Chocolate Company's Shipping Division in Penrith. The company's Shipping Division has excess capacity and can ship the 3000 litres at a variable cost of $0.25 per litre. What is the total cost to Penrith Chocolate Company if the milk is purchased from the local supplier? A) $9000 B) $6000 C) $12 000 D) $9750 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. 47) Transfer prices should be judged by whether they promote: A) goal congruence B) the balanced scorecard method C) a high level of subunit autonomy in decision making D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 48) Market price is the only price a firm should use when transferring goods from one subunit to another subunit. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. 49) The choice of a transfer-pricing method has minimal effect on the allocation of company-wide operating profit among divisions. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. 50) No matter how low the transfer price, the manager of the selling division should sell the division's product to other company divisions in the interests of overall company profitability. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: An illustration of transfer pricing Learning Objective: 19.4 Calculate transfer prices using market-based, cost-based and hybrid methods. Choose the one alternative that best completes the statement or answers the question. 51) Transferring products or services at market prices generally leads to optimal decisions when: A) there are no additional costs or benefits to the company in buying or selling in the external market. B) the market for the intermediate product is perfectly competitive. C) the interdependencies of the subunits are minimal. D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 52) The costs used in cost-based transfer prices: A) are budgeted costs. B) are actual costs. C) can either be actual or budgeted costs. D) are lower than the market-based transfer prices. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices
Learning Objective: 19.5 Evaluate market-based transfer pricing. Answer the following questions using the information below: Bass Strait Oil Corporation has two divisions: Refining and Production. The company's primary product is Enkoil Oil. Each division's costs are provided below: Production: 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
$3 $2 $10 $12
The Refining Division has been operating at a capacity of 40 000 barrels a day and usually purchases 25 000 barrels of oil from the Production Division and 15 000 barrels from other suppliers at $20 per barrel. 53) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 180% of variable costs? A) $5.40 B) $23.40 C) $9.00 D) $18.00 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 54) What is the transfer price per barrel from the Production Division to the Refining Division, assuming the method used to place a value on each barrel of oil is 110% of full costs? A) $5.50 B) $24.20 C) $29.70 D) $22.00 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 55) Assume 200 barrels are transferred from the Production Division to the Refining Division for a transfer price of $6 per barrel. The Refining Division sells the 200 barrels at a price of $40 each to customers. What
is the operating profit of both divisions together? A) $2400 B) $2600 C) $6800 D) $3600 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Answer the following questions using the information below: NSW Farmers Coop has two divisions: Distribution and Production. The company's primary product is fertiliser. Each division's costs are provided below: Production: Distribution:
Variable costs per kilo Fixed costs per kilo Variable costs per kilo Fixed costs per kilo
$0.05 $0.25 $0.03 $0.02
The Distribution Division has been operating at a capacity of 4 000 000 kilos a week and usually purchases 2 000 000 kilos from the Production Division and 2 000 000 kilos from other suppliers at $0.45 per kilo. 56) What is the transfer price per kilo from the Production Division to the Distribution Division, assuming the method used to place a value on each kilo of fertiliser is 160% of variable costs? A) $0.11 B) $0.40 C) $0.08 D) $0.05 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 57) What is the transfer price per kilo from the Production Division to the Distribution Division, assuming the method used to place a value on each kilo of fertiliser is 120% of full costs, what is the transfer price per kilo from the Production Division to the Distribution Division? A) $0.55 B) $0.36
C) $0.30 D) $0.45 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 58) Assume 100 000 kilos are transferred from the Production Division to the Distribution Division for a transfer price of $0.40 per kilo. The Distribution Division sells the 100 000 kilos at a price of $0.55 each to customers. What is the operating profit of both divisions together? A) $15 000 B) $10 000 C) $20 000 D) $25 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Answer the following questions using the information below: The Betashoe Company manufactures shoes. It has two divisions: the Sole Division and the Assembly Division. The Sole Division manufactures soles for the Assembly Division, which completes the manufacturing of the shoes and sells the completed product to retailers. The Sole Division 'sells' pairs of soles to the Assembly Division. The market price for the Assembly Division to purchase a pair of soles is $20. (Ignore changes in inventory.) The fixed costs for the Sole Division are assumed to be the same over the range of 40 000-100 000 units. The fixed costs for the Assembly Division are assumed to be $7 per pair of shoes at 100 000 units. Costs per pair of soles are: Direct materials Direct labour Variable overhead Division fixed costs
$4 $3 $2 $1
Assembly's costs per completed pair of shoes are: Direct materials $6 Direct labour $2 Variable overhead $1
Division fixed costs
$7
59) What is the market-based transfer price per pair of soles from the Sole Division to the Assembly Division? A) $10 B) $16 C) $20 D) $26 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 60) If the method used to place a value on each pair of soles is 180% of variable costs, what is the transfer price per pair of soles from the Sole Division to the Assembly Division? A) $12.60 B) $28.80 C) $16.20 D) $14.40 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 61) What is the transfer price per pair of shoes from the Sole Division to the Assembly Division per pair of soles if the transfer price per pair of soles is 125% of full costs? A) $15 B) $12.50 C) $13 D) $10 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 62) Calculate and compare the difference in overall corporate net profit between Scenario A and Scenario B if the Assembly Division sells 100 000 pairs of shoes for $60 per pair to customers.
Scenario A: Negotiated transfer price of $15 per pair of soles Scenario B: Market-based transfer price A) $100 000 of net profit using Scenario A B) $500 000 more net profit under Scenario A C) $500 000 of net profit using Scenario B D) None of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 63) Assume the transfer price for a pair of soles is 180% of total costs of the Sole Division and 40 000 pairs of soles are produced and transferred to the Assembly Division. The Sole Division's operating profit is: A) $320 000 B) $360 000 C) $440 000 D) $400 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 64) If the Assembly Division sells 100 000 pairs of shoes at a price of $60 a pair to customers, what is the operating profit of both divisions together? A) $2 600 000 B) $3 400 000 C) $3 000 000 D) $4 400 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Answer the following questions using the information below: Calculate the Division operating profit for the Cool Air Company which manufactures only one type of air conditioner and has two divisions: the Compressor Division and the Assembly Division. The Compressor Division manufactures compressors for the Assembly Division, which completes the air conditioner and
sells it to retailers. The Compressor Division 'sells' compressors to the Assembly Division. The market price for the Assembly Division to purchase a compressor is $77. (Ignore changes in inventory.) The fixed costs for the Compressor Division are assumed to be the same over the range of 5000-10 000 units. The fixed costs for the Assembly Division are assumed to be $15.00 per unit at 10 000 units. Compressor's costs per compressor are: Direct materials $34.00 Direct labour $14.50 Variable overhead $6.00 Division fixed costs $15.00 Assembly's costs per completed air conditioner are: Direct materials $300.00 Direct labour $125.00 Variable overhead $40.00 Division fixed costs $15.00 65) What is the market-based transfer price per compressor from the Compressor Division to the Assembly Division? A) $54.50 B) $34.00 C) $69.50 D) $77 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 66) What is the transfer price per compressor from the Compressor Division to the Assembly Division if the method used to place a value on each compressor is 150% of variable costs? A) $81.75 B) $72.75 C) $9.00 D) $77.00 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing.
67) What is the transfer price per compressor from the Compressor Division to the Assembly Division if the transfer price per compressor is 110% of full costs? A) $80.00 B) $84.70 C) $76.45 D) None of these options are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 68) Assume the transfer price for a compressor is 150% of total costs of the Compressor Division and 1000 of the compressors are produced and transferred to the Assembly Division. The Compressor Division's operating profit is: A) $36 500 B) $31 750 C) $34 750 D) $32 750 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 69) If the Assembly Division sells 1000 air conditioners at a price of $750.00 per air conditioner to customers, what is the operating profit of both divisions together? A) $200 500 B) $194 000 C) $165 750 D) $207 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Answer the following questions using the information below: Division A sells soybean paste internally to Division B, which in turn, produces soybean burgers that sell
for $5 per kilo. Division A incurs costs of $0.75 per kilo while Division B incurs additional costs of $2.50 per kilo. 70) What is Division A's operating profit per kilo, assuming the transfer price of the soybean paste is set at $1.25 per kilo? A) $0.500 B) $1.250 C) $1.625 D) $0.875 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 71) Which formula correctly reflects the company's operating profit per kilo? A) $5.00 - ($1.25 + $2.50) = $1.25 B) $5.00 - ($0.25 + $1.25 + $3.50) = 0 C) $5.00 - ($0.75 + $3.75) = $0.50 D) $5.00 - ($0.75 + $2.50) = $1.75 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Answer the following questions using the information below: Calculate the Division operating profit for the Don's Cricket Bat Company which manufactures cricket bats. It has two divisions: the Bat Blade Division and the Assembly Division. The Bat Blade Division manufactures blades for the Assembly Division, which splices handles to the blades and sells the completed bats to retailers. The Bat Blade Division 'sells' blades to the Assembly Division. The market price for the Assembly Division to purchase a blade is $40. (Ignore changes in inventory.) The fixed costs for the Bat Blade Division are assumed to be the same over the range of 20 000-50 000 units. The fixed costs for the Assembly Division are assumed to be $14 per bat at 50 000 units. Costs per blade are: Direct materials Direct labour Variable overhead Division fixed costs
$8 $6 $4 $2
Assembly's costs per completed bat are: Direct materials $12 Direct labour $4 Variable overhead $1 Division fixed costs $14 72) The market-based transfer price per blade from the Bat Blade Division to the Assembly Division is: A) $20 B) $32 C) $40 D) $52 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 73) What is the transfer price per blade from the Bat Blade Division to the Assembly Division if the method used to place a value on each blade is 180% of variable costs? A) $57.60 B) $25.20 C) $32.40 D) $28.80 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 74) What is the transfer price per blade from the Bat Blade Division to the Assembly Division per blade if the transfer price per blade is 125% of full costs? A) $26 B) $25 C) $20 D) $30 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices
Learning Objective: 19.5 Evaluate market-based transfer pricing. 75) Calculate and compare the difference in overall corporate net profit between Scenario A and Scenario B if the Assembly Division sells 50 000 blades for $120 each to customers. Scenario A: Negotiated transfer price of $15 per blade Scenario B: Market-based transfer price A) $500 000 more net profit under Scenario A B) $100 000 of net profit using Scenario A C) $500 000 of net profit using Scenario B D) None of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 76) Assume the transfer price for a blade is 180% of total costs of the Bat Blade Division and 40 000 blades are produced and transferred to the Assembly Division. The Bat Blade Division's operating profit is: A) $640 000 B) $880 000 C) $800 000 D) $720 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 77) What is the operating profit of both divisions together if the Assembly Division sells 50 000 blades at a price of $120 a pair to customers? A) $2 600 000 B) $3 400 000 C) $3 000 000 D) $4 400 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing.
78) Which on the following is a benefit of using a market-based transfer price? A) Profits of the division receiving the products are sacrificed for the overall good of the corporation. B) Economic viability and profitability of each division can be evaluated individually. C) Profits of the transferring division are sacrificed for the overall good of the corporation. D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 79) When an industry has excess capacity, market prices may drop well below their historical average. If this drop is temporary, it is called: A) dropped prices. B) distress prices. C) substitute prices. D) low-average prices. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 80) Actual costs are the only costs used in cost-based transfer prices. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 81) Market-based transfer pricing and cost-based transfer pricing are the only two methods for determining transfer prices. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. 82) A disadvantage of using budgeted costs for transfer prices is that inefficiencies in actual costs can be passed along to the receiving division.
Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Write your answer in the space provided or on a separate sheet of paper. 83) Briefly describe the conditions that should be met for market-based transfer pricing to lead to optimal decision making among subunits of a large organisation.
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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Market-based transfer prices Learning Objective: 19.5 Evaluate market-based transfer pricing. Choose the one alternative that best completes the statement or answers the question. 84) Cost-based transfer prices are helpful when: A) a market exists for the product. B) the product is unique. C) a price is easy to obtain. D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based transfer prices Learning Objective: 19.6 Evaluate cost-based transfer pricing. 85) Optimal corporate decisions do NOT result when goods or services are transferred at: A) market prices. B) variable-cost prices. C) full-cost prices. D) Either B or C is correct.
Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based transfer prices Learning Objective: 19.6 Evaluate cost-based transfer pricing. 86) When companies do not want to, or find it too costly to, use market prices, they typically use prices, even though suboptimal decisions may occur. A) full-cost B) long-run cost C) short-run average cost D) average-cost Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based transfer prices Learning Objective: 19.6 Evaluate cost-based transfer pricing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 87) Cost-based transfer pricing is a better method when the products being transferred are specialised in nature. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based transfer prices Learning Objective: 19.6 Evaluate cost-based transfer pricing. 88) If a firm uses a cost-based transfer price, its selling division will never be able to achieve goal congruence. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based transfer prices Learning Objective: 19.6 Evaluate cost-based transfer pricing. Write your answer in the space provided or on a separate sheet of paper. 89) Describe how to avoid making suboptimal decisions when cost-based transfer pricing is used between subunits of a large organisation.
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 mark-up) to the receiving division. This is not optimal, because it causes the receiving division to treat the transferred unit 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 organisation 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 organisation. In the event that the supplying organisation is a profit centre 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 mark-up) method to be used. The objective is to have the organisation 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Cost-based transfer prices Learning Objective: 19.6 Evaluate cost-based transfer pricing. 90) Sandhoppers Queensland Car Company manufactures motor vehicles. The Red Car Division sells its red cars for $25 000 each to the general public. The red cars have manufacturing costs of $12 500 each for variable and $5000 each for fixed costs. The division's total fixed manufacturing costs are $25 000 000 at the normal volume of 5000 units. The Blue Car Division has been unable to meet the demand for its cars this year. It has offered to buy 1000 cars from the Red Car Division at the full cost of $17 500. The Red Car Division has excess capacity and the 1000 units can be produced without interfering with the current outside sales of 5000. The 6000 volume is within the division's relevant operating range. Explain whether the Red Car Division should accept the offer.
Answer: Unit Sales Variable costs Contribution margin
$17 500 12 500 $5000
The proposal should be accepted because it makes a contribution to fixed costs and profits of $5000 per unit. This would increase the division's operating profit by $5 000 000 = ($5000 × 1000 units). AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Cost-based transfer prices
Learning Objective: 19.6 Evaluate cost-based transfer pricing. Choose the one alternative that best completes the statement or answers the question. 91) What is an advantage of a negotiated transfer price? A) negotiated transfer price preserves divisional autonomy B) negotiations usually do not require much time and energy C) close relationship between the negotiated price and the market price D) Both B and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 92) The range over which two divisions will negotiate a transfer price is: A) anywhere above the supplying division's full cost of the product. B) between the supplying division's variable cost and the market price of the product. C) between the supplying division's variable cost and its full cost of the product. D) between the supplying division's full cost and 180% above its full cost. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 93) What is a disadvantage of a negotiated transfer price? A) negotiations usually require much time and energy B) negotiated transfer price preserves divisional autonomy C) each division manager must put forth effort to increase division operating profit D) Both B and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 94) The transfer-pricing method that reduces the goal-congruence problems associated with a pure cost-plus-based transfer-pricing method is: A) single pricing B) dual pricing
C) market pricing D) Both A and B are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 95) Why is dual pricing not widely used in practice? A) It increases goal congruence. B) The manager of the supplying division does not have sufficient incentive to control costs. C) Managers are not insulated from the frictions of the market place. D) Both B and C are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. Write your answer in the space provided or on a separate sheet of paper. 96) 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 instance, the transfer price is likely to be in the lower range, covering only the outlay costs involved in the production of the product. AACSB: Able to translate knowledge of business and management into practice Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 97) The Micro Division of ACT Computers produces computer chips that are sold to the Personal Computer Division and to outsiders. Operating data for the Micro Division for 2017 are as follows: Internal Sales External Sales Sales: 300 000 chips at $10 200 000 chips at $12
$3 000 000 $2 400 000
Variable expenses at $4 Contribution margin Fixed cost (allocated in units) Operating profit
1 200 000 $1 800 000 1 500 000 $300 000
800 000 $1 600 000 1 000 000 $600 000
The Personal Computer Division has just received an offer from an outside supplier to furnish chips at $8.60 each. The manager of Micro Division is not willing to meet the $8.60 price. She argues that it costs her $9.00 to produce and sell each chip. Sales to outside customers are at a maximum of 200 000 chips. Required: a. Verify the Micro Division's $9.00 unit cost figure. b. Should the Micro Division meet the outside price of $8.60? Explain. c. Could the $8.60 price be met and still show a profit for the Micro Division sales to the Personal Computer Division? Show computations.
Answer: a. Variable costs Fixed costs [($1 500 000 + $1 000 000)/500 000 units] Total unit costs
$4.00 5.00 $9.00
b. Yes, because the contribution margin is positive ($8.60 - $4.00 = $4.60). If it loses the internal business, the other sales would have to absorb the fixed costs, which would force even higher external prices. The Micro Division manager does not have much bargaining power since the external sales are already at a maximum. c. Sales (300 000 × $8.60) Variable costs (300 000 × $4) Contribution margin Fixed costs (300 000 × $5.00) Operating profit
$2 580 000 1 200 000 $1 380 000 1 500 000 $(120 000)
Internal sales will not show a profit. This assumes the fixed costs are still allocated at $5.00 per unit. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing.
Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 98) The prices negotiated by two divisions of the same company usually have no specific relationship to either costs or market price. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 99) One major advantage of negotiated transfer pricing is that it can be done with little time or effort. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 100) Dual pricing reduces the goal-congruence problem associated with a pure cost-based transfer-pricing method. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. Write your answer in the space provided or on a separate sheet of paper. 101) Wentworth Company has two divisions. The Bottle Division produces products that have variable costs of $3 per unit. Its 2010 sales were 150 000 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 was no beginning or ending inventories during the year. Required: What are the operating profits of the two divisions and the company as a whole for the year? Explain why the company's operating profit is less than the sum of the two divisions' total profits.
Answer: a.
Bottle Revenue: External Internal* Total Variable costs: Incurred Transferred-in Total Contribution margin Fixed Costs Operating profit
Mixing
Company
$750 000 168 000 $918 000
$460 000 0 $460 000
$1 210 000 0 $1 210 000
$570 000 0 570 000 348 000 125 000 $223 000
$100 000 120 000 220 000 240 000 85 000 $155 000
$670 000 0 670 000 540 000 210 000 $330 000
* 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. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. Write your answer in the space provided or on a separate sheet of paper. 102) The Airbags Division of Shepparton Motor Assemblies produces airbags that are sold to the Assembly Division and to outsiders. Operating data for the Airbags Division for 2017 are as follows: Internal Sales External Sales Sales: 150 000 airbags at $20 100 000 airbags at $24 Variable expenses at $8 Contribution margin Fixed cost (allocated in units) Operating profit
$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 Assembly Division has just received an offer from an outside supplier to provide airbags at $8.60 each. The manager of Airbags Division is not willing to meet the $17.20 price. She argues that it costs her $18.00 to produce and sell each airbag. Sales to outside customers are at a maximum of 200 000 airbags.
Required: a. Verify the Airbags Division's $18.00 unit cost figure. b. Should the Airbags Division meet the outside price of $17.20? Explain. c. Could the $17.20 price be met and still show a profit for the Airbags Division sales to the Assembly Division? Show calculations.
Answer: a. Variable costs Fixed costs [($1 500 000 + $1 000 000)/250 000 units] Total unit costs
$8.00 10.00 $18.00
b. Yes, because the contribution margin is positive ($17.20 - $8.00 = $9.20). If it loses the internal business, the other sales would have to absorb the fixed costs, which would force even higher external prices. The Airbags Division manager does not have much bargaining power since the external sales are already at a maximum. c. Sales (150 000 × $17.20) $2 580 000 Variable costs (150 000 × $8) 1 200 000 Contribution margin $1 380 000 Fixed costs (150 000 × $10.00) 1 500 000 Operating profit $(120 000) Internal sales will not show a profit. This assumes the fixed costs are still allocated at $10.00 per unit. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. Write your answer in the space provided or on a separate sheet of paper. 103) The Micro Division of Woomera Wi-Fi produces micro chips that are sold to the Assembly Division and to outsiders. The Micro Division produces chips that have variable costs of $6 per unit. Its 2017 sales were 150 000 to outsiders at $10 per unit and 40 000 units to the Assembly Division at 140% of variable costs. Under a dual transfer-pricing system, the Assembly Division pays only the variable cost per unit. The fixed costs of the Micro Division are $250 000 per year. Assembly Division sells its finished products to outside customers for $23 per unit. Assembly Division has variable costs of $5.00 per unit in addition to the costs from the Micro Division. The annual fixed costs of Assembly Division were $170 000. There were no beginning or ending inventories during the year.
Required: What are the operating profits of the two divisions and the company as a whole for the year? Explain why the company's operating profit is less than the sum of the two divisions' total profits.
Answer: Micro Revenue: External Internal* Total Variable costs: Incurred Transferred-in Total Contribution margin Fixed Costs Operating profit
Assembly
Company
$1 500 000 336 000 $1 836 000
$920 000 0 $920 000
$2 420 000 0 $2 420 000
$1 140 000 0 1 140 000 696 000 250 000 $446 000
$200 000 240 000 440 000 480 000 170 000 $310 000
$1 340 000 0 1 340 000 1 080 000 420 000 $660 000
* 40 000 × $6 × 1.40 = $336 000 The internal sales are not included in the company's statement because the company cannot sell to itself. Therefore, it has to exclude $96 000 of dual pricing. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 104) For each of the following, identify whether it BEST relates to market-based, cost-based, negotiated, or all types of transfer pricing. Examples 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
Market-based/Cost-based/Negotiated/Any Method
e.
Manufacturing costs plus marketing costs plus distribution costs plus customer service costs f. Price listed in a trade journal g. Selling price less normal sales commissions h. Variable manufacturing cost plus a mark-up Answer: a. Negotiated b. Cost-based c. Cost-based d. Any method e. Cost-based f. Market-based g. Market-based h. Cost-based AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 105) 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. Satisfaction of Transfer Pricing Criteria 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.
Yes/No/Sometimes
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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 106) The Home Appliances Company makes all types of kitchen appliances. The Induction Cooktops Division is currently producing 10 000 cooktops per year with a capacity of 15 000. The variable costs assigned to each cooktop are $450 and annual fixed costs of the division are $1 350 000. The Induction Cooktop sells for $600. The Executive Division wants to buy 5000 cooktops at $420 for its custom home design business. The Induction Cooktops 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 cooktop from $135 to $90 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 Induction Cooktops Division? Why? b. From the perspective of the Induction Cooktops Division and the company, should the order be accepted if the Executive Division plans on selling the cooktops in the outside market for $630 after incurring additional costs of $150 per cooktop? c. What action should the company CEO take?
Answer:
a. Sales Variable costs Contribution margin
$420 450 $(30)
The manager should not accept the order because it is below variable costs. It will generate a loss of $150 000 [5000 units × $(30)]. This is a losing proposition in both the short-run and long-run. b. What the Executive Division does with the cooktops after receiving them is of no consequence to the Induction Cooktops Division. However, the division will still object to the transfer price of $420. The company, on the other hand, will encourage the offer because it increases total company operating profit by $150 000 = 5000 × [$630 - ($450 + $150)]. c. If the company CEO 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 107) The Home Office Company makes all types of office desks. The Computer Desk Division is currently producing 10 000 desks per year with a capacity of 15 000. The variable costs assigned to each desk are $300 and annual fixed costs of the division are $900 000. The computer desk sells for $400. The Executive Division wants to buy 5000 desks at $280 for its custom office design business. The Computer 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 Computer Desk Division? Why? b. From the perspective of the Computer Desk Division and the company, should the order be accepted if the Executive Division plans on selling the desks in the outside market for $420 after incurring additional costs of $100 per desk? c. What action should the company CEO take?
Answer:
a. Sales Variable costs Contribution margin
$280 300 $(20)
The manager should not accept the order because it is below variable costs. It will generate a loss of $100 000 [5000 units × $(20)]. This is a losing proposition in both the short-run and long-run. b. What the Executive Division does with the desks after receiving them is of no consequence to the Computer Desk Division. However, the division will still object to the transfer price of $280. The company, on the other hand, will encourage the offer because it increases total company operating profit by $100 000 = 5000 × [$420 - ($300 + $100)]. c. If the company CEO 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 108) 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 mark-up. They could also be calculated using a negotiated price between the buying and selling divisions. AACSB: Written and oral communication Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 109) The Derwent Omega-3 Oil Company has two divisions. The Fish-oil Division extracts Omega-3 oil from its salmon fishery activities. The Finishing Division converts the oil into natural health products. No inventories exist in either division at the beginning of 2017. During the year, the Fish-oil Division extracted 30 000 litres of oil at a cost of $330 000. All the oil was transferred to the Finishing Division, where additional operating costs of $6 per litre were incurred. The 300 000 litres of finished product were sold for
$1 250 000. Required: a. Determine the operating profit for each division if the transfer price from Fish-oil to Finishing is at cost - $11 a litre. b. Determine the operating profit for each division if the transfer price is $9 per litre. c. Since the Fish-oil Division sells all of its oil internally to the Finishing Division, does the manager care what price is selected? Why? Should the Fish-oil Division be a cost centre or a profit centre under the circumstances?
Answer: a. Revenue Cost of services: Incurred Transferred-in Total Operating profit * 30 000 litres × $11 = $330 000
Fish-oil $330 000*
Finishing $1 250 000
$330 000 0 $330 000
$180 000 330 000 $510 000
$0
$740 000
Fish-oil $270 000*
Finishing $1 250 000
$330 000 0 $330 000
$180 000 270 000 $450 000
$(60 000)
$800 000
b. Revenue Cost of services: Incurred Transferred-in Total Operating profit * 30 000 litres × $9 = $270 000
c. The manager of Fish-oil cares about the transfer price if the division is a profit centre but not if it is a cost centre. Under the circumstances, the division probably should be a cost centre and not worry about the profit it pretends to make by selling to another division. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices
Learning Objective: 19.7 Evaluate hybrid transfer pricing. 110) The Eucalypt Forestry Company has two divisions. The Cutting Division prepares timber at its sawmills. The Assembly Division prepares the cut timber into finished wood for the furniture industry. No inventories exist in either division at the beginning of 2018. During the year, the Cutting Division prepared 60 000 cubic meters of wood at a cost of $660 000. All the timber was transferred to the Assembly Division, where additional operating costs of $6 per cubic meter were incurred. The 600 000 board metres of finished wood were sold for $2 500 000. Required: a. Determine the operating profit for each division if the transfer price from Cutting to Assembly is at cost - $11 a cubic meter. b. Determine the operating profit for each division if the transfer price is $9 per cubic meter. c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the manager care what price is selected? Why? Should the Cutting Division be a cost centre or a profit centre under the circumstances?
Answer: a. Revenue Cost of services: Incurred Transferred-in Total
Cutting $660 000*
Assembly $2 500 000
$660 000 0 $660 000
$360 000 660 000 $1 020 000
$0
$1 480 000
Cutting $540 000*
Assembly $2 500 000
$660 000 0 $660 000
$360 000 540 000 $900 000
$(120 000)
$1 600 000
Operating profit * 60 000 cubic meters × $11 = $660 000 b. Revenue Cost of services: Incurred Transferred-in Total Operating profit * 60 000 cubic meters × $9 = $540 000
c. The manager of Cutting cares about the transfer price if the division is a profit centre but not if it is a cost centre. Under the circumstances, the division probably should be a cost centre and not worry about the profit it pretends to make by selling to another division. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 111) Glenelg Sheet Metal Company has two divisions. The Raw Material Division prepares sheet metal at its warehouse facility. The Fabrication Division prepares the cut sheet metal into finished products for the air conditioning industry. No inventories exist in either division at the beginning of 2017. During the year, the Raw Material Division prepared 450 000 square metres of sheet metal at a cost of $1 800 000. All the sheet metal was transferred to the Fabrication Division where additional operating costs of $1.50 per square metre were incurred. The 450 000 square metres of finished fabricated sheet metal products were sold for $3 875 000. Required: a. Determine the operating profit for each division if the transfer price from Raw Material to Fabrication is at a cost of $4 per square metre. b. Determine the operating profit for each division if the transfer price is $5 per square metre. c. Since the Raw Materials Division sells all of its sheet metal internally to the Fabrication Division, does the Raw Materials manager care what price is selected? Why? Should the Raw Materials Division be a cost centre or a profit centre under the circumstances?
Answer: a. Revenue Cost of services: Incurred Transferred-in Total
Raw Material $1 800 000*
Fabrication $3 875 000
$1 800 000 $1 800 000
$675 000 1 800 000 $2 475 000
$0
$1 400 000
Raw Materials $2 250 000*
Fabrication $3 875 000
Operating profit * 450 000 sq metres × $4 = $1 800 000 b. Revenue
Cost of services: Incurred Transferred-in Total
$1 800 000 0 $1 800 000
$675 000 2 250 000 $2 925 000
Operating profit
$450 000
$950 000
* 450 000 sq metres × $5 = $2 250 000 c. The manager of Raw Materials cares about the transfer price if the division is a profit centre but not if it is a cost centre. Under the circumstances, the division probably should be a cost centre and should not worry about the profit it pretends to make by selling to another division. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 112) 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 profit 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 Revenue: External Internal Total Cost of goods: Incurred
Assembly
Company
$4 000 000 6 000 000 $10 000 000
$7 200 000 0 $7 200 000
$11 200 000 0 $11 200 000
$6 000 000
$1 500 000
$7 500 000
Transferred-in Total
0 $6 000 000
6 000 000 $7 500 000
0 $7 500 000
Operating profit
$4 000 000
$(300 000)
$3 700 000
The Assembly manager is probably not happy because this 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 113) WestOZ Aluminium Company has two divisions. The Refining Division processes bauxite into alumina for the Smelting Division to convert into aluminium. No inventories exist in either division at the beginning of 2017. During the year, the Refining Division produced 45 000 tonnes of alumina at a cost of $18 000 000. All the alumina was transferred to the Smelting Division, where additional operating costs of $150 per tonne were incurred. The 45 000 tonnes of alumina produced 22 500 tonnes of finished ingots of aluminium which were sold for $38 750 000. Required: a. Determine the operating profit for each division if the transfer price from Refining to Smelting is at a cost of $400 per tonne. b. Determine the operating profit for each division if the transfer price is $500 per tonne. c. Since the Refining Division sells all of its alumina internally to the Smelting Division, does the Refining manager care what price is selected? Why? Should the Refining Division be a cost centre or a profit centre under the circumstances?
Answer: a. Revenue Cost of services: Incurred Transferred-in Total Operating profit
Refining $18 000 000*
Smelting $38 750 000
$18 000 000 $18 000 000
$6 750 000 18 000 000 $24 750 000
$0
$14 000 000
* 45 000 tonnes × $400 = $18 000 000 b. Revenue Cost of services: Incurred Transferred-in Total Operating profit * 45 000 tonnes × $500 = $22 500 000
Refining $22 500 000*
Smelting $38 750 000
$18 000 000 0 $18 000 000
$6 750 000 22 500 000 $29 250 000
$4 500 000
$9 500 000
c. The manager of Refining cares about the transfer price if the division is a profit centre but not if it is a cost centre. Under the circumstances, the division probably should be a cost centre and should not worry about the profit it pretends to make by selling to another division. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 114) Barossa Bicycle Company makes bicycles. The Frame Division manufactures the frames and the Assembly Division makes the finished bicycles. The frames can be sold separately for $500. The bicycles sell for $750. The information related to manufacturing for 2017 is as follows: Frame Division manufacturing costs Sales of frames by Frame Division Market value of frames transferred to Assembly Sales of bicycles by Assembly Division Additional manufacturing costs of Assembly Division
$12 000 000 8 000 000 12 000 000 14 400 000 3 000 000
Required: Calculate the operating profit for each division and the company as a whole. Use market value as the transfer price. Will all of the managers be happy with this concept? Explain.
Answer: Frame Revenue:
Assembly
Company
External Internal Total Cost of goods: Incurred Transferred-in Total
$8 000 000 12 000 000 $20 000 000
$14 400 000 0 $14 400 000
$22 400 000 0 $22 400 000
$12 000 000 0 $12 000 000
$3 000 000 12 000 000 $15 000 000
$15 000 000 0 $15 000 000
Operating profit
$8 000 000
$(600 000)
$7 400 000
The Assembly manager is probably not happy because this 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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 115) South Sydney Consultants has two divisions: Accountancy Services and Legal Advisory Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 2017 were $2 000 000 for Accountancy Services and $3 500 000 for Legal Advisory Services. Accountancy Services worked 3000 hours for Legal Advisory Services, who in turn, worked 1200 hours for Accountancy Services. The total costs of external services performed by Accountancy Services were $1 100 000 and $2 400 000 by Legal Advisory Services. Required: a. Determine the operating profit for each division and for the company as a whole if the transfer price from Accountancy Services to Legal Advisory Services is $150 per hour and the transfer price from Legal Advisory Services to Accountancy Services is $125 per hour. b. Determine the operating profit for each division and for the company as a whole if the transfer price between divisions is $150 per hour. c. What are the operating profit results for each division and for the company as a whole if the two divisions net the hours worked for each other and charge $125 per hour for the one with the excess? Which division manager prefers this arrangement?
Answer: a.
Computer Revenue: External Internal* Total Cost of services: Incurred Transferred-in* Total
Legal
Company
$2 000 000 450 000 $2 450 000
$3 500 000 150 000 $3 650 000
$5 500 000 0 $5 500 000
$1 100 000 150 000 $1 250 000
$2 400 000 450 000 $2 850 000
$3 500 000 0 $3 500 000
$800 000
$2 000 000
Operating profit $1 200 000 * Accountancy Services = 3 000 hours × $150 = $450 000 Legal Advisory Services = 1 200 hours × $125 = $150 000 Revenue for one is an expense of the other. b. Computer Revenue: External Internal* Total Cost of services: Incurred Transferred-in* Total
Legal
Company
$2 000 000 450 000 $2 450 000
$3 500 000 180 000 $3 680 000
$5 500 000 0 $5 500 000
$1 100 000 180 000 $1 280 000
$2 400 000 450 000 $2 850 000
$3 500 000 0 $3 500 000
$830 000
$2 000 000
Operating profit $1 170 000 *Accountancy Services = 3 000 hours × $150 =$450 000 Legal Advisory Services = 1 200 hours × $150 = $180 000 Revenue for one is an expense of the other. c. Computer Revenue: External Internal* Total Cost of services: Incurred
Legal
Company
$2 000 000 225 000 $2 225 000
$3 500 000 0 $3 500 000
$5 500 000 0 $5 500 000
$1 100 000
$2 400 000
$3 500 000
Transferred-in* Total
0 $1 100 000
22 500 $2 625 000
0 $3 500 000
Operating profit $1 125 000 $875 000 *Accountancy Services net = (3 000 – 1 200) hours × $125 =$225 000 Revenue for one is the expense of the other.
$2 000 000
The manager of Accountancy Services favours this procedure for the current year. If the hours are always in favour of Accountancy Services, the manager of Accountancy Services will favour this procedure. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 116) Flinders Street Consultancy has two divisions: Computer Services and Management Advisory Services. In addition to their external customers, each division performs work for the other division. The external fees earned by each division in 2017 were $200 000 for Computer Services and $350 000 for Management Advisory Services. Computer Services worked 3000 hours for Management Advisory Services, who in turn, worked 1200 hours for Computer Services. The total costs of external services performed by Computer Services were $110 000 and $240 000 by Management Advisory Services. Required: a. Determine the operating profit for each division and for the company as a whole if the transfer price from Computer Services to Management Advisory Services is $15 per hour and the transfer price from Management Advisory Services to Computer Services is $12.50 per hour. b. Determine the operating profit for each division and for the company as a whole if the transfer price between divisions is $15 per hour. c. What are the operating profit 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?
Answer: a. Computer Revenue: External Internal* Total Cost of services:
$200 000 45 000 $245 000
Management $350 000 15 000 $365 000
Company $550 000 0 $550 000
Incurred Transferred-in* Total
$110 000 15 000 $125 000
$240 000 45 000 $285 000
$350 000 0 $350 000
Operating profit $120 000 $80 000 *Computer Services = 3 000 hours × $15 = $45 000 Management Advisory Services = 1 200 hours × $12.50 = $15 000 Revenue for one is an expense of the other.
$200 000
b. Computer Revenue: External Internal* Total Cost of services: Incurred Transferred-in* Total
Management
Company
$200 000 45 000 $245 000
$350 000 18 000 $368 000
$550 000 0 $550 000
$110 000 18 000 $128 000
$240 000 45 000 $285 000
$350 000 0 $350 000
Operating profit $117 000 $83 000 *Computer Services = 3 000 hours × $15 = $45 000 Management Advisory Services = 1 200 hours × $15 = $18 000 Revenue for one is an expense of the other. c. Computer Management Revenue: External $200 000 $350 000 Internal* 22 500 0 Total $222 500 $350 000 Cost of services: Incurred $110 000 $240 000 Transferred-in* 0 22 500 Total $110 000 $262 500
$200 000
Company $550 000 0 $550 000 $350 000 0 $350 000
Operating profit $112 500 $87 500 $200 000 *Computer Services = (3 000 – 1 200) hours × $12.50 = $22 500 Revenue for one is an expense of the other. The manager of Computer Services favours this procedure for the current year. If the hours are always in
favour of Computer Services, the manager of Computer Services will favour this procedure. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing. 117) Adelaide Better Foods Company recently acquired an olive oil processing company that has an annual capacity of 2 000 000 litres and that processed and sold 1 400 000 litres last year at a market price of $4 per litre. The purpose of the acquisition was to furnish oil for the Cooking Division. The Cooking Division needs 800 000 litres of oil per year. It has been purchasing oil from suppliers at the market price. Production costs at capacity of the olive oil company, now a division, are as follows: Direct materials per litre Direct processing labour Variable processing overhead Fixed processing overhead Total
$1.00 0.50 0.24 0.40 $2.14
Management is trying to decide what transfer price to use for sales from the newly-acquired company to the Cooking Division. The manager of the Olive Oil Division argues that $4, the market price, is appropriate. The manager of the Cooking Division argues that the cost of $2.14 should be used, or perhaps a lower price, 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 litre. Required: a. Compute the operating profit for the Olive Oil Division using a transfer price of $4. b. Compute the operating profit for the Olive Oil Division using a transfer price of $2.14. c. What transfer price(s) do you recommend? Compute the operating profit for the Olive Oil Division using your recommendation.
Answer: a. Sales: External (1 200 000 × $4) Internal (800 000 × $4) Cost of goods sold: Variable (2 000 000 ×$1.74) Fixed (2 000 000 × $0.40) Operating profit
$4 800 000 3 200 000 $3 480 000 800 000
$8 000 000
4 280 000 $3 720 000
b. Sales: External (1 200 000 × $4) Internal (800 000 × $2.14) Cost of goods sold: Variable (2 000 000 ×$1.74) Fixed (2 000 000 × $0.40) Operating profit
$4 800 000 1 712 000 $3 480 000 800 000
$6 512 000
4 280 000 $2 232 000
c. Due to current demand in excess of the capacity, the Olive Oil Division should not be penalised by having to sell inside. All sales equivalent to the current external demand of 1 400 000 litres should be at the market price. Current external demand Current internal demand Total demand Capacity Excess demand Internal demand Non-competitive internal demand Sales: External (1 200 000 × $4) Internal (200 000 × $4) Internal (600 000 × $2.14)
1 400 000 800 000 2 200 000 2 000 000 200 000 800 000 600 000
$4 800 000 800 000 1 284 000
Cost of goods sold: Variable (2 000 000 ×$1.74) $3 480 000 Fixed (2 000 000 × $0.40) 800 000 Operating profit AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Hybrid transfer prices Learning Objective: 19.7 Evaluate hybrid transfer pricing.
$6 884 000
4 280 000 $2 604 000
Choose the one alternative that best completes the statement or answers the question. 118) Which of the following transfer-pricing methods always achieves goal congruence? A) full-cost plus a standard profit margin
B) a negotiated transfer price C) a market-based transfer price D) a cost-based transfer price Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 119) Which of the following transfer-pricing methods preserves subunit autonomy? A) market-based transfer pricing B) cost-based transfer pricing C) negotiated transfer pricing D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 120) The minimum transfer price equals: A) opportunity costs times 125% plus the additional outlay costs. B) opportunity costs less the additional outlay costs. C) incremental costs plus opportunity costs. D) opportunity costs divided by the additional outlay costs. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 121) The seller of Product A has no idle capacity and can sell all it can produce at $20 per unit. Outlay cost is $4. Assuming the seller can sell internally, what is the opportunity cost? A) $4 B) $16 C) $20 D) $24 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate
Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 122) The seller of a product has no idle capacity and can sell all it can produce at $11 per unit. Outlay cost is $3. Assuming the seller can sell internally, what is the opportunity cost? A) $2 B) $4 C) $8 D) $11 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 123) In analysing transfer prices, the: A) buyer will willingly pay more than the ceiling transfer price. B) buyer will not willingly purchase a product for less than the incremental costs incurred to manufacture the product internally. C) buyer will not pay less than the ceiling transfer price. D) seller will not willingly sell a product for less than the incremental costs incurred to make the product. Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 124) Which of the following transfer-pricing methods motivates management effort? A) a market-based transfer price B) a negotiated transfer price C) a cost-based transfer price based on budgeted costs D) All of the above. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 125) Which of the following transfer-pricing methods is likely to be best for evaluating subunit performance in a competitive market?
A) a cost-based transfer price based on budgeted costs B) a negotiated transfer price C) a market-based transfer price D) All of the above. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 126) Opportunity costs represent the cash flows directly associated with the production and transfer of the products and services. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 127) Market-based transfer prices are ideal in perfectly competitive markets when there is idle capacity in the selling division. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 128) If the product sold between divisions has no intermediate market, the opportunity cost of supplying the product internally is the variable cost of the product. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. Write your answer in the space provided or on a separate sheet of paper. 129) The Assembly Division of The Melbourne Car Company has offered to purchase 90 000 batteries from the Electrical Division for $104 per unit. At a normal volume of 250 000 batteries per year, production costs per battery are as follows:
Direct materials Direct manufacturing labour Variable factory overhead Fixed factory overhead Total
$40 20 12 40 $112
The Electrical Division has been selling 250 000 batteries per year to outside buyers at $136 each; capacity is 350 000 batteries per year. The Assembly Division has been buying batteries from outside sources for $130 each. Required: a. Should the Electrical Division manager accept the offer? Explain. b. From the company's perspective, will the internal sales be of any benefit? Explain.
Answer: a. Variable cost per battery = $40 + $20 + $12 = $72 Sales to Assembly Variable costs Contribution margin
$104 72 $32
Because the Electrical Division is not at capacity, it should sell to the Assembly Division up to 100 000 units at $104. This will add $2 880 000 (90 000 × $32) at the current level to its operating profit without reducing its outside sales. b. The internal sales would be beneficial to the company because the internal variable manufacturing costs of $72 per battery are less than the external price of $130 currently being paid by the Assembly Division. The company would be saving $5 220 000 [90 000 × ($130 - $72)] per year. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. 130) The Assembly Division of Hunter Valley Bicycles Company has offered to purchase 90 000 frames from the Frame Division for $170 per unit. At a normal volume of 250 000 frames per year, production costs per frame are as follows: Direct materials Direct manufacturing labour
$80 40
Variable factory overhead Fixed factory overhead Total
24 40 $184
The Frame Division has been selling 250 000 frames per year to outside buyers at $230 each; capacity is 350 000 frames per year. The Assembly Division has been buying frames from outside sources for $225 each. Required: a. Should the Frame 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 frame = $80 + $40 + $24 = $144 Sales to Assembly Variable costs Contribution margin
$170 144 $26
Because the Frame Division is not at capacity, it should sell to the Assembly Division up to 100 000 units at $170. This will add $2 340 000 (90 000 × $26) at the current level to its operating profit without reducing its outside sales. b. The internal sales would be beneficial to the company because the internal variable manufacturing costs of $144 per frame are less than the external price of $225 currently being paid by the Assembly Division. The company would be saving $7 290 000 [90 000 × ($225 - $144)] per year. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: A general guideline for transfer pricing Learning Objective: 19.8 Apply a general guideline for determining a minimum transfer price. Choose the one alternative that best completes the statement or answers the question. 131) Perth Pillow Company is highly decentralised. Each division is empowered to make its own sales decisions. The Assembly Division can purchase swan down, a key component, from the Production Division or from external suppliers. The Production Division has been the major supplier of swan down in recent years. The Assembly Division has announced that two external suppliers will be used to purchase the swan down at $20 per kilo for the next year. The Production Division recently increased its unit price to $40. The manager of the Production Division presented the following information — variable cost $32 and fixed cost $8 — to top management in order to attempt to force the Assembly Division to purchase the
swan down internally. The Assembly Division purchases 20 000 kilos of swan down per month. What would be the monthly operating advantage (or disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to $50 per kilo and the Production Division is able to utilise the facilities for other operations, resulting in a monthly cash-operating savings of $30 per kilo? A) $1 000 000 B) $(400 000) C) $(240 000) D) $360 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. 132) Evans Bicycle Company is highly decentralised. Each division is empowered to make its own sales decisions. The Assembly Division can purchase wheel rims, a key component, from the Production Division or from external suppliers. The Production Division has been the major supplier of rims in recent years. The Assembly Division has announced that two external suppliers will be used to purchase the rims at $30 per rim for the next year. The Production Division recently increased its unit price to $50. The manager of the Production Division presented the following information — variable cost $42 and fixed cost $8 — to top management in order to attempt to force the Assembly Division to purchase the rims internally. The Assembly Division purchases 20 000 rims per month. What would be the monthly operating advantage (or disadvantage) of purchasing the goods internally, assuming the external supplier increased its price to $80 per rim and the Production Division is able to utilise the facilities for other operations, resulting in a monthly cash-operating savings of $35 per rim? A) $760 000 B) $(1 540 000) C) $60 000 D) $1 600 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. 133) An advantage of using budgeted costs for transfer pricing among divisions is that: A) it promotes subunit autonomy. B) it usually provides a basis for optimal decision making. C) overall corporate profitability is usually higher. D) the divisions know the transfer price in advance.
Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. 134) 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) tax authorities may suspect manipulation of records. B) it is almost impossible to keep the records straight and hard to reconcile the books. C) it is illegal. D) Both A and B are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. 135) 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 minimise its worldwide tax liability, we would expect Global Giant to: A) stop marketing in the high tax rate country. B) stop producing in the low tax rate country. C) establish a high transfer price when the producing unit sells to the marketing unit. D) establish a low transfer price when the producing unit sells to the marketing unit. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 136) Additional factors that arise in multinational transfer pricing include tariffs and customs duties levied on imports of products into a country. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing.
137) Tax considerations should play no part in determining a transfer price between international divisions of a firm. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. 138) It is possible to increase the overall after-tax profit of a multinational corporation by adjusting transfer prices. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. Write your answer in the space provided or on a separate sheet of paper. 139) Cronulla Sportswear Company manufactures socks. The Athletic Division sells its socks for $6 a pair to outsiders. Socks have manufacturing costs of $2.50 per pair for variable and $1.50 for fixed. The division's total fixed manufacturing costs are $105 000 at the normal volume of 70 000 units. The New Zealand Division has offered to buy 15 000 pairs of socks at the full cost of $4. The Athletic Division has excess capacity and the 15 000 pairs 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 Variable costs Contribution margin
$4.00 2.50 $1.50
The proposal should be accepted because it makes a contribution to fixed costs and profits of $1.50 per unit. This would increase the division's operating profit by $22 500 = ($1.50 × 15 000 pairs). AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing. 140) 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. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Multinational transfer pricing and tax implications Learning Objective: 19.9 Describe the impact of income tax factors on multinational transfer pricing.
Chapter 20 Performance measurement, compensation and multinational considerations Choose the one alternative that best completes the statement or answers the question. 1) A report that measures financial and non-financial performance measures for various organisation units in a single report is called a(n): A) unbalanced scorecard. B) imbalanced scorecard. C) balanced scorecard. D) financial report scorecard. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. 2) Customer-satisfaction measures are an example of the: A) financial report scorecard approach. B) balanced scorecard approach. C) goal-congruence approach. D) investment success approach. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. 3) An example of a performance measure with a long-run time horizon is: A) direct materials efficiency variances. B) number of new patents developed. C) return on investment.
D) All of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 4) Many common performance measures, such as customer satisfaction, rely on internal financial accounting information. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. 5) Some companies present financial and non-financial performance measures for their subunits in a single report called the 'balanced scorecard’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. 6) The 'balanced scorecard' in most organisations is broken down into the following categories: financial perspective, customer perspective, internal business-process perspective, and productivity perspective. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. Write your answer in the space provided or on a separate sheet of paper. 7) Assume you are evaluating a manufacturing company. Match the various organisational 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 profit 9. Product reliability 10. Time-to-market Activities
Answer: 1, 8 5, 7, 9 6, 10
Performance measure a. Profitability b. Customer satisfaction c. Innovation d. Efficiency, quality, and time
a. Profitability b. Customer satisfaction c. Innovation
2, 3, 4, 7, 9, 10 d. Efficiency, quality, and time AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. 8) Companies are increasingly using non-financial measures to evaluate performance. Since these measures 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 non-financial measures concentrate on areas and questions that indicate the quality of a particular company's products. While some of these items do not come from a company's financial records, such as defect rates, they are quantifiable and can be verified. AACSB: Able to analyse and frame problems
Difficulty: Complex Topic: Financial and non-financial performance measures Learning Objective: 20.1 Select financial and non-financial performance measures to use in a balanced scorecard. Choose the one alternative that best completes the statement or answers the question. 9) The question 'Does operating profit best measure a subunit's financial performance?' is considered to be part of which step in designing an accounting-based performance measure? A) Choose performance measures that align with top management's financial goals. B) Choose the time horizon of each performance measure. C) Choose a definition for each performance measure. D) Choose a measurement alternative for each performance measure. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial and non-financial performance measures Learning Objective: 20.2 Design an accounting-based performance measure. 10) The question 'Should assets be defined as total assets or net assets?' is considered to be part of which step in designing an accounting-based performance measure? A) Choose performance measures that align with top management's financial goals. B) Choose the time period of each performance measure. C) Choose a definition for each performance measure. D) Choose a measurement alternative for each performance measure. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial and non-financial performance measures Learning Objective: 20.2 Design an accounting-based performance measure. 11) The question 'Should assets be measured at historical cost or current cost?' is considered to be part of which step in designing an accounting-based performance measure? A) Choose performance measures that align with top management's financial goals. B) Choose the time period of each performance measure. C) Choose a definition for each performance measure. D) Choose a measurement alternative for each performance measure. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial and non-financial performance measures
Learning Objective: 20.2 Design an accounting-based performance measure. 12) Which statement about designing an accounting-based performance measure is FALSE? A) The issues considered in each step are independent. B) Management's beliefs are present during the analyses. C) The steps need not be done sequentially. D) Behavioural criteria are important when evaluating the steps. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial and non-financial performance measures Learning Objective: 20.2 Design an accounting-based performance measure. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 13) The first step in designing accounting based performance measures is to choose performance measures that align with top management's financial goals. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Financial and non-financial performance measures Learning Objective: 20.2 Design an accounting-based performance measure. Write your answer in the space provided or on a separate sheet of paper. 14) Designing an accounting based performance measure requires six steps. List each step. For three of the steps, describe a question that must be resolved as part of the implementation process.
Answer: 1. Choose performance measures that align with top management's goals. Does operating profit, return on assets, or revenues best measure a subunit's financial goals? 2. Choose the time period of each performance measure. Should the performance measures be calculated for one year or a multiyear time horizon? 3. Choose a definition for each performance measure. Should assets be defined as total assets or net assets? 4. Choose a measurement alternative for each performance measure. Should assets be measured at historical cost or current cost? 5. Choose a target level of performance. Should all subunits have the same targets such as the same required rate of return on assets? 6. Choose the timing of the feedback. How often should manufacturing performance reports be sent to management? AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Financial and non-financial performance measures Learning Objective: 20.2 Design an accounting-based performance measure. 15) The CEO of Geelong Pen Company wants to establish an accounting-based performance measurement system for the company's new plant. The company has an accounting information system sufficient to support a fairly sophisticated performance measurement system. The new plant is going to be considered an investment centre since its products will be markedly different from others the company currently sells. The new plant will have no internal dealings with other plants within the company. Required: What are some of the key steps that should be undertaken in the establishment of an accounting-based performance measurement system?
Answer: Key steps include: 1. Choose performance measures that align with top management's financial goals for the plant. They would include those that relate to the plant as an investment centre. 2. Choose the time period of each performance measure in step 1. 3. Choose a definition of the components in each performance measure in step 1. For example, how should investment be defined? 4. Choose a measurement alternative for each performance measure in step 1. For example, should historical cost or current cost be used to measure investment? 5. Choose a target level of performance. 6. Choose the timing of feedback. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Financial and non-financial performance measures Learning Objective: 20.2 Design an accounting-based performance measure. Choose the one alternative that best completes the statement or answers the question. 16) Managers usually use the term 'return on investment' to evaluate: A) the performance of a subunit. B) a potential project. C) the performance of a subdivision. D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 17) The return on investment is usually considered the most popular approach to incorporating the investment base into a performance measure because: A) it blends all the ingredients of profitability into a single percentage. B) it is similar to the company's price earnings ratio which is available daily in the financial press. C) once determined, there is no need to use it with other measures of performance. D) Both A and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 18) Return on investment can be increased by: A) decreasing operating assets. B) increasing operating assets. C) decreasing revenues. D) Both B and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 19) The method of profitability analysis recognises the two basic ingredients in profit-making: increasing profit per dollar of revenues and using assets to generate more revenues. A) balanced scorecard B) DuPont C) residual-income D) economic value added Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 20) During the past 12 months, the Platypus Corporation had a net profit of $50 000. What is the amount of
the investment if the return on investment is 20%? A) $100 000 B) $200 000 C) $250 000 D) $500 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 21) During the past 12 months, the Wombat Corporation had a net profit of $39 200. What is the return on investment if the amount of the investment is $280 000? A) 10% B) 12% C) 14% D) 16% Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 22) Tassietiger Corporation had the following information for 2017: Revenue Operating expenses Total assets
$900 000 670 000 1 150 000
What is the return on investment? A) 10% B) 20% C) 25% D) 78.2% Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method.
23) Wacker Company has two regional offices. The data for each follows:
Revenues Operating assets Net operating profit
Adelaide $580 000 4 800 000 2 016 000
Perth $596 000 9 000 000 2 400 000
What is the Adelaide Division's return on investment? A) 0.42 B) 0.54 C) 0.96 D) 4.12 Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 24) Thacker Company has two regional offices. The data for each follows:
Revenues Operating assets Net operating profit
Sydney $580 000 4 800 000 2 016 000
Melbourne $596 000 9 000 000 4 860 000
What is the return on investment for the Melbourne Division? A) 0.42 B) 0.54 C) 0.96 D) 4.12 Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. Answer the following questions using the information below: The Echuca Electrical Corporation reported the following information for its Coaxial Cables Division: Revenues
$1 000 000
Operating costs Taxable income Operating assets
600 000 200 000 500 000
Profit is defined as operating profit. 25) What is the Coaxial Cables Division's investment turnover ratio? A) 2.00 B) 2.50 C) 3.33 D) 0.80 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 26) What is the Coaxial Cables Division's return on sales? A) 0.20 B) 0.40 C) 0.50 D) 0.60 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 27) What is the Coaxial Cables Division's return on investment? A) 0.2 B) 0.4 C) 0.5 D) 0.8 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. Answer the following questions using the information below:
The top management at Munchie Company, 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 profit Operating assets Return on investment Return on sales Investment turnover
Alpha Division Beta Division $2 500 000 (a) $1 500 000 $650 000 (b) (c) 0.25 0.15 (e) 0.10 (f) (g)
Gamma Division $1 150 000 $575 000 $766 667 (d) 0.5 1.5
28) What were the sales for the Beta Division? A) $4 333 333 B) $5 952 380 C) $6 500 000 D) $7 151 800 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 29) What is the value of the operating assets belonging to the Alpha Division? A) $4 333 333 B) $6 000 000 C) $6 500 000 D) $7 151 800 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 30) What is the value of the operating assets belonging to the Beta Division? A) $4 333 333 B) $5 952 380 C) $6 500 000 D) $7 151 800 Answer: A
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 31) What is the Gamma Division's return on investment? A) 0.25 B) 0.42 C) 0.60 D) 0.75 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 32) What is the Alpha Division's return on sales? A) 0.25 B) 0.42 C) 0.60 D) 0.75 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 33) What is Alpha Division's investment turnover? A) 1.5 B) 0.42 C) 2.4 D) 0.6 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 34) What is Beta Division's investment turnover? A) 0.15
B) 1.5 C) 2.4 D) 0.67 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. Answer the following questions using the information below: The top management at Groundscare 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 profit Operating assets Return on investment Return on sales Investment turnover
Tractor Division $5 000 000 $500 000 (b) 0.20 (e) (f)
Tiller Division (a) $720 000 (c) 0.10 0.12 (g)
Digger Division $1 200 000 $300 000 $1 000 000 (d) 0.25 1.2
35) What were the sales for the Tiller Division? A) $4 800 000 B) $6 000 000 C) $7 750 000 D) $7 500 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 36) What is the value of the operating assets belonging to the Tractor Division? A) $2 250 000 B) $1 750 000 C) $2 000 000 D) $2 500 000 Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 37) What is the value of the operating assets belonging to the Tiller Division? A) $6 000 000 B) $5 000 000 C) $7 200 000 D) $7 500 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 38) What is the Digger Division's return on investment? A) 0.25 B) 0.30 C) 0.60 D) 0.45 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 39) What is the Tractor Division's return on sales? A) 0.10 B) 0.15 C) 0.12 D) 0.20 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 40) What is the Tractor Division's investment turnover? A) 1.0 B) 2.5
C) 2.0 D) .50 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 41) What is the Tiller Division's investment turnover? A) 0.50 B) 0.833 C) 1.5 D) 1.2 Answer: B Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. Answer the following questions using the information below: The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 2017 reported the following results:
Sales Operating profit Taxable income Investment
North $3 000 000 750 000 650 000 6 000 000
South $2 500 000 550 000 375 000 5 000 000
The company's desired rate of return is 10%. Profit is defined as operating profit. 42) What are the respective return-on-investment ratios for the North and South Divisions? A) 0.108 and 0.075 B) 0.050 and 0.150 C) 0.125 and 0.110 D) 0.110 and 0.125 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1
Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 43) Which of the following is the correct formula for return on sales? A) Investment/Profit B) Profit/Revenue C) Revenue/Investment D) Profit/Investment Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 44) Another name for 'return-on-investment' is the: A) residual income. B) accounting rate of return. C) internal rate of return. D) net present value. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. Answer the following questions using the information below: The top management at Watersport Company, a manufacturer of water sport 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 profit Operating assets Return on investment Return on sales Investment turnover
Jetski Division $7 500 000 $750 000 (b) 0.20 (e) (f)
Boat Division (a) $1 080 000 (c) 0.10 0.12 (g)
45) What were the sales for the Boat Division? A) $7 200 000 B) $9 000 000
Surfboard Division $1 800 000 $450 000 $1 500 000 (d) 0.25 1.2
C) $11 750 000 D) $7 500 000 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 46) What is the value of the operating assets belonging to the Jetski Division? A) $2 250 000 B) $1 750 000 C) $2 000 000 D) $3 750 000 Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 47) What is the value of the operating assets belonging to the Boat Division? A) $7 500 000 B) $11 650 000 C) $10 800 000 D) $9 000 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 48) What is the Surfboard Division's return on investment? A) 0.45 B) 0.30 C) 0.60 D) 0.25 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method.
49) What is the Jetski Division's return on sales? A) 0.10 B) 0.15 C) 0.20 D) 0.12 Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 50) What is the Jetski Division's investment turnover? A) .50 B) 2.5 C) 2.0 D) 1.0 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 51) What is the Boat Division's investment turnover? A) 1.2 B) 0.833 C) 0.50 D) 1.5 Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 52) A major weakness of comparing two companies using only operating profits as the basis of comparison is that this method ignores differences in the size of the investment required to earn the operating profit. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 53) ‘Return on investment’ is also called the ‘accrual accounting rate of return’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 54) Investment turnover is calculated by dividing investments by revenues. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 55) Return on sales is calculated by dividing net profit by revenues. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 56) The three alternatives for increasing return on investment include increasing assets such as receivables, increasing revenues and decreasing costs. (In all cases, assume that all other items stay the same.) Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 57) Return on investment is the most popular performance measure when measuring performance in an investment centre. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method.
Write your answer in the space provided or on a separate sheet of paper. 58) Museum Corporation uses the investment centre concept for the museums that it manages. Select operating data for three of its museums for 2017 are as follows:
Revenue Operating assets Net operating profit
Melbourne $600 000 300 000 51 000
Canberra $750 000 250 000 56 000
Brisbane $900 000 350 000 59 000
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. Melbourne = $51 000/$300 000 = 0.170 Canberra = $56 000/$250 000 = 0.224 Brisbane = $59 000/$350 000 = 0.169 b. Canberra was doing the best because the ROI was the highest, and compared to Brisbane, was doing better with fewer assets. c. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 59) Kase Tractor Company allows its divisions to operate as autonomous units. The operating data for 2017 follow:
Revenues Accounts receivable Operating assets Net operating profit Taxable income
Ploughs $2 250 000 800 000 1 000 000 220 000 165 000
Tractors $500 000 152 500 400 000 60 000 90 000
Required: a. Calculate the investment turnover for each division.
Combines $4 800 000 1 435 000 1 750 000 480 000 385 000
b. c. d. e.
Calculate the return on sales for each division. Calculate the return on investment for each division. Which division manager is doing best? Why? What other factors should be included when evaluating the managers?
For parts (b) and (c) income is defined as operating profit.
Answer: a. Investment turnover: Ploughs = $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.
Return on Sales: Ploughs = $220 000/$2 250 000 = 0.10 Tractors = $60 000/$500 000 = 0.12 Combines = $480 000/$4 800 000 = 0.10
c.
ROI: Ploughs = 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 Combines had the highest investment turnover, which offset the second-best return on sales. e. Residual income should be considered and non-controllable factors such as the age of the assets. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 60) Perth Electronics Company allows its divisions to operate as autonomous units. The operating data for 2017 follow:
Revenues Accounts receivable Operating assets
TVs Photography $4 500 000 $1 000 000 1 600 000 305 000 2 000 000 800 000
Computers $9 600 000 2 870 000 3 500 000
Net operating profit Taxable income
440 000 330 000
120 000 180 000
960 000 770 000
Required: a. Calculate the investment turnover for each division. b. Calculate the return on sales for each division. c. Calculate 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 profit.
Answer: a. Investment turnover: TVs Photography Computers
= $4 500 000/$2 000 000 = 2.25 = $1 000 000/$800 000 = 1.25 = $9 600 000/$3 500 000 = 2.74
b. Return on Sales: TVs Photography Computers
= $440 000/$4 500 000 = $120 000/$1 000 000 = $960 000/$9 600 000
c.
ROI: TVs Photography Computers
= 2.25 × 0.10 = 1.25 × 0.12 = 2.74 × 0.10
= 0.10 = 0.12 = 0.10
= 0.225 = 0.150 = 0.274
d. Computers' manager had the best performance because Computers had the highest investment turnover, which offset the second-best return on sales. e. Residual income should be considered and non-controllable factors such as the age of the assets. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 61) Provide the missing data for the following situations: Red Division White Division Blue Division
Sales Net operating profit Operating assets Return on investment Return on sales Investment turnover
$? $200 000 $? 0.16 0.04 ?
$10 000 000 $400 000 $? 0.10 ? ?
$? $288 000 $1 600 000 ? 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 4.0 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 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 62) Provide the missing data for the following situations:
River Division Stream Division Creek Division $? $5 000 000 $? $100 000 $200 000 $144 000 $? $? $800 000 0.16 0.10 ? 0.04 ? 0.12 ? ? 1.5
Sales Net operating profit Operating assets Return on investment Return on sales Investment turnover Answer:
River Division: ROI = ROS × IT 0.16 = 0.04 × IT IT = 4.0 ROS = Income/Sales 0.04 = $100 000/Sales Sales = $2 500 000 IT 4.0 OA
= Sales/OA = $2 500 000/OA = $625 000
Stream Division: ROS = $200 000/$5 000 000
= 0.04
IT
= ROI/ROS = 0.10/0.04
= 2.5
OA
= S/IT
= $5 000 000/2.5
= $2 000 000
= 1.5 × $800 000
= $1 200 000
Creek Division: Sales = IT × OA
ROI = 0.12 × 1.5 = 0.18 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1
Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. 63) John's Mobile 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 profit and net revenue. The DuPont method is generally used. The company's Phone Accessories Division had the following results for the last two years: 2016 ROI = ($2 000 000/$20 000 000) × ($20 000 000/$10 000 000) = 0.20 2017 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 2017, 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 2017. b. Would there have been any substantial difference if average capital had been used?
Answer: a. While sales increased by 25%, net profit only increased by 20%. This may indicate that expenses increased more than they should have. Apparently, the expected marginal net profit 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. AACSB: Able to analyse and frame problems and written and oral communication Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.3 Analyse return on investment (ROI) using the DuPont method. Choose the one alternative that best completes the statement or answers the question. 64) Costs recognised in particular situations but not incorporated in financial accounting records are:
A) imputed costs. B) cash accounting costs. C) opportunity costs. D) None of these answers are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 65) A problem with using residual income as a performance measure is that a corporation with a: A) high investment turnover ratio always has a higher residual income than a corporation with a smaller investment turnover ratio. B) larger dollar amount of assets is likely to have a higher residual income than a corporation with a smaller dollar amount of assets. C) high return on sales always has a higher residual income than a corporation with a smaller return on sales. D) None of these answers are correct. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 66) A company which favours the residual income approach to measure performance wants managers to: A) concentrate on maximising a percentage return. B) maximise return on sales. C) concentrate on maximising an absolute amount of dollars. D) maximise the investment turnover ratio. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 67) 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) concentrates on maximising an absolute amount of dollars. C) calculates a percentage return rather than an absolute return.
D) concentrates on maximising the return on sales. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. Answer the following questions using the information below: The Bandage Medical Supply Company has two divisions that operate independently of one another. The financial data for the year 2017 reported the following results:
Sales Operating profit Taxable income Investment
North $3 000 000 750 000 650 000 6 000 000
South $2 500 000 550 000 375 000 5 000 000
The company's desired rate of return is 10%. Profit is defined as operating profit. 68) What are the respective residual incomes for the North and South Divisions? A) $30 000 and $50 000 B) $50 000 and a negative $150 000 C) $150 000 and $50 000 D) $150 000 and $30 000 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 69) 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) South, North D) North, South Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1
Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 70) ‘Return on investment’ is also called the ‘imputed cost’ of the investment. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 71) Imputed costs are costs recognised in particular situations that are not usually incorporated in financial accounting records. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 72) The objective of maximising their return on investment may induce managers of highly profitable divisions to reject projects that from the viewpoint of the overall organisation should be accepted. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 73) Goal congruence is more likely to be promoted by using return on investment rather than residual income as a measure of a subunit's managerial performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 74) Residual income is a better evaluation method than return on investment because it has a lower required rate of return for the company projects than return on investment does. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1
Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 75) To evaluate overall aggregate performance, return on investment and residual income measures are more appropriate than return on sales. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. Write your answer in the space provided or on a separate sheet of paper. 76) Consolidated Supply Corporation uses the investment centre concept for the service 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 2017 are as follows:
Revenue Operating assets Net operating profit
Pine Street $8 500 000 3 500 000 480 000
Oak Street Gum Street $6 750 000 $7 500 000 3 500 000 2 500 000 575 000 455 000
Required: a. Compute the return on investment for each station. b. Which service station manager is doing best based only on ROI? Why? c. Are any of the service stations in danger of being closed due to lack of performance? d. What other factors should be included when evaluating the managers? Answer:
a. Pine Oak Gum
= $480 000/$3 500 000 = $575 000/$3 500 000 = $455 000/$2 500 000
= 0.137 = 0.164 = 0.182
b. Gum Street was doing the best because the ROI was the highest. c. Pine Street is in danger of being shut down because it is only making a return on its investment base of 13.7%. This is less than the required rate of return of 15%. a. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets.
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 77) Illawarra Pizzas Corporation uses the investment centre concept for the pizza bars that it manages in the city. Illawarra has a 30% required rate of return on investment in order for a branch to be viable. Select operating data for three of its branches for 2017 are as follows:
Revenue Operating assets Net operating profit
Acacia Street Wattle Street Gum Street $4 250 000 $3 375 000 $3 750 000 1 750 000 1 750 000 1 250 000 480 000 575 000 455 000
Required: a. Compute the return on investment for each. b. Which branch manager is doing best based only on ROI? Why? c. Are any of the pizza bars in danger of being closed due to lack of performance? d. What other factors should be included when evaluating the managers?
Answer: a. Acacia Wattle Gum b.
= $480 000/$1 750 000 = $575 000/$1 750 000 = $455 000/$1 250 000
= 0.274 = 0.329 = 0.364
Gum Street was doing the best because the ROI was the highest.
c. Acacia Street is in danger of being shut down because it is only making a return on its investment base of 27.4%. This is less than the required rate of return of 30%. d. At a minimum, the company should consider examining the DuPont method, residual income, and the age of operating assets. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 78) Hargrave Products has three divisions, which operate autonomously. Their results for 2017 were as follows: East West International
Sales Cost of goods sold Operating profit Investment base
$30 000 000 15 000 000 4 500 000 30 000 000
$40 000 000 25 000 000 4 750 000 30 500 000
$50 000 000 37 000 000 5 000 000 31 000 000
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 = 0.150 West ROI = $4 750 000/$30 500 000 = 0.156 International = $5 000 000/$31 000 000 = 0.161 b. Investment base Minimum rate Minimum return
East $30 000 000 × 0.15 $4 500 000
West International $30 500 000 $31 000 000 × 0.15 × 0.15 $4 575 000 $4 650 000
Operating Profit Minimum return Residual income
$4 500 000 4 500 000 $0
$4 750 000 4 575 000 $175 000
$5 000 000 4 650 000 $350 000
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 79) Boomerang Products has three divisions, which operate autonomously. Their results for 2017 were as follows:
Sales Cost of goods sold Operating profit
Standard $30 000 000 15 000 000 4 500 000
Deluxe $40 000 000 25 000 000 4 750 000
Supreme $50 000 000 37 000 000 5 000 000
Investment base
18 000 000
18 555 000
18 650 000
The company's desired rate of return is 25%. Required: a. Calculate each division's ROI (round to three decimal places). b. Calculate each division's residual income.
Answer: a. Standard ROI = $4 500 000/$18 000 000 = 0.250 Deluxe ROI = $4 750 000/$18 555 000 = 0.255 Supreme = $5 000 000/$18 650 000 = 0.268 b. Investment base Minimum rate Minimum return
Standard $18 000 000 × 0.25 $4 500 000
Deluxe $18 555 000 × 0.25 $4 638 750
Supreme $18 650 000 × 0.25 $4 662 500
Operating Profit Minimum return Residual income
$4 500 000 4 500 000 $0
$4 750 000 4 638 750 $111 250
$5 000 000 4 662 500 $337 500
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 80) Batman Abstract Company has three divisions that operate autonomously. Their results for 2017 are as follows:
Sales Contribution margin Operating profit Investment base
Riddler $5 000 000 1 440 000 1 000 000 9 000 000
The company's desired rate of return is 20%.
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
Required: a. Calculate each division's ROI. b. Calculate each division's residual income. c. Rank each division by both ROI and residual income. d. Which division had the best performance in 2017? Why?
Answer: a. Riddler ROI = $1 000 000/$9 000 000 Joker ROI = $1 750 000/$10 000 000 Penguin ROI = $2 520 000/$14 000 000
= 0.111 = 0.175 = 0.180
b. Investment base Minimum rate Minimum return
Riddler $9 000 000 × 0.20 $1 800 000
Joker $10 000 000 × 0.20 $2 000 000
Penguin $14 000 000 × 0.20 $2 800 000
Profit Minimum return Residual income
$1 000 000 1 800 000 $(800 000)
$1 750 000 2 000 000 $(250 000)
$2 520 000 2 800 000 $(280 000)
c.
ROI Rank: Penguin # 1 Joker # 2 Riddler # 3 RI Rank: Joker #1 Penguin #2 Riddler #3
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 profit level. As to meeting management's expectations of residual income, all divisions fall short of the goal with Joker being slightly ahead of Penguin. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1
Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. 81) Frenchs Forest Publishing Company has three divisions that operate autonomously. Their results for 2017 are as follows:
Sales Contribution margin Operating profit Investment base
Academic $15 000 000 1 440 000 1 500 000 7 000 000
Fiction Non-fiction $17 000 000 $20 000 000 1 700 000 3 500 000 1 200 000 2 120 000 5 000 000 14 000 000
The company's desired rate of return is 20%. Required: a. Calculate each division's ROI. b. Calculate each division's residual income. c. Rank each division by both ROI and residual income. d. Which division had the best performance in 2017? Why?
Answer: a. Academic ROI Fiction ROI Non-fiction ROI
= $1 500 000/$7 000 000 = $1 200 000/$5 000 000 = $2 120 000/$14 000 000
= 0.214 = 0.240 = 0.151
b. Investment base Minimum rate Minimum return Profit Minimum return Residual income c. ROI Rank: Fiction # 1 Academic # 2 Non-fiction # 3 RI Rank:
Academic $7 000 000 × 0.20 $1 400 000 $1 500 000 1 400 000 $100 000
Fiction Non-fiction $5 000 000 $14 000 000 × 0.20 × 0.20 $1 000 000 $2 800 000 $1 200 000 1 000 000 $200 000
$2 120 000 2 800 000 $(680 000)
Fiction #1 Academic #2 Non-fiction #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 Fiction Division has the highest ranking. However, Non-fiction does have a substantially higher profit level. As to meeting management's expectations of residual income, Academic and Fiction both meet the target with Fiction being slightly ahead of Academic. However, Non-fiction falls well short of the goal. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.4 Use the residual-income (RI) measure and explain its advantages. Choose the one alternative that best completes the statement or answers the question. 82) After-tax operating profit minus the after-tax weighted-average cost of capital multiplied by total assets minus current liabilities equals: A) economic value added. B) weighted-average cost of capital. C) residual income. D) return on investment. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 83) The after-tax average cost of all the long-term funds used by a corporation equals: A) economic value added. B) return on investment. C) weighted-average cost of capital. D) return on equity. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 84) Ghan Rail Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8 000 000 and an interest rate of 8%, and equity capital with a market value of $12 000 000 and a
cost of equity of 12%. What is Ghan Rail's weighted-average cost of capital (WACC)? A) .0480 B) .1000 C) .0912 D) .0800 Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 85) Ghan Rail Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8 000 000 and an interest rate of 8%, and equity capital with a market value of $12 000 000 and a cost of equity of 12%. Ghan Rail has two operating divisions, the Blue division and the Gold division, with the following financial measures for the current year:
Blue Div. Gold Div.
Total Assets Current Liabilities Operating Profit $9 500 000 $2 800 000 $1 055 000 $11 000 000 $2 200 000 $1 200 000
What is Economic Value Added (EVA®) for the Blue Division? A) $433 960 B) $21 960 C) $188 600 D) -$233 400 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 86) Ghan Rail Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8 000 000 and an interest rate of 8%, and equity capital with a market value of $12 000 000 and a cost of equity of 12%. Ghan Rail's after-tax cost of debt is: A) .0800 B) .0480 C) .0912 D) .0320 Answer: B AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 87) Ghan Rail Corporation, whose tax rate is 40%, has two sources of funds: long-term debt with a market value of $8 000 000 and an interest rate of 8%, and equity capital with a market value of $12 000 000 and a cost of equity of 12%. Ghan Rail 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 $11 000 000
Current Liabilities $2 800 000 $2 200 000
Operating Profit $1 055 000 $1 200 000
Calculate EVA® for the Gold Division. A) $196 800 B) -$82 560 C) -$283 200 D) $397 440 Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Answer the following questions using the information below: Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centres in the following locations with the following operating profits, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.
Mildura Townsville Broome
Operating Profit $960 000 $1 200 000 $2 040 000
88) What is the EVA® for Mildura? A) $720 000 B) $327 460 C) $392 540 D) $255 740
Assets $4 000 000 $8 000 000 $12 000 000
Current Liabilities $200 000 $600 000 $1 200 000
Answer: B AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 89) What is the EVA® for Townsville? A) $135 580 B) $234 000 C) $220 000 D) $305 000 Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 90) What is the EVA® for Broome? A) $1 530 000 B) $450 000 C) $414 360 D) $1 115 640 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Answer the following questions using the information below: Coldbrook Company has two sources of funds: long-term debt with a market and book value of $15 million issued at an interest rate of 10%, and equity capital that has a market value of $9 million (book value of $5 million). Coldbrook Company has profit centres in the following locations with the following operating profits, total assets, and current liabilities. The cost of equity capital is 15%, while the tax rate is 30%.
Darwin Hobart Newcastle
Operating Profit $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
91) What is the EVA® for Darwin? A) $305 000 B) $338 563 C) $275 500 D) $255 500 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 92) What is the EVA® for Hobart? A) $428 000 B) $476 250 C) $415 525 D) $390 000 Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 93) What is the EVA® for Newcastle? A) $1 108 000 B) $1 403 063 C) $1 315 063 D) $1 168 700 Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Answer the following questions using the information below: Echidna Company has two sources of funds: long-term debt with a market and book value of $30 million issued at an interest rate of 10%, and equity capital that has a market value of $18 million (book value of $5 million). Echidna Company has profit centres in the following locations with the following operating profits, total assets, and current liabilities. The cost of equity capital is 15%, while the tax rate is 30%. Operating Profit
Assets
Current Liabilities
Mt Iron Mt Pilbara Broken Hill
$1 630 000 $2 200 000 $4 900 000
$5 625 000 $7 500 000 $13 875 000
$1 600 000 $2 400 000 $6 360 000
94) What is the EVA® for Mt Iron? A) $710 000 B) $511 000 C) $738 500 D) $677 126 Answer: C AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 95) What is the EVA® for Mt Pilbara? A) $952 500 B) $831 050 C) $856 000 D) $1 030 000 Answer: D AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 96) What is the EVA® for Broken Hill? A) $2 678 500 B) $2 337 400 C) $2 806 126 D) $2 630 126 Answer: A AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 97) Economic Value Added (EVA®) calculations are similar to residual income calculations because in each calculation there is a charge for the division's invested capital which is deducted from a measure of
that division's profit. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 98) Economic value added, unlike residual income, charges managers for the costs of their investments in long-term assets and working capital. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 99) Companies that adopt the Economic Value Added (EVA®) concept define investment as ‘total assets employed minus current liabilities’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 100) In an Economic Added Value (EVA®) calculation, the corporate charge for a division's investment is based entirely on the after-tax interest rate on the firm's debt. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 101) In an Economic Value Added (EVA®) calculation, the measure of the invested capital for a division would be that division's assets minus that division's liabilities. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 102) In an Economic Value Added (EVA®) calculation, the appropriate measure of a division's profit
would be that division's after tax operating profit. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Write your answer in the space provided or on a separate sheet of paper. 103) 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 centres in four divisions that operate autonomously. The company's results for 2017 are as follows:
Sydney Melbourne Canberra Adelaide
Operating profit $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. Calculate Coptermagic's weighted-average cost of capital. b. Calculate each division's Economic Value Added. c. Rank the divisions by EVA®.
Answer: a. WACC
b. Sydney (EVA®)
= [(.10 × (1 - .30) × $32 000 000) + (.15 × $18 000 000)]/$50 000 000 = 9.88 % = [($1 750 000 × (1 - .30)] - [0.0988 × ($11 500 000 - $2 500 000)] = $1 225 000 - $889 200 = $335 800
Melbourne (EVA®) = [($2 400 000 × (1 - .30)] - [0.0988 × ($9 000 000 - $3 500 000)] = $1 680 000 - $543 400 = $1 136 600 Canberra (EVA®)
= [($4 675 000 × (1 - .30)] - [0.0988 × ($27 500 000 - $9 500 000)] = $3 272 500 - $1 788 400 = $1 494 100
Adelaide (EVA®)
= [($4 200 000 × (1 - .30)] - [0.0988 × ($25 000 000 - $8 000 000)] = $2 940 00 - $1 679 600 = $1 260 400
c.
Rank: Canberra # 1 Adelaide # 2 Melbourne # 3 Sydney #4 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 104) The economic value added (EVA®) concept has attracted considerable attention in recent years. Explain the attractiveness of this number as a measure of performance. Answer: The attractiveness of economic value added (EVA®) at the divisional level is primarily the fact that it allows managers to incorporate the cost of capital in decisions at the divisional level. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. 105) Gold Coast Motors Ltd operates a New Car Division and a Used Car Division. Some division financial measures for 2017 are as follows:
Total assets Current liabilities Operating profit Total assets — current liabilities Required rate of return
New Cars 25 000 000 1 500 000 $2 250 000 23 500 000 10%
Used Cars 12 500 000 2 750 000 1 850 000 7 750 000 10%
Required: a. Calculate return on investment (ROI) for each division using operating profit as a measure of income and total assets as a measure of investment. b. Calculate residual income (RI) for each division using operating profit as a measure of income and total assets as a measure of investment. c. Calculate an alternative RI for each division that is not sensitive to the amount of short-term debt taken on by the Company. Comment on the result.
d. Gold Coast Motors Ltd, whose tax rate is 30%, has two sources of funds: long-term debt with a market value of $20 000 000 at an interest rate of 10%, and equity capital with a market value of $6 250 000 and a cost of equity of 14%. Applying the same weighted-average cost of capital (WACC) to each division, calculate EVA® for each division. e. Use your preceding calculations to comment on the relative performance of each division.
Answer: a. ROI (based on total assets) New: $2 250 000/25 000 000 Used: $1 850 000/12 500 000
= =
9.0% 14.8%
b. RI (based on total assets) New: $2 250 000 — (10% × 25 000 000) = ($250 000) Used: $1 850 000 — (10% × 12 500 000) = $600 000 c. RI (based on total assets — current liabilities) New: $2 250 000 — (10% × 23 500 000) = ($100 000) Used: $1 850 000 — (10% × 9 750 000) = $875 000 A large component of the required rate of return is the imputed cost of borrowing. This is an economic cost to Gold Coast for holding the asset investments. Therefore, netting the short-term debt with the total assets has the impact of distorting the RI and making it look better than it is. d. After-tax cost of debt financing After-tax cost of equity financing
= (1− 0.3) × 10% = 7% = 14%
Weighted average cost of capital: (20 000 000 × 0.07) + (6 250 000 × 0.14)/(20 000 000 + 6 250 000) = 8.667% Operating profit after tax 0.7 × operating profit before tax 0.7 × $2 250 000 0.7 × $1 850 000 Required return for EVA® 8.667% × Investment 0.08667 × 23 500 000 0.08667% × 7 750 000
New $1 575 000
$1 295 000
2 036 745 ($461 745)
AACSB: Able to analyse and frame problems
Used
671 693 $623 307
Difficulty: Complex Topic: Choosing among different performance measures: step 1 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 106) The ROI, RI, and EVA® calculations represent the results for a several periods; for example, three years. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Choosing the time period of the performance measures: step 2 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Choose the one alternative that best completes the statement or answers the question. 107) A negative feature of defining investment by excluding the portion of total assets employed that are financed by short-term creditors is that: A) short-term debt is always more expensive to finance than long-term debt. B) current liabilities are sometimes difficult to define. C) this method encourages managers to use an excessive amount of short-term debt. D) this method encourages managers to use an excessive amount of long-term debt. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing appropriate definitions for performance measures: step 3 Learning Objective: 20.5 Use the economic value added (EVA®) method to evaluate performance. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 108) 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 AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing bases for performance measures: step 4 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. 109) A firm will see a difference in the return on investment result depending on whether they use historical cost or current cost valuation methods for the assets. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Choosing bases for performance measures: step 4 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. 110) Using gross book value as an investment base is consistent with the amount of total assets shown in the conventional balance sheet. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing bases for performance measures: step 4 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. 111) Using gross book value as an investment base will result in a lower ROI than using net book value as an investment base. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing bases for performance measures: step 4 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. 112) Using net book value as an investment base is consistent with the amount of total assets shown in the balance sheet, and with income calculations. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing bases for performance measures: step 4 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. Write your answer in the space provided or on a separate sheet of paper. 113) When using the historical cost of assets for calculation of return on investment, is it better to use the gross book value of the assets or the net book value of the assets? Discuss.
Answer: Although the most frequently used measure of assets by companies is the net book value, there are advantages and disadvantages of each option.
An advantage of using net book value is that it is consistent with the assets shown in the conventional balance sheet, and that it is consistent with the profit computations that include deductions for depreciation expense. An advantage of using the gross book value calculation is that it is easier to compare ROI across the subunits. AACSB: Able to communicate effectively orally and in writing Difficulty: Complex Topic: Choosing bases for performance measures: step 4 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 114) Historical-cost-based accounting measures are very good for evaluating economic returns on new investments. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing bases for performance measures: step 5 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. Choose the one alternative that best completes the statement or answers the question. 115) Timing of feedback depends on: A) the sophistication of the organisation's information technology. B) the specific level of management receiving the feedback. C) how critical the information is for the success of the organisation. D) All of the above. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Choosing the timing of feedback: step 6 Learning Objective: 20.6 Contrast the strengths and weaknesses of current-cost and historical-cost asset-measurement methods. Choose the one alternative that best completes the statement or answers the question. 116) If a company is a multinational company with operations in several different countries, one way to achieve comparability of historical-cost based ROIs for facilities in different countries is to: A) use GAAP for all reporting and calculations. B) restate the results of all operations in the currency of the home country. C) restate the results of operations using the cash basis method of accounting.
D) All of these answers are correct. Answer: B Difficulty: Moderate AACSB: Able to analyse and frame problems Topic: Performance measurement in multinational companies Learning Objective: 20.7 Describe the difficulties that occur when the performance of divisions operating in different countries is compared. 117) Which of the following statements is true? A) Governments in some countries may impose controls and limit selling prices of a company's products. B) The economic, legal, political, social, and cultural environments differ across countries. C) Because of advances in telecommunications and transportation, the availability of materials and skilled labour does not differ significantly across countries. D) Both A and B are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Performance measurement in multinational companies Learning Objective: 20.7 Describe the difficulties that occur when the performance of divisions operating in different countries is compared. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 118) Comparing the performance of divisions of a multinational company operating in different countries is difficult due to the differences in economic, legal, political, social, and cultural environments. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Performance measurement in multinational companies Learning Objective: 20.7 Describe the difficulties that occur when the performance of divisions operating in different countries is compared. 119) One way to achieve greater comparability of historical cost-based ROIs for a company's foreign division is to restate performance in home country currency. Answer: True AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Performance measurement in multinational companies Learning Objective: 20.7 Describe the difficulties that occur when the performance of divisions operating in different countries is compared.
Write your answer in the space provided or on a separate sheet of paper. 120) 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. • Many governments impose price and import/export controls on various products. • Availability of materials and skilled labour, 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. AACSB: Able to translate knowledge of business and management into practice Difficulty: Complex Topic: Performance measurement in multinational companies Learning Objective: 20.7 Describe the difficulties that occur when the performance of divisions operating in different countries is compared. Choose the one alternative that best completes the statement or answers the question. 121) and would be uncontrollable factors that a firm would need to consider when evaluating the return on investment of an international division. A) Manager's compensation; political climate B) Custom duties; cultural environment C) Required rate of return; legal requirements D) Manager's experience; currency stability Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Distinction between managers and organisation units Learning Objective: 20.7 Describe the difficulties that occur when the performance of divisions operating in different countries is compared. 122) Relative performance evaluation: A) filters out the effect of common non-controllable factors. B) results in managers having no incentive to help one another. C) is called ‘benchmarking’. D) All of these answers are correct. Answer: D
AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 123) An important consideration in designing compensation arrangements is the trade-off between creating incentives and imposing risks. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 124) 'Moral hazard' describes contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee's effort cannot be accurately monitored and enforced. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 125) Another term for benchmarking is a 'relative performance evaluation’. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. Write your answer in the space provided or on a separate sheet of paper. 126) R&D Storage is a small, but diversified, moving and storage company. In recent years, its profit 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 and managers better than the bonus methods, but should not be used in situations where a high degree of motivation is desired. 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 maximise 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. Suboptimisation is a potential problem with this approach if the winning manager's bonus is substantially above everyone else's bonus. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 127) The Coffee Division of New Zealand Products is planning the 2019 operating budget. Average operating assets of $1 500 000 will be used during the year and unit selling prices are expected to average $100 each. Variable costs of the division are budgeted at $400 000, while fixed costs are set at $250 000. The company's required rate of return is 18%. Required: a. Compute the 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 2019, assuming he achieves the 20% ROI from part (a)?
Answer: a. Target operating profit = 0.20 × $1 500 000 = $300 000 Operating profit $300 000 Variable costs 400 000 Fixed costs 250 000 Target revenues $950 000
Sales volume = $950 000/$100 = 9500 units b. Asset base Minimum rate Required return Target operating profit Required return Residual income
$1 500 000 × 0.18 $270 000 $300 000 270 000 $30 000
Bonus = $30 000 × 0.50 = $15 000 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 128) The Frozen Foods Division of Northern Territory Products is planning the 2019 operating budget. Average operating assets of $4 500 000 will be used during the year and unit selling prices are expected to average $50 each. Variable costs of the division are budgeted at $1 200 000, while fixed costs are set at $500 000. The company's required rate of return is 20%. Required: a. Calculate the sales volume necessary to achieve a 22% ROI. b. The division manager receives a bonus of 50% of residual income. What is his anticipated bonus for 2019, assuming he achieves the 22% ROI from part (a)?
Answer: a. Target operating profit = 0.22 × $4 500 000 = $990 000 Operating profit $990 000 Variable costs 1 200 000 Fixed costs 500 000 Target revenues $2 690 000 Sales volume = $950 000/$50 = 9500 units b. Asset base
$4 500 000
Minimum rate Required return
× 0.20 $900 000
Target operating profit Required return Residual income
$990 000 900 000 $90 000
Bonus = $90 000 × 0.50 = $45 000 AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 129) LaserLife Printer Cartridge Company is a decentralised organisation 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 2019 are budgeted as follows: Sales Less variable costs Contribution margin Less fixed expenses Net operating profit
$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 2019, 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 Variable costs Fixed costs
$1 600 000 $960 000 600 000
1 560 000
Operating profit
$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
Profit Required amount Residual income
$40 000 36 000 $4000
The manager would accept the investment because profit is increased by $4000. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 130) Murray River Fisheries Company is a decentralised organisation 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 Greenwall Division for 2019 are budgeted as follows: Sales Less variable costs Contribution margin Less fixed expenses Net operating profit
$10 000 000 5 000 000 5 000 000 3 600 000 $1 400 000
Operating assets for the division are currently $7 200 000. For 2019, the division can add a new product line for an investment of $1 200 000. The new product line will generate sales of $3 200 000 and will incur fixed expenses of $1 200 000 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 Variable costs Fixed costs Operating profit
$3 200 000 $1 920 000 1 200 000
3 120 000 $80 000
Current ROI = $1 400 000/$7 200 000 = 0.194 New investment ROI = $80 000/$1 200 000 = 0.067 Combined ROI = $1 480 000/$8 400 000 = 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
$1 200 000 × 0.06 $72 000
Profit Required amount Residual income
$80 000 72 000 $8000
The manager would accept the investment because profit is increased by $8000. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 131) Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results for 2019 are as follows: Division A B
Operating profit $15 000 000 $25 000 000
Investment $100 000 000 $125 000 000
C $11 000 000 $50 000 000 The company is planning an expansion, which will require each division to increase its investments by $25 000 000 and its profit 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?
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.
= $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
ROI Rank:
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 = 0.20 = 0.22
1. B 2. C 3. A = 0.156 = 0.197 = 0.207
= $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. AACSB: Able to analyse and frame problems Difficulty: Complex Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 132) Canberra Asset Management has three divisions. Each division's required rate of return is 15%. Planned operating results for 2019 are as follows: Division A B C
Operating profit $22 500 000 $37 500 000 $16 500 000
Investment $175 000 000 $187 500 000 $75 000 000
The company is planning an expansion, which will require each division to increase its investments by $37 500 000 and its profit by $6 750 000. Required: a. Calculate the current ROI for each division. b. Calculate 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?
Answer: a. A ROI = $22 500 000/$150 000 000 B ROI = $37 500 000/$187 500 000 C ROI = $16 500 000/$75 000 000
= 0.15 = 0.20 = 0.22
b. A RI B RI C RI
= $0 = $9 375 000 = $5 250 000
c.
= $22 500 000 - ($150 000 000 × 0.15) = $37 500 000 - ($187 500 000 × 0.15) = $16 500 000 - ($75 000 000 × 0.15)
ROI Rank:
1. C 2. B 3. A
RI Rank:
d. A ROI = $29 250 000/$187 500 000
1. B 2. C 3. A = 0.156
B ROI = $44 250 000/$225 000 000 C ROI = $23 250 000/$112 500 000
= 0.197 = 0.207
A RI B RI C RI
= $1 125 000 = $10 500 000 = $6 375 000
= $29 250 000 - ($187 500 000 × 0.15) = $44 250 000 - ($225 000 000 × 0.15) = $23 250 000 - ($112 500 000 × 0.15)
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. AACSB: Able to analyse and frame problems and written and oral communication Difficulty: Complex Topic: Distinction between managers and organisation units Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. Choose the one alternative that best completes the statement or answers the question. 133) In performance evaluations: A) to have an effective and fair evaluation, a manager should be evaluated over several time periods. B) economic conditions for the specific industry should not be considered. C) the performance of the division prior to the manager assuming control should be considered. D) Both A and C are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 134) A problem with rewarding managers only on the basis of residual income is that: A) on occasion, the items in the residual income calculation are not quantifiable. B) residual income is difficult to measure. C) residual income can depend on items over which the manager has little control. D) All of these answers are correct. Answer: C AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Performance measures at the individual activity level
Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 135) describes contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee's effort cannot be accurately monitored and enforced. A) Management compensation B) Moral hazard C) Goal congruence D) Incentive compensation Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 136) Tying performance measures more closely to a manager's efforts: A) normally requires the use of non-financial measures. B) results in the salary component of compensation dominating the total compensation package. C) results in a strict use of financial ratios. D) Both A and C are correct. Answer: A AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 137) Team incentives encourage cooperation by: A) improving morale. B) forcing people to work together on difficult tasks. C) rewarding all teams the same amount. D) letting individuals help one another as they strive toward a common goal. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 138) Many manufacturing, marketing, and design problems require employees with multiple skills; therefore, teams are used and the members have the added encouragement of: A) team incentives. B) morale incentives.
C) management incentives. D) individual incentives. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 139) The situation in which an employee prefers to exert less effort compared with the effort desired by the owner because the employee's effort cannot accurately be monitored and enforced is known as a(n): A) objective. B) imputed cost. C) incentive. D) moral hazard. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 140) Managers only employ one task as a part of their job, and thus evaluation of how well they do is simple to accomplish. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. 141) The only criticism of team-based compensation is that the incentives for individual employees to excel are diminished, harming overall performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Performance measures at the individual activity level Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. Choose the one alternative that best completes the statement or answers the question. 142) Designers of executive compensation plans emphasise which of the following factors? A) Administrative ease
B) Achievement of organisational goals C) The probability that the executives affected by the plan will perceive the plan as fair D) All of these answers are correct. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Executive performance measures and compensation Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 143) Evaluating an executive's performance using the annual return on investment would sharpen an executive's long-run focus. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Executive performance measures and compensation Learning Objective: 20.8 Explain the roles of salaries and incentives when rewarding managers.
Chapter 21 Measuring and reporting sustainability Choose the one alternative that best completes the statement or answers the question. 1) Sustainability does NOT include: A) climate change. B) recycling. C) the impact of globalisation on living standards in developing countries. D) None of the above are excluded. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. 2) The primary purpose of making an organisation sustainable is to: A) make sure the organisation survives in the long-term. B) ensure that present needs are met without compromising the needs of future generations. C) reduce greenhouse gases to a very low level. D) make sure its profits are sustainable over the long-term. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. 3) Sustainability requires ‘systems thinking’. Which of these is a part of systems thinking? A) Accepting uncertainty and ambiguity B) Challenging our world view C) Recognising the larger context D) All of the above. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability
Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. 4) What is the most important factor in addressing social and environmental challenges? A) The difficulty in collecting relevant information B) Recognising and understanding the problem C) Including all stakeholders D) The interconnectedness of the causes and outcomes Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. 5) All of these statements are correct except: A) many businesses profess a commitment to sustainable business practices. B) eco-justice is an important concept of sustainability. C) there is pressure from society for businesses to address social and environmental concerns. D) all businesses currently accept that sustainability is their primary goal. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. 6) Which of these product labels does NOT indicate socially and environmentally responsible production conditions? A) A 'made in Canada' label B) A fair trade label C) A rainforest alliance for coffee beans label D) None of the above; i.e. all are labels indicating socially and environmentally responsible production conditions. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Sustainability and maximising the social good Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 7) With crisis comes opportunity.
Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. 8) Currently, very few organisations are truly sustainable. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. 9) The term 'dynamic complexity' in sustainable decision-making refers to the way in which the factors in the decision change and respond to each other. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. Write your answer in the space provided or on a separate sheet of paper. 10) In order, list the five steps in a decision-making process to achieve sustainability.
Answer: 1. Identify the problem, including the social and environmental issues. 2. Collect financial and non-financial relevant information. 3. Determine possible courses of action and consider the consequences of each including the environmental and social consequences. 4. Evaluate each possible course of action and select the best one. 5. Implement the decision, evaluate performance, and learn. AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Definition of sustainability Learning Objective: 21.1 Explain the terms ‘equity’ and ‘interdependency’ in the context of sustainability. Choose the one alternative that best completes the statement or answers the question. 11) What is the externalised cost of electricity generation referred to as? A) The cost of constructing the plant
B) The cost of buying coal C) The cost of purchasing water to cool the plant D) None of the above are externalised costs. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Externalities Learning Objective: 21.2 Define the term ‘externality’ and provide examples of the social and environmental impacts that organisations have on their various stakeholders. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 12) Traditional profits measures can measure sustainability; the information just has to be rearranged. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Externalities Learning Objective: 21.2 Define the term ‘externality’ and provide examples of the social and environmental impacts that organisations have on their various stakeholders. 13) One of the consequences of the existence of externalised costs is that the market place, as it currently operates, does not achieve the optimal outcomes for society as a whole. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Externalities Learning Objective: 21.2 Define the term ‘externality’ and provide examples of the social and environmental impacts that organisations have on their various stakeholders. 14) A 'cap and trade' approach to greenhouse gas control is a 'stick' rather than a 'carrot' approach. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Externalities Learning Objective: 21.2 Define the term ‘externality’ and provide examples of the social and environmental impacts that organisations have on their various stakeholders. Write your answer in the space provided or on a separate sheet of paper. 15) Explain the meaning of 'externalities'.
Answer: Externalities are costs that are not paid for by the organisation, but which are caused by its actions; e.g. air pollution costs or the long-term costs to the community of child labour which stops children from going to school. It also includes benefits, other than to customers, which are incidental to the product or service, for which the organisation does not receive revenue. Internalisation of these costs would force managers to consider them along with normal internal costs when making decisions. AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Externalities Learning Objective: 21.2 Define the term ‘externality’ and provide examples of the social and environmental impacts that organisations have on their various stakeholders. Choose the one alternative that best completes the statement or answers the question. 16) What is the best way to make businesses take into account the external costs of their activities? A) Implement fines B) Internalising those costs C) Implement penalties D) None of the above. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Internalising externalities: the emissions trading scheme (ETS) Learning Objective: 21.3 Explain how an emissions trading scheme (ETS) operates. 17) A scheme that is designed to reduce greenhouse gases by providing economic incentives to achieve a reduction in these gas emissions is known as: A) systems thinking. B) a balanced scorecard. C) an emissions trading scheme. D) the ecological footprint scheme. Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Internalising externalities: the emissions trading scheme (ETS) Learning Objective: 21.3 Explain how an emissions trading scheme (ETS) operates. 18) The following statements concerning a 'cap and trade' approach to reducing greenhouse gases are true EXCEPT for: A) emission polluters will be given greenhouse gas credits. B) the government can reduce total levels of pollution by progressively putting more credits into the market.
C) the government will set a cap on the number of greenhouse credits. D) organisations can sell unused credits and this creates an incentive to reduce emissions. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Internalising externalities: the emissions trading scheme (ETS) Learning Objective: 21.3 Explain how an emissions trading scheme (ETS) operates. 19) A possible method of reducing a company's carbon footprint is: A) planting trees. B) injecting carbon dioxide into porous rock and thereby 'burying' it. C) piping carbon dioxide kilometres below the ocean. D) All of the above. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Internalising externalities: the emissions trading scheme (ETS) Learning Objective: 21.3 Explain how an emissions trading scheme (ETS) operates. Choose the one alternative that best completes the statement or answers the question. 20) Australian companies must follow the as their social and environmental reporting framework. A) Standards for Environmental Management B) Global Reporting Initiative C) Australian Sustainability Index D) These are not compulsory. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 21) What is the world's most widely used sustainability reporting framework referred to as? A) The Global Reporting Initiative B) The International Standards for Environmental Management C) The Corporate Social Responsibility Reporting Framework D) The Australian Sustainability Index Answer: A AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 22) The following is NOT an indicator of social impact under the Global Reporting Initiative: A) liquidity B) occupational health and safety C) labour/management relations D) None; i.e. all are indicators of socially responsible reporting. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 23) The is an independent institution which develops and disseminates sustainable reporting guidelines globally. A) Global Reporting Initiative (GRI) B) World Bank C) Department of the Environment D) All of the above. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 24) The description in the next sentence relates to which of the Global Reporting Initiative's principles on report content? 'Information in a report should cover topics and indicators that reflect the organisation's significant economic environmental and social impacts, or that would substantively influence the assessments and decisions of stakeholders.' A) Sustainability context B) Completeness C) Stakeholder inclusiveness D) Materiality Answer: D AACSB: Able to analyse and frame problems
Difficulty: Moderate Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 25) The Australian index used to rank companies on their sustainability is the: A) Australian Corporate Sustainability Index. B) ASX Sustainability Index. C) Corporate Governance Social and Environmental Index. D) Australian SAM Sustainability Index. Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 26) Which of these is NOT a Global Reporting Initiative principle for ensuring report quality? A) Clarity B) Accuracy C) Length D) Timeliness Answer: C AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 27) In which sector has the Global Reporting Initiative not issued sector supplement guidelines? A) Non-government organisations B) Small business C) Financial services D) None of the above; i.e. it has issued them in ALL of these sectors. Answer: B AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI.
Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 28) The most universal reporting framework for sustainability is the International Standards for Environmental Management. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 29) As the reporting required from businesses under an emissions trading scheme will be the responsibility of financial accountants, the work of management accountants will not be affected. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. 30) A criticism of the Global Reporting Initiative (GRI) is that compliance with its principles just means that an organisation is reporting only those aspects of social and environmental reporting that make it look good. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Reporting sustainability: external reporting frameworks Learning Objective: 21.4 Identify the issues that arise for performance measurement when organisations choose to adopt one of the major external reporting frameworks, such as the GRI. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 31) Environmental management accounting provides only non-financial measures of environmental-related performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Environmental management systems Learning Objective: 21.5 List the steps involved in establishing environmental management accounting (EMA) as part of an environmental management system (EMS).
32) Activity-based costing cannot be extended to include social and environmental costs. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Environmental management systems Learning Objective: 21.5 List the steps involved in establishing environmental management accounting (EMA) as part of an environmental management system (EMS). 33) The International Standards for Environmental Management Systems are ISO 14001 and ISO 14004. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Environmental management systems Learning Objective: 21.5 List the steps involved in establishing environmental management accounting (EMA) as part of an environmental management system (EMS). 34) Specifically identifying in separate accounts the costs associated with aspects of environmental performance creates the information for managers to reduce those costs. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Environmental management systems Learning Objective: 21.5 List the steps involved in establishing environmental management accounting (EMA) as part of an environmental management system (EMS). Write your answer in the space provided or on a separate sheet of paper. 35) Briefly explain what is meant by 'environmental management accounting' (EMA).
Answer: EMA provides financial and non-financial measures of environment-related performance. Environmental inputs and outputs are measured and reported so they can be managed. This can be done by the adaption of existing management accounting tools (e.g. Activity Based Costing) or the creation of new tools. EMA is an important part of an organisation's environmental management system (EMS). AACSB: Able to communicate effectively orally and in writing Difficulty: Moderate Topic: Environmental management systems Learning Objective: 21.5 List the steps involved in establishing environmental management accounting (EMA) as part of an environmental management system (EMS).
Choose the one alternative that best completes the statement or answers the question. 36) Why might a business undertake a sustainable approach within its organisation? A) Increase its market share B) Behave ethically C) Improve relationships with suppliers D) All of the above. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The business case for sustainability Learning Objective: 21.6 Explain the business case for corporate sustainability. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 37) Pursuing sustainability almost always leads to a fall in the economic performance of an organisation. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The business case for sustainability Learning Objective: 21.6 Explain the business case for corporate sustainability. 38) The business case for sustainability rests mostly on avoiding government penalties for poor environmental performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: The business case for sustainability Learning Objective: 21.6 Explain the business case for corporate sustainability. 39) 'Green' products may achieve a premium in the market place. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: The business case for sustainability Learning Objective: 21.6 Explain the business case for corporate sustainability. 40) It is not possible to achieve increased economic performance simultaneously with increased social and environmental performance. Answer: False AACSB: Able to analyse and frame problems Difficulty: Basic
Topic: The business case for sustainability Learning Objective: 21.6 Explain the business case for corporate sustainability. Write your answer in the space provided or on a separate sheet of paper. 41) Ways in which environmental performance can impact on an organisation's cash flow are: by affecting revenue (R); by affecting access to markets (M); by affecting costs (C); through climate change policies (CC). Using the letter(s) in brackets, state the main way the item in the following list would affect cash flow. Items R/M/C/CC 1. More efficient use of water. 2. A carbon trading scheme. 3. Recycling and reusing raw materials. 4. An ETS. 5. Launch of a 'green' version of a product. 6. Solar panels to feed excess electricity into the grid. 7. Environmental impact assessments. 8. Introduction of a carbon credit trading scheme. Answer: 1. C 2. CC 3. C 4. CC 5. M 6. R 7. C 8. CC AACSB: Able to analyse and frame problems Difficulty: Complex Topic: The business case for sustainability Learning Objective: 21.6 Explain the business case for corporate sustainability. Choose the one alternative that best completes the statement or answers the question. 42) The term used to describe the ongoing learning that an organisation must undertake to achieve sustainability is: A) life-cycle analysis. B) environmental management. C) corporate social responsibility. D) learning for sustainability. Answer: D
AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy for sustainability Learning Objective: 21.7 Outline a strategy for progression towards being a sustainable organisation. 43) How does Professor Dexter Dunphy's research describe businesses that want to create a sustainable world by changing the very way they operate? A) Compliance Reactive Minimalists B) Bunker Wombats C) Proactive Strategists D) Transforming Futurists Answer: D AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Strategy for sustainability Learning Objective: 21.7 Outline a strategy for progression towards being a sustainable organisation. 44) Which of the following have been identified as 'waste' in the Toyota production system? A) Making defective products B) Waiting time C) Holding too large a quantity of inventory D) All of the above are considered waste. Answer: D AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy for sustainability Learning Objective: 21.7 Outline a strategy for progression towards being a sustainable organisation. Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 45) 'Learning for sustainability' is the term used to describe the ongoing learning that must go on within an organisation to achieve sustainability. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Strategy for sustainability Learning Objective: 21.7 Outline a strategy for progression towards being a sustainable organisation. 46) The objectives for sustainability are unlikely to be completely met within an organisation. Answer: True AACSB: Able to analyse and frame problems
Difficulty: Basic Topic: Strategy for sustainability Learning Objective: 21.7 Outline a strategy for progression towards being a sustainable organisation. Choose the one alternative that best completes the statement or answers the question. 47) The statements concerning life-cycle analysis (LCA) are true EXCEPT for: A) The definition of life-cycle always begins with the extraction of the raw materials and ends with the disposal of the product. B) The broadest view of LCA recognises some of social or environmental impacts that are difficult to cost. C) Life-cycle analysis may include costs incurred by the customer and the supplier. D) No statement is incorrect; i.e. all are correct statements. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Life-cycle analysis (LCA) Learning Objective: 21.8 Perform life-cycle analysis (LCA). Write ‘True’ if the statement is correct and ‘False’ is the statement is incorrect. 48) Performing life-cycle analysis for a product may also mean looking at the costs of suppliers and customers. Answer: True AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Life-cycle analysis (LCA) Learning Objective: 21.8 Perform life-cycle analysis (LCA). Choose the one alternative that best completes the statement or answers the question. 49) The tool used to study the impact of a firm's projects and operations on society at large, including the impact on individuals groups and communities, is known as a(n): A) environmental impact assessment. B) social impact assessment. C) corporate governance. D) risk assessment. Answer: B AACSB: Able to analyse and frame problems Difficulty: Moderate Topic: Management accounting tools for sustainability Learning Objective: 21.9 Apply various management tools to support sustainability objectives. 50) Which of these management accounting tools used to monitor an organisation's social and
environmental efforts, is NOT a traditional tool? A) Scenario Modelling B) The Balanced Scorecard C) Activity-based Costing D) None of the above; i.e. all are adaptions of traditional tools. Answer: A AACSB: Able to analyse and frame problems Difficulty: Basic Topic: Management accounting tools for sustainability Learning Objective: 21.9 Apply various management tools to support sustainability objectives.