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# Chapter 21

1) The four typical categories of cash flow for an investment project are: (1) net initial
investment, (2) net income, (3) after tax cash flow from operations, and (4) after tax
cash flow from terminal disposal of an asset.
A. correct B. false

Chapter 7
3-5 based on the following question
Caan Corporation used the following data to evaluate their current operating system.
The company sells items for \$20 each and used a budgeted selling price of \$20 per
unit.

Actual Budgeted
Units sold 200,000 units 203,000 units
Variable costs \$1,250,000 \$1,500,000
Fixed costs \$ 925,000 \$ 900,000

## 3) What is the static-budget variance of revenues?

A) \$60,000 favorable
B) \$60,000 unfavorable
C) \$6,000 favorable
D) \$6,000 unfavorable
Explanation: B) (200,000 units × \$20) - (203,000 units × \$20) = \$60,000 U

## 4) What is the static-budget variance of variable costs?

A) \$200,000 favorable
B) \$50,000 unfavorable
C) \$250,000 favorable
D) \$250,000 unfavorable
Explanation: C) \$1,250,000 - \$1,500,000= \$250,000 F

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5 What is the static-budget variance of operating income?
A) \$165,000 favorable
B) \$190,000 unfavorable
C) \$60,000 favorable
D) \$60,000 unfavorable
Explanation: A) Actual Static Static-budget
Results Budget Variance
Units sold 200,000 203,000
Revenues \$4,000,000 \$4,060,000 \$(60,000) U
Variable costs 1,250,000 1,500,000 (250,000) F
Contribution margin\$2,750,000 \$2,560,000 190,000 F
Fixed costs 925,000 900,000 25,000 U
Operating income \$1,825,000 \$1,660,000 \$165,000 F

Chapter 8
6 The major challenge when planning fixed overhead is:
A) calculating total costs
B) calculating the cost-allocation rate
C) choosing the appropriate level of capacity
D) choosing the appropriate planning period

## 7 Variable overhead costs can be managed by:

A) reducing the consumption of the cost-allocation base
C) planning for appropriate capacity levels
D) Both A and B are correct.

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8-12 based on the following question
Russo Corporation manufactured 16,000 air conditioners during November. The
overhead cost-allocation base is \$31.50 per machine-hour. The following variable

Actual Budgeted
Production 16,000 units 18,000 units
Machine-hours 7,875 hours 9,000 hours
Variable overhead cost per machine-hour: \$31.00 \$31.50

## 8) What is the actual variable overhead cost?

A) \$244,125
B) \$ 279,000
C) \$248,063
D) \$250,000
Explanation: A) 7,875 mh × \$31.00 = \$244,125

## 9) What is the flexible-budget amount?

A) \$248,033
B) \$252,000
C) \$248,000
D) \$279,000
Explanation: B) 16,000 × (9,000/18,000) × \$31.50 = \$252,000

## 10) What is the variable overhead spending variance?

A) \$4,500 unfavorable
B) \$3,937.50 unfavorable
C) \$4,500 favorable
D) \$3,937.50 favorable
Explanation: D) (\$31.00- \$31.50) × 7,875 mh = \$3,937.50 favorable

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11) What is the variable overhead efficiency variance? (page 289)
A) \$3,937.50 favorable
B) \$3,937.50 unfavorable
C) \$4,500 favorable
D) \$4,500 unfavorable
Explanation: A) [7,875 - (16,000 × 9,000/18,000) mh] × \$31.50 = \$3,937.50
favorable

## 12) What is the total variable overhead variance

A) \$7,875 unfavorable
B) \$3,937.50 f unfavorable
C) \$7,875 favorable
D) \$3,937.50 f favorable
(7,875 mh × \$31.00) - [16,000 × (9,000/18,000) mh × \$31.50]
\$244,125 - \$252,000 = \$7,875 favorable

Chapter 10
13) Which of the following does NOT represent a cause-and-effect relationship?
A) Material costs increase as the number of units produced increases.
B) A company is charged 40 cents for each brochure printed and mailed.
C) Utility costs increase at the same time that insurance costs increase.
D) It makes sense that if a complex product has a large number of parts it will take
longer to assemble than a simple product with fewer parts.

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Presented below are the production data for the first six months of the year for the
mixed costs incurred by Gallup Company.

## Month Cost Units

January \$4,890 4,100
February 4,024 3,200
March 6,480 5,300
April 8,840 7,500
May 5,800 4,800
June 7,336 6,600

## Gallup Company uses the high-low method to analyze mixed costs.

14) How would the cost function be stated?
A) y = \$440 + \$1.12X
B) y = \$3,562.30 + \$0.144X
C) y = \$107.20 + \$1.12
D) y = \$7,850 + \$0.132X
Explanation: A) b = (\$8,840 - \$4,024) / (7,500 - 3,200) = \$1.12
\$8,840 = a + \$1.12 × 7,500
a = \$440
Cost function is Y=\$440 + \$1.12X

## 15) Schotte Manufacturing Company uses two different independent variables

(machine-hours and number of packages) in two different equations to evaluate costs
of the packaging department. The most recent results of the two regressions are as
follows:
Machine-hours:
Variable Coefficient Standard Error t-Value
Constant \$748.30 \$341.20 2.19
Independent Variable \$52.90 \$35.20 1.50
r2 = 0.33
Number of packages:
Variable Coefficient Standard Error t-Value
Constant \$242.90 \$75.04 3.24
Independent Variable \$5.60 \$2.00 2.80
r2 = 0.73

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Required:
a. What are the estimating equations for each cost driver?
b. Which cost driver is best and why?

a. Machine-hours y = \$748.30 + \$52.90X
Number of packages y = \$242.90 + \$5.60X

b. Machine-hours has a low r2 which implies that a small proportion of the variance
is explained by machine-hours, thereby making it less attractive than number of
packages as a cost predictor.
Also, for the independent variable, number of packages, the t-value of 2.80
indicates that a relationship exists between the independent and dependent variables.
For machine-hours, the t-value (1.50) is below 2.00, indicating that the coefficient is
not significantly different from zero and that there may not be a relationship between
the independent and dependent variables.
The t-values of the constant terms (g) for both drivers is greater than 2.00,
therefore, there is no distinguishing characteristic between the constants.
Given the above findings, it appears that number of packages is the best predictor
of costs of the packing department.