Final Exam

Chapter 04 - Process Costing
Chapter 04 Process Costing

Multiple Choice Questions
13. In a process costing system, manufacturing overhead applied is usually recorded as a debit to: A. Finished goods. B. Work in process. C. Manufacturing overhead. D. Cost of goods sold.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing system Level: Easy
14. A company has two processing departments: A and B. Which of the following entries or sets of journal entries would be used to record the transfer between processing departments and from the final processing department to finished goods?
A. B.
C.
D.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing system Level: Medium
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15. A process costing system: A. uses a separate Work in Process account for each processing department. B. uses a single Work in Process account for the entire company. C. uses a separate Work in Process account for each type of product produced. D. does not use a Work in Process account in any form.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing system Level: Medium
16. A company should use process costing, rather than job order costing, if: A. production is only partially completed during the accounting period. B. the product is manufactured in batches only as orders are received. C. the product is composed of mass-produced homogeneous units. D. the product goes through several steps of production.
17. Which of the following characteristics applies to process costing, but does not apply to job order costing? A. The need for averaging. B. The use of equivalent units of production. C. Separate, identifiable jobs. D. The use of predetermined overhead rates.
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18. Equivalent units for a process costing system using the weighted-average method would be equal to: A. units completed during the period and transferred out. B. units started and completed during the period plus equivalent units in the ending work in process inventory. C. units completed during the period less equivalent units in the beginning inventory, plus equivalent units in the ending work in process inventory. D. units completed during the period plus equivalent units in the ending work in process inventory.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04-02 Compute the equivalent units of production using the weighted-average method Level: Medium
19. The cost of beginning inventory under the weighted-average method is: A. added in with current period costs in determining costs per equivalent unit for a given period. B. ignored in determining the costs per equivalent unit for a given period. C. considered separately from costs incurred during the current period. D. subtracted from current period costs in determining costs per equivalent unit for a given period.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 04-03 Compute the cost per equivalent unit using the weighted-average method Level: Easy
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20. The Nichols Company uses the weighted-average method in its process costing system. The company recorded 29,500 equivalent units for conversion costs for November in a particular department. There were 6,000 units in the ending work in process inventory on November 30, 75% complete with respect to conversion costs. The November 1 work in process inventory consisted of 8,000 units, 50% complete with respect to conversion costs. A total of 25,000 units were completed and transferred out of the department during the month. The number of units started during November in the department was: A. 24,500 units B. 23,000 units C. 27,000 units D. 21,000 units Beginning work in process inventory + Units started into production = Ending work in process inventory + Units completed and transferred out Units started into production = Ending work in process inventory + Units completed and transferred out - Beginning work in process inventory = 6,000 + 25,000 - 8,000 = 23,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing system Level: Medium
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21. The Assembly Department started the month with 14,000 units in its beginning work in process inventory. An additional 296,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 14,000 units in the ending work in process inventory of the Assembly Department. How many units were transferred to the next processing department during the month? A. 293,000 B. 310,000 C. 324,000 D. 296,000 Beginning work in process inventory + Units started into production or transferred in = Ending work in process inventory + Units completed and transferred out Units started into production or transferred in = Ending work in process inventory + Units completed and transferred out - Beginning work in process inventory = 14,000 + 296,000 - 14,000 = 296,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-01 Record the flow of materials; labor; and overhead through a process costing system Level: Easy
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22. Diston Company uses the weighted-average method in its process costing system. The first processing department, the Welding Department, started the month with 18,000 units in its beginning work in process inventory that were 30% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $44,820. An additional 90,000 units were started into production during the month. There were 21,000 units in the ending work in process inventory of the Welding Department that were 10% complete with respect to conversion costs. A total of $677,970 in conversion costs were incurred in the department during the month. What would be the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.) A. $8.112 B. $8.300 C. $7.533 D. $6.108 Units transferred to the next department = Units in beginning work in process + Units started into production - Units in ending work in process = 18,000 + 90,000 - 21,000 = 87,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-02 Compute the equivalent units of production using the weighted-average method Learning Objective: 04-03 Compute the cost per equivalent unit using the weighted-average method Level: Medium
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23. Loll Company uses the weighted-average method in its process costing system. Operating data for the first processing department for the month of June appear below:
According to the company's records, the conversion cost in beginning work in process inventory was $46,915 at the beginning of June. Additional conversion costs of $825,183 were incurred in the department during the month. What was the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.) A. $8.420 B. $6.934 C. $8.530 D. $8.322 Units transferred to the next department = Units in beginning work in process + Units started into production - Units in ending work in process = 11,000 + 98,000 - 21,000 = 88,000
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24. The following information pertains to Yap Company's Grinding Department for the month of April:
All materials are added at the beginning of the process. Using the weighted-average method, the cost per equivalent unit for materials is closest to: A. $0.59 B. $0.55 C. $0.45 D. $0.43
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-02 Compute the equivalent units of production using the weighted-average method Learning Objective: 04-03 Compute the cost per equivalent unit using the weighted-average method Level: Medium Source: CMA, adapted
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25. Hardouin Company uses the weighted-average method in its process costing system. The first processing department, the Welding Department, started the month with 22,000 units in its beginning work in process inventory that were 20% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $23,320. An additional 97,000 units were started into production during the month and 101,000 units were completed in the Welding Department and transferred to the next processing department. There were 18,000 units in the ending work in process inventory of the Welding Department that were 40% complete with respect to conversion costs. A total of $529,380 in conversion costs were incurred in the department during the month. What would be the cost per equivalent unit for conversion costs for the month? (Round off to three decimal places.) A. $5.300 B. $5.458 C. $4.603 D. $5.108
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26. Parmentier Company uses the weighted-average method in its process costing system. The Molding Department is the second department in its production process. The data below summarize the department's operations in January.
The accounting records indicate that the conversion cost that had been assigned to beginning work in process inventory was $5,096 and a total of $87,668 in conversion costs were incurred in the department during January. What was the cost per equivalent unit for conversion costs for January in the Molding Department? (Round off to three decimal places.) A. $1.654 B. $1.752 C. $1.490 D. $1.499
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27. Scheney Company uses the weighted-average method in its process costing system. The company's work in process inventory on March 31 consisted of 20,000 units. The units in the ending work in process inventory were 100% complete with respect to materials and 70% complete with respect to labor and overhead. If the cost per equivalent unit for March was $2.50 for materials and $4.75 for labor and overhead, the total cost in the March 31 work in process inventory was: A. $145,000 B. $116,500 C. $101,500 D. $78,500
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-02 Compute the equivalent units of production using the weighted-average method Learning Objective: 04-04 Assign costs to units using the weighted-average method Level: Medium
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28. The following data were taken from the accounting records of the Hazel Corporation which uses the weighted-average method in its process costing system:
The equivalent units for conversion costs was: A. 102,000 units B. 112,000 units C. 111,000 units D. 100,000 units Units transferred to the next department = Units in beginning work in process + Units started into production - Units in ending work in process = 30,000 + 90,000 - 20,000 = 100,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-02 Compute the equivalent units of production using the weighted-average method Level: Medium
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29. Borwan Company uses the weighted-average method in its process costing system. The Assembly Department started the month with 8,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. An additional 69,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 5,000 units in the ending work in process inventory of the Assembly Department that were 20% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Assembly Department for the month? A. 67,400 B. 73,000 C. 72,000 D. 66,000 Units transferred to the next department = Units in beginning work in process + Units started into production - Units in ending work in process = 8,000 + 69,000 - 5,000 = 72,000
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30. Jastak Company uses the weighted-average method in its process costing system. Operating data for the Painting Department for the month of April appear below:
What were the equivalent units for conversion costs in the Painting Department for April? A. 106,100 B. 91,500 C. 98,970 D. 106,270 Units transferred to the next department = Units in beginning work in process + Units started into production - Units in ending work in process = 1,000 + 98,800 - 8,300 = 91,500
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31. Fayard Corporation uses the weighted-average method in its process costing system. The Assembly Department started the month with 5,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. An additional 67,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. During the month 63,000 units were completed in the Assembly Department and transferred to the next processing department. There were 9,000 units in the ending work in process inventory of the Assembly Department that were 50% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Assembly Department for the month? A. 71,000 B. 64,000 C. 63,000 D. 67,500
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-02 Compute the equivalent units of production using the weighted-average method Level: Easy
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32. Nguyen Corporation uses the weighted-average method in its process costing system. Operating data for the Lubricating Department for the month of October appear below:
What were the equivalent units for conversion costs in the Lubricating Department for October? A. 53,700 B. 52,280 C. 54,080 D. 50,100
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33. Sanchez Corporation uses the weighted-average method in its process costing system. The Fitting Department is the second department in its production process. The data below summarize the department's operations in March.
The Fitting Department's cost per equivalent unit for conversion cost for March was $8.66. How much conversion cost was assigned to the units transferred out of the Fitting Department during March? A. $480,630 B. $450,320 C. $444,258 D. $510,940 Units transferred to the next department = Units in beginning work in process + Units started into production - Units in ending work in process = 7,000 + 52,000 - 3,500 = 55,500
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-04 Assign costs to units using the weighted-average method Level: Medium
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34. The Gasson Company uses the weighted-average method in its process costing system. The company's ending work in process inventory consists of 10,000 units, 100% complete with respect to materials and 70% complete with respect to labor and overhead. If the costs per equivalent unit are $4.50 for the materials and $2.00 for labor and overhead, the balance of the ending work in process inventory account would be: A. $44,500 B. $50,500 C. $59,000 D. $65,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-04 Assign costs to units using the weighted-average method Level: Easy
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35. Ravalt Corporation uses the weighted-average method in its process costing system. The Molding Department is the second department in its production process. The data below summarize the department's operations in January.
The Molding Department's cost per equivalent unit for conversion cost for January was $7.90. How much conversion cost was assigned to the ending work in process inventory in the Molding Department for January? A. $27,729 B. $30,810 C. $3,081 D. $5,056
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-04 Assign costs to units using the weighted-average method Level: Easy
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36. In February, one of the processing departments at Carpentier Corporation had beginning work in process inventory of $14,000 and ending work in process inventory of $29,000. During the month, $148,000 of costs were added to production and the cost of units transferred out from the department was $133,000. In the department's cost reconciliation report for February, the total cost to be accounted for would be: A. $310,000 B. $162,000 C. $324,000 D. $43,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-05 Prepare a cost reconciliation report Level: Easy
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37. In February, one of the processing departments at Whisenhunt Corporation had beginning work in process inventory of $35,000 and ending work in process inventory of $11,000. During the month, the cost of units transferred out from the department was $410,000. In the department's cost reconciliation report for February, the total cost to be accounted for would be: A. $46,000 B. $807,000 C. $842,000 D. $421,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-05 Prepare a cost reconciliation report Level: Medium
Jumper Company uses the weighted-average method in its process costing system. The following data pertain to operations in the first processing department for a recent month:
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38. How many units were in the ending work in process inventory? A. 600 units B. 1,000 units C. 800 units D. 1,400 units Units in ending work in process = Units in beginning work in process + Units started into production - Units transferred to the next department = 400 + 15,000 - 14,400 = 1,000
39. What was the cost per equivalent unit for conversion cost? A. $5.00 B. $12.30 C. $8.50 D. $14.75
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-03 Compute the cost per equivalent unit using the weighted-average method Level: Medium
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40. How much cost, in total, was transferred to the next department during the month? A. $315,200 B. $306,000 C. $312,000 D. $317,100
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Atwich Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 600 units. The costs and percentage completion of these units in beginning inventory were:
A total of 5,100 units were started and 4,400 units were transferred to the second processing department during the month. The following costs were incurred in the first processing department during the month:
The ending inventory was 75% complete with respect to materials and 10% complete with respect to conversion costs. Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.
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41. What are the equivalent units for conversion costs for the month in the first processing department? A. 4,400 B. 4,530 C. 130 D. 5,700 Units in beginning work in process inventory + Units started into production or transferred in = Units in ending work in process inventory + Units completed and transferred out 600 + 5,100 = Units in ending work in process inventory + 4,400 Units in ending work in process inventory = 600 + 5,100 - 4,400 = 1,300
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42. The cost per equivalent unit for materials for the month in the first processing department is closest to: A. $21.28 B. $20.07 C. $19.29 D. $18.19 Units in beginning work in process inventory + Units started into production or transferred in = Units in ending work in process inventory + Units completed and transferred out 600 + 5,100 = Units in ending work in process inventory + 4,400 Units in ending work in process inventory = 600 + 5,100 - 4,400 = 1,300
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43. The cost per equivalent unit for conversion costs for the first department for the month is closest to: A. $34.18 B. $39.93 C. $43.00 D. $45.15 Units in beginning work in process inventory + Units started into production or transferred in = Units in ending work in process inventory + Units completed and transferred out 600 + 5,100 = Units in ending work in process inventory + 4,400 Units in ending work in process inventory = 600 + 5,100 - 4,400 = 1,300
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44. The total cost transferred from the first processing department to the next processing department during the month is closest to: A. $366,430 B. $284,600 C. $309,200 D. $282,858
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45. The cost of ending work in process inventory in the first processing department according to the company's cost system is closest to: A. $26,342 B. $62,679 C. $8,357 D. $83,572
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Byklea Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 200 units. The costs and percentage completion of these units in beginning inventory were:
46. How many units are in ending work in process inventory in the first processing department at the end of the month? A. 500 B. 900 C. 300 D. 6,800 Units in ending work in process = Units in beginning work in process + Units started into production - Units transferred to the next department = 200 + 7,000 - 6,700 = 500
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47. What are the equivalent units for conversion costs for the month in the first processing department? A. 6,925 B. 7,200 C. 6,700 D. 225
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48. The cost per equivalent unit for materials for the month in the first processing department is closest to: A. $18.88 B. $18.75 C. $18.33 D. $18.46
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49. The cost per equivalent unit for conversion costs for the first department for the month is closest to: A. $32.03 B. $30.81 C. $33.63 D. $31.64
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Chae Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 500 units. The costs and percentage completion of these units in beginning inventory were:
52. How many units are in ending work in process inventory in the first processing department at the end of the month? A. 1,100 B. 900 C. 600 D. 7,600 Units in ending work in process = Units in beginning work in process + Units started into production - Units transferred to the next department = 500 + 8,100 -7,500 = 1,100
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53. What are the equivalent units for conversion costs for the month in the first processing department? A. 8,600 B. 825 C. 7,500 D. 8,325
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Epstein Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 400 units. The costs and percentage completion of these units in beginning inventory were:
56. What are the equivalent units for conversion costs for the month in the first processing department? A. 405 B. 6,905 C. 6,500 D. 7,400
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Froment Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 200 units. The costs and percentage completion of these units in beginning inventory were:
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-02 Compute the equivalent units of production using the weighted-average method Learning Objective: 04-03 Compute the cost per equivalent unit using the weighted-average method Learning Objective: 04-04 Assign costs to units using the weighted-average method Level: Medium
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Weighted-average method:
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Grosseiller Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 900 units. The costs and percentage completion of these units in beginning inventory were:
61. How many units are in ending work in process inventory in the first processing department at the end of the month? A. 2,100 B. 1,200 C. 5,500 D. 900 Units in ending work in process = Units in beginning work in process + Units started into production - Units transferred to the next department = 900 + 6,400 -5,200 = 2,100
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62. What are the equivalent units for materials for the month in the first processing department? A. 1,365 B. 6,565 C. 7,300 D. 5,200
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Heller Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places.
68. What are the equivalent units for materials for the month in the first processing department? A. 840 B. 9,140 C. 9,700 D. 8,300
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Kramer Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
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Lothian Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
76. What are the equivalent units for materials for the month in the first processing department? A. 5,200 B. 325 C. 5,525 D. 5,700
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Duhamel Corporation uses the weighted-average method in its process costing system. This month, the beginning inventory in the first processing department consisted of 600 units. The costs and percentage completion of these units in beginning inventory were:
79. How many units are in ending work in process inventory in the first processing department at the end of the month? A. 1,400 B. 7,200 C. 900 D. 800 Units in ending work in process = Units in beginning work in process + Units started into production - Units transferred to the next department = 600 + 7,800 -7,000 = 1,400
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Ire Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below
82. What are the equivalent units for conversion costs for the month in the first processing department? A. 8,800 B. 1,045 C. 10,700 D. 9,845
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Jaderston Corporation uses the weighted-average method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
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The information below was obtained from the records of the first processing department of Moore Company for the month of May. The company uses the weighted-average method in its process costing system.
All materials are added at the beginning of the process.
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86. The equivalent units for materials for the month of May were: A. 60,000 units B. 74,000 units C. 64,000 units D. 69,800 units
87. The equivalent units for labor and overhead for the month of May were: A. 60,000 units B. 69,800 units C. 65,800 units D. 73,800 units
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Nando Company uses the weighted-average method in its process costing system. Department J is the second of three sequential processes at the company. During October, Department J collected the following data:
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88. The total cost assigned to units transferred out during October was: A. $264,600 B. $316,000 C. $342,000 D. $358,400
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04-04 Assign costs to units using the weighted-average method Level: Hard
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89. The total cost assigned to ending work in process inventory was: A. $75,400 B. $101,400 C. $152,800 D. $59,000
In January, one of the processing departments at Seidl Corporation had ending work in process inventory of $35,000. During the month, $111,000 of costs were added to production and the cost of units transferred out from the department was $86,000.
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90. In the department's cost reconciliation report for January, the cost of beginning work in process inventory for the department would be: A. $51,000 B. $10,000 C. $76,000 D. $60,000 Cost of beginning work in process inventory = Cost of ending work in process inventory + Cost of units transferred out - Costs added to production = $35,000 + $86,000 - $111,000 = $10,000
91. In the department's cost reconciliation report for January, the total cost accounted for would be: A. $242,000 B. $232,000 C. $121,000 D. $45,000 Total cost accounted for = Cost of ending work in process inventory + Cost of units transferred out = $35,000 + $86,000 = $121,000
In August, one of the processing departments at Knepp Corporation had beginning work in process inventory of $17,000 and ending work in process inventory of $13,000. During the month, $178,000 of costs were added to production.
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92. In the department's cost reconciliation report for August, the cost of units transferred out of the department would be: A. $182,000 B. $195,000 C. $169,000 D. $165,000 Cost of units transferred out = Cost of beginning work in process inventory + Cost added to production - Cost of ending work in process inventory = $17,000 + $178,000 - $13,000 = $182,000
93. In the department's cost reconciliation report for August, the total cost to be accounted for would be: A. $30,000 B. $390,000 C. $195,000 D. $373,000 Total cost accounted for = Cost of ending work in process inventory + Cost of units transferred out = $17,000 + $178,000 = $195,000
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10. The FIFO method provides a major advantage over the weighted-average method in that: A. the calculation of equivalent units is less complex under the FIFO method. B. the FIFO method treats units in the beginning inventory as if they were started and completed during the current period. C. the FIFO method provides measurements of work done during the current period. D. the weighted-average method ignores units in the beginning and ending work in process inventories.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04A-02 Compute the equivalent units of production using the weighted-average method Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Level: Medium
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11. The weighted-average method of process costing differs from the FIFO method of process costing in that the weighted-average method: A. can be used under any cost flow assumption. B. does not require the use of predetermined overhead rates. C. keeps costs in the beginning inventory separate from current period costs. D. does not consider the degree of completion of units in the beginning work in process inventory when computing equivalent units of production.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04A-02 Compute the equivalent units of production using the weighted-average method Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Level: Medium
12. Equivalent units for a process costing system using the FIFO method would be equal to: A. units completed during the period plus equivalent units in the ending work in process inventory. B. units started and completed during the period plus equivalent units in the ending work in process inventory. C. units completed during the period and transferred out. D. units started and completed during the period plus equivalent units in the ending work in process inventory plus work needed to complete units in the beginning work in process inventory.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Level: Medium
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13. The computation of equivalent units under the FIFO method: A. treats units in the beginning work in process inventory as if they were started and completed during the current period. B. treats units in the beginning work in process inventory as if they represent a separate batch of goods separate and distinct from goods started and completed during the current period. C. treats units in the ending work in process inventory as if they were started and completed during the current period. D. ignores units in the beginning and ending work in process inventories.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Level: Medium
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14. Elard Company uses the FIFO method in its process costing system. The first processing department, the Welding Department, started the month with 17,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $101,150. An additional 68,000 units were started into production during the month. There were 23,000 units in the ending work in process inventory of the Welding Department that were 80% complete with respect to conversion costs. A total of $565,125 in conversion costs were incurred in the department during the month. The cost per equivalent unit for conversion costs is closest to: A. $8.50 B. $8.31 C. $8.25 D. $7.84 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 68,000 - 23,000 = 45,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Learning Objective: 04A-07 Compute the cost per equivalent unit using the FIFO method Level: Medium
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15. Mannarelli Corporation uses the FIFO method in its process costing system. Operating data for the Casting Department for the month of September appear below:
According to the company's records, the conversion cost in beginning work in process inventory was $15,660 at the beginning of September. Additional conversion costs of $526,524 were incurred in the department during the month. The cost per equivalent unit for conversion costs for September is closest to: (Round off to three decimal places.) A. $5.916 B. $5.340 C. $5.220 D. $5.213 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 89,000 - 24,000 = 65,000
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16. Castle Company uses the FIFO method in its process costing system. In the Cutting Department in June, units were four-fifths complete with respect to conversion in the beginning work in process inventory and one-third complete with respect to conversion in the ending work in process inventory. Other data for the department for June follow:
The cost per equivalent unit for conversion cost is closest to: A. $1.40 B. $1.35 C. $1.21 D. $1.64 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 135,000 - 25,000 = 110,000
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Units in beginning work in process inventory + Units started into production during the period = Units in ending work in process inventory + Units completed during the period 25,000 + 140,000 = X + 135,000 X = 25,000 + 140,000 - 135,000 = 30,000 Y = X 1/3 = 30,000 1/3 = 10,000 Z = 5,000 + 110,000 + Y = 5,000 + 110,000 + 10,000 = 125,000
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17. Imbram Corporation uses the FIFO method in its process costing system. The first processing department, the Forming Department, started the month with 23,000 units in its beginning work in process inventory that were 40% complete with respect to conversion costs. The conversion cost in this beginning work in process inventory was $27,692. An additional 86,000 units were started into production during the month and 86,000 units were completed and transferred to the next processing department. There were 23,000 units in the ending work in process inventory of the Forming Department that were 10% complete with respect to conversion costs. A total of $221,480 in conversion costs were incurred in the department during the month. The cost per equivalent unit for conversion costs for the month is closest to: A. $2.80 B. $2.29 C. $3.01 D. $2.58 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 86,000 - 23,000 = 63,000
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18. Qik Corporation uses the FIFO method in its process costing system. Operating data for the Cutting Department for the month of March appear below:
According to the company's records, the conversion cost in beginning work in process inventory was $45,662 at the beginning of March. Additional conversion costs of $305,576 were incurred in the department during the month. The cost per equivalent unit for conversion costs for March is closest to: A. $5.77 B. $5.72 C. $5.91 D. $6.04 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 58,400 - 8,400 = 50,000
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19. Herston Company uses the FIFO method in its process costing system. The beginning work in process inventory in a particular department consisted of 6,000 units, two-thirds complete with respect to conversion costs. During the month, 42,000 units were started and 40,000 units were completed and transferred out of the department. The company had 40,000 equivalent units for conversion costs. The ending work in process inventory in the department consisted of: A. 8,000 units, 25% complete with respect to conversion costs B. 0 units C. 8,000 units, 50% complete with respect to conversion costs D. 4,000 units, 100% complete with respect to conversion costs FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 40,000 - 6,000 = 34,000
2,000 + 34,000 + X = 40,000 X = 40,000 - 2,000 - 34,000 = 4,000 Units in beginning work in process inventory + Units started into production during the period = Units in ending work in process inventory + Units completed during the period 6,000 + 42,000 = Y + 40,000 Y = 6,000 + 42,000 - 40,000 = 8,000 YZ=X 8,000 Z = 4,000 Z = 4,000 8,000 = 0.50
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Level: Hard
20. Bennett Company uses the FIFO method in its process costing system. During April the equivalent units of production with respect to conversion costs totaled 24,600 units. Work in process inventory on April 1 consisted of 8,000 units, 40% complete with respect to conversion costs. A total of 25,000 units were started into production during the month and 20,000 units were transferred to finished goods. Based on this information, Bennett Company's work in process inventory on April 30 consisted of: A. 13,000 units, 40% complete with respect to conversion costs B. 5,000 units, 40% complete with respect to conversion costs C. 13,000 units, 60% complete with respect to conversion costs D. 4,600 units, 40% complete with respect to conversion costs FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 20,000 - 8,000 = 12,000
4,800 + 12,000 + X = 24,600 X = 24,600 - 4,800 - 12,000 = 7,800 Units in beginning work in process inventory + Units started into production during the period = Units in ending work in process inventory + Units completed during the period 8,000 + 25,000 = Y + 20,000 Y = 8,000 + 25,000 - 20,000 = 13,000 YZ=X 13,000 Z = 7,800 Z = 7,800 13,000 = 0.60
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Level: Hard
21. Cargin Company uses the FIFO method in its process costing system. The Assembly Department started the month with 15,000 units in its beginning work in process inventory that were 50% complete with respect to conversion costs. An additional 71,000 units were transferred in from the prior department during the month to begin processing in the Assembly Department. There were 9,000 units in the ending work in process inventory of the Assembly Department that were 30% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Assembly Department for the month? A. 77,000 B. 79,700 C. 65,000 D. 72,200 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 71,000 - 9,000 = 62,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-06 Compute the equivalent units of production using the FIFO method Level: Medium
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22. Kharbanda Corporation uses the FIFO method in its process costing system. Operating data for the Enameling Department for the month of May appear below:
What were the equivalent units for conversion costs in the Enameling Department for May? A. 57,960 B. 55,800 C. 51,000 D. 55,920 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 53,400 - 2,700 = 50,700
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23. Jolly Company uses the FIFO method in its process costing system. Beginning inventory in the mixing processing center consisted of 4,000 units, 75% complete with respect to conversion costs. Ending work in process inventory consisted of 3,000 units, 60% complete with respect to conversion costs. If 12,000 units were transferred to the next processing center during the period, the equivalent units for conversion costs would be: A. 13,200 units B. 10,800 units C. 12,000 units D. 13,000 units FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 12,000 - 4,000 = 8,000
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24. Intask Company uses the FIFO method in its process costing system. Beginning inventory in the mixing department consisted of 6,000 units that were 75% complete with respect to conversion costs. Ending work in process inventory consisted of 5,000 units that were 60% complete with respect to conversion costs. If 12,000 units were transferred to the next processing department during the period, the equivalent units for conversion cost would be: A. 12,500 units B. 10,500 units C. 13,500 units D. 13,000 units FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 12,000 - 6,000 = 6,000
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25. The following data were taken from the accounting records of Abacus Company which uses the FIFO method in its process costing system:
The equivalent units are: A. Material, 90,000 units; labor and overhead, 89,000 units B. Material, 100,000 units; labor and overhead, 91,000 units C. Material, 60,000 units; labor and overhead, 53,000 units D. Material, 80,000 units; labor and overhead, 79,000 units FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 80,000 - 30,000 = 50,000
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26. Branden Company uses the FIFO method in its process costing system. All materials are introduced at the beginning of the process in Department One. The following data relate to the month of May for Department One:
What are the equivalent units for the month of May?
A. Option A B. Option B C. Option C D. Option D FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 7,500 - 1,000 = 6,500
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27. Galos Corporation uses the FIFO method in its process costing system. The Grinding Department started the month with 3,000 units in its beginning work in process inventory that were 70% complete with respect to conversion costs. An additional 82,000 units were transferred in from the prior department during the month to begin processing in the Grinding Department. During the month 74,000 units were completed in the Grinding Department and transferred to the next processing department. There were 11,000 units in the ending work in process inventory of the Grinding Department that were 10% complete with respect to conversion costs. What were the equivalent units for conversion costs in the Grinding Department for the month? A. 74,000 B. 75,100 C. 90,000 D. 73,000 FIFO method Units started and completed during the period = Units started into production during the period Units in ending work in process inventory = 82,000 - 11,000 = 71,000
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28. Ozogus Company uses the FIFO method in its process costing system. Operating data for the Brazing Department for the month of November appear below:
What were the equivalent units for conversion costs in the Brazing Department for November? A. 36,600 B. 35,800 C. 39,300 D. 34,800 FIFO method Units started and completed during the period = Units started into production during the period Units in ending work in process inventory = 35,300 - 5,000 = 30,300
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29. Severn Company uses the FIFO method in its process costing system. The following data were taken from the accounting records of the company for last month:
The cost of the units in the ending Work in Process inventory is: A. $17,000 B. $20,000 C. $10,000 D. $22,500 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 80,000 - 15,000 = 65,000
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-08 Assign costs to units using the FIFO method Level: Hard
30. Tepla Corporation uses the FIFO method in its process costing system. Operating data for the Curing Department for the month of March appear below:
According to the company's records, the conversion cost in beginning work in process inventory was $40,608 at the beginning of March. The cost per equivalent unit for conversion costs for March was $9.30. How much conversion cost would be assigned to the units completed and transferred out of the department during March? A. $562,152 B. $561,720 C. $520,800 D. $521,544
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FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 56,000 - 1,000 = 55,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-08 Assign costs to units using the FIFO method Level: Medium
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31. In October, one of the processing departments at Schones Corporation had beginning work in process inventory of $26,000 and ending work in process inventory of $17,000. During the month, $279,000 of costs were added to production and the cost of units transferred out from the department was $288,000. The company uses the FIFO method in its process costing system. In the department's cost reconciliation report for October, the total cost to be accounted for would be: A. $584,000 B. $43,000 C. $610,000 D. $305,000 FIFO method
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-09 Prepare a cost reconciliation report using the FIFO method Level: Easy
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32. In November, one of the processing departments at Ijames Corporation had ending work in process inventory of $26,000. During the month, $426,000 of costs were added to production and the cost of units transferred out from the department was $436,000. The company uses the FIFO method in its process costing system. In the department's cost reconciliation report for November, the total cost to be accounted for would be: A. $924,000 B. $888,000 C. $62,000 D. $462,000 FIFO method
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-09 Prepare a cost reconciliation report using the FIFO method Level: Medium
Zippy Company has a process costing system. Information about units processed and processing costs incurred during a recent month in the Refining Department follow:
The beginning work in process inventory had $10,946 of processing cost attached to it at the beginning of the month. During the month, the Department incurred an additional $289,954 in processing cost.
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33. Assuming that the company uses the weighted-average method, what are the equivalent units for processing costs for the Department for the month? A. 94,000 B. 100,300 C. 100,000 D. 112,000 Weighted-average method
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-02 Compute the equivalent units of production using the weighted-average method Level: Medium
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34. Assuming that the company uses the weighted-average method, what is the cost per equivalent unit for processing for the month? A. $2.89 B. $2.98 C. $3.00 D. $3.08 Weighted-average method
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-03 Compute the cost per equivalent unit using the weighted-average method Level: Hard
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35. Assuming that the company uses the FIFO method, what are the equivalent units for processing costs for the Department for the month? A. 97,300 B. 91,300 C. 94,000 D. 100,300 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 100,000 - 18,000 = 82,000
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36. Assuming that the company uses the FIFO method, what is the cost per equivalent unit of production for processing for the month? A. $2.89 B. $2.98 C. $3.00 D. $3.09 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 100,000 - 18,000 = 82,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-07 Compute the cost per equivalent unit using the FIFO method Level: Medium
Nyman Company successfully switched to a lean production system at the beginning of March. Therefore, as shown by the summary below, there were no work in process inventories on hand at the end of the month.
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37. If Nyman Company uses the FIFO cost method, the March equivalent units for conversion would be: A. 150,000 units B. 190,000 units C. 172,000 units D. 168,000 units FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 190,000 - 40,000 = 150,000
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38. If Nyman Company uses the weighted-average cost method, the March equivalent units for materials would be: A. 190,000 units B. 174,000 units C. 150,000 units D. 166,000 units Weighted-average method
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39. If Nyman continues to successfully employ lean production and starts 140,000 units into production during April (the next month), the April equivalent units for conversion costs using the weighted-average method would be: A. 150,000 units B. 140,000 units C. 190,000 units D. 160,000 units Weighted-average method With lean production there should be no beginning or ending inventories.
The activity in Nolan Company's Blending Department for the month of April is given below:
All materials are added at the beginning of processing in the Blending Department.
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40. The equivalent units for material for the month, using the FIFO method, are: A. 50,000 units B. 58,000 units C. 54,000 units D. 60,000 units FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 50,000 - 10,000 = 40,000
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41. The equivalent units for labor and overhead for the month, using the FIFO method, are: A. 47,000 units B. 51,000 units C. 5,000 units D. 54,000 units FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 50,000 - 10,000 = 40,000
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42. The equivalent units for material for the month, using the weighted-average method, are: A. 48,000 units B. 50,000 units C. 58,000 units D. 52,000 units Weighted-average method Units in beginning work in process inventory + Units started into production = Units in ending work in process inventory + Units transferred to the next department Units transferred to the next department = Units in beginning work in process inventory + Units started into production - Units in ending work in process inventory = 8,000 + 50,000 10,000 = 48,000
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43. The equivalent units for labor and overhead for the month, using the weighted-average method, are: A. 50,000 units B. 51,000 units C. 47,000 units D. 55,000 units Weighted-average method Units in beginning work in process inventory + Units started into production = Units in ending work in process inventory + Units transferred to the next department Units transferred to the next department = Units in beginning work in process inventory + Units started into production - Units in ending work in process inventory = 8,000 + 50,000 10,000 = 48,000
Wilson Company has a process costing system. The Assembly Department had the following costs for May:
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44. Assume that Wilson uses the FIFO method, and that for May the company computed 16,000 equivalent units for materials. The cost per equivalent unit for materials for the month would have been: A. $12.50 B. $3.00 C. $5.00 D. $9.50 FIFO method
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45. Assume that Wilson uses the weighted-average method and that for May the company computed 20,000 equivalent units for labor and overhead. The cost per equivalent unit for labor and overhead for the month would have been: A. $1.60 B. $10.00 C. $8.40 D. $16.00 Weighted-average method
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04A-03 Compute the cost per equivalent unit using the weighted-average method Level: Easy
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Morvan Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer that is the closest to the answer you computed.
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46. What are the equivalent units for materials for the month in the first processing department? A. 9,000 B. 375 C. 8,300 D. 8,715 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,500 - 200 = 8,300
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47. What are the equivalent units for conversion costs for the month in the first processing department? A. 9,000 B. 8,500 C. 8,300 D. 150 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,500 - 200 = 8,300
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48. The cost per equivalent unit for materials for the month in the first processing department is closest to: A. $27.70 B. $26.82 C. $28.13 D. $28.40 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,500 - 200 = 8,300
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49. The cost per equivalent unit for conversion costs for the first department for the month is closest to: A. $48.50 B. $44.72 C. $42.59 D. $43.33 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,500 - 200 = 8,300
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50. The cost of a completed unit transferred out of the department is closest to: A. $74.51 B. $68.27 C. $74.02 D. $70.29 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,500 - 200 = 8,300
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FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,500 - 200 = 8,300
Note: The answer without any rounding error is $597,619.
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52. The cost of ending work in process inventory in the first processing department according to the company's cost system is closest to: A. $35,144 B. $16,775 C. $10,543 D. $26,358 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,500 - 200 = 8,300
Note: The answer without any rounding error is $16,775.
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Prasad Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
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53. What are the equivalent units for materials for the month in the first processing department? A. 10,500 B. 960 C. 8,300 D. 9,530 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,900 - 600 = 8,300
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FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 8,900 - 600 = 8,300
Note: With no rounding, the answer is $449,250.
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Qdynamic Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
56. How many units were started AND completed during the month in the first processing department? A. 6,100 B. 5,500 C. 7,600 D. 7,000 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 7,000 - 1,500 = 5,500
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57. The cost per equivalent unit for conversion costs for the first department for the month is closest to: A. $42.49 B. $43.96 C. $45.00 D. $41.87 FIFO method Units started and completed during the period = Units started into production during the period - Units in ending work in process inventory = 7,000 - 1,500 = 5,500
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Nilgiri Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
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58. What are the equivalent units for materials for the month in the first processing department? A. 1,680 B. 7,150 C. 8,200 D. 5,200 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 6,100 - 900 = 5,200
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Osborne Corporation uses the FIFO method in its process costing system. Data concerning the first processing department for the most recent month are listed below:
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60. What are the equivalent units for conversion costs for the month in the first processing department? A. 6,600 B. 440 C. 7,150 D. 7,600 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 6,800 - 200 = 6,600
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61. The cost per equivalent unit for materials for the month in the first processing department is closest to: A. $16.87 B. $15.65 C. $15.09 D. $18.00 FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 6,800 - 200 = 6,600
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The information below was obtained from the records of one of the departments of Cushing Company for the month of August. The company uses the FIFO method in its process costing system.
62. The equivalent units for materials for the month of August are: A. 75,000 units B. 85,000 units C. 87,500 units D. 95,000 units FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 75,000 - 10,000 = 65,000
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63. The equivalent units for labor and overhead for the month of August are: A. 85,000 units B. 95,000 units C. 87,500 units D. 82,500 units FIFO method Units started and completed during the period = Units completed during the period - Units in beginning work in process inventory = 75,000 - 10,000 = 65,000
In February, one of the processing departments at Grosz Corporation had beginning work in process inventory of $18,000 and ending work in process inventory of $11,000. During the month, the cost of units transferred out from the department was $204,000. The company uses the FIFO method in its process costing system.
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64. In the department's cost reconciliation report for February, the costs added to production in the department would be: A. $211,000 B. $197,000 C. $186,000 D. $193,000 FIFO method
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65. In the department's cost reconciliation report for February, the total cost accounted for would be: A. $29,000 B. $412,000 C. $215,000 D. $430,000 FIFO method
In May, one of the processing departments at Lukman Corporation had beginning work in process inventory of $11,000. During the month, $120,000 of costs were added to production and the cost of units transferred out from the department was $94,000. The company uses the FIFO method in its process costing system.
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66. In the department's cost reconciliation report for May, the cost of ending work in process inventory would be: A. $15,000 B. $63,000 C. $37,000 D. $26,000 FIFO method
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67. In the department's cost reconciliation report for May, the total cost to be accounted for would be: A. $48,000 B. $251,000 C. $262,000 D. $131,000 FIFO method
5. Gatlin Company has several service departments that provide services for each other as well as for operating departments within the company. The method that would be least accurate in allocating the company's service department costs would be: A. by the step-down method. B. by the direct method. C. by cost behavior. D. by the reciprocal method.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 04B-10 Allocate service department costs to operating departments using the direct method Learning Objective: 04B-11 Allocate service department costs to operating departments using the step-down method Level: Easy
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6. The step-down method of allocating service department costs: A. is a less accurate method of allocation than the direct method. B. can't be used when a company has more than two service departments. C. is a simpler allocation method than the direct method. D. ignores some interdepartmental services.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 04B-10 Allocate service department costs to operating departments using the direct method Learning Objective: 04B-11 Allocate service department costs to operating departments using the step-down method Level: Medium
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7. Hidden Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Administrative and Facilities, and two operating departments, Assembly and Wholesaling.
Administrative costs are allocated on the basis of employee hours and Facilities costs are allocated on the basis of space occupied. The total Wholesaling Department cost after the allocations of service department costs is closest to: A. $389,876 B. $378,900 C. $392,340 D. $392,544 Allocation base for Administrative costs = 26,000 + 14,000 = 40,000 Allocation base for Facilities costs = 33,000 + 6,000 = 39,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04B-10 Allocate service department costs to operating departments using the direct method Level: Easy
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8. Balthazar Clinic uses the direct method to allocate service department costs to operating departments. The clinic has two service departments, Personnel and Support, and two operating departments, Prenatal and Pediatrics.
Personnel Department costs are allocated on the basis of employee hours and Support Department costs are allocated on the basis of space occupied in square feet. The total Pediatrics Department cost after the allocations of service department costs is closest to: A. $304,880 B. $310,281 C. $312,290 D. $312,554 Allocation base for Personnel costs = 23,000 + 13,000 = 36,000 Allocation base for Support costs = 37,000 + 6,000 = 43,000
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9. Amorim Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Data Processing and Personnel, and two operating departments, Assembly and Finishing.
Data Processing Department costs are allocated on the basis of computer workstations and Personnel Department costs are allocated on the basis of employees. The total amount of Data Processing Department cost allocated to the two operating departments is closest to: A. $34,944 B. $145,367 C. $31,329 D. $25,774 Data Processing costs to be allocated = $34,944
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10. The direct method is used by Colquitt Publishing, Inc., to allocate service department costs to operating departments. The company has two service departments, Information Technology and Personnel, and two operating departments, Prepress and Printing.
Information Technology Department costs are allocated on the basis of computer workstations and Personnel Department costs are allocated on the basis of employees. The total Prepress Department cost after service department allocations is closest to: A. $516,249 B. $522,964 C. $520,389 D. $510,887 Allocation base for Information Technology costs = 59 + 38 = 97 Allocation base for Facilities costs = 106 + 33 = 139
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11. Silton Surgical Hospital uses the direct method to allocate service department costs to operating departments. The hospital has two service departments, Telecommunications and Administration, and two operating departments, Surgery and Recovery.
Telecommunications Department costs are allocated on the basis of the number of telecommunications ports in departments and Administration Department costs are allocated on the basis of employees. The total Surgery Department cost after service department allocations is closest to: A. $278,389 B. $276,783 C. $274,208 D. $269,621 Allocation base for Telecommunication costs = 49 + 49 = 98 Allocation base for Administration costs = 49 + 48 = 97
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12. Rich Company has a Custodial Services department which services the company's Maintenance department and two operating departments, Machinery and Milling. Costs of Custodial Services are allocated to the other departments on the basis of square footage of space occupied. The amount of space occupied by each department is given below:
Budgeted costs in Custodial Services amount to $86,400. The amount of Custodial Services cost allocated to Maintenance under the step-down method would be: A. $5,184 B. $5,400 C. $0 D. $5,760 Allocation rate for Custodial services costs = Cost to be allocated Allocation base = $86,400 (9,000 square feet + 45,000 square feet + 90,000 square feet) =$0.60 per square foot Custodial services department cost allocated to Maintenance = $0.60 per square foot 9,000 square feet = $5,400
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04B-11 Allocate service department costs to operating departments using the step-down method Level: Medium
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13. Bankert Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, General Management and Physical Plant, and two operating departments, Sales and After-Sales. Data concerning those departments follow:
General Management Department costs are allocated first on the basis of employee time and Physical Plant Department costs are allocated second on the basis of space occupied. The total After-Sales Department cost after allocations is closest to: A. $307,594 B. $300,100 C. $310,240 D. $310,376 Allocation base for General Management costs = 2,000 + 33,000 + 13,000 = 48,000 Allocation base for Physical Plant costs = 33,000 + 8,000 = 41,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04B-11 Allocate service department costs to operating departments using the step-down method Level: Easy
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14. Poteete, Inc., allocates service department costs to operating departments using the stepdown method. The company has two service departments, Administration and Physical Plant, and two operating departments, Assembly and Testing. Data concerning those departments follow:
Administration Department costs are allocated first on the basis of employee time and Physical Plant Department costs are allocated second on the basis of space occupied. The total Testing Department cost after allocations is closest to: A. $539,189 B. $526,180 C. $538,930 D. $537,376 Allocation base for Administration costs = 1,000 + 26,000 + 17,000 = 44,000 Allocation base for Physical Plant costs = 38,000 + 2,000 = 40,000
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15. Diprima Clinic uses the step-down method to allocate service department costs to operating departments. The clinic has two service departments, Personnel and Information Technology (IT), and two operating departments, Family Medicine and Pediatric. Data concerning those departments follow:
Personnel costs are allocated first on the basis of employees and IT costs are allocated second on the basis of PCs. The total Pediatric Department cost after allocations is closest to: A. $233,732 B. $238,715 C. $238,298 D. $205,318 Allocation base for Personnel costs = 20 + 137 + 170 = 327 Allocation base for IT costs = 129 + 104 = 233
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16. Stazenski Children's Clinic allocates service department costs to operating departments using the step-down method. The clinic has two service departments, Administration and Information Technology (IT), and two operating departments, Prenatal and Pediatric. Data concerning those departments follow:
Administration costs are allocated first on the basis of employees and IT costs are allocated second on the basis of PCs. The total Pediatric Department cost after allocations is closest to: A. $435,029 B. $390,920 C. $434,832 D. $423,486 Allocation base for Administration costs = 26 + 115 + 169 = 310 Allocation base for IT costs = 100 + 166 = 266
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The Uinta Company has two service departments and two operating departments. The following data are available from last year:
The costs of service departments 1 and 2 are allocated on the basis of number of transactions and square feet occupied respectively. No distinction is made between fixed and variable costs.
17. Assuming that Uinta allocates service department costs by the direct method, the total overhead costs allocated from Department 1 to Department X are: A. $18,000 B. $25,200 C. $42,000 D. $29,400 Allocation base for Service Department 1 costs = 14,000 + 16,000 = 30,000 Allocation base for Service Department 2 costs = 3,000 + 2,000 = 5,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 04B-10 Allocate service department costs to operating departments using the direct method Level: Medium
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18. Assuming that Uinta allocates service department costs by the direct method, the total overhead costs allocated from Department 2 to Department Y are: A. $22,400 B. $16,800 C. $42,000 D. $14,000 Allocation base for Service Department 1 costs = 14,000 + 16,000 = 30,000 Allocation base for Service Department 2 costs = 3,000 + 2,000 = 5,000
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19. Assume that Uinta allocates service department costs by the step-down method, starting with Department 1. The total overhead costs allocated from Department 1 to Department X are: A. $12,115 B. $21,000 C. $24,000 D. $33,600 Allocation base for Service Department 1 costs = 12,000 + 14,000 + 16,000 = 42,000 Allocation base for Service Department 2 costs = 3,000 + 2,000 = 5,000
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20. Assume that Uinta allocates service department costs by the step-down method, starting with Department 1. The total overhead costs allocated from Department 2 to Department Y are: A. $18,000 B. $24,000 C. $21,000 D. $25,200 Allocation base for Service Department 1 costs = 12,000 + 14,000 + 16,000 = 42,000 Allocation base for Service Department 2 costs = 3,000 + 2,000 = 5,000
The Grand Company has budgeted departmental costs and operating activity in its four departments for the coming year as follows:
The company does not distinguish between fixed and variable service department costs. Custodial costs are allocated on the basis of square feet occupied. Repair costs are allocated on the basis of the number of repair requests.
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21. Assume Grand uses the direct allocation method. After all allocations, how much of the company's total overhead cost will be charged to the Production Department for the coming year? A. $43,400 B. $46,200 C. $45,941 D. $41,728 Allocation base for Custodial costs = 1,200 + 3,600 = 4,800 Allocation base for Repair costs = 220 + 100 = 320
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22. Assume Grand uses the step-down allocation method with Custodial costs allocated first. After all allocations, how much of the company's total overhead cost will be charged to the company's Finishing Department for the coming year? A. $57,274 B. $55,184 C. $59,777 D. $56,854 Allocation base for Custodial costs = 200 + 1,200 + 3,600 = 5,000 Allocation base for Repair costs = 220 + 100 = 320
Reddin Corporation has two service departments, Administrative and Facilities, and two operating departments, Assembly and Customer Solutions.
The company uses the direct method to allocate service department costs to operating departments. Administrative costs are allocated on the basis of employee hours and Facilities costs are allocated on the basis of space occupied.
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23. The total amount of Administrative Department cost allocated to the Assembly Department is closest to: A. $20,991 B. $29,484 C. $23,460 D. $23,009 Allocation base for Administrative costs = 34,000 + 17,000 = 51,000 Allocation base for Facilities costs = 31,000 + 6,000 = 37,000
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24. The total Customer Solutions Department cost after the allocations of service department costs is closest to: A. $674,310 B. $686,040 C. $683,705 D. $686,473 Allocation base for Administrative costs = 34,000 + 17,000 = 51,000 Allocation base for Facilities costs = 31,000 + 6,000 = 37,000
President Clinic has two service departments, Administrative and Support, and two operating departments, Adult Medicine and Pediatrics.
The clinic uses the direct method to allocate service department costs to operating departments. Administrative Department costs are allocated on the basis of employee hours and Support Department costs are allocated on the basis of space occupied in square feet.
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25. The total amount of Administrative Department cost allocated to the Adult Medicine Department is closest to: A. $28,368 B. $31,096 C. $43,235 D. $32,340 Allocation base for Administrative costs = 33,000 + 17,000 = 50,000 Allocation base for Support costs = 30,000 + 4,000 = 34,000
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26. The total Pediatrics Department cost after the allocations of service department costs is closest to: A. $475,220 B. $491,880 C. $488,839 D. $491,683 Allocation base for Administrative costs = 33,000 + 17,000 = 50,000 Allocation base for Support costs = 30,000 + 4,000 = 34,000
Brannigan Corporation uses the direct method to allocate service department costs to operating departments. The company has two service departments, Information Technology and Personnel, and two operating departments, Fabrication and Customization.
Information Technology Department costs are allocated on the basis of computer workstations and Personnel Department costs are allocated on the basis of employees.
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27. The total amount of Information Technology Department cost allocated to the two operating departments is closest to: A. $141,772 B. $26,749 C. $30,820 D. $22,503 Information Technology costs to be allocated = $30,820
28. The total Fabrication Department cost after service department allocations is closest to: A. $604,655 B. $606,735 C. $599,122 D. $602,460 Allocation base for Information Technology costs = 47 + 45 = 92 Allocation base for Support costs = 70 + 41 = 111
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Enzor Surgical Hospital uses the direct method to allocate service department costs to operating departments. The hospital has two service departments, Information Technology and Administration, and two operating departments, Surgery and Recovery.
Information Technology Department costs are allocated on the basis of computer workstations and Administration Department costs are allocated on the basis of employees.
29. The total amount of Information Technology Department cost allocated to the two operating departments is closest to: A. $23,841 B. $29,414 C. $113,244 D. $19,695 Information Technology costs to be allocated = $29,414
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30. The total Surgery Department cost after service department allocations is closest to: A. $500,818 B. $498,775 C. $494,416 D. $503,713 Allocation base for Information Technology costs = 40 + 37 = 77 Allocation base for Administration costs = 61 + 32 = 93
Goodland Corporation uses the step-down method to allocate service department costs to operating departments. The company has two service departments, Service Department A and Service Department B, and two operating departments, Operating Department X and Operating Department Y. Data concerning those departments follow:
Service Department A costs are allocated first on the basis of allocation base A and Service Department B costs are allocated second on the basis of allocation base B.
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31. In the first step of the allocation, the amount of Service Department A cost allocated to the Operating Department X is closest to: A. $9,760 B. $20,608 C. $19,800 D. $18,032 Allocation base for Service Department A costs = 2,000 + 33,000 + 16,000 = 51,000 Allocation base for Service Department B costs = 31,000 + 8,000 = 39,000
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32. The total Operating Department Y cost after allocations is closest to: A. $423,352 B. $425,820 C. $416,220 D. $425,966 Allocation base for Service Department A costs = 2,000 + 33,000 + 16,000 = 51,000 Allocation base for Service Department B costs = 31,000 + 8,000 = 39,000
Ponce Corporation, a manufacturer, uses the step-down method to allocate service department costs to operating departments. The company has two service departments, Administration and Facilities, and two operating departments, Assembly and Finishing. Data concerning those departments follow:
Administration Department costs are allocated first on the basis of labor hours and Facilities Department costs are allocated second on the basis of space occupied.
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33. In the first step of the allocation, the amount of Administration Department cost allocated to the Assembly Department is closest to: A. $19,515 B. $22,370 C. $21,330 D. $10,040 Allocation base for Administration costs = 2,000 + 27,000 + 14,000 = 43,000 Allocation base for Facilities costs = 34,000 + 9,000 = 43,000
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34. The total Finishing Department cost after allocations is closest to: A. $515,170 B. $510,933 C. $504,110 D. $515,379 Allocation base for Administration costs = 2,000 + 27,000 + 14,000 = 43,000 Allocation base for Facilities costs = 34,000 + 9,000 = 43,000
Duda Clinic uses the step-down method to allocate service department costs to operating departments. The clinic has two service departments, Personnel and Information Technology (IT), and two operating departments, Family Medicine and Geriatric Medicine. Data concerning those departments follow:
Personnel costs are allocated first on the basis of employees and IT costs are allocated second on the basis of PCs.
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35. In the first step of the allocation, the amount of Personnel Department cost allocated to the Family Medicine Department is closest to: A. $17,804 B. $20,296 C. $37,408 D. $18,700 Allocation base for Personnel costs = 25 + 110 + 183 = 318 Allocation base for IT costs = 81 + 136 = 217
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36. The total Geriatric Medicine Department cost after allocations is closest to: A. $163,616 B. $188,179 C. $194,726 D. $194,717 Allocation base for Personnel costs = 25 + 110 + 183 = 318 Allocation base for IT costs = 81 + 136 = 217
Deardurff Legal Services, LLC, uses the step-down method to allocate service department costs to operating departments. The firm has two service departments, Personnel and Information Technology (IT), and two operating departments, Family Law and Corporate Law. Data concerning those departments follow:
Personnel costs are allocated first on the basis of employees and IT costs are allocated second on the basis of PCs.
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37. In the first step of the allocation, the amount of Personnel Department cost allocated to the Family Law Department is closest to: A. $20,121 B. $13,937 C. $15,637 D. $14,430 Allocation base for Personnel costs = 24 + 111 + 176 = 311 Allocation base for IT costs = 91 + 163 = 254
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38. The total Corporate Law Department cost after allocations is closest to: A. $417,451 B. $417,540 C. $410,562 D. $394,660 Allocation base for Personnel costs = 24 + 111 + 176 = 311 Allocation base for IT costs = 91 + 163 = 254
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Chapter 06 Variable Costing and Segment Reporting: Tools for Management
20. Routsong Company had the following sales and production data for the past four years:
Selling price per unit, variable cost per unit, and total fixed cost are the same in each year. Which of the following statements is not correct? A. Under variable costing, net operating income for Year 1 and Year 2 would be the same. B. Because of the changes in production levels, under variable costing the unit product cost will change each year. C. The total net operating income for all four years combined would be the same under variable and absorption costing. D. Under absorption costing, net operating income in Year 4 would be less than the net operating income in Year 2.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Hard
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21. Would the following costs be classified as product or period costs under variable costing at a retail clothing store?
A. Option A B. Option B C. Option C D. Option D
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Level: Medium
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22. Fixed manufacturing overhead is included in product costs under:
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Level: Easy
23. Which of the following are considered to be product costs under variable costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses. A. I. B. I and II. C. I and III. D. I, II, and III.
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24. Which of the following are considered to be product costs under absorption costing? I. Variable manufacturing overhead. II. Fixed manufacturing overhead. III. Selling and administrative expenses. A. I, II, and III. B. I and II. C. I and III. D. I.
25. Under variable costing, costs that are treated as period costs include: A. only fixed manufacturing costs. B. both variable and fixed manufacturing costs. C. all fixed costs. D. only fixed selling and administrative costs.
26. Selling and administrative expenses are considered to be: A. a product cost under variable costing. B. a product cost under absorption costing. C. part of fixed manufacturing overhead under variable costing. D. a period cost under variable costing.
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27. A portion of the total fixed manufacturing overhead cost incurred during a period may: A. be excluded from cost of goods sold under absorption costing. B. be charged as a period cost with the remainder deferred under variable costing. C. never be excluded from cost of goods sold under absorption costing. D. never be excluded from cost of goods sold under variable costing.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Hard
28. A company using lean production methods likely would show approximately the same net operating income under both absorption and variable costing because: A. ending inventory would be valued in the same manner for both methods under lean production. B. production is geared to sales under lean production and thus there would be little or no ending inventory. C. under lean production fixed manufacturing overhead costs are charged to the period incurred rather than to the product produced. D. there is no distinction made under lean production between fixed and variable costs.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Medium
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29. Dull Corporation has been producing and selling electric razors for the past ten years. Shown below are the actual net operating incomes for the last three years of operations at Dull:
Dull Corporation's cost structure and selling price has not changed during its ten years of operations. Based on the information presented above, which of the following statements is true? A. Dull Corporation operated above the breakeven point in each of the three years presented. B. For the three years presented in total, Dull Corporation sold more units than it produced. C. In Year 10, Dull Corporation produced fewer units than it sold. D. In Year 9, Dull Corporation produced more units than it sold.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Hard
30. Net operating income reported under absorption costing will exceed net operating income reported under variable costing for a given period if: A. production equals sales for that period. B. production exceeds sales for that period. C. sales exceed production for that period. D. the variable manufacturing overhead exceeds the fixed manufacturing overhead.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Medium Source: CMA, adapted
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31. If the number of units produced exceeds the number of units sold, then net operating income under absorption costing will: A. be equal to the net operating income under variable costing. B. be greater than net operating income under variable costing. C. be equal to the net operating income under variable costing plus total fixed manufacturing costs. D. be equal to the net operating income under variable costing less total fixed manufacturing costs.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Medium
32. Over an extended period of time in which the final ending inventories are zero, the accumulated net operating income figures reported under absorption costing will be: A. greater than those reported under variable costing. B. less than those reported under variable costing. C. the same as those reported under variable costing. D. higher or lower since no generalization can be made.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Hard
33. In an income statement segmented by product line, a fixed expense that cannot be allocated among product lines on a cause-and-effect basis should be: A. classified as a traceable fixed expense and not allocated. B. allocated to the product lines on the basis of sales dollars. C. allocated to the product lines on the basis of segment margin. D. classified as a common fixed expense and not allocated.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions Level: Medium
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34. A common cost that should not be assigned to a particular product on a segmented income statement is: A. the product's advertising costs. B. the salary of the corporation president. C. direct materials costs. D. the product manager's salary.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions Level: Easy
35. All other things being equal, if a division's traceable fixed expenses increase: A. the division's contribution margin ratio will decrease. B. the division's segment margin ratio will remain the same. C. the division's segment margin will decrease. D. the overall company profit will remain the same.
36. All other things equal, if a division's traceable fixed expenses decrease: A. the division's segment margin will increase. B. the overall company net operating income will decrease. C. the division's contribution margin will increase. D. the division's sales volume will increase.
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37. Segment margin is sales minus: A. variable expenses. B. traceable fixed expenses. C. variable expenses and common fixed expenses. D. variable expenses and traceable fixed expenses.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions Level: Easy
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38. Clayton Company produces a single product. Last year, the company's variable production costs totaled $8,000 and its fixed manufacturing overhead costs totaled $4,800. The company produced 4,000 units during the year and sold 3,600 units. Assuming no units in the beginning inventory: A. under variable costing, the units in ending inventory will be costed at $3.20 each. B. the net operating income under absorption costing for the year will be $480 lower than net operating income under variable costing. C. the ending inventory under variable costing will be $480 lower than the ending inventory under absorption costing. D. the net operating income under absorption costing for the year will be $800 lower than net operating income under variable costing.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Medium
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39. Gangwer Corporation produces a single product and has the following cost structure:
The absorption costing unit product cost is: A. $95 B. $119 C. $61 D. $56
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Level: Easy
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40. Olds Inc., which produces a single product, has provided the following data for its most recent month of operations:
There were no beginning or ending inventories. The absorption costing unit product cost was: A. $97 B. $130 C. $99 D. $207
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41. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations:
What is the absorption costing unit product cost for the month? A. $102 B. $130 C. $97 D. $125
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What is the variable costing unit product cost for the month? A. $103 B. $99 C. $94 D. $90
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What is the total period cost for the month under variable costing? A. $185,000 B. $117,600 C. $273,200 D. $302,600
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44. Swiatek Corporation produces a single product and has the following cost structure:
The variable costing unit product cost is: A. $161 B. $225 C. $153 D. $158
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45. Cockriel Inc., which produces a single product, has provided the following data for its most recent month of operations:
There were no beginning or ending inventories. The variable costing unit product cost was: A. $42 B. $43 C. $37 D. $48
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What is the total period cost for the month under absorption costing? A. $58,300 B. $37,100 C. $259,900 D. $201,600
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47. Roy Corporation produces a single product. During July, Roy produced 10,000 units. Costs incurred during the month were as follows:
Under absorption costing, any unsold units would be carried in the inventory account at a unit product cost of: A. $5.10 B. $4.40 C. $3.80 D. $3.50
Absorption costing unit product cost = $44,000 10,000 units = $4.40 per unit
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Level: Medium
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What is the net operating income for the month under variable costing? A. $21,600 B. $(15,200) C. $8,000 D. $13,600
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Variable costing unit product cost
Variable costing income statement
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Medium
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What is the net operating income for the month under absorption costing? A. $5,300 B. $3,000 C. $(12,700) D. $8,300 Unit product cost under absorption costing:
Absorption costing income statement
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The total gross margin for the month under absorption costing is: A. $42,000 B. $14,700 C. $69,000 D. $79,800 Unit product cost under absorption costing:
Absorption costing income statement
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Easy
51. A company produces a single product. Last year, fixed manufacturing overhead was $30,000, variable production costs were $48,000, fixed selling and administration costs were $20,000, and variable selling administrative expenses were $9,600. There was no beginning inventory. During the year, 3,000 units were produced and 2,400 units were sold at a price of $40 per unit. Under variable costing, net operating income would be: A. a profit of $6,000. B. a profit of $4,000. C. a loss of $2,000. D. a loss of $4,400. Variable costing unit product cost = $48,000 3,000 units produced = $16 per unit
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The total contribution margin for the month under variable costing is: A. $183,600 B. $90,000 C. $70,400 D. $169,200 Unit product cost under variable costing:
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Easy
53. Last year, Heidenescher Corporation's variable costing net operating income was $63,600 and its inventory decreased by 600 units. Fixed manufacturing overhead cost was $1 per unit. What was the absorption costing net operating income last year? A. $64,200 B. $63,000 C. $63,600 D. $600
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Medium
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54. Sproles Inc. manufactures a variety of products. Variable costing net operating income was $90,500 last year and its inventory decreased by 3,500 units. Fixed manufacturing overhead cost was $6 per unit. What was the absorption costing net operating income last year? A. $90,500 B. $21,000 C. $69,500 D. $111,500
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55. Roberts Company produces a single product. This year, the company's net operating income under absorption costing was $2,000 lower than under variable costing. The company sold 8,000 units during the year, and its variable costs were $8 per unit, of which $2 was variable selling and administrative expense. If production cost was $10 per unit under absorption costing, then how many units did the company produce during the year? (The company produced the same number of units last year.) A. 7,500 units B. 7,000 units C. 9,000 units D. 8,500 units Variable production cost per unit = $8 per unit - $2 per unit = $6 per unit Absorption unit product cost = Variable production cost per unit + Fixed production cost per unit $10 per unit = $6 per unit + Fixed manufacturing overhead cost per unit Fixed manufacturing overhead cost per unit = $10 per unit - $6 per unit = $4 per unit Since absorption costing net operating income was $2,000 lower than its variable costing net operating income, $2,000 of fixed manufacturing overhead cost was released from inventory under absorption costing. Fixed manufacturing overhead cost released from inventory under absorption costing = Fixed manufacturing overhead cost per unit Decrease in units in inventory $2,000 = $4 per unit Decrease in units in inventory Decrease in units in inventory = $2,000 $4 per unit = 500 units Units sold = Units produced + Decrease in units in inventory 8,000 units = Units produced + 500 units Units produced = 8,000 units - 500 units = 7,500 units
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Hard
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56. Evans Company produces a single product. During the most recent year, the company had a net operating income of $90,000 using absorption costing and $84,000 using variable costing. The fixed overhead application rate was $6 per unit. There were no beginning inventories. If 22,000 units were produced last year, then sales for last year were: A. 15,000 units B. 21,000 units C. 23,000 units D. 28,000 units
Since absorption costing net operating income was greater than its variable costing net operating income by $6,000, it must have deferred $6,000 of fixed manufacturing overhead costs in inventory under absorption costing. Fixed manufacturing overhead costs deferred in inventory under absorption costing = Fixed manufacturing overhead cost per unit Increase in units in inventory $6,000 = $6 per unit Increase in units in inventory Increase in units in inventory = $6,000 $6 per unit = 1,000 units Therefore, since there were no beginning inventories and 1,000 units of the 22,000 units that were produced were in ending inventories, sales must have been 21,000 units.
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57. Craft Company produces a single product. Last year, the company had a net operating income of $80,000 using absorption costing and $74,500 using variable costing. The fixed manufacturing overhead cost was $5 per unit. There were no beginning inventories. If 21,500 units were produced last year, then sales last year were: A. 16,000 units B. 20,400 units C. 22,600 units D. 27,000 units
Since absorption costing net operating income was greater than its variable costing net operating income by $5,500, it must have deferred $5,500 of fixed manufacturing overhead costs in inventory under absorption costing. Fixed manufacturing overhead costs deferred in inventory under absorption costing = Fixed manufacturing overhead cost per unit Increase in units in inventory $5,500 = $5 per unit Increase in units in inventory Increase in units in inventory = $5,500 $5 per unit = 1,100 units Therefore, since there were no beginning inventories and 1,100 units of the 21,500 units that were produced were in ending inventories, sales must have been 20,400 units.
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58. Moore Company produces a single product. During last year, Moore's variable production costs totaled $10,000 and its fixed manufacturing overhead costs totaled $6,800. The company produced 5,000 units during the year and sold 4,600 units. There were no units in the beginning inventory. Which of the following statements is true? A. The net operating income under absorption costing for the year will be $800 higher than net operating income under variable costing. B. The net operating income under absorption costing for the year will be $544 higher than net operating income under variable costing. C. The net operating income under absorption costing for the year will be $544 lower than net operating income under variable costing. D. The net operating income under absorption costing for the year will be $800 lower than net operating income under variable costing.
Therefore, net operating income under absorption costing would be $544 higher than net operating income under variable costing.
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59. Last year, Salada Corporation's variable costing net operating income was $97,000. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $14,000. What was the absorption costing net operating income last year? A. $14,000 B. $111,000 C. $97,000 D. $83,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-03 Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ Level: Easy
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60. Tsuchiya Corporation manufactures a variety of products. Last year, the company's variable costing net operating income was $57,500. Fixed manufacturing overhead costs deferred in inventory under absorption costing amounted to $35,400. What was the absorption costing net operating income last year? A. $22,100 B. $35,400 C. $57,500 D. $92,900
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61. Stephen Company produces a single product. Last year, the company had 20,000 units in its ending inventory. During the year, Stephen's variable production costs were $12 per unit. The fixed manufacturing overhead cost was $8 per unit in the beginning inventory. The company's net operating income for the year was $9,600 higher under variable costing than it was under absorption costing. The company uses a last-in-first-out (LIFO) inventory flow assumption. Given these facts, the number of units of product in the beginning inventory last year must have been: A. 21,200 B. 19,200 C. 18,800 D. 19,520 Since the variable costing operating net income was $9,600 higher under variable costing than under absorption costing, fixed manufacturing overhead costs must have been released from inventory under absorption costing. In other words, the ending inventory must have been lower than the beginning inventory. Under the LIFO inventory flow assumption, all of the units in ending inventory were also in beginning inventory. Therefore, the reduction in inventory must have been 1,200 units (= $9,600 $8 per unit). Units in ending inventory = Units in beginning inventory - Reduction in units in inventory 20,000 units = Units in beginning inventory - 1,200 units Units in beginning inventory = 20,000 units + 1,200 units = 21,200 units
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62. Hansen Company produces a single product. During the last year, Hansen had net operating income under absorption costing that was $5,500 lower than its income under variable costing. The company sold 9,000 units during the year, and its variable costs were $10 per unit, of which $6 was variable selling expense. If fixed production cost is $5 per unit under absorption costing every year, then how many units did the company produce during the year? A. 7,625 units B. 8,450 units C. 10,100 units D. 7,900 units Since net operating income under absorption costing was $5,500 lower than under variable costing, inventories must have decreased. A reduction in inventories results in releasing fixed manufacturing overhead from inventories. Fixed manufacturing overhead costs released from inventory under absorption costing = Fixed manufacturing overhead per unit Reduction in the units in inventory $5,500 = $5 per unit Reduction in the units in inventory Reduction in the units in inventory = $5,500 $5 per unit = 1,100 units Units in beginning inventory + Units produced = Units sold + Units in ending inventory Units in beginning inventory - Units in ending inventory = Units sold - Units produced Reduction in the units in inventory = Units sold - Units produced 1,100 units = 9,000 units - Units produced Units produced = 9,000 units - 1,100 units = 7,900 units
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63. Hatch Company has two divisions, O and E. During the year just ended, Division O had a segment margin of $9,000 and variable expenses equal to 70% of sales. Traceable fixed expenses for Division E were $19,000. Hatch Company as a whole had a contribution margin ratio of 40%, a segment margin of $25,000, and sales of $200,000. Given this data, the sales for Division E for last year were: A. $50,000 B. $150,000 C. $87,500 D. $116,667
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E segment margin = Total segment margin - O segment margin = $25,000 - $9,000 = $16,000
E segment margin = E contribution margin - E traceable expenses E contribution margin = E segment margin + E traceable expenses $16,000 + $19,000 = $35,000
Total contribution margin = Total sales Total contribution margin ratio = $200,000 0.40 = $80,000
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Total contribution margin = O contribution margin + E contribution margin O contribution margin = Total contribution margin - E contribution margin = $80,000 - $35,000 = $45,000
O CM ratio = 1 - O variable expense ratio = 1 - 0.70 = 0.30 O contribution margin = O CM ratio O sales $45,000 = 0.30 O sales O sales = $45,000 0.30 = $150,000
Total sales = O sales + E sales E sales = Total sales - O sales = $200,000 - $150,000 = $50,000
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions Level: Hard
64. During April, Division D of Carney Company had a segment margin ratio of 15%, a variable expense ratio of 60% of sales, and traceable fixed expenses of $15,000. Division D's sales were closest to: A. $100,000 B. $60,000 C. $33,333 D. $22,500 Segment margin = 0.15 Segment sales Segment variable expenses = 0.60 Segment sales Segment traceable fixed expenses = $15,000 Segment margin = Segment sales - Segment variable expenses - Segment traceable fixed expenses 0.15 Segment sales = Segment sales - 0.60 Segment sales - $15,000 0.25 Segment sales = $15,000 Segment sales = $15,000 0.25 = $60,000
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65. Colasuonno Corporation has two divisions: the West Division and the East Division. The corporation's net operating income is $88,800. The West Division's divisional segment margin is $39,500 and the East Division's divisional segment margin is $166,900. What is the amount of the common fixed expense not traceable to the individual divisions? A. $255,700 B. $206,400 C. $117,600 D. $128,300 Total segment margin = $39,500 + $166,900 = $206,400 Total net operating income = Total segment margin - Common fixed expenses $88,800 = $206,400 - Common fixed expenses Common fixed expenses = $206,400 - $88,800 = $117,600
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions Level: Medium
66. Gore Corporation has two divisions: the Business Products Division and the Export Products Division. The Business Products Division's divisional segment margin is $55,700 and the Export Products Division's divisional segment margin is $70,600. The total amount of common fixed expenses not traceable to the individual divisions is $107,400. What is the company's net operating income? A. $233,700 B. $(126,300) C. $126,300 D. $18,900 Total segment margin = $55,700 + $70,600 = $126,300 Total net operating income = Total segment margin - Common fixed expenses = $126,300 - $107,400 = $18,900
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-04 Prepare a segmented income statement that differentiates traceable fixed costs from common fixed costs and use it to make decisions Level: Easy
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67. More Company has two divisions, L and M. During July, the contribution margin in Division L was $60,000. The contribution margin ratio in Division M was 40% and its sales were $250,000. Division M's segment margin was $60,000. The common fixed expenses were $50,000 and the company net operating income was $20,000. The segment margin for Division L was: A. $0 B. $10,000 C. $50,000 D. $60,000
Net operating income = Total segment margin - Common fixed expenses $20,000 = Total segment margin - $50,000 Total segment margin = $20,000 + $50,000 = $70,000
Total segment margin = L segment margin + M segment margin $70,000 = L segment margin + $60,000 L segment margin = $70,000 - $60,000 = $10,000
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68. Stephen Company has the following data for its three stores last year:
Given the above data, the total company sales were: A. $1,250,000 B. $1,375,000 C. $1,450,000 D. $800,000
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Segment A Variable expense ratio = Segment A Variable expenses Segment A Sales 0.60 = $240,000 Segment A Sales Segment A Sales = $240,000 0.60 = $400,000
Segment B CM ratio = Segment B Contribution margin Segment B Sales 0.20 = $120,000 Segment B Sales Segment B Sales = $120,000 0.20 = $600,000
Segment C CM ratio = 1 - Segment C Variable expense ratio Segment C Variable expense ratio = 1 - Segment C CM ratio = 1 - 0.40 = 0.60 Segment C Variable expense ratio = Segment C Variable expenses Segment C Sales Segment C Sales = Segment C Variable expenses Segment C Variable expense ratio = $150,000 0.60 = $250,000
Total sales = $400,000 + $600,000 + $250,000 = $1,250,000
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69. Johnson Company operates two plants, Plant A and Plant B. Last year, Johnson Company reported a contribution margin of $40,000 for Plant A. Plant B had sales of $200,000 and a contribution margin ratio of 40%. Net operating income for the company was $27,000 and traceable fixed expenses for the two stores totaled $50,000. Johnson Company's common fixed expenses were: A. $43,000 B. $50,000 C. $93,000 D. $120,000
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Plant B Contribution margin = Plant B CM ratio Plant B Sales = 0.40 $200,000 = $80,000
Net operating income = Segment margin - Common fixed expenses $27,000 = $70,000 - Common fixed expenses Common fixed expenses = $70,000 - $27,000
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70. The ARB Company has two divisions: Electronics and DVD/Video Sales. Electronics has traceable fixed expenses of $146,280 and the DVD/Video Sales has traceable fixed expenses of $81,765. If ARB Company has a total of $322,490 in fixed expenses, what are its common fixed expenses? A. $94,445 B. $322,490 C. $228,045 D. $47,223 Common fixed expenses = Total fixed expenses - Traceable fixed expenses = $322,490 - ($146,280 + $81,765) =$94,445
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71. Leis Retail Company has two Stores, M and N. Store N had sales of $180,000 during March, a segment margin of $54,000, and traceable fixed expenses of $26,000. The company as a whole had a contribution margin ratio of 25% and $120,000 in total contribution margin. Based on this information, total variable expenses in Store M for the month must have been: A. $140,000 B. $260,000 C. $300,000 D. $360,000
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CM ratio = Contribution margin Sales 0.25 = $120,000 Sales Sales = $120,000 0.25 = $480,000
Contribution margin = Sales - Variable expenses $120,000 = $480,000 - Variable expenses Variable expenses = $480,000 - $120,000 = $360,000
Store N Segment margin = Store N Contribution margin - Segment N Traceable fixed expenses $54,000 = Store N Contribution margin - $26,000 Store N Contribution margin = $54,000 + $26,000 = $80,000
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Store N Contribution margin = Store N Sales - Store N Variable expenses $80,000 = $180,000 - Store N Variable expenses Store N Variable expenses = $180,000 - $80,000 = $100,000
Total Variable expenses = Store M Variable expenses + Store N Variable expenses $360,000 = Store M Variable expenses + $100,000 Store M Variable expenses = $360,000 - $100,000 = $260,000
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72. Sugiki Corporation has two divisions: the Alpha Division and the Delta Division. The Alpha Division has sales of $820,000, variable expenses of $369,000, and traceable fixed expenses of $347,300. The Delta Division has sales of $460,000, variable expenses of $294,400, and traceable fixed expenses of $134,100. The total amount of common fixed expenses not traceable to the individual divisions is $97,300. What is the company's net operating income? A. $135,200 B. $37,900 C. $616,600 D. $519,300
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73. Phillipson Corporation has two divisions: the IEB Division and the PIH Division. The corporation's net operating income is $83,900. The IEB Division's divisional segment margin is $149,700 and the PIH Division's divisional segment margin is $60,100. What is the amount of the common fixed expense not traceable to the individual divisions? A. $233,600 B. $209,800 C. $144,000 D. $125,900 Net operating income = Segment margin - Common fixed expenses $83,900 = ($149,700 +$60,100) - Common fixed expenses $83,900 = $209,800 - Common fixed expenses Common fixed expenses = $209,800 - $83,900 = $125,900
The Pacific Company manufactures a single product. The following data relate to the year just completed:
During the last year, 5,000 units were produced and 4,800 units were sold. There were no beginning inventories.
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74. Under variable costing, the unit product cost would be: A. $91.00 B. $72.00 C. $58.00 D. $43.00 Under variable costing, the unit product cost is the variable production cost of $43 per unit.
75. The carrying value of finished goods inventory at the end of the year under variable costing would be: A. $8,800 greater than under absorption costing. B. $8,800 less than under absorption costing. C. $5,800 less than under absorption costing. D. The same as absorption costing. Fixed manufacturing overhead per unit = Fixed manufacturing overhead Units produced = $145,000 5,000 units = $29 per unit Change in units in inventory = Units produced - Units sold = 5,000 units - 4,800 units = 200 units Since inventories increased by 200 units, fixed manufacturing overhead is deferred in inventories and absorption costing net operating income will be greater than variable costing net operating income. Manufacturing overhead deferred in inventory = Fixed manufacturing overhead per unit Increase in units in inventory = $29 per unit 200 unit increase = $5,800
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Medium
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76. Under absorption costing, the cost of goods sold for the year would be: A. $206,400 B. $345,600 C. $278,400 D. $360,000
Carr Company produces a single product. During the past year, Carr manufactured 25,000 units and sold 20,000 units. Production costs for the year were as follows:
Sales totaled $850,000, variable selling expenses totaled $110,000, and fixed selling and administrative expenses totaled $170,000. There were no units in beginning inventory. Assume that direct labor is a variable cost.
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77. The contribution margin per unit would be: A. $12.10 B. $22.10 C. $17.70 D. $16.60 Variable expenses per unit:
Selling price per unit = $850,000 20,000 units = $42.50 per unit Unit CM = Selling price per unit - Variable expenses per unit = $42.50 per unit - $25.90 per unit = $16.60 per unit
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78. Under absorption costing, the ending inventory for the year would be valued at: A. $179,500 B. $213,500 C. $222,000 D. $152,000
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79. The net operating income for the year under variable costing would be: A. $28,000 lower than under absorption costing B. $28,000 higher than under absorption costing C. $50,000 lower than under absorption costing D. $50,000 higher than under absorption costing Change in units in inventory = Units produced - Units sold = 25,000 units - 20,000 units = 5,000 unit increase Fixed manufacturing overhead per unit = Fixed manufacturing overhead Units produced = $250,000 25,000 units = $10.00 per unit Since the units produced exceeds the units sold, fixed manufacturing overhead costs will be deferred in inventory and absorption costing net operating income will exceed variable costing net operating income. Manufacturing overhead deferred in inventory = Fixed manufacturing overhead per unit Increase in units in inventory = $10.00 per unit 5,000 units = $50,000
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Favini Company, which has only one product, has provided the following data concerning its most recent month of operations:
80. What is the unit product cost for the month under variable costing? A. $98 B. $125 C. $118 D. $91
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81. What is the unit product cost for the month under absorption costing? A. $91 B. $125 C. $118 D. $98
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82. What is the net operating income for the month under variable costing? A. $11,800 B. $3,700 C. $8,100 D. $(23,600)
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83. What is the net operating income for the month under absorption costing? A. $11,800 B. $3,700 C. $8,100 D. $(23,600)
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Hadlock Company, which has only one product, has provided the following data concerning its most recent month of operations:
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85. The total contribution margin for the month under the variable costing approach is: A. $192,000 B. $128,000 C. $72,800 D. $140,800
Unit CM = Selling price per unit - Variable expenses per unit = $91 per unit - $69 per unit = $22 per unit Contribution margin = Unit CM Unit sales = $22 per unit 6,400 units = $140,800
86. What is the total period cost for the month under the variable costing approach? A. $125,600 B. $108,800 C. $176,800 D. $68,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Hard
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87. What is the net operating income for the month under variable costing? A. $15,200 B. $4,000 C. $(9,200) D. $19,200
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Abe Company, which has only one product, has provided the following data concerning its most recent month of operations:
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Unit CM = Selling price per unit - Variable expenses per unit = $126 per unit - ($81 per unit + $7 per unit) = $126 per unit - $88 per unit = $38 per unit Contribution margin = Unit CM Unit sales = $38 per unit 8,400 units = $319,200
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91. The total gross margin for the month under the absorption costing approach is: A. $319,200 B. $16,800 C. $226,800 D. $256,500
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-02 Prepare income statements using both variable and absorption costing Level: Hard
93. What is the total period cost for the month under the absorption costing approach? A. $156,600 B. $210,000 C. $151,200 D. $366,600
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94. What is the net operating income for the month under variable costing? A. $11,400 B. $16,800 C. $5,400 D. $(12,900)
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95. What is the net operating income for the month under absorption costing? A. $11,400 B. $(12,900) C. $16,800 D. $5,400
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Ingerson Company, which has only one product, has provided the following data concerning its most recent month of operations:
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97. What is the net operating income for the month under variable costing? A. $12,000 B. $8,000 C. $(27,600) D. $4,000
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Jarvinen Company, which has only one product, has provided the following data concerning its most recent month of operations:
The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.
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100. What is the net operating income for the month under variable costing? A. $11,600 B. $2,900 C. $8,700 D. $0
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101. What is the net operating income for the month under absorption costing? A. $2,900 B. $0 C. $8,700 D. $11,600
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DeAnne Company produces a single product. The company's variable costing income statement for August appears below:
The company produced 35,000 units in August and the beginning inventory consisted of 8,000 units. Variable production costs per unit and total fixed costs have remained constant over the past several months.
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102. The value of the company's inventory on August 31 under the absorption costing method is: A. $27,000 B. $42,000 C. $36,000 D. $47,000 Units sold = $600,000 $15 per unit = 40,000 units Units in beginning inventory + Units produced = Units sold + Units in ending inventory 8,000 units + 35,000 units = 40,000 units + Units in ending inventory Units in ending inventory = 8,000 units + 35,000 units - 40,000 units = 3,000 units
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 06-01 Explain how variable costing differs from absorption costing and compute unit product costs under each method Level: Hard
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103. Under absorption costing, for the month ended August 31, the company would report a: A. $20,000 profit B. $5,000 loss C. $35,000 profit D. $5,000 profit
Fahey Company manufactures a single product that it sells for $25 per unit. The company has the following cost structure:
There were no units in beginning inventory. During the year, 18,000 units were produced and 15,000 units were sold.
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104. Under absorption costing, the unit product cost is: A. $9 B. $12 C. $13 D. $16
105. The company's net operating income for the year under variable costing is: A. $60,000 B. $81,000 C. $57,000 D. $69,000
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Galino Company, which has only one product, has provided the following data concerning its most recent month of operations:
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107. The total gross margin for the month under the absorption costing approach is: A. $49,400 B. $18,200 C. $73,400 D. $124,800 Unit product cost under absorption costing:
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Kilihea Corporation produces a single product. The company's absorption costing income statement for July follows:
The company's variable production costs are $20 per unit and its fixed manufacturing overhead totals $80,000 per month.
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110. Net operating income under the variable costing method for July would be: A. $53,000 B. $49,800 C. $61,000 D. $57,000
111. The contribution margin per unit during July was: A. $17 B. $20 C. $25 D. $6
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112. The break-even point in units for the month under variable costing is: A. 6,850 units B. 4,000 units C. 3,200 units D. 5,100 units
Fixed expenses = Fixed selling and administrative expense + Fixed manufacturing overhead = $57,000 + $80,000 = $137,000 Unit sales to break even = Fixed expenses Unit CM = $137,000 $20 = 6,850 units
Eagle Corporation manufactures a picnic table. Shown below is Eagle's cost structure:
In its first year of operations, Eagle produced and sold 10,000 tables. The tables sold for $120 each.
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113. If Eagle had sold only 9,000 tables in its first year, what total amount of cost would have been assigned to the 1,000 tables in finished goods inventory under the absorption costing method? A. $37,100 B. $45,800 C. $58,000 D. $74,200
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114. How would Eagle's variable costing net operating income have been affected in its first year if only 9,000 tables were sold instead of 10,000? A. net operating income would have been $37,100 lower B. net operating income would have been $45,800 lower C. net operating income would have been $56,000 lower D. net operating income would have been $62,000 lower Unit CM = Selling price per unit - Variable expenses per unit = $120 per unit - ($58 per unit + $6 per unit) = $120 per unit - $64 per unit = $56 per unit Change in contribution margin = Unit CM ratio Change in unit sales = $56 per unit 1,000 units = $56,000 Since fixed expenses would not be affected by this change in unit sales, the change in contribution margin would drop directly to the bottom line, decreasing net operating income by $56,000.
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115. How would Eagle's absorption costing net operating income have been affected in its first year if 12,000 tables were produced instead of 10,000 and Eagle still sold 10,000 tables? A. net operating income would not have been affected B. net operating income would have been $27,000 higher C. net operating income would have been $31,500 higher D. net operating income would have been $116,000 lower Absorption costing income statement with production and sales of 10,000 units:
Absorption costing income statement with production of 12,000 units and sales of 10,000 units:
Therefore, net operating income would have been $27,000 higher (= $398,000 - $371,000)
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Green Enterprises produces a single product. The following data were provided by the company for the most recent period:
116. Under variable costing, the unit product cost is: A. $20 B. $18 C. $15 D. $22 Under variable costing, the unit product cost is the variable manufacturing cost.
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117. Under absorption costing, the unit product cost is: A. $20 B. $18 C. $15 D. $25
118. For the period above, one would expect the net operating income under absorption costing to be: A. higher than the net operating income under variable costing. B. lower than the net operating income under variable costing. C. the same as the net operating income under variable costing. D. The relation between absorption costing net operating income and variable costing net operating income cannot be determined. When production exceeds sales, net operating income under absorption costing will always be higher than under variable costing. A portion of fixed manufacturing cost will be deferred in ending inventory rather than being included in the income statement.
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Whitney, Inc., produces a single product. The following data pertain to one month's operations:
119. The carrying value on the balance sheet of the ending finished goods inventory under variable costing would be: A. $16,000 B. $10,000 C. $19,000 D. $12,000
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120. The carrying value on the balance sheet of the ending finished goods inventory under absorption costing would be: A. $16,000 B. $10,000 C. $12,000 D. $21,000
121. For the month referred to above, net operating income under variable costing will be: A. higher than net operating income under absorption costing. B. lower than net operating income under absorption costing. C. the same as net operating income under absorption costing. D. The relation between variable costing and absorption costing net operating income cannot be determined. Since production exceeds sales, the net operating income for variable costing will be lower than for absorption costing. This occurs because under absorption costing, some of the fixed manufacturing overhead cost is deferred in ending inventories.
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Mennig Corporation produces a single product and has the following cost structure:
122. The unit product cost under absorption costing is: A. $92 B. $228 C. $182 D. $85
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123. The unit product cost under variable costing is: A. $182 B. $92 C. $87 D. $94
Byron Company, which has only one product, has provided the following data concerning its most recent month of operations:
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During the last year, Snyder Co. produced 10,000 units of its only product. Costs incurred by Snyder during the year were as follows:
126. The unit product cost under absorption costing was: A. $5.43 B. $3.81 C. $4.71 D. $4.12
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127. The unit product cost under variable costing was: A. $3.20 B. $3.81 C. $4.12 D. $3.51
Deboer Company, which has only one product, has provided the following data concerning its most recent month of operations:
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The following cost formula relates to last year's operations at Lemine Manufacturing Corporation: Y = $84,000 + $60.00X In the formula above, 75% of the fixed cost and 90% of the variable cost are manufacturing costs. Y is the total cost and X is the number of units produced and sold.
130. If Lemine produces and sells 7,000 units, what is the unit product cost under each of the following methods?
A. Option A B. Option B C. Option C D. Option D Variable manufacturing cost = 0.90 $60.00 = $54.00 Fixed manufacturing cost = 0.75 $84,000 = $63,000
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131. If Lemine produces and sells only 6,000 units, what is the unit product cost under each of the following methods?
A. Option A B. Option B C. Option C D. Option D Variable manufacturing cost = 0.90 $60.00 = $54.00 Fixed manufacturing cost = 0.75 $84,000 = $63,000
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Pellman Inc., which produces a single product, has provided the following data for its most recent month of operations:
There were no beginning or ending inventories.
132. The unit product cost under absorption costing was: A. $91 B. $72 C. $25 D. $32
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133. The unit product cost under variable costing was: A. $33 B. $32 C. $72 D. $40
Elbon Company, which has only one product, has provided the following data concerning its most recent month of operations:
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134. What is the net operating income for the month under variable costing? A. $10,200 B. $(19,000) C. $8,800 D. $1,400 Unit product cost under variable costing:
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135. What is the net operating income for the month under absorption costing? A. $1,400 B. $(19,000) C. $8,800 D. $10,200 Unit product cost under absorption costing:
Gordon Company produces a single product that sells for $10 per unit. Last year there were no beginning inventories, 100,000 units were produced, and 80,000 units were sold. The company has the following cost structure:
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136. Net operating income under variable costing would be: A. $114,000 B. $210,000 C. $234,000 D. $330,000 Unit product cost under variable costing:
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137. The carrying value on the balance sheet of the ending finished goods inventory under absorption costing would be: A. $80,000 B. $104,000 C. $110,000 D. $124,000
Clements Company, which has only one product, has provided the following data concerning its most recent month of operations:
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139. The total gross margin for the month under the absorption costing approach is: A. $19,500 B. $51,000 C. $74,000 D. $55,500 Unit product cost under absorption costing:
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Kierst Company, which has only one product, has provided the following data concerning its most recent month of operations:
The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month.
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140. What is the net operating income for the month under variable costing? A. $10,600 B. $16,200 C. $6,200 D. $7,500 Unit product cost under variable costing:
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141. What is the net operating income for the month under absorption costing? A. $7,500 B. $16,200 C. $6,200 D. $10,600 Unit product cost under absorption costing:
Krug Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:
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142. What was the absorption costing net operating income last year? A. $86,200 B. $89,100 C. $88,800 D. $91,400
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143. What was the absorption costing net operating income this year? A. $91,300 B. $93,300 C. $95,900 D. $88,500
Enz Corporation manufactures a variety of products. The following data pertain to the company's operations over the last two years:
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Vanstee Corporation manufactures a variety of products. Variable costing net operating income last year was $60,000 and this year was $67,000. Last year, $37,000 in fixed manufacturing overhead costs were deferred in inventory under absorption costing. This year, $8,000 in fixed manufacturing overhead costs were released from inventory under absorption costing.
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Condit Corporation manufactures a variety of products. Variable costing net operating income was $75,600 last year and was $80,100 this year. Last year, inventory decreased by 3,400 units. This year, inventory increased by 3,000 units. Fixed manufacturing overhead cost is $5 per unit.
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The Rial Company's income statement for June is given below:
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150. If sales for Division F increase $40,000 with a $10,000 increase in the Division's traceable fixed costs, the overall company net operating income should: A. increase by $30,000 B. increase by $6,000 C. increase by $2,889 D. decrease by $4,000 CM ratio = Contribution margin Sales = $88,000 $220,000 = 0.40 Change in contribution margin = CM ratio Change in sales = 0.40 $40,000 = Change in net operating income = Change in contribution margin - Increase in traceable fixed costs = $16,000 - $10,000 = $6,000
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151. During June, the sales clerks in Division F received salaries totaling $35,000. Assume that during July the salaries of these sales clerks are discontinued and instead they are paid a commission of 18% of sales. If sales in Division F increase by $65,000 as a result of this change, the July segment margin for Division F should be: A. $42,700 B. $19,400 C. $54,400 D. $94,000 Projected sales = $220,000 + $65,000 = $285,000 Current variable expense ratio = $132,000 $220,000 = 0.60 Projected variable expense ratio = 0.60 + 0.18 = 0.78 Projected variable expenses = 0.78 $285,000 = $222,300 Projected traceable fixed expenses = $55,000 - $35,000 = $20,000
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152. If the sales in Division L increase by 30% while common fixed expenses in the company decrease by $10,000, the segment margin for Division L should: A. increase by $32,400 B. increase by $10,800 C. decrease by $22,400 D. decrease by $65,600 CM ratio = Contribution margin Sales = $108,000 $180,000 = 0.60 Change in contribution margin = CM ratio Change in sales = 0.60 (0.30 $180,000) = $32,400 The decrease in common fixed expenses has no impact on the Division L segment margin. Therefore, the Division L segment margin will increase by $32,400.
153. A proposal has been made that will lower variable expenses in Division L to 35% of sales. However, this reduction can only be accomplished by a $15,000 increase in Division L's traceable fixed expenses. If this proposal is implemented and if sales remain constant, overall company net operating income should: A. increase by $15,000 B. increase by $24,000 C. decrease by $15,000 D. decrease by $6,000
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Pong Incorporated's income statement for the most recent month is given below.
154. If Store G sales increase by $40,000 with no change in fixed costs, the overall company net operating income should: A. increase by $4,000 B. increase by $8,000 C. increase by $24,000 D. increase by $20,000 CM ratio = Contribution margin Sales = $30,000 $60,000 = 0.50 Change in contribution margin = CM ratio Change in sales = 0.50 $40,000 = $20,000 Since there is no change in fixed costs, the net operating income should increase by $20,000.
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155. The marketing department believes that a promotional campaign for Store H costing $8,000 will increase the store's sales by $15,000. If the campaign is adopted, overall company net operating income should: A. decrease by $5,000 B. decrease by $5,500 C. increase by $2,000 D. increase by $7,000 CM ratio = Contribution margin Sales = $60,000 $90,000 = 2/3 Change in contribution margin = CM ratio Change in sales = 2/3 $15,000 = $10,000 Change in net operating income = Change in contribution margin - Cost of promotional campaign = $10,000 - $8,000 = $2,000
Ring, Incorporated's income statement for the most recent month is given below.
For each of the following questions, refer back to the original data.
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156. If Store Q sales increase by $30,000 with no change in fixed expenses, the overall company net operating income should: A. increase by $3,750 B. increase by $7,500 C. increase by $12,000 D. increase by $18,000 CM ratio = Contribution margin Sales = $160,000 $400,000 = 0.40 Change in contribution margin = CM ratio Change in sales = 0.40 $30,000 = $12,000 Since there is no change in any other cost, the net operating income should increase by $12,000.
157. The marketing department believes that a promotional campaign at Store P costing $5,000 will increase sales by $15,000. If the campaign is adopted, overall company net operating income should: A. decrease by $800 B. decrease by $5,800 C. increase by $5,800 D. increase by $10,000 CM ratio = Contribution margin Sales = $56,000 $200,000 = 0.28 Change in contribution margin = CM ratio Change in sales = 0.28 $15,000 = $4,200 Change in net operating income = Change in contribution margin - Cost of promotional campaign = $4,200 - $5,000 = -$800
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158. A proposal has been made that will lower variable costs in Store P to 65% of sales. However, this reduction can only be accomplished by a $16,000 increase in Store P's traceable fixed costs. If this proposal is implemented and sales remain constant, overall company net operating income should: A. remain the same B. decrease by $2,000 C. increase by $2,000 D. increase by $14,000 Proposed variable expense ratio = 0.65 Proposed variable expenses = 0.65 $200,000 = $130,000
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159. If sales in Store Q increase by $30,000 as a result of a $7,000 increase in traceable fixed costs: A. Store Q's contribution margin should increase by $18,000 B. Store Q's segment margin should increase by $12,000 C. Store Q's contribution margin should increase by $11,000 D. Store Q's segment margin should increase by $5,000 CM ratio = Contribution margin Sales = $160,000 $400,000 = 0.40 Change in contribution margin = CM ratio Change in sales = 0.40 $30,000 = $12,000 Change in net operating income = Change in contribution margin - Increase in traceable fixed costs = $12,000 - $7,000 = $5,000
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160. Currently the sales clerks receive a salary of $17,000 per month in Store Q. A proposal has been made to change from a fixed salary to a sales commission of 5%. Assume that this proposal is adopted, and that as a result sales in Store Q increase by $40,000. The new segment margin for Store Q should be: A. $47,000 B. $61,000 C. $85,000 D. $44,000 Current variable expense ratio = Variable expenses Sales = $240,000 $400,000 = 0.60 Projected variable expense ratio = 0.60 + 0.05 = 0.65 Projected sales = $400,000 + $40,000 = $440,000 Projected variable expenses = 0.65 $440,000 = $286,000 Projected traceable fixed expenses = $110,000 - $17,000 = $93,000
The Gasson Company sells three products, Product A, Product B and Product C, and had sales of $1,000,000 during the month of June. The company's overall contribution margin ratio was 37% and fixed expenses totaled $350,000. Sales were: Product A, $500,000; Product B, $300,000; and Product C, $200,000. Traceable fixed costs were: Product A, $120,000; Product B, $100,000; and Product C, $60,000. The variable expenses of Product A were $300,000 and the variable expenses of Product B were $180,000.
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161. The net operating income for the company as a whole for June was: A. $20,000 B. $90,000 C. $170,000 D. $300,000 Total contribution margin = Overall CM ratio Total sales = 0.37 $1,000,000 = $370,000 Net operating income = Total contribution margin - Total fixed expenses = $370,000 $350,000 = $20,000
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162. The contribution margin ratio for Product C is: A. 75% B. 69% C. 31% D. 25%
Total contribution margin = Overall CM ratio Total sales = 0.37 $1,000,000 = $370,000
Total contribution margin = Total sales - Total variable expenses $370,000 = $1,000,000 - Total variable expenses Total variable expenses = $1,000,000 - $370,000 = $630,000
Total variable expenses = Product A variable expenses + Product B variable expenses + Product C variable expenses $630,000 = $300,000 + $180,000 + Product C variable expenses Product C variable expenses = $630,000 - $300,000 - $180,000 = $150,000
Product C contribution margin = $200,000 - $150,000 = $50,000 Product C CM ratio = Product C contribution margin Product C sales = $50,000 $200,000 = 0.25
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163. The common fixed expense for Gasson Company for the month of June was: A. $350,000 B. $280,000 C. $70,000 D. $20,000 Total traceable fixed expenses = $120,000 + $100,000 + $60,000 = $280,000 Common fixed expenses = Total fixed expenses - Total traceable fixed expenses = $350,000 - $280,000 = $70,000
164. The product line segment margin for Product A for June was: A. $200,000 B. $80,000 C. $65,000 D. $10,000
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165. The contribution margin in dollars for Product B for June was: A. $20,000 B. $111,000 C. $120,000 D. $200,000
Tennison Corporation has two major business segments-Consumer and Commercial. Data for the segment and for the company for May appear below:
In addition, common fixed expenses totaled $371,000 and were allocated as follows: $186,000 to the Consumer business segment and $185,000 to the Commercial business segment.
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166. The contribution margin of the Commercial business segment is: A. $769,000 B. $272,000 C. $313,000 D. $86,000
167. A properly constructed segmented income statement in a contribution format would show that the segment margin of the Consumer business segment is: A. $272,000 B. $270,000 C. $86,000 D. $514,000
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168. A properly constructed segmented income statement in a contribution format would show that the net operating income of the company as a whole is: A. $769,000 B. $104,000 C. $475,000 D. -$267,000
Stryker Corporation has two major business segments-East and West. In April, the East business segment had sales revenues of $500,000, variable expenses of $280,000, and traceable fixed expenses of $80,000. During the same month, the West business segment had sales revenues of $970,000, variable expenses of $514,000, and traceable fixed expenses of $184,000. The common fixed expenses totaled $280,000 and were allocated as follows: $112,000 to the East business segment and $168,000 to the West business segment.
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169. The contribution margin of the West business segment is: A. $456,000 B. $140,000 C. $28,000 D. $676,000
170. A properly constructed segmented income statement in a contribution format would show that the segment margin of the East business segment is: A. $108,000 B. $28,000 C. $140,000 D. $280,000
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171. A properly constructed segmented income statement in a contribution format would show that the net operating income of the company as a whole is: A. $412,000 B. $676,000 C. -$148,000 D. $132,000
Canon Company has two sales areas: North and South. During last year, the contribution margin in the North Area was $50,000, or 20% of sales. The segment margin in the South was $15,000, or 8% of sales. Traceable fixed expenses are $15,000 in the North and $10,000 in the South. During last year, the company reported total net operating income of $26,000.
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172. The total fixed expenses (traceable and common) for Canon Company for the year were: A. $49,000 B. $25,000 C. $24,000 D. $50,000
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Total traceable fixed expenses = North Traceable fixed expenses + South Traceable fixed expenses = $15,000 + $10,000 = $25,000
North Segment margin = North Contribution margin - North Traceable fixed expenses = $50,000 - $15,000 = $35,000
Total Segment margin = North Segment margin + South Segment margin = $35,000 + $15,000 = $50,000
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Net operating income = Segment margin - Common fixed expenses Common fixed expenses = Segment margin - Net operating income = $50,000 - $26,000 = $24,000
The total fixed expenses = Traceable fixed expenses + Common fixed expenses = $25,000 + $24,000 = $49,000
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173. The variable expenses for the South Area for the year were: A. $230,000 B. $185,000 C. $162,500 D. $65,000
South Segment margin = 0.08 South Sales $15,000 = 0.08 South Sales South Sales = $15,000 0.08 = $187,500
South segment margin = South contribution margin - South traceable fixed expenses $15,000 = South contribution margin - $10,000 South contribution margin = $15,000 + $10,000 = $25,000
South Contribution margin = South Sales - South Variable expenses $25,000 = $187,500 - South Variable expenses South Variable expenses = $187,500 - $25,000 = $162,500
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Data for June for Ozaki Corporation and its two major business segments, North and South, appear below:
In addition, common fixed expenses totaled $145,000 and were allocated as follows: $73,000 to the North business segment and $72,000 to the South business segment.
174. The contribution margin of the South business segment is: A. $343,000 B. $63,000 C. $119,000 D. $192,000
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175. A properly constructed segmented income statement in a contribution format would show that the segment margin of the North business segment is: A. $270,000 B. $119,000 C. $207,000 D. $192,000
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176. A properly constructed segmented income statement in a contribution format would show that the net operating income of the company as a whole is: A. $(56,000) B. $89,000 C. $343,000 D. $234,000
Falquez Company sells three products: R, S, and T. Data for activity of Falquez Company during July are as follows:
Common fixed expenses for July amounted to $90,000.
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177. Net operating income for the company was: A. $166,000 B. $256,000 C. $334,000 D. $46,000 Contribution margin = CM ratio Sales = 0.32 $800,000 = $256,000 Net operating income = Contribution margin - Traceable fixed expenses - Common fixed expenses = $256,000 - $120,000 - $90,000 = $46,000
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178. The contribution margin for Product R was: A. $48,750 B. $63,500 C. $51,000 D. $48,000
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Contribution margin = CM ratio Sales = 0.32 $800,000 = $256,000
Total Sales = R Sales + S Sales + T Sales $800,000 = $150,000 + S Sales + $200,000 S Sales = $800,000 - ($150,000 + $200,000) = $450,000
S Contribution margin = S CM ratio S Sales = 0.25 $450,000 = $112,500
T Contribution margin = T CM ratio T Sales = 0.40 $200,000 = $80,000
Total Contribution margin = R Contribution margin + S Contribution margin + T Contribution margin $256,000 = R Contribution margin + $112,500 + $80,000 R Contribution margin = $256,000 - ($112,500 + $80,000) = $63,500
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179. The segment margin for Product T was: A. $45,000 B. $85,000 C. $(10,000) D. $80,000
Total Traceable fixed expenses = R Traceable fixed expenses + S Traceable fixed expenses + T Traceable fixed expenses $120,000 = $25,000 + $60,000 + T Traceable fixed expenses T Traceable fixed expenses = $120,000 - ($25,000 + $60,000) = $35,000
Contribution margin = CM ratio Sales = 0.40 $200,000 = $80,000
T Segment margin = T Contribution margin - T Traceable fixed expenses = $80,000 - $35,000 = $45,000
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Chapter 11 Performance Measurement in Decentralized Organizations

12. Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: A. the problems associated with measuring the asset base are eliminated. B. desirable investment decisions will not be rejected by divisions that already have a high ROI. C. only the gross book value of assets needs to be calculated. D. returns do not increase as assets are depreciated.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Medium Source: CMA, adapted
13. Turnover is computed by dividing average operating assets into: A. invested capital. B. total assets. C. net operating income. D. sales.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Level: Easy
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14. Which of the following statements provide(s) an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROI computation? I. Net book value is consistent with how plant and equipment items are reported on a balance sheet. II. Net book value is consistent with the computation of net operating income, which includes depreciation as an operating expense. III. Net book value allows ROI to decrease over time as assets get older. A. Only I. B. Only III. C. Only I and II. D. Only I and III.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Level: Medium
15. In computing the margin in a ROI analysis, which of the following is used? A. Sales in the denominator B. Net operating income in the denominator C. Average operating assets in the denominator D. Residual income in the denominator
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16. Which of the following is not an operating asset? A. Cash B. Inventory C. Plant equipment D. Common stock
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Level: Easy
17. In determining the dollar amount to use for operating assets in the return on investment (ROI) calculation, companies will generally use either net book value or gross cost of the assets. Which of the following is an argument for the use of gross cost rather than net book value? A. It is consistent with how assets are reported on the balance sheet. B. It eliminates the depreciation method as a factor in ROI calculations. C. It encourages the replacement of old, worn-out equipment. D. all of the above.
18. Which of the following will not result in an increase in the residual income, assuming other factors remain constant? A. An increase in sales. B. An increase in the minimum required rate of return. C. A decrease in expenses. D. A decrease in operating assets.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Medium
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19. All other things the same, which of the following would increase residual income? A. Increase in average operating assets. B. Decrease in average operating assets. C. Increase in minimum required return. D. Decrease in net operating income.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Medium
20. Which of the following three statements are correct? I. A profit center has control over both cost and revenue. II. An investment center has control over invested funds, but not over costs and revenue. III. A cost center has no control over sales. A. Only I B. Only II C. Only I and III D. Only I and II
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: Other topics Level: Medium
21. The purpose of the Data Processing Department of Falena Corporation is to assist the various departments of the corporation with their information needs free of charge. The Data Processing Department would best be evaluated as a: A. cost center. B. revenue center. C. profit center. D. investment center.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: Other topics Level: Easy
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22. Average operating assets are $110,000 and net operating income is $23,100. The company invests $25,000 in new assets for a project that will increase net operating income by $4,750. What is the return on investment (ROI) of the new project? A. 21% B. 19% C. 18.5% D. 20% ROI = Net operating income Average operating assets = $4,750 $25,000 = 19%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Level: Medium
23. Last year a company had stockholder's equity of $160,000, net operating income of $16,000 and sales of $100,000. The turnover was 0.5. The return on investment (ROI) was: A. 10% B. 9% C. 8% D. 7% Margin = Net operating income Sales = $16,000 $100,000 = 16% ROI = Margin Turnover = 16% 0.5 = 8%
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24. Sales and average operating assets for Company P and Company Q are given below:
What is the margin that each company will have to earn in order to generate a return on investment of 20%? A. 12% and 16% B. 50% and 100% C. 8% and 4% D. 2.5% and 5% Company P: Turnover = Sales Average operating assets = $20,000 $8,000 = 2.5 ROI Turnover = Margin = 20% 2.5 = 8% Company Q: Turnover = Sales Average operating assets = $50,000 $10,000 = 5 ROI Turnover = Margin = 20% 5 = 4%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Level: Hard
25. Reed Company's sales last year totaled $150,000 and its return on investment (ROI) was 12%. If the company's turnover was 3, then its net operating income for the year must have been: A. $6,000 B. $2,000 C. $18,000 D. it is impossible to determine from the data given.
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ROI = Margin Turnover Margin = ROI Turnover = 12% 3 = 4% Margin = Net operating income Sales Net operating income = Margin Sales = 4% $150,000 = $6,000
26. A company's current net operating income is $16,800 and its average operating assets are $80,000. The company's required rate of return is 18%. A new project being considered would require an investment of $15,000 and would generate annual net operating income of $3,000. What is the residual income of the new project? A. 20.8% B. 20% C. ($150) D. $300
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Easy
27. Soderquist Corporation uses residual income to evaluate the performance of its divisions. The company's minimum required rate of return is 11%. In April, the Commercial Products Division had average operating assets of $100,000 and net operating income of $9,400. What was the Commercial Products Division's residual income in April? A. -$1,600 B. $1,600 C. $1,034 D. -$1,034
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28. In August, the Universal Solutions Division of Jugan Corporation had average operating assets of $670,000 and net operating income of $77,500. The company uses residual income, with a minimum required rate of return of 12%, to evaluate the performance of its divisions. What was the Universal Solutions Division's residual income in August? A. $2,900 B. -$2,900 C. -$9,300 D. $9,300
29. Division B had an ROI last year of 15%. The division's minimum required rate of return is 10%. If the division's average operating assets last year were $450,000, then the division's residual income for last year was: A. $67,500 B. $22,500 C. $37,500 D. $45,000
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ROI = Net operating income Average operating assets Net operating income = ROI Average operating assets = 15% $450,000 = $67,500
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Hard
30. Garnick Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below:
The delivery cycle time was: A. 3.5 hours B. 8.7 hours C. 34.9 hours D. 36.1 hours Throughput time = Process time + Inspection time + Move time + Queue time = 0.9 hours + 0.3 hours + 3.5 hours + 5.2 hours = 9.9 hours Delivery cycle time = Wait time + Throughput time = 26.2 hours + 9.9 hours = 36.1 hours
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE) Level: Easy
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31. Galanis Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below:
The throughput time was: A. 38.8 hours B. 33.4 hours C. 14.1 hours D. 5.4 hours Throughput time = Process time + Inspection time + Move time + Queue time = 1.4 hours + 0.4 hours + 3.6 hours + 8.7 hours = 14.1 hours
32. Hoster Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below:
The throughput time was: A. 8.9 hours B. 18 hours C. 4.5 hours D. 22.5 hours
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Throughput time = Process time + Inspection time + Move time + Queue time = 1.2 hours + 0.4 hours + 2.9 hours + 4.4 hours = 8.9 hours
33. Botelho Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below:
The delivery cycle time was: A. 33.1 hours B. 3.7 hours C. 12.6 hours D. 30.9 hours Throughput time = Process time + Inspection time + Move time + Queue time = 1.9 hours + 0.3 hours + 3.7 hours + 8.9 hours = 14.8 hours Delivery cycle time = Wait time + Throughput time = 18.3 hours + 14.8 hours = 33.1 hours
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34. Niemiec Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below:
The manufacturing cycle efficiency (MCE) was closest to: A. 0.20 B. 0.06 C. 0.12 D. 0.96 Throughput time = Process time + Inspection time + Move time + Queue time = 1.5 hours + 0.2 hours + 2.6 hours + 8.5 hours = 12.8 hours MCE = Value-added time (Process time) Throughput (manufacturing cycle) time = 1.5 hours 12.8 hours = 0.12
35. Mordue Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below:
The manufacturing cycle efficiency (MCE) was closest to: A. 0.15 B. 0.53 C. 0.05 D. 0.16
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Throughput time = Process time + Inspection time + Move time + Queue time = 1.7 hours + 0.1 hours + 2.4 hours + 6.7 hours = 10.9 hours MCE = Value-added time (Process time) Throughput (manufacturing cycle) time = 1.7 hours 10.9 hours = 0.16
Aide Industries is a division of a major corporation. Data concerning the most recent year appears below:
36. The division's margin is closest to: A. 21.8% B. 5.0% C. 23.0% D. 28.0% Margin = Net operating income Sales = $870,000 $17,400,000 = 5.0%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Level: Easy
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37. The division's turnover is closest to: A. 20.00 B. 4.35 C. 0.22 D. 3.57 Turnover = Sales Average operating assets = $17,400,000 $4,000,000 = 4.35
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38. The division's return on investment (ROI) is closest to: A. 4.1% B. 21.75% C. 17.9% D. 1.1% ROI = Net operating income Average operating assets = $870,000 $4,000,000 = 21.75%
The Reed Division reports the following operating data for the past two years:
The return on investment at Reed was exactly the same in Year 1 and Year 2.
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39. The margin in Year 2 was: A. 48% B. 32% C. 20% D. 10% ROI in Year 1: ROI = Margin Turnover = 16% 2.5 = 40% By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2: ROI = Margin Turnover 40% = Margin 2 Margin = 40% 2 = 20%
40. Sales in Year 2 amounted to: A. $250,000 B. $300,000 C. $325,000 D. $350,000 ROI in Year 1: ROI = Margin Turnover = 16% 2.5 = 40% By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2: Net operating income = ROI Average operating assets = 40% $150,000 = $60,000 Margin = Net operating income Sales Sales = Net operating income Margin = $60,000 20% = $300,000
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41. Average operating assets in Year 1 were: A. $160,000 B. $150,000 C. $125,000 D. $100,000 Margin = Net operating income Sales Sales = Net operating income Margin = $40,000 16% = $250,000 Turnover = Sales Average operating assets Average operating assets = Sales Turnover = $250,000 2.5 = $100,000
42. Net operating income in Year 2 amounted to: A. $60,000 B. $50,000 C. $40,000 D. $35,000 ROI in Year 1: ROI = Margin Turnover = 16% 2.5 = 40% By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2: Net operating income = ROI Average operating assets = 40% $150,000 = $60,000
Beall Industries is a division of a major corporation. Last year the division had total sales of $20,160,000, net operating income of $1,592,640, and average operating assets of $8,000,000.
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43. The division's margin is closest to: A. 39.7% B. 47.6% C. 7.9% D. 19.9% Margin= Net operating income Sales = $1,592,640 $20,160,000 = 7.9%
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45. The division's return on investment (ROI) is closest to: A. 19.9% B. 16.6% C. 1.6% D. 5.7% ROI = Net operating income Average operating assets = $1,592,640 $8,000,000 = 19.9%
The West Division of Shekarchi Corporation had average operating assets of $620,000 and net operating income of $80,100 in March. The minimum required rate of return for performance evaluation purposes is 14%.
46. What was the West Division's minimum required return in March? A. $80,100 B. $86,800 C. $11,214 D. $98,014 Minimum required return = Average operating assets Minimum required rate of return = $620,000 14% = $86,800
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47. What was the West Division's residual income in March? A. -$6,700 B. $6,700 C. -$11,214 D. $11,214
The Consumer Products Division of Weiter Corporation had average operating assets of $570,000 and net operating income of $65,100 in March. The minimum required rate of return for performance evaluation purposes is 12%.
48. What was the Consumer Products Division's minimum required return in March? A. $7,812 B. $76,212 C. $68,400 D. $65,100 Minimum required return = Average operating assets Minimum required rate of return = $570,000 12% = $68,400
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49. What was the Consumer Products Division's residual income in March? A. -$3,300 B. $3,300 C. -$7,812 D. $7,812
Estes Company has assembled the following data for its divisions for the past year:
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50. Division A's sales are: A. $400,000 B. $625,000 C. $125,000 D. $200,000 Turnover = Sales Average operating assets Sales = Average operating assets Turnover = $500,000 1.25 = $625,000
51. Division A's residual income is: A. $20,000 B. $30,000 C. $35,000 D. $45,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Medium
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52. Division B's average operating assets is: A. $81,200 B. $2,080,000 C. $1,333,333 D. $130,000 Turnover = Sales Average operating assets Average operating assets = Sales Turnover = $520,000 4 = $130,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-01 Compute return on investment (ROI) and show how changes in sales; expenses; and assets affect ROI Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Medium
Operating data from Tindall Company for last year follows:
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53. The average operating assets amounted to: A. $600,000 B. $400,000 C. $500,000 D. $800,000 Turnover = Sales Average operating assets Average operating assets = Sales Turnover = $900,000 1.5 = $600,000
54. The residual income was: A. $18,000 B. $10,000 C. $12,000 D. $16,000 Turnover = Sales Average operating assets Average operating assets = Sales Turnover = $900,000 1.5 = $600,000 ROI = Net operating income Average operating assets Net operating income = ROI Average operating assets = 12% $600,000 = $72,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Hard
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55. The margin used in ROI calculations was closest to: A. 18.00% B. 8.00% C. 6.67% D. 15.00% ROI = Margin Turnover Margin = ROI Turnover = 12% 1.5 = 8%
The Baily Division recorded operating data as follows for the past two years:
Baily Division's turnover was exactly the same in both Year 1 and Year 2.
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56. Sales in Year 1 amounted to: A. $400,000 B. $900,000 C. $750,000 D. $1,200,000 Turnover = ROI Margin = 22.5% 15% = 1.5 Turnover = Sales Average operating assets Sales = Average operating assets Turnover = $600,000 1.5 = $900,000
57. The net operating income in Year 1 was: A. $90,000 B. $135,000 C. $140,000 D. $150,000 Turnover = ROI Margin = 22.5% 15% = 1.5 Turnover = Sales Average operating assets Sales = Average operating assets Turnover = $600,000 1.5 = $900,000 Margin = Net operating income Sales Net operating income = Sales Margin = $900,000 15% = $135,000
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58. The margin in Year 2 was: A. 18.75% B. 27.00% C. 22.50% D. 12.00% Turnover in Year 1 = ROI in Year 1 Margin in Year 1 = 22.5% 15% = 1.5 ROI = Margin Turnover Margin in Year 2 = ROI in Year 2 Turnover in Year 2 = ROI in Year 2 Turnover in Year 1 = 18% 1.5 = 12%
59. The average operating assets in Year 2 were: A. $720,000 B. $750,000 C. $800,000 D. $900,000 Turnover in Year1 = ROI in Year 1 Margin in Year 1 = 22.5% 15% = 1.5 Turnover in Year 2 = Sales in Year 2 Average operating assets in Year 2 Average operating assets in Year 2 = Sales in Year 2 Turnover in Year 2 = Sales in Year 2 Turnover in Year 1 = $1,200,000 1.5 = $800,000
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The following data are available for the South Division of Redride Products, Inc. and the single product it makes:
60. How many units must South sell each year to have an ROI of 16%? A. 240,000 B. 1,300,000 C. 52,000 D. 65,000 ROI = Net operating income Average operating assets Net operating income = ROI Average operating assets = 16% $1,500,000 = $240,000 Unit sales to attain a target profit = (Target profit + Fixed expenses) Unit CM = ($240,000 + $280,000) ($20 per unit - $12 per unit) = $520,000 $8 per unit = 65,000 units
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61. If South wants a residual income of $50,000 and the minimum required rate of return is 10%, the annual turnover will have to be: A. 0.32 B. 0.80 C. 1.25 D. 1.50 Turnover = Sales Average operating assets We need to determine the Sales that would generate a residual income of $50,000. Residual income = Net operating income - Average operating assets Minimum required rate of return $50,000 = Net operating income - ($1,500,000 10%) Net operating income = $50,000 + ($1,500,000 10%) = $200,000 Dollar sales to attain a target profit = (Target profit + Fixed expenses) CM ratio = ($200,000 + $280,000) [($20 per unit - $12 per unit)/$20 per unit] = $480,000 ($8 per unit/$20 per unit) = $480,000 0.40 = $1,200,000 Turnover = Sales Average operating assets = $1,200,000 $1,500,000 = 0.8
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-02 Compute residual income and understand its strengths and weaknesses Level: Hard
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The following data pertain to the Whalen Division of Northern Industries.
The margin at Whalen was exactly the same in Year 2 as it was in Year 1.
62. The average operating assets for Year 2 amounted to: A. $400,000 B. $800,000 C. $600,000 D. $500,000 Turnover = Sales Average operating assets Average operating assets = Sales Turnover = $600,000 1.2 = $500,000
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63. The return on investment in Year 1 was: A. 48.00% B. 32.50% C. 7.58% D. 1.92% ROI = Margin Turnover Margin in Year 2 = ROI in Year 2 Turnover in Year 2 = 9.6% 1.2 = 8% ROI in Year 1 = Margin in Year 1 Turnover in Year 1 ROI in Year 1 = Margin in Year 2 Turnover in Year 1 = 8% 6 = 48%
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64. The minimum required rate of return in Year 1 was: A. 18% B. 17% C. 16% D. 15% Margin = Net operating income Sales Net operating income = Sales Margin = $300,000 8% = $24,000 ROI = Margin Turnover Margin in Year 2 = ROI in Year 2 Turnover in Year 2 = 9.6% 1.2 = 8% ROI in Year 1 = Margin in Year 1 Turnover in Year 1 ROI in Year 1 = Margin in Year 2 Turnover in Year 1 = 8% 6 = 48% ROI = Net operating income Average operating assets 48% = $24,000 Average operating assets Average operating assets = $24,000 48% = $50,000 Residual income = Net operating income - Average operating assets Minimum required rate of return $16,000 = $24,000 - $50,000 Minimum required rate of return $50,000 Minimum required rate of return = $24,000 - $16,000 Minimum required rate of return = $8,000 $50,000 = 16%
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Dickonson Products is a division of a major corporation. The following data are for the last year of operations:
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68. The division's residual income is closest to: A. $(320,640) B. $1,119,360 C. $399,360 D. $(2,595,840)
Chace Products is a division of a major corporation. Last year the division had total sales of $21,300,000, net operating income of $575,100, and average operating assets of $5,000,000. The company's minimum required rate of return is 12%.
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72. The division's residual income is closest to: A. $575,100 B. $1,175,100 C. $(1,980,900) D. $(24,900)
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Diorio Corporation keeps careful track of the time required to fill orders. The times recorded for a particular order appear below:
73. The delivery cycle time was: A. 29.1 hours B. 30.6 hours C. 8 hours D. 2.7 hours Throughput time = Process time + Inspection time + Move time + Queue time = 1.4 hours + 0.1 hours + 2.7 hours + 5.3 hours = 9.5 hours Delivery cycle time = Wait time + Throughput time = 21.1 hours + 9.5 hours = 30.6 hours
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74. The throughput time was: A. 4.2 hours B. 9.5 hours C. 30.6 hours D. 26.4 hours Throughput time = Process time + Inspection time + Move time + Queue time = 1.4 hours + 0.1 hours + 2.7 hours + 5.3 hours = 9.5 hours
75. The manufacturing cycle efficiency (MCE) was closest to: A. 0.15 B. 0.05 C. 0.45 D. 0.18 Throughput time = Process time + Inspection time + Move time + Queue time = 1.4 hours + 0.1 hours + 2.7 hours + 5.3 hours = 9.5 hours MCE = Value-added time (Process time) Throughput (manufacturing cycle) time = 1.4 hours 9.5 hours = 0.15
Hart Manufacturing operates an automated steel fabrication process. For one operation, Hart has found that 45% of the total throughput (manufacturing cycle) time is spent on non-valueadded activities. Delivery cycle time is 12 hours, waiting time during the production process is 3 hours, queue time prior to starting the production process is 2 hours, and inspection time is 1.2 hours.
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76. The manufacturing cycle efficiency (MCE) for this operation is: A. 55% B. 45% C. 6.6 hours D. 5.4 hours Percentage of time spent on non-value-added activities = 100% - MCE 45% = 100% - MCE MCE = 100% - 45% = 55%
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE) Level: Medium
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77. What is the move time recorded for the operation? A. 1.5 hours B. 6.5 hours C. 5.8 hours D. 0.85 hours Delivery cycle time = Wait time + Throughput time 12 hours = 3 hours + Throughput time Throughput time = 12 hours - 3 hours = 9 hours Percentage of time spent on non-value-added activities = 100% - MCE 45% = 100% - MCE MCE = 100% - 45% = 55% MCE = Value-added time (Process time) Throughput (manufacturing cycle) time 55% = Process time 9 hours Process time = 9 hours 55% = 4.95 hours Throughput time = Process time + Inspection time + Move time + Queue time 9.00 hours = 4.95 hours + 1.20 hours + Move time + 2.00 hours Move time = 9.00 hours - (4.95 hours + 1.20 hours + 2.00 hours) = 9.00 hours - 8.15 hours = 0.85 hours
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE) Level: Hard
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78. What is the throughput (manufacturing cycle) time for the operation? A. 12.0 hours B. 9.0 hours C. 10.0 hours D. 5.8 hours Delivery cycle time = Wait time + Throughput time 12 hours = 3 hours + Throughput time Throughput time = 12 hours - 3 hours = 9 hours
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11-03 Compute delivery cycle time; throughput time; and manufacturing cycle efficiency (MCE) Level: Hard
Saffer Corporation keeps careful track of the time required to fill orders. Data concerning a particular order appear below:
79. The throughput time was: A. 9.3 hours B. 4.9 hours C. 30.9 hours D. 26 hours Throughput time = Process time + Inspection time + Move time + Queue time = 1.6 hours + 0.2 hours + 3.1 hours + 4.4 hours = 9.3 hours
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80. The manufacturing cycle efficiency (MCE) was closest to: A. 0.17 B. 0.05 C. 0.43 D. 0.19 MCE = Value-added time (Process time) Throughput (manufacturing cycle) time = 1.6 hours 9.3 hours = 0.17
81. The delivery cycle time was: A. 7.5 hours B. 29.1 hours C. 30.9 hours D. 3.1 hours Delivery cycle time = Wait time + Throughput time = 21.6 hours + 9.3 hours = 30.9 hours
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4. When the selling division in an internal transfer has unsatisfied demand from outside customers for the product that is being transferred, then the lowest acceptable transfer price as far as the selling division is concerned is: A. variable cost of producing a unit of product. B. the full absorption cost of producing a unit of product. C. the market price charged to outside customers, less costs saved by transferring internally. D. the amount that the purchasing division would have to pay an outside seller to acquire a similar product for its use.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 11A-05 Determine the range; if any; within which a negotiated transfer price should fall Level: Medium
5. Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:
Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $70 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X can already sell all of the units it can produce on the outside market. What should be the lowest acceptable transfer price from the perspective of Division X? A. $75 B. $66 C. $16 D. $50 Because there is no opportunity cost, the selling division should not accept any transfer price less than its variable cost of $75 per unit.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11A-05 Determine the range; if any; within which a negotiated transfer price should fall Level: Medium
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6. Part WY4 costs the Eastern Division of Tyble Corporation $26 to make-direct materials are $10, direct labor is $4, variable manufacturing overhead is $9, and fixed manufacturing overhead is $3. Eastern Division sells Part WY4 to other companies for $30. The Western Division of Tyble Corporation can use Part WY4 in one of its products. The Eastern Division has enough idle capacity to produce all of the units of Part WY4 that the Western Division would require. What is the lowest transfer price at which the Eastern Division should be willing to sell Part WY4 to the Central Division? A. $30 B. $26 C. $23 D. $27 Because the selling division has ample idle capacity there is no opportunity cost and therefore the lowest price the part should be sold for is the total amount of variable costs that would be incurred, which is $23 per unit (= $10 per unit + $4 per unit + $9 per unit).
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11A-05 Determine the range; if any; within which a negotiated transfer price should fall Level: Easy
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7. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be: A. $600,000 B. $225,000 C. $750,000 D. $135,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11A-05 Determine the range; if any; within which a negotiated transfer price should fall Level: Hard
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8. Division X makes a part that it sells to customers outside of the company. Data concerning this part appear below:
Division Y of the same company would like to use the part manufactured by Division X in one of its products. Division Y currently purchases a similar part made by an outside company for $49 per unit and would substitute the part made by Division X. Division Y requires 5,000 units of the part each period. Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into outside sales. According to the formula in the text, what is the lowest acceptable transfer price from the standpoint of the selling division? A. $50 B. $49 C. $46 D. $30 Since Division X has ample excess capacity and consequently there is no opportunity cost, the lowest price the part should be sold for is the variable cost of $30 per unit.
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9. Division A makes a part that it sells to customers outside of the company. Data concerning this part appear below:
Division B of the same company would like to use the part manufactured by Division A in one of its products. Division B currently purchases a similar part made by an outside company for $38 per unit and would substitute the part made by Division A. Division B requires 5,000 units of the part each period. Division A has ample capacity to produce the units for Division B without any increase in fixed costs and without cutting into sales to outside customers. If Division A sells to Division B rather than to outside customers, the variable cost be unit would be $1 lower. What should be the lowest acceptable transfer price from the perspective of Division A? A. $40 B. $38 C. $30 D. $29 Since Division X has ample excess capacity and consequently there is no opportunity cost, the lowest price the part should be sold for is the variable cost that would be incurred or $29 per unit (= $30 per unit - $1 per unit).
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The Milk Chocolate Division of Mmmm Foods, Inc. had the following operating results last year:
Milk Chocolate expects identical operating results this year. The Milk Chocolate Division has the ability to produce and sell 200,000 pounds of chocolate annually.
10. Assume that the Peanut Butter Division of Mmmm Foods wants to purchase an additional 20,000 pounds of chocolate from the Milk Chocolate Division. Milk Chocolate will be able to increase its profit by accepting any transfer price above: A. $0.40 per pound B. $0.08 per pound C. $0.15 per pound D. $0.25 per pound Because the Milk Chocolate Division has ample excess capacity and consequently there is no opportunity cost, the profit of the division would be increased by any transfer price in excess of its variable cost of $0.25 per pound (= $37,500 150,000 pounds).
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11. Assume that the Milk Chocolate Division is currently operating at its capacity of 200,000 pounds of chocolate. Also assume again that the Peanut Butter Division wants to purchase an additional 20,000 pounds of chocolate from Milk Chocolate. Under these conditions, what amount per pound of chocolate would Milk Chocolate have to charge Peanut Butter in order to maintain its current profit? A. $0.40 per pound B. $0.08 per pound C. $0.15 per pound D. $0.25 per pound Since the Milk Chocolate Division is already operating at capacity, it would have to charge the Peanut Butter Division its current selling price on the outside market of $0.40 per pound to maintain its current profit.
Division X makes a part with the following characteristics:
Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each.
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12. Suppose Division X has ample excess capacity to handle all of Division Y's needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be: A. worse off by $70,000 each period. B. better off by $10,000 each period. C. worse off by $60,000 each period. D. worse off by $20,000 each period. Instead of incurring a cost of $11 per unit, the company would have to incur a cost of $17 per unit to purchase from an outside supplier. Therefore, the company would be worse off by $60,000 per period = ($17 per unit - $11 per unit) 10,000 units per period.
13. Suppose that Division X is operating at capacity and can sell all of its output to outside customers. If Division X sells the parts to Division Y at $17 per unit, the company as a whole will be: A. better off by $10,000 each period. B. worse off by $20,000 each period. C. worse off by $10,000 each period. D. There will be no change in the status of the company as a whole. Instead of being able to sell the units for $18 per unit on the outside market, the company would save $17 per unit transferring them internally. The net effect is a reduction of $10,000 per period = ($18 per unit - $17 per unit) 10,000 units per period.
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Division A produces a part with the following characteristics:
Division B, another division in the company, would like to buy this part from Division A. Division B is presently purchasing the part from an outside source at $28 per unit. If Division A sells to Division B, $1 in variable costs can be avoided.
14. Suppose Division A is currently operating at capacity and can sell all of the units it produces on the outside market for its usual selling price. From the point of view of Division A, any sales to Division B should be priced no lower than: A. $27 B. $29 C. $20 D. $28 Because Division A is already operating at capacity, it would have to charge Division B at least $29 per unit ($30 per unit less the $1 per unit in variable cost that can be avoided by transferring internally rather than selling on the external market).
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15. Suppose that Division A has ample idle capacity to handle all of Division B's needs without any increase in fixed costs and without cutting into its sales to outside customers. From the point of view of Division A, any sales to Division B should be priced no lower than: A. $29 B. $30 C. $18 D. $17 Because Division A has excess operating capacity, the opportunity cost is zero. Hence, Division A would make money charging Division B anything more than $17 per unit ($18 variable cost per unit less the $1 in variable cost that can be avoided by transferring internally rather than selling on the outside market).
The Post Division of the M.T. Woodhead Company produces basic posts which can be sold to outside customers or sold to the Lamp Division of the M.T. Woodhead Company. Last year the Lamp Division bought all of its 25,000 posts from Post at $1.50 each. The following data are available for last year's activities of the Post Division:
The total fixed costs would be the same for all the alternatives considered below.
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16. Suppose there is ample capacity so that transfers of the posts to the Lamp Division do not cut into sales to outside customers. What is the lowest transfer price that would not reduce the profits of the Post Division? A. $0.90 B. $1.35 C. $1.41 D. $1.75 Since the Post Division has excess operating capacity, the opportunity cost is zero. Therefore, the Post Division's profits would not be reduced if the transfer price is at least the variable cost of $0.90 per unit.
17. Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. What is the lowest transfer price that would not reduce the profits of the Post Division? A. $0.90 B. $1.35 C. $1.41 D. $1.75 Total contribution margin on lost sales = ($1.75 per unit - $0.90 per unit) 15,000 units = $0.85 per unit 15,000 units = $12,750 Opportunity cost = Total contribution margin on lost sales Number of units transferred = $12,750 25,000 units = $0.51 per unit Transfer price > Variable cost per unit + Opportunity cost per unit = $0.90 per unit + $0.51 per unit = $1.41 per unit
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18. Suppose the transfers of posts to the Lamp Division cut into sales to outside customers by 15,000 units. Further suppose that an outside supplier is willing to provide the Lamp Division with basic posts at $1.45 each. If the Lamp Division had chosen to buy all of its posts from the outside supplier instead of the Post Division, the change in net operating income for the company as a whole would have been: A. $1,250 decrease B. $10,250 increase C. $1,000 decrease D. $13,750 decrease
The incremental change in net operating income to the company as a whole would be 25,000 units @ $0.04 per unit, for a total of $1,000 in decreased profits.
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The Pole Division of Hillyard Company produces poles which can be sold to outside customers or transferred to the Flag Division of Hillyard Company. Last year the Flag Division bought 50,000 poles from Pole at $2.50 each. The following data are available for last year's activities in the Pole Division:
In order to sell 50,000 poles to the Flag Division, the Pole Division must give up sales of 30,000 poles to outside customers. That is, the Pole Division could sell 380,000 poles each year to outside customers (rather than only 350,000 poles as shown above) if it were not making sales to the Flag Division.
19. According to the formula in the text, what is the lowest acceptable transfer price from the viewpoint of the selling division? A. $2.50 B. $2.00 C. $2.60 D. $3.00 From the perspective of the selling division, profits would increase as a result of the transfer if and only if: Transfer price > Variable cost per unit + Opportunity cost per unit where Opportunity cost per unit = Total contribution margin on lost sales Number of units transferred Total contribution margin on lost sales = ($3 per unit - $2 per unit) 30,000 units = $30,000 Opportunity cost per unit = Total contribution margin on lost sales Number of units transferred = $30,000 50,000 units = $0.60 per unit
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20. Suppose that last year an outside supplier would have been willing to provide the Flag Division with the basic poles at $2.10 each. If Flag had chosen to buy all of its poles from the outside supplier instead of the Pole Division, the change in net operating income for the company as a whole would have been: A. $45,000 increase B. $20,000 decrease C. $20,000 increase D. $25,000 increase
The cost would be lower by $25,000 if the poles were purchased from the outside supplier. Hence, the net operating income would be higher by $25,000.
7. For performance evaluation purposes, variable costs of service departments should be charged to operating departments at the end of the period on the basis of: A. the actual rate based on peak-period service needed. B. the budgeted rate based on peak-period service needed. C. the actual rate based on actual service provided. D. the budgeted rate based on actual service provided.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 11B-06 Charge operating departments for services provided by service departments Level: Medium
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8. Fixed service department costs should be charged to operating departments at the end of the period according to which one of the following the formulas? A. Budgeted rate x Budgeted activity. B. Budgeted rate x Actual activity. C. Actual rate x Actual activity. D. Budgeted total cost x Percentage of peak-period capacity required.
9. Piedmont Company has one service department and three operating departments. During a particular year, a substantial variance developed between the actual costs and the budgeted costs of the service department. For performance evaluation purposes, the variance should be: A. allocated to the operating departments on the basis of usage. B. allocated to operating departments, but on some basis other than usage. C. kept in the service department, and not charged to the operating departments at all. D. shared equitably among all departments.
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10. Matrix Company has a Maintenance Department that maintains the machines in departments A and B. Next year Department A is budgeted to have 6,000 machine-hours of activity and Department B is budgeted to have 24,000 machine-hours. Fixed costs in the Maintenance Department are budgeted at $60,000 per year and are incurred in order to support peak period activity. Department A requires 25% of the peak period capacity and Department B requires 75% of the peak period capacity. How much of the fixed cost of the Maintenance Department should be charged to Department B? A. $45,000 B. $30,000 C. $48,000 D. $60,000 Allocation of Maintenance Department fixed costs to Department B = 75% $60,000 = $45,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11B-06 Charge operating departments for services provided by service departments Level: Medium
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11. Norgaard Corporation has two operating divisions: a Consumer Division and a Commercial Division. The company's Customer Service Department provides services to both divisions. The variable costs of the Customer Service Department are budgeted at $70 per order. The Customer Service Department's fixed costs are budgeted at $245,000 for the year. The fixed costs of the Customer Service Department are determined based on the peak period orders.
At the end of the year, actual Customer Service Department variable costs totaled $348,920 and fixed costs totaled $259,790. The Consumer Division had a total of 1,520 orders and the Commercial Division had a total of 3,360 orders for the year. For performance evaluation purposes, how much actual Customer Service Department cost should NOT be charged to the operating divisions at the end of the year? A. $14,790 B. $22,110 C. $7,320 D. $0
Total spending variance not charged to the operating divisions = $7,320 + $14,790 = $22,110
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12. Fairview Hospital has a Food Services department that provides food for patients in all other departments of the hospital. For May, variable food costs were budgeted at $3 per meal, based on 15,000 meals served during the month. At the end of the month, it was determined that 16,000 meals had been served at a total cost of $54,000. How much food cost should be charged to the other departments at the end of the month? A. $45,000 B. $51,200 C. $48,000 D. $50,625 Total variable cost charged to the operating departments = $3 per meal 16,000 meals = $48,000
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13. Hilbun Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $34 per shipment. The Logistics Department's fixed costs are budgeted at $371,700 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
How much Logistics Department cost should be charged to the Atlantic Division at the end of the year for performance evaluation purposes? A. $187,895 B. $158,100 C. $292,950 D. $205,065
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11B-06 Charge operating departments for services provided by service departments Level: Easy
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14. Janner Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Order Fulfillment Department provides services to both divisions. The variable costs of the Order Fulfillment Department are budgeted at $79 per order. The Order Fulfillment Department's fixed costs are budgeted at $302,500 for the year. The fixed costs of the Order Fulfillment Department are determined based on the peak period orders.
At the end of the year, actual Order Fulfillment Department variable costs totaled $446,016 and fixed costs totaled $320,930. The Consumer Division had a total of 1,540 orders and the Commercial Division had a total of 3,980 orders for the year. For purposes of evaluation performance, how much Order Fulfillment Department cost should be charged to the Commercial Division at the end of the year? A. $526,170 B. $546,235 C. $532,527 D. $552,979
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15. Dunkle Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments during the peak period. Data appear below:
For performance evaluation purposes, how much Maintenance Department cost should be charged to the Paints Division at the end of the year? A. $298,800 B. $498,000 C. $289,000 D. $240,000
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16. The fixed costs of Baxter Company's personnel department are allocated to operating departments on the basis of direct labor-hours. The following data have been provided:
The fixed costs of the personnel department are budgeted at $56,000 per year and are incurred in order to support long-run average requirements. How much of this fixed cost should be charged to Operating Department X at the end of the year for performance evaluation purposes? A. $35,000 B. $33,600 C. $52,500 D. $22,400 Percentage of long-run average requirements for Operating Department X = 15,000 DLHs/(15,000 DLHs + 10,000 DLHs) = 60% Fixed cost of personnel department allocated to Operating Department X = 60% $56,000 = $33,600
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17. Peake Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments during the peak period. Data appear below:
For performance evaluation purposes, how much Maintenance Department cost should be charged to the Stains Division at the end of the year? A. $669,623 B. $637,339 C. $625,500 D. $657,584
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18. Wilson Company maintains a cafeteria for its employees. For June, variable food costs were budgeted at $45 per employee based on a budgeted level of 200 employees in other departments. During the month, an average of 190 employees worked in other departments and actual food costs totaled $9,250. How much food cost should be charged to the other departments at the end of the month for performance evaluation purposes? A. $9,000 B. $9,250 C. $8,550 D. $9,737 Total variable food costs allocated to other departments = 190 employees $45 per employee = $8,550
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19. Omeara Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $48 per shipment. The Logistics Department's fixed costs are budgeted at $431,600 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
At the end of the year, actual Logistics Department variable costs totaled $505,920 and fixed costs totaled $438,080. The Atlantic Division had a total of 3,900 shipments and the Pacific Division had a total of 6,300 shipments for the year. How much Logistics Department cost should be charged to the Pacific Division at the end of the year for performance evaluation purposes? A. $583,059 B. $626,100 C. $641,040 D. $568,976
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20. Herriott Corporation has two operating divisions-an Atlantic Division and a Pacific Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $43 per shipment. The Logistics Department's fixed costs are budgeted at $209,000 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
At the end of the year, actual Logistics Department variable costs totaled $246,960 and fixed costs totaled $217,870. The Atlantic Division had a total of 3,000 shipments and the Pacific Division had a total of 2,600 shipments for the year. For performance evaluation purposes, how much actual Logistics Department cost should NOT be charged to the operating divisions at the end of the year? A. $8,870 B. $15,030 C. $6,160 D. $0
5,600 actual shipments $43 per shipment = $240,800
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Marazzi Corporation has two operating divisions-an East Division and a West Division. The company's Logistics Department services both divisions. The variable costs of the Logistics Department are budgeted at $47 per shipment. The Logistics Department's fixed costs are budgeted at $328,600 for the year. The fixed costs of the Logistics Department are determined based on peak-period demand.
At the end of the year, actual Logistics Department variable costs totaled $333,270 and fixed costs totaled $340,240. The East Division had a total of 2,300 shipments and the West Division had a total of 4,600 shipments for the year.
21. How much Logistics Department cost should be allocated to the West Division at the end of the year? A. $462,650 B. $477,360 C. $435,267 D. $449,007
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22. How much actual Logistics Department cost should not be allocated to the operating divisions at the end of the year? A. $0 B. $20,610 C. $11,640 D. $8,970
6,900 actual shipments $47 per shipment = $324,300
The Juab Company has a Freight Department that delivers scrap metal from salvage yards to its two fabricating facilities--the Emory Plant and the Salina Plant. Operating data for the two plants for last year follow:
Budgeted costs consist of $150,000 fixed costs and $0.50 variable cost for each ton of scrap delivered to the plants. Actual costs incurred in the Freight Department were $52,800 variable, and $165,000 fixed. Juab allocates variable and fixed service department costs separately. The level of budgeted fixed costs is determined by peak-period needs. The Emory Plant requires 40% of the peak-period capacity and the Salina Plant requires 60%.
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23. How much fixed Freight Department costs should be charged to the Emory Plant at the end of the year for performance evaluation purposes? A. $60,000 B. $65,625 C. $66,000 D. $56,250
24. How much variable Freight Department costs should be charged to the Salina Plant at the end of the year for performance evaluation purposes? A. $30,000 B. $33,000 C. $25,000 D. $22,500
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25. How much of the actual Freight Department cost should not be charged to either plant at the end of the year for performance evaluation purposes? A. $0 B. $15,000 C. $17,800 D. $27,800
80,000 actual tons $0.50 per ton = $40,000
Total spending variance not charged to either plant = $12,800 + $15,000 = $27,800
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 11B-06 Charge operating departments for services provided by service departments Level: Hard
Lindon Hospital has a Food Services Department that provides meals for all patients in the hospital. Budgeted and actual meals served for June follow:
The budgeted variable cost of meals for June was $75,000; the actual variable cost of meals for the month was $97,500.
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26. How much Food Services cost should be charged to the Surgical Department at the end of June for performance evaluation purposes? A. $71,250 B. $74,100 C. $50,000 D. $52,000 Budgeted variable cost per meal = $75,000 60,000 meals = $1.25 per meal
27. How much of the actual Food Services cost for June should be kept in the Food Services Department and not be charged to the other departments for performance evaluation purposes? A. $22,500 B. $3,000 C. $3,750 D. $0 Budgeted variable cost per meal = $75,000 60,000 meals = $1.25 per meal
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Gunnison Foods has two operating departments, Processing and Packaging. It also has a Housekeeping Department that serves the two operating departments. The costs of the Housekeeping Department are all variable and are allocated to the operating departments on the basis of the number of employees. Data for last year follow:
The budgeted costs of the Housekeeping Department were $40,800 and the actual costs were $44,980.
28. How much Housekeeping Department cost should have been charged to Packaging at the end of last year for performance evaluation purposes? A. $26,988 B. $25,600 C. $17,340 D. $27,680 Budgeted variable cost per employee = $40,800 (1,700 employees + 3,400 employees) = $8 per employee
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29. How much of the actual Housekeeping Department costs should not have been charged to the operating departments for performance evaluation purposes? A. $4,180 B. $0 C. $18,460 D. $3,380 Budgeted variable cost per employee = $40,800 (1,700 employees + 3,400 employees) = $8 per employee
Boudrie Corporation's Maintenance Department provides services to the company's two operating divisions-the Paints Division and the Stains Division. The variable costs of the Maintenance Department are budgeted based on the number of cases produced by the operating departments. The fixed costs of the Maintenance Department are determined by the number of cases produced by the operating departments during the peak period. Data appear below:
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30. How much Maintenance Department cost should be allocated to the Stains Division at the end of the year? A. $578,735 B. $648,836 C. $564,170 D. $664,006
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31. How much actual Maintenance Department cost should not be allocated to the operating divisions at the end of the year? A. $22,632 B. $0 C. $17,602 D. $5,030
Total spending variance not allocated to the operating divisions = $17,602 + $5,030 = $22,632
Fixed costs budgeted for Caldwell Company's Maintenance Department for the year totaled $480,000; actual fixed costs for the year totaled $510,000. The level of budgeted fixed costs is determined by peak-period requirements. The Milling Department requires 1/3 of the peakperiod capacity and the Assembly Department requires 2/3.
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32. How much fixed maintenance cost should be charged to the Assembly Department at the end of the year for purposes of measuring performance? A. $320,000 B. $340,000 C. $360,000 D. $382,500
33. How much of the actual fixed maintenance cost for the year should be kept in the Maintenance Department and not allocated to the other departments for performance evaluation purposes? A. $0 B. $30,000 C. $90,000 D. $85,000
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Higuera Corporation has two operating divisions-a Consumer Division and a Commercial Division. The company's Order Fulfillment Department provides services to both divisions. The variable costs of the Order Fulfillment Department are budgeted at $28 per order. The Order Fulfillment Department's fixed costs are budgeted at $280,800 for the year. The fixed costs of the Order Fulfillment Department are budgeted based on the peak period orders.
At the end of the year, actual Order Fulfillment Department variable costs totaled $152,810 and fixed costs totaled $286,580. The Consumer Division had a total of 1,720 orders and the Commercial Division had a total of 3,460 orders for the year.
34. How much Order Fulfillment Department cost should be allocated to the Commercial Division at the end of the year? A. $284,441 B. $274,018 C. $293,492 D. $265,360
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35. How much actual Order Fulfillment Department cost should not be allocated to the operating divisions at the end of the year? A. $0 B. $5,780 C. $13,550 D. $7,770
Total spending variance not allocated to the operating divisions = $7,770 + $5,780 = $13,550
Chapter 12 Differential Analysis: The Key to Decision Making

17. Costs which are always relevant in decision making are those costs which are: A. variable. B. avoidable. C. sunk. D. fixed.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Easy
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18. A general rule in relevant cost analysis is: A. variable costs are always relevant. B. fixed costs are always irrelevant. C. differential future costs and revenues are always relevant. D. depreciation is always irrelevant.
19. The opportunity cost of making a component part in a factory with no excess capacity is the: A. variable manufacturing cost of the component. B. fixed manufacturing cost of the component. C. total manufacturing cost of the component. D. net benefit foregone from the best alternative use of the capacity required.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Medium Source: CMA, adapted
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20. Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this decision, which of the following factors is (are) relevant? I. Cost of direct materials used II. Resale value of Machine X A. Only I B. Only II C. Both I and II D. Neither I nor II
21. Which of the following are valid reasons for eliminating a product line? I. The product line's contribution margin is negative. II. The product line's traceable fixed costs plus its allocated common corporate costs are less than its contribution margin. A. Only I B. Only II C. Both I and II D. Neither I nor II
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Knowledge Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Easy
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22. When there is a production constraint, a company should emphasize the products with: A. the highest unit contribution margins. B. the highest contribution margin ratios. C. the highest contribution margin per unit of the constrained resource. D. the highest contribution margins and contribution margin ratios.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 12-05 Determine the most profitable use of a constrained resource Level: Medium
23. In a sell or process further decision, which of the following costs are relevant? I. A variable production cost incurred prior to the split-off point. II. An avoidable fixed production cost incurred after the split-off point. A. Only I. B. Only II. C. Both I and II. D. Neither I nor II.
AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Comprehension Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further Level: Medium
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24. Scherer Corporation is preparing a bid for a special order that would require 720 liters of material U48N. The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter. Material U48N is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.80 per liter. New stocks of the material can be readily purchased for $6.65 per liter. What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order? A. $4,592 B. $4,788 C. $4,456 D. $4,176 The relevant cost is the current market cost which is 720 liters current market $6.65 per liter = $4,788.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Hard Source: CIMA, adapted
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25. Cung Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap? A. -$69,100 B. -$700 C. $29,400 D. -$39,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Medium Source: CIMA, adapted
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26. Liffick Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,200 units of component VFG. Each unit of VFG requires 8 units of material C79 and 6 units of material X70. Data concerning these two materials follow:
Material C79 is in use in many of the company's products and is routinely replenished. Material X70 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VFG? A. $528,551 B. $523,280 C. $476,350 D. $484,455 Materials requirements for C79: 6,200 units of VFG 8 units of C79 per unit of VFG = 49,600 units of C79 Materials requirements for X70: 6,200 units of VFG 6 units of X70 per unit of VFG = 37,200 units of X70
* 37,200 units - 31,060 units = 6,140 units
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27. Schemm Inc. regularly uses material F04E and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material F04E is: A. $5,850 B. $4,200 C. $4,404 D. $4,680 The relevant cost is the current market value: 800 liters current market $5.85 per liter = $4,680
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28. Stampka Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units of component JJF. Each unit of JJF requires 6 units of material O38 and 9 units of material P56. Data concerning these two materials follow:
Material O38 is in use in many of the company's products and is routinely replenished. Material P56 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product JJF? A. $146,790 B. $199,080 C. $155,610 D. $212,340 Materials requirements for O38: 4,200 units of JJF 6 units of O38 per unit of JJF = 25,200 units of O38 Materials requirements for P56: 4,200 units of JJF 9 units of P56 per unit of JJF = 37,800 units of P56
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29. Janus Corporation has in stock 43,700 kilograms of material L that it bought five years ago for $6.10 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $3.23 per kilogram. An alternative would be to use material L in one of the company's current products, E99D, which currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram. Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a substitute for this material in the production of product E99D. However, after modification, 3 kilograms of material L is required for every unit of product E99D that is produced. Janus Corporation has now received a request from a company that could use material L in its production process. Assuming that Janus Corporation could use all of its stock of material L to make product E99D or the company could sell all of its stock of the material at the current scrap price of $3.23 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process? A. $3.23 B. $5.68 C. $6.92 D. $2.45
The value of using material L to produce E99D is greater than its scrap value, so the company would be giving up benefits of $5.68 per kilogram if it were to sell material L. Therefore, the minimum acceptable price is $5.68 per kilogram.
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30. Lampshire Inc. is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $75 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project? A. $1,040 B. $965 C. $1,136 D. $1,160 The company's relevant cost in this case is how much it could earn by selling the 160 kilograms at the discounted price of $6.50 per kilogram, less delivery costs of $75 for all 160 kilograms.
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31. A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would: A. decrease by $20,000 per year B. increase by $20,000 per year C. decrease by $10,000 per year D. increase by $30,000 per year
Net operating income would decline by $10,000 if Product A were dropped.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Easy
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32. The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses:
Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of: A. $100,000 B. $150,000 C. $(140,000) D. $50,000
The company currently has a net operating income of $50,000the combined effect of the apparent $50,000 loss in the North Division and the apparent $100,000 profit in the South Division. Dropping the North Division would reduce net operating income by $190,000. Therefore, after dropping the North Division, the overall company net operating loss would be $140,000 (= $50,000 - $190,000).
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Medium
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33. Power Systems Inc. manufactures jet engines for the United States armed forces on a costplus basis. The production cost of a particular jet engine is shown below:
If production of this engine was discontinued, the production capacity would be idle, and the supervisor would be laid off. The depreciation referred to above is for special equipment that would have no resale value and that does not wear out through use. When asked to bid on the next contract for this engine, the minimum unit price that Power Systems should bid is: A. $408,000 B. $365,000 C. $397,000 D. $385,000 The relevant (avoidable) cost of producing an engine is:
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Medium Source: CMA, adapted
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34. The management of Heider Corporation is considering dropping product J14V. Data from the company's accounting system appear below:
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued. What would be the effect on the company's overall net operating income if product J14V were dropped? A. Overall net operating income would decrease by $55,000. B. Overall net operating income would increase by $160,000. C. Overall net operating income would increase by $55,000. D. Overall net operating income would decrease by $160,000.
Net operating income would decline by $160,000 if Product J14V were dropped. Therefore, the product should not be dropped. Another way of saying this is that the company is actually currently making $160,000 on this product.
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35. Product R19N has been considered a drag on profits at Buzzeo Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below:
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $49,000 of the fixed manufacturing expenses and $30,000 of the fixed selling and administrative expenses are avoidable if product R19N is discontinued. What would be the effect on the company's overall net operating income if product R19N were dropped? A. Overall net operating income would decrease by $59,000. B. Overall net operating income would decrease by $22,000. C. Overall net operating income would increase by $59,000. D. Overall net operating income would increase by $22,000.
Net operating income would decline by $59,000 if Product R19N were dropped. Therefore, the product should not be dropped. Another way of saying this is that the company is actually currently making $59,000 on this product.
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36. Lusk Company produces and sells 15,000 units of Product A each month. The selling price of Product A is $20 per unit, and variable expenses are $14 per unit. A study has been made concerning whether Product A should be discontinued. The study shows that $70,000 of the $100,000 in fixed expenses charged to Product A would continue even if the product was discontinued. These data indicate that if Product A is discontinued, the company's overall net operating income would: A. decrease by $60,000 per month B. increase by $10,000 per month C. increase by $20,000 per month D. decrease by $20,000 per month
Net operating income would decline by $60,000 if Product A were dropped. Therefore, the product should not be dropped. Another way of saying this is that the company is actually making $60,000 on this product.
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37. Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity. Peluso's plant manager is considering making the headlights now being purchased from an outside supplier for $11 each. The Peluso plant has idle equipment that could be used to manufacture the headlights. The design engineer estimates that each headlight requires $4 of direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. Forty percent of the manufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of: A. $(2.00) B. $1.60 C. $0.40 D. $2.80
It would cost the company $0.40 less to make the part than to buy it for $11.00.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-03 Prepare a make or buy analysis Level: Medium Source: CMA, adapted
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38. Part I51 is used in one of Pries Corporation's products. The company makes 18,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to produce this part and sell it to the company for $15.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy part I51 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A. Net operating income would decline by $81,800 per year. B. Net operating income would decline by $55,800 per year. C. Net operating income would decline by $119,800 per year. D. Net operating income would decline by $29,800 per year.
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Net operating income would decline by $119,800 per year if the part were purchased rather than made internally.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-03 Prepare a make or buy analysis Level: Easy
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39. Iwasaki Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 13,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:
Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 1 minute on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 2 minutes on this machine and that has a contribution margin of $5.20 per unit. When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component? A. $22.40 B. $19.80 C. $17.28 D. $19.88
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-03 Prepare a make or buy analysis Level: Hard Source: CIMA, adapted
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40. Part N29 is used by Farman Corporation to make one of its products. A total of 11,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to make the part and sell it to the company for $21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part N29 could be used to make more of one of the company's other products, generating an additional segment margin of $29,000 per year for that product. What would be the impact on the company's overall net operating income of buying part N29 from the outside supplier? A. Net operating income would decline by $38,900 per year. B. Net operating income would increase by $29,000 per year. C. Net operating income would decline by $32,600 per year. D. Net operating income would increase by $19,100 per year.
Net operating income would decline by $32,600 per year if the part were purchased rather than made internally.
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AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-03 Prepare a make or buy analysis Level: Medium
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41. Fillip Corporation makes 4,000 units of part U13 each year. This part is used in one of the company's products. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to make and sell the part to the company for $21.60 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part U13 would be used to make more of one of the company's other products, generating an additional segment margin of $13,000 per year for that product. What would be the impact on the company's overall net operating income of buying part U13 from the outside supplier? A. Net operating income would increase by $13,000 per year. B. Net operating income would decline by $42,600 per year. C. Net operating income would decline by $68,600 per year. D. Net operating income would increase by $9,200 per year.
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Net operating income would increase by $9,200 per year if the part were bought from the outside supplier.
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42. Ethridge Corporation is presently making part H25 that is used in one of its products. A total of 9,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to make and sell the part to the company for $15.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part H25 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A. Net operating income would increase by $24,300 per year. B. Net operating income would decline by $24,300 per year. C. Net operating income would increase by $58,500 per year. D. Net operating income would decline by $58,500 per year.
Net operating income would decline by $24,300 per year if the part were purchased from the outside supplier.
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43. Pitkin Company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows:
An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each. The company estimates that 30% of the fixed manufacturing overhead costs above will continue if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per unit dollar advantage or disadvantage of purchasing the parts from the outside supplier would be: A. $3 advantage B. $1 advantage C. $1 disadvantage D. $4 disadvantage
Because the part could be purchased from the outside supplier for $27, but costs $30 to make internally, purchasing the parts from the outside supplier would yield a $3 advantage.
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44. A customer has requested that Inga Corporation fill a special order for 2,000 units of product K81 for $25.00 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $19.90:
Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product K81 that would increase the variable costs by $1.20 per unit and that would require an investment of $10,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by: A. $13,000 B. $(9,700) C. $10,200 D. $(2,200)
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted Level: Easy
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45. Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each. Product W68's unit product cost is $18.50, determined as follows:
Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product W68 that would increase the variable costs by $7.90 per unit and that would require an investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by: A. $(4,400) B. $69,600 C. $30,600 D. $(24,600)
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted Level: Easy
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46. Ellis Television makes and sells portable televisions. Each television regularly sells for $210. The following cost data per television is based on a full capacity of 10,000 televisions produced each period.
A special order has been received by Ellis for a sale of 2,000 televisions to an overseas customer. The only selling costs that would be incurred on this order would be $6 per television for shipping. Ellis is now selling 6,000 televisions through regular channels each period. What should be the minimum selling price per television in negotiating a price for this special order? A. $174 B. $168 C. $210 D. $180
The selling price should at least cover the variable cost of $174 per unit.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted Level: Medium
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47. An automated turning machine is the current constraint at Naik Corporation. Three products use this constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A. OP, KU, YY B. YY, OP, KU C. KU, YY, OP D. YY, KU, OP
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-05 Determine the most profitable use of a constrained resource Level: Easy
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48. Pappan Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A. RH, GY, QF B. GY, RH, QF C. QF, GY, RH D. RH, QF, GY
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49. Consider the following production and cost data for two products, X and Y:
The company has 15,000 machine hours available each period, and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period? A. $120,000 B. $125,000 C. $135,000 D. $150,000
Since there is unlimited demand for each product, all of the available capacity should be used to produce Product Y. Production of Product Y = 15,000 machine-hours 2 machine-hours per unit = 7,500 units Total contribution margin = $18.00 per unit 7,500 units = $135,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-05 Determine the most profitable use of a constrained resource Level: Hard
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50. The constraint at Mcglathery Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:
Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource? A. $75.26 per unit B. $38.94 per unit C. $11.80 per minute D. $15.20 per minute
The company should be willing to pay up to $11.80 per minute to produce more CR.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource Level: Medium
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51. Wright Company produces products I, J, and K from a single raw material input. Budgeted data for the next month follows:
If the cost of the raw material input is $78,000, which of the products should be processed beyond the split-off point?
Only Product I and Product K should be processed beyond the split-off point.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further Level: Medium
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52. Two products, IF and RI, emerge from a joint process. Product IF has been allocated $25,300 of the total joint costs of $46,000. A total of 2,000 units of product IF are produced from the joint process. Product IF can be sold at the split-off point for $11 per unit, or it can be processed further for an additional total cost of $10,000 and then sold for $13 per unit. If product IF is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point? A. $31,300 less profit B. $6,000 less profit C. $16,000 more profit D. $19,300 more profit
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further Level: Medium Source: CIMA, adapted
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53. Coakley Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets costs $48 to buy from farmers and $10 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $24 or processed further for $16 to make the end product industrial fiber that is sold for $36. The beet juice can be sold as is for $44 or processed further for $28 to make the end product refined sugar that is sold for $70. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A. $(31) B. $(60) C. $(2) D. $(12)
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further Level: Easy
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54. Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets costs $51 to buy from farmers and $14 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20 or processed further for $18 to make the end product industrial fiber that is sold for $45. The beet juice can be sold as is for $41 or processed further for $21 to make the end product refined sugar that is sold for $62. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A. $(104) B. $(4) C. $7 D. $3
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55. Beilke Corporation processes sugar beets in batches that it purchases from farmers for $53 a batch. A batch of sugar beets costs $12 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20 or processed further for $10 to make the end product industrial fiber that is sold for $26. The beet juice can be sold as is for $30 or processed further for $29 to make the end product refined sugar that is sold for $79. Which of the intermediate products should be processed further? A. beet fiber should be processed into industrial fiber; beet juice should be processed into refined sugar B. beet fiber should NOT be processed into industrial fiber; beet juice should be processed into refined sugar C. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be processed into refined sugar D. beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar
Beet fiber should not be processed into industrial fiberit should be sold as is at the split-off point. Beet juice should be processed into refined sugar.
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56. Zollars Cane Products, Inc., processes sugar cane in batches. The company buys a batch of sugar cane from farmers for $70 which is then crushed in the company's plant at a cost of $19. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $21 or processed further for $13 to make the end product industrial fiber that is sold for $42. The cane juice can be sold as is for $44 or processed further for $26 to make the end product molasses that is sold for $88. How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses? A. $26 B. $2 C. $(24) D. $(128)
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57. Kempler Corporation processes sugar cane in batches. The company purchases a batch of sugar cane for $34 from farmers and then crushes the cane in the company's plant at the cost of $15. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $26 or processed further for $17 to make the end product industrial fiber that is sold for $41. The cane juice can be sold as is for $32 or processed further for $22 to make the end product molasses that is sold for $51. Which of the intermediate products should be processed further? A. Cane fiber should be processed into industrial fiber; Cane juice should be processed into molasses B. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses C. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed into molasses D. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses
Cane fiber should NOT be processed into industrial fiber and cane juice should NOT be processed into molasses, both products should be sold as is without further processing.
Two alternatives, code-named X and Y, are under consideration at Afalava Corporation. Costs associated with the alternatives are listed below.
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58. Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.) A. Only materials costs are relevant B. Only processing costs are relevant C. Both materials costs and processing costs are relevant D. Neither materials costs nor processing costs are relevant The materials costs are not relevant because they do not differ between the alternatives. The processing costs are relevant because they do differ between the alternatives.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Easy
59. What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs? A. $103,000 B. $39,000 C. $142,000 D. $122,500
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Zurasky Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:
60. Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.) A. Neither materials costs nor processing costs are relevant B. Only processing costs are relevant C. Only materials costs are relevant D. Both materials costs and processing costs are relevant Materials costs are relevant because they differ between the alternatives. Processing costs are not relevant because they do not differ between the alternatives.
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61. What is the differential cost of Alternative B over Alternative A, including all of the relevant costs? A. $44,000 B. $149,000 C. $105,000 D. $127,000
Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows:
Each month 4,000 spindles of yarn are produced that can either be sold outright or processed into afghans.
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62. If Austin chooses to produce 4,000 afghans each month, the change in the monthly net operating income as compared to selling 4,000 spindles of yarn is: A. $24,000 decrease B. $24,000 increase C. $16,000 decrease D. $16,000 increase
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Medium
63. What is the lowest price Austin should be willing to accept for one afghan as long as it can sell spindles of yarn to the outside market for $12 each? A. $32 B. $30 C. $28 D. $26
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Hard
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The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.
64. The sunk cost in this situation is: A. $720,000 B. $160,000 C. $50,000 D. $100,000 The value of the obsolete microcomputers in inventory, $720,000, is a sunk cost.
65. What is the net advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition? A. $110,000 advantage B. $660,000 disadvantage C. $10,000 advantage D. $60,000 advantage
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66. Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition? A. $100 B. $770 C. $300 D. $210 The selling price of the upgraded computers would have to cover the opportunity cost of $50,000 for selling the computers as is as well as the $100,000 cost of upgrading. The point of indifference would be $150,000 500 computers = $300 per computer.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-01 Identify relevant and irrelevant costs and benefits in a decision Level: Medium
The management of Fries Corporation has been concerned for some time with the financial performance of its product R89H and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $31,000 of the fixed manufacturing expenses and $46,000 of the fixed selling and administrative expenses are avoidable if product R89H is discontinued.
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67. According to the company's accounting system, what is the net operating income earned by product R89H? A. $143,000 B. $8,000 C. $(8,000) D. $(143,000)
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68. What would be the effect on the company's overall net operating income if product R89H were dropped? A. Overall net operating income would decrease by $66,000. B. Overall net operating income would decrease by $8,000. C. Overall net operating income would increase by $66,000. D. Overall net operating income would increase by $8,000.
Overall net operating income would decrease by $66,000.
The management of Freshwater Corporation is considering dropping product C11B. Data from the company's accounting system appear below:
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $122,000 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.
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69. According to the company's accounting system, what is the net operating income earned by product C11B? A. $74,000 B. $(521,000) C. $(74,000) D. $521,000
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70. What would be the effect on the company's overall net operating income if product C11B were dropped? A. Overall net operating income would decrease by $188,000. B. Overall net operating income would increase by $74,000. C. Overall net operating income would decrease by $74,000. D. Overall net operating income would increase by $188,000.
Overall net operating income would decrease by $188,000.
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The Western Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows:
If the new product is added to the existing product line, then sales of existing products will decline. As a consequence, the contribution margin of the other existing product lines is expected to drop $78,000 per year.
71. If the new product is added next year, the increase in net operating income resulting from this decision would be: A. $387,000 B. $261,000 C. $183,000 D. $207,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Hard
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72. What is the lowest selling price per unit among those listed below that could be charged for the new product and still make it economically desirable to add the new product? A. $240 B. $222 C. $291 D. $249
The selling price would have to cover the total cost of $744,000. On a per unit basis, this would be $744,000 3,000 units = $248 per unit. The lowest selling price that is listed that is larger than $248 per unit is $249 per unit.
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Condensed monthly operating income data for Cosmo Inc. for November is presented below. Additional information regarding Cosmo's operations follows the statement.
Three-quarters of each store's traceable fixed expenses are avoidable if the store were to be closed. Cosmo allocates common fixed expenses to each store on the basis of sales dollars. Management estimates that closing the Town Store would result in a ten percent decrease in Mall Store sales, while closing the Mall Store would not affect Town Store sales. The operating results for November are representative of all months.
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73. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase (decrease) in Cosmo's operating income of: A. $4,000 B. $(10,800) C. $(800) D. $(6,000)
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Hard Source: CMA, adapted
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74. Cosmo is considering a promotional campaign at the Town Store that would not affect the Mall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order to increase Town Store sales by ten percent would result in a monthly increase (decrease) in Cosmo's operating income of: A. $(16,800) B. $3,400 C. $7,000 D. $(1,400)
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Hard Source: CMA, adapted
The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows:
If the new cabinets are added, it is expected that the contribution margin of other product lines at the cabinet shop will drop by $20,000 per year.
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75. If the new cabinet product line is added next year, the increase in net operating income resulting from this decision would be: A. $80,000 B. $225,000 C. $125,000 D. $105,000
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-02 Prepare an analysis showing whether a product line or other business segment should be added or dropped Level: Medium
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76. What is the lowest selling price per unit that could be charged for the new cabinets from the following list and still make it economically desirable to add the new product line? A. $160 B. $164 C. $171 D. $151
The selling price would have to cover all of the costs of $795,000. On a per unit basis, the cost is $159 per unit (= $795,000 5,000 units). The lowest selling price on the list that covers the cost is $160 per unit.
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Knaack Corporation is presently making part R20 that is used in one of its products. A total of 18,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to produce and sell the part to the company for $27.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally.
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77. If management decides to buy part R20 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A. Net operating income would increase by $162,000 per year. B. Net operating income would increase by $50,400 per year. C. Net operating income would decline by $50,400 per year. D. Net operating income would decline by $162,000 per year.
Because of the higher cost to purchase, net operating income would decline by $50,400 per year.
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78. In addition to the facts given above, assume that the space used to produce part R20 could be used to make more of one of the company's other products, generating an additional segment margin of $27,000 per year for that product. What would be the impact on the company's overall net operating income of buying part R20 from the outside supplier and using the freed space to make more of the other product? A. Net operating income would increase by $27,000 per year. B. Net operating income would decline by $135,000 per year. C. Net operating income would decline by $23,400 per year. D. Net operating income would decline by $189,000 per year.
Because of the higher cost of purchasing, net operating income would decline by $23,400 per year.
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Meltzer Corporation is presently making part O13 that is used in one of its products. A total of 3,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to produce and sell the part to the company for $27.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided.
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79. If management decides to buy part O13 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income? A. Net operating income would decline by $23,100 per year. B. Net operating income would decline by $26,100 per year. C. Net operating income would decline by $20,100 per year. D. Net operating income would decline by $8,700 per year.
Net operating income would decline by $8,700 per year.
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80. In addition to the facts given above, assume that the space used to produce part O13 could be used to make more of one of the company's other products, generating an additional segment margin of $26,000 per year for that product. What would be the impact on the company's overall net operating income of buying part O13 from the outside supplier and using the freed space to make more of the other product? A. Net operating income would decline by $49,100 per year. B. Net operating income would increase by $26,000 per year. C. Net operating income would increase by $2,900 per year. D. Net operating income would increase by $17,300 per year.
Net operating income would increase by $17,300 per year.
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Ahsan Company makes 60,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:
An outside supplier has offered to sell the company all of these parts it needs for $45.70 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $318,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $3.50 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.
81. How much of the unit product cost of $40.50 is relevant in the decision of whether to make or buy the part? A. $40.50 B. $15.20 C. $27.90 D. $37.00
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82. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? A. $318,000 B. $(522,000) C. $(312,000) D. $(204,000)
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-03 Prepare a make or buy analysis
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83. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 60,000 units required each year? A. $40.50 B. $42.30 C. $45.80 D. $5.30
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-03 Prepare a make or buy analysis Level: Hard
Talboe Company makes wheels which it uses in the production of children's wagons. Talboe's costs to produce 200,000 wheels annually are as follows:
An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $25,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $55,000 per year.
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84. If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a: A. $5,000 decrease B. $50,000 increase C. $70,000 increase D. $40,000 increase
The change in annual net operating income is a $50,000 increase.
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85. What is the highest price that Talboe could pay the outside supplier for each wheel and still be economically indifferent between making or buying the wheels? A. $0.95 B. $1.15 C. $1.00 D. $1.05
The company could pay up to $1.05 per unit ($210,000 200,000 units).
The Rodgers Company makes 27,000 units of a certain component each year for use in one of its products. The cost per unit for the component at this level of activity is as follows:
Rodgers has received an offer from an outside supplier who is willing to provide 27,000 units of this component each year at a price of $25 per component. Assume that direct labor is a variable cost. None of the fixed manufacturing overhead would be avoidable if this component were purchased from the outside supplier.
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86. Assume that there is no other use for the capacity now being used to produce the component and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rodgers Company purchases the components rather than making them internally, what would be the impact on the company's annual net operating income? A. $94,500 increase B. $81,000 decrease C. $237,600 decrease D. $124,000 increase
Expenses would increase by $81,000 (= $675,000 - $594,000), so annual net operating income would decrease by $81,000.
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87. Assume that if the component is purchased from the outside supplier, $35,100 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the component would be rented to another company for $64,800 per year. If Rodgers chooses to buy the component from the outside supplier under these circumstances, then the impact on annual net operating income due to accepting the offer would be: A. $18,900 decrease B. $18,900 increase C. $21,400 decrease D. $21,400 increase
Expenses would decrease by $18,900 (= $629,100 - $610,200), so annual net operating income would increase by $18,900.
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Meacham Company has traditionally made a subcomponent of its major product. Annual production of 20,000 subcomponents results in the following costs:
Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the facilities now being used to make the subcomponent would be rented to another company for $75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the fixed overhead would be unaffected.
88. If Meacham decides to purchase the subcomponent from the outside supplier, how much higher or lower will net operating income be than if Meacham continued to make the subcomponent? A. $45,000 higher B. $70,000 higher C. $30,000 lower D. $70,000 lower
Expenses would decrease by $45,000 (= $530,000 - $485,000), so if Meacham decides to purchase the subcomponent from the outside supplier, its net operating income would be $45,000 higher.
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89. Suppose the price for the subcomponent has not been set. At what price per unit charged by the outside supplier would Meacham be economically indifferent between making the subcomponent or buying it from the outside? A. $30.25 B. $29.25 C. $26.50 D. $31.50
The purchase price at which the company would be indifferent is $30.25 per unit (= $605,000 20,000 units).
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Elhard Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:
The normal selling price of the product is $51.10 per unit. An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.10 less per unit on this order than on normal sales. Direct labor is a variable cost in this company.
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90. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $41.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? A. $2,000 B. $25,200 C. $(8,400) D. $(18,800)
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91. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer? A. $5.40 B. $5.30 C. $9.50 D. $22.00 The opportunity cost is the contribution margin on normal sales.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted Level: Hard
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92. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 200 units for regular customers. The minimum acceptable price per unit for the special order is closest to: A. $38.80 B. $31.20 C. $51.10 D. $45.80
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Minimum acceptable price:
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The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are:
The regular selling price for one Hom is $60. A special order has been received at Varone from the Fairview Company to purchase 8,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labor is a variable cost.
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93. If Varone can expect to sell 32,000 Homs next year through regular channels and the special order is accepted at 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a: A. $52,000 increase B. $80,000 increase C. $24,000 decrease D. $68,000 increase
*Regular selling price: $60 (1 - 15%) = $51 **Variable selling expense: $8 (1 - 25%) = $6
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94. If Varone can expect to sell 32,000 Homs next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order? A. $51.00 B. $48.20 C. $42.50 D. $39.60
*Variable selling expense: $8 (1 - 25%) = $6 Varone is economically indifferent between either accepting or not accepting this special order at the point where revenue equals cost, so the selling price would have to be at least $42.50 per unit (= $340,000 8,000 units).
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95. If Varone has an opportunity to sell 37,960 Homs next year through regular channels and the special order is accepted for 15% off the regular selling price, the effect on net operating income next year due to accepting this order would be a: A. $33,320 decrease B. $33,320 increase C. $35,480 decrease D. $35,480 increase
Since the special order would displace 5,960 units of normal sales, the lost contribution margin would be $101,320 (= $17 per unit 5,960 units).
*Regular selling price: $60 (1 - 15%) = $51 **Variable selling expense: $8 (1 - 25%) = $6 Consequently, accepting the special order would generate incremental net operating income of $68,000, but would displace normal sales generating a contribution margin of $101,320,so the net effect would be a $33,320 decrease (= $101,320 - $68,000) in net operating income.
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The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:
If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order.
96. If Immanuel accepts this special order, the change in monthly net operating income will be a: A. $12,600 increase B. $14,400 increase C. $3,600 increase D. $1,800 increase
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97. At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer? A. $7.40 B. $7.70 C. $6.40 D. $4.90
Immanuel Company is economically indifferent between either accepting or not accepting this special order at the point where revenue equals cost; this would occur when the selling price is $4.90 per unit (= $29,400 6,000 units).
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98. Suppose that regular sales of jigs total 85,000 units per month. All other conditions remain the same. If Immanuel accepts the special order, the change in monthly net operating income will be: A. $14,400 increase B. $7,200 increase C. $3,600 decrease D. $5,400 decrease
The special order would generate incremental net operating income of $12,600, but would displace normal sales with a contribution margin of $5,400. The net effect would be a $7,200 increase (= $12,600 - $5,400) in net operating income.
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Mckerchie Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as G62. Data concerning this product are given below:
The above per unit data are based on annual production of 9,000 units of the component. Direct labor can be considered to be a variable cost.
99. The company has received a special, one-time-only order for 300 units of component G62. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Mckerchie has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go? A. $26 B. $67 C. $55 D. $160 The selling price for the special order would have to at least cover the variable cost per unit of $26.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted Level: Medium Source: CMA, adapted
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100. The company has received a special, one-time-only order for 300 units of component G62. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Mckerchie has no excess capacity and this special order would require 50 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $6,900. What is the minimum price per unit on the special order below which the company should not go? A. $90 B. $23 C. $49 D. $78
The selling price for the special order would have to cover both the $26 variable cost per unit and the opportunity cost of $6,900.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted Level: Hard Source: CMA, adapted
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101. Refer to the original data in the problem. What is the current contribution margin per unit for component G62 based on its selling price of $160 and its annual production of 9,000 units? A. $28 B. $134 C. $93 D. $132
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-04 Prepare an analysis showing whether a special order should be accepted Level: Easy Source: CMA, adapted
The constraint at Dalbey Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:
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102. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A. WP, FE, MB B. FE, WP, MB C. FE, MB, WP D. MB, FE, WP
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103. Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of this constrained resource? A. $12.50 per minute B. $29.96 per unit C. $10.70 per minute D. $71.92 per unit
The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $10.70 per minute for WP.
Marrin Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below:
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104. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A. KZ, XB, ZP B. ZP, KZ, XB C. XB, ZP, KZ D. KZ, ZP, XB
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105. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource? A. $14.30 per minute B. $14.80 per minute C. $33.81 per unit D. $118.69 per unit
The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $14.30 per minute for KZ.
Cress Company makes four products in a single facility. Data concerning these products appear below:
The milling machines are potentially the constraint in the production facility. A total of 11,500 minutes are available per month on these machines.
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106. How many minutes of milling machine time would be required to satisfy demand for all four products? A. 12,000 B. 10,800 C. 9,000 D. 11,500
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107. Which product makes the LEAST profitable use of the milling machines? A. Product A B. Product B C. Product C D. Product D
Product A makes the least profitable use of the milling machines.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-05 Determine the most profitable use of a constrained resource Level: Medium
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108. Which product makes the MOST profitable use of the milling machines? A. Product A B. Product B C. Product C D. Product D
Product D makes the most profitable use of the milling machines.
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109. Up to how much should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent.) A. $7.46 B. $15.20 C. $19.40 D. $0.00
The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $7.46 per minute for Product A.
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Broze Company makes four products in a single facility. These products have the following unit product costs:
Additional data concerning these products are listed below.
The grinding machines are potentially the constraint in the production facility. A total of 53,600 minutes are available per month on these machines. Direct labor is a variable cost in this company.
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110. How many minutes of grinding machine time would be required to satisfy demand for all four products? A. 56,100 B. 40,900 C. 53,600 D. 13,000
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111. Which product makes the LEAST profitable use of the grinding machines? A. Product A B. Product B C. Product C D. Product D
Product C makes the least profitable use of the grinding machines.
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112. Which product makes the MOST profitable use of the grinding machines? A. Product A B. Product B C. Product C D. Product D
Product D makes the MOST profitable use of the grinding machines.
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113. Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.) A. $35.90 B. $0.00 C. $8.58 D. $11.60
The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $8.58 per minute for Product C.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-06 Determine the value of obtaining more of the constrained resource Level: Hard
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Dunford Company produces three products with the following costs and selling prices:
114. If Dunford has a limit of 20,000 direct labor hours but no limit on units sold or machine hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is: A. X, Y, Z B. Y, Z, X C. X, Z, Y D. Z, Y, X
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115. If Dunford has a limit of 30,000 machine hours but no limit on units sold or direct labor hours, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is: A. Y, Z, X B. X, Y, Z C. X, Z, Y D. Z, X, Y
Sohr Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $50 to buy from farmers and $15 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20 or processed further for $19 to make the end product industrial fiber that is sold for $58. The beet juice can be sold as is for $41 or processed further for $23 to make the end product refined sugar that is sold for $58.
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116. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar? A. $(107) B. $(4) C. $9 D. $13
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117. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? A. $(71) B. $(6) C. $(39) D. $(21)
The company incurs a loss of $(6) a unit by processing the intermediate product beet juice into refined sugar rather than selling it as is.
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118. Which of the intermediate products should be processed further? A. beet fiber should NOT be processed into industrial fiber; beet juice should be processed into refined sugar B. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be processed into refined sugar C. beet fiber should be processed into industrial fiber; beet juice should be processed into refined sugar D. beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar
Beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar.
Resendes Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $48 to buy from farmers and $16 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $24 or processed further for $17 to make the end product industrial fiber that is sold for $38. The cane juice can be sold as is for $34 or processed further for $23 to make the end product molasses that is sold for $76.
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119. How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses? A. $16 B. $(104) C. $(6) D. $10
120. How much profit (loss) does the company make by processing the intermediate product cane juice into molasses rather than selling it as is? A. $3 B. $19 C. $(45) D. $(13)
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121. Which of the intermediate products should be processed further? A. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses B. Cane fiber should be processed into industrial fiber; Cane juice should be processed into molasses C. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses D. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed into molasses
Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses.
Dodrill Company makes two products from a common input. Joint processing costs up to the split-off point total $43,200 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the splitoff point or processed further. Data concerning these products appear below:
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122. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point? A. $26,800 B. $7,000 C. $4,800 D. $29,000
123. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point? A. $(4,200) B. $21,800 C. $24,400 D. $(1,600)
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124. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point? A. $26,800 B. $19,800 C. $52,200 D. $45,200
The minimum amount the company should accept for Product X if it is to be sold at the splitoff point is $26,800.
AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Bloom's: Application Learning Objective: 12-07 Prepare an analysis showing whether joint products should be sold at the split-off point or processed further Level: Hard
Payne Company makes two products, M and N, in a joint process. At the split-off point, 40,000 units of M and 50,000 units of N are available each month. Monthly joint production costs are $270,000. Product M can be sold at the split-off point for $4.20 per unit. Product N can either be sold at the split-off point for $3.20 per unit or it can be processed further and sold for $6.30 per unit. If N is processed further, additional processing costs of $2.50 per unit will be incurred.
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125. If N is processed further and then sold, rather than being sold at the split-off point, the change in monthly operating income would be a: A. $30,000 increase B. $315,000 increase C. $155,000 increase D. $125,000 decrease
Total profit = $0.60 per unit 50,000 units = $30,000
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126. What would the selling price per unit of product N need to be after further processing in order for Payne Company to be economically indifferent between selling N at the split-off point or processing N further? A. $8.70 B. $6.70 C. $7.20 D. $5.70 Profit from further processing The company would be indifferent between selling Product N at the split-off point or processing Product N further when the sales value at the split-off point equals the incremental profit that the company could earn by processing further. Sales value at split-off point = Final sales value after further processing - Cost of further processing $3.20 = Final sales value after further processing - $2.50 Final sales value after further processing = $3.20 + $2.50 = $5.70
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Chapter 04 - Process Costing

Chapter 04 Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing

Chapter 04 - Process Costing