PART 3A COST MEASUREMENT CONCEPTS
ANSWERS
[1] Source: CMA 0690 5-27
Answer (A) is incorrect because committed costs
are fixed costs arising from the possession of plant
and equipment and a basic organization. These costs
are affected primarily by long-run decisions as to a
company's desired capacity.
Answer (B) is correct. Discretionary costs are
characterized by uncertainty about the relationship
between input (the costs) and the value of the
related output. Advertising and research are
examples. They should be contrasted with
engineered costs, that is, costs having a clear input-
output relationship (e.g.,
the cost of direct materials).
Answer (C) is incorrect because opportunity cost is
the return available from the next best use of a
resource.
Answer (D) is incorrect because differential
(incremental) costs are those that vary among
decision options.
[2] Source: CMA 1291 3-27
Answer (A) is incorrect because $35 equals direct
labor plus variable manufacturing overhead. It does
not include $6 fixed overhead.
Answer (B) is correct. Conversion costs are incurred
in transforming raw materials into finished
products.
They include direct labor and factory overhead.
Thus,
unit conversion costs equal $41 ($20 direct labor +
$15 variable overhead + $6 fixed overhead).
Answer (C) is incorrect because $48 includes $3 in
variable selling costs and $4 in fixed selling costs.
Answer (D) is incorrect because $67 includes $32 in
direct materials and excludes $6 fixed overhead.
[3] Source: CMA 1291 3-28
Answer (A) is incorrect because $73 includes $15
variable manufacturing overhead and $6 fixed
manufacturing overhead.
Answer (B) is incorrect because $32 does not
include $20 direct labor.
Answer (C) is incorrect because $67 includes $15
variable manufacturing overhead.
Answer (D) is correct. Prime costs are the costs of
direct materials and direct labor. They are costs
that
can be directly associated with the finished
product.
Hence, unit prime costs are $52 ($32 direct
materials
+ $20 direct labor).
[4] Source: CMA 1291 3-29
Answer (A) is incorrect because $38 does not
include $32 direct materials.
Answer (B) is correct. Variable costs vary in direct
proportion to production. Total unit variable costs are
$70 ($32 direct materials + $20 direct labor + $15
variable overhead + $3 variable selling costs).
Answer (C) is incorrect because $52 does not
include $15 variable overhead and $3 variable selling
costs.
Answer (D) is incorrect because $18 does not
include $32 direct materials and $20 direct labor.
[5] Source: CMA 1291 3-30
Answer (A) is incorrect because total estimated costs
are $948,000 [($73 x 12,000) + ($4 x 12,000) +
($3 x 8,000)].
Answer (B) is incorrect because $960,000 is
calculated using 12,000 units to determine variable
selling costs instead of 8,000.
Answer (C) is correct. Manufacturing costs at a
production level of 12,000 units are $73 per unit
($32 + $20 + $15 + $6). Total estimated
manufacturing costs are therefore $876,000 ($73 x
12,000 units). Fixed selling costs are expected to be
$48,000 ($4 x 12,000 units). The anticipated total
variable selling costs are $24,000 ($3 x 8,000 units).
Thus, the total estimated costs are $948,000
($876,000 + $48,000 + $24,000).
Answer (D) is incorrect because $932,000 is
calculated using 8,000 units to determine fixed selling
costs instead of 12,000.
[6] Source: CMA 0692 3-6
Answer (A) is correct. The activity base for overhead
allocation should have a high correlation with the
incurrence of overhead. Thus, the activities of various
departments are usually more appropriate as activity
bases than plant-wide activities, particularly when
products and production activities are not
homogeneous.
Answer (B) is incorrect because the number of
departments is not as important as the relationship
between the costs and activity base.
Answer (C) is incorrect because products require
similar manufacturing effort, they are relatively
homogeneous, and a plant-wide rate might be
adequate.
Answer (D) is incorrect because the degree of
variability in costs is not as important as the
relationship between activity bases and costs, and the
degree to which manufacturing activities are similar
for all products.
[7] Source: CMA 0691 3-22
Answer (A) is incorrect because external failure cost
 is not related to statistical quality control.
Answer (B) is incorrect because internal failure cost
is not related to statistical quality control.
Answer (C) is incorrect because prevention cost is
not related to statistical quality control.
Answer (D) is correct. Statistical quality control
methods attempt to identify nonrandom variations
in
operating activities. The costs of maintaining a
statistical quality control system are appraisal costs
because they are incurred to detect products not
meeting specifications.
[8] Source: CIA 1193 IV-6
Answer (A) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (B) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (C) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (D) is correct. The rework charge for direct
materials, indirect materials (supplies), direct labor,
and overhead applied on the basis of direct labor
cost is $40,300 [$5,000 + $300 + $14,000 + (1.5 x
$14,000)]. If an allowance for rework is included in
a Answer (B) is incorrect because relevant costing
company's manufacturing overhead budget, rework
of defective units is spread over all jobs or batches
as
part of the predetermined overhead application
rate.
Hence, the debit is to overhead control.
[9] Source: CIA 0593 IV-4
Answer (A) is correct. Job-order costing is used by
organizations whose products or services are
readily
identified by individual units or batches. The
advertising agency accumulates its costs by client.
Job-order costing is the most appropriate system
for
this type of nonmanufacturing firm.
Answer (B) is incorrect because operation costing
would most likely be employed by a manufacturer
producing goods that have common characteristics
plus some individual characteristics. This would not
be an appropriate system for an advertising agency
with such a diverse client base.
Answer (C) is incorrect because relevant costing
refers to expected future costs that are considered
in
decision making.
Answer (D) is incorrect because process costing is
employed when a company mass produces a
homogeneous product in a continuous fashion through
a series of production steps.
[10] Source: CIA 0594 III-47
Answer (A) is incorrect because marketing and
distribution costs should be allocated to specific
products.
Answer (B) is correct. ABC determines the activities
that will serve as cost objects and then accumulates a
cost pool for each activity using the appropriate
activity base (cost driver). It is a system that may be
employed with job order or process costing methods.
Thus, when there is only one product, the allocation
of costs to the product is trivial. All of the cost is
assigned to the one product; the particular method
used to allocate the costs does not matter.
Answer (C) is incorrect because ABC determines the
activities that will serve as cost objects and then
accumulates a cost pool for each activity using the
appropriate activity base (cost driver).
Answer (D) is incorrect because, under ABC, a
product is allocated only those costs that pertain to its
production; that is, products are not
cross-subsidized.
[11] Source: CIA 0591 IV-7
Answer (A) is incorrect because process costing is
employed when manufacturing involves a
homogeneous product.
refers to expected future costs that are considered in
decision making.
Answer (C) is incorrect because direct costing
includes only variable manufacturing costs in unit cost.
Answer (D) is correct. The job-order cost system of
accounting is appropriate when products have varied
characteristics and/or when identifiable groupings are
possible, e.g., batches of certain styles or types of
furniture. The unique aspect of job-order costing is
the identification of costs to specific units or a
particular job.
[12] Source: CIA 1188 IV-5
Answer (A) is incorrect because process costing is
more appropriate for the continuous manufacture of
similar products.
Answer (B) is incorrect because transfer pricing is
used when a company transfers products between
two decentralized divisions.
Answer (C) is correct. The job-order cost system of
accounting is appropriate when producing products
with individual characteristics such as in the
manufacturing of custom-built yachts. The unique
aspect of job-order costing is the identification of
costs to specific units or a particular job.

Answer (D) is incorrect because the step-down
method allocates service department costs to the
users of services.
[13] Source: CIA 0589 IV-4
Answer (A) is incorrect because a process costing
system is used for continuous process
manufacturing
of units that are relatively homogeneous (e.g., oil
refining and automobile production).
Answer (B) is correct. The job-order cost system of
accounting is appropriate when producing products
with individual characteristics and/or when
identifiable
groupings are possible, e.g., batches of certain
styles
or types of furniture. The unique aspect of job-order
costing is the identification of costs to specific units
or
a particular job. A job-order system is appropriate
in
consulting because of the substantial variation
between engagements.
Answer (C) is incorrect because an operations
costing system is a hybrid of job-order and process
costing. It is used by companies that manufacture
goods with some common and some dissimilar
characteristics.
Answer (D) is incorrect because a just-in-time
costing system is a hybrid-costing system used in
conjunction with just-in-time production systems. It
eliminates the stores account and detailed
recording
of raw materials and direct labor through various
operations. It also replaces work-in-process with a
raw and in-process inventory.
[14] Source: Publisher
Answer (A) is incorrect because work-in-process is
an inventory or real account.
Answer (B) is correct. The manufacturing account is
an inventory account to which direct materials,
direct
labor, and factory overhead costs are charged as
they are incurred in the production process. The
sum
of these costs plus the cost of BWIP is the total
production cost to be accounted for in any one
period. The total is allocated to goods completed
during the period, i.e., to finished goods, and to
EWIP. The manufacturing account may also be
credited for abnormal spoilage.
Answer (C) is incorrect because work-in-process is
a real account.
Answer (D) is incorrect because the factory
overhead account pools the indirect costs as
incurred
and charges them to production systematically.
[15] Source: Publisher
Answer (A) is incorrect because EWIP is credited
when completed units are transferred but should
never have a credit balance.
Answer (B) is correct. The sum of the debits to WIP
equals total production costs to be accounted for.
Ignoring possible spoilage, production consists either
of goods that have been completed or those still in
process. Accordingly, after the account is credited
for the cost of goods completed and transferred to
the FG inventory, the debit balance in the account is
EWIP.
Answer (C) is incorrect because total production
costs to be accounted for include finished goods as
well as EWIP.
Answer (D) is incorrect because work-in-process is
an asset (inventory) account. Asset accounts are real
accounts that are not closed out at the end of the
period.
[16] Source: Publisher
Answer (A) is incorrect because factory depreciation
and supplies are excellent examples of indirect costs
that are considered overhead.
Answer (B) is incorrect because service department
costs are not directly related to the production of
specific goods; these costs are indirect although
associated with the manufacturing process. Thus, they
can be allocated to the final output.
Answer (C) is incorrect because maintenance costs
are indirectly associated with manufacturing and are
allocated to products through the overhead account.
Answer (D) is correct. Marketing costs, for example,
salaries of sales personnel, sales commissions, and
advertising, are period costs and are expensed as
incurred. They cannot be allocated to the product
because these marketing costs are not associated
with the manufacturing process.
[17] Source: CIA 0591 IV-11
Answer (A) is incorrect because this amount results
from treating the actual overhead and labor hours as
the estimated values and vice versa.
Answer (B) is correct. Applied overhead equals the
actual labor hours (210,000) times the estimated
application rate ($500,000 ・200,000 DLH = $2.50
per direct labor hour), or $525,000. This amount is
$10,000 ($525,000 - $515,000 actual cost) higher
than the actual overhead cost incurred. Hence,
overhead was overapplied by $10,000.
Answer (C) is incorrect because this amount results
from treating actual overhead as the estimated value
and vice versa.
Answer (D) is incorrect because $15,000 is the
excess of actual over estimated overhead.
Additionally, factory overhead is overapplied.

[18] Source: Publisher
Answer (A) is incorrect because 10,250 would have
been produced if overhead had been overapplied
by
$1,500 [($39,500 + $1,500) ・$4].
Answer (B) is incorrect because 10,000 is the result
of dividing budgeted, not applied, overhead by the
application rate.
Answer (C) is incorrect because 9,875 units would
have been produced if $39,500 had been the
amount
of applied overhead.
Answer (D) is correct. Given actual overhead of
$39,500 and underapplied overhead of $1,500,
overhead applied was $38,000 ($39,500 - $1,500).
Overhead is applied at the rate of $4 per unit
($40,000 budgeted overhead ・10,000 budgeted
units). Accordingly, 9,500 units were produced
($38,000 applied overhead ・ $4 per unit
application
rate).
[19] Source: CIA 0591 IV-6
Answer (A) is incorrect because job-order costing is
employed when manufacturing involves different
(heterogeneous) products.
Answer (B) is incorrect because direct costing
includes only variable manufacturing costs in unit
cost.
It may be used whether products are homogeneous
or heterogeneous and with either process or
job-order costing.
Answer (C) is incorrect because absorption costing
includes all manufacturing costs as part of the cost
of
a finished product. It may be used whether
products
are homogeneous or heterogeneous and with either
process or job-order costing.
Answer (D) is correct. Like products that are mass
produced should be accounted for using process
costing techniques to assign costs to products.
Costs
are accumulated by departments or cost centers
rather than by jobs, work-in-process is stated in
terms of equivalent units, and unit costs are
established on a departmental basis. Process
costing
is an averaging process that calculates the average
cost of all units.
[20] Source: Publisher
Answer (A) is incorrect because activity-based
costing may be used with process costing.
Answer (B) is incorrect because activity-based
costing may be used with a job-order costing
system.
Answer (C) is incorrect because activity-based
costing tends to increase cost pools.
Answer (D) is correct. Activity-based costing
analyzes production processes and defines the
activities of which they are composed. It then
accumulates a cost pool for each activity using the
appropriate activity base (cost driver or causal factor
in the incurrence of cost). Whereas a traditional
system might use a single cost pool for a process,
activity-based costing may designate many activities
within that process for the separate accumulation of
costs, each with a different allocation base. The result
is greater accuracy because costs are more likely to
be assigned on a specific cause-and-effect basis than
in less precise traditional systems.
[21] Source: Publisher
Answer (A) is correct. Transferred-in costs are the
costs incurred in prior stages of production. They
pertain to the units of production that move from one
process to another. Thus, they are the basic units
being produced. Direct materials are added to the
basic units during processing.
Answer (B) is incorrect because value is not an issue
in differentiating between transferred-in costs and
other direct materials.
Answer (C) is incorrect because value is not an issue
in differentiating between transferred-in costs and
other direct materials.
Answer (D) is incorrect because direct materials may
be added at the beginning of a process and,
conceivably, the transferred-in materials (i.e., basic
units) could be added to the process after the direct
materials were processed.
[22] Source: Publisher
Answer (A) is incorrect because EUP must be
calculated for conversion costs.
Answer (B) is incorrect because transferred-in costs
are usually included at the beginning of the process.
They consist of costs incurred in preceding
departments and are therefore conceptually similar to
direct materials. Hence, they are separate from other
costs.
Answer (C) is incorrect because direct materials may
be added at various points in the operation. Each
kind of material should be the basis for a separate
EUP calculation.
Answer (D) is correct. Overhead is often applied on
the basis of a direct labor activity base such as hours
or cost. Thus, a single EUP calculation is made for
conversion costs (direct labor and overhead). There
is no basis for separating these costs if they are
incurred uniformly.
[23] Source: Publisher
Answer (A) is correct. Normal spoilage is the
 spoilage that occurs under normal operating
conditions. It is essentially uncontrollable in the
short
run. Normal spoilage arises under efficient
operations
and is treated as a product cost.
Answer (B) is incorrect because, if spoilage occurs
from a special production run, it is abnormal.
Answer (C) is incorrect because spoilage is
abnormal
if it arises under inefficient operations.
Answer (D) is incorrect because, if spoilage is
controllable, it should be controlled under normal
circumstances.
[24] Source: Publisher
Answer (A) is incorrect because the allocation is
solely to cost of goods manufactured when EWIP
has not been inspected.
Answer (B) is incorrect because normal spoilage
costs should be allocated to all good units, i.e., all
units that have passed the inspection point.
Answer (C) is incorrect because, when the
inspection
point is at the end of the process, goods in EWIP
have not yet passed the inspection point.
Answer (D) is correct. Normal spoilage costs should
be allocated to all good units, i.e., all units that
have
passed the inspection point. In typical accounting
problems, the inspection point is at the end of the
process. Therefore, goods in EWIP have not passed
the inspection point. If the inspection point is prior
to
the end of the process, however, and goods in EWIP
have passed the inspection point, a portion of the
normal spoilage costs should be allocated to EWIP.
[25] Source: Publisher
Answer (A) is incorrect because normal spoilage is
allocated to good units as they pass through each
inspection point, not just to goods completed
during
the period.
Answer (B) is incorrect because normal spoilage
must be allocated to all good units as they pass
through each inspection point, not just to units in
EWIP and completed goods based on their relative
values.
Answer (C) is correct. At each inspection point, the
costs of normal spoilage should be allocated to the
good units passing through the inspection point.
Consequently, the cost of moving the good units to
the inspection point includes the direct materials
and
conversion costs of the normally spoiled units as
well
as those of the good units.
Answer (D) is incorrect because normal spoilage is
allocated to good units as they pass through each
inspection point based on their relative values (not
based on units).
[26] Source: Publisher
Answer (A) is incorrect because shrinkage should be
treated as spoilage and charged to the product if
normal and charged as a loss if abnormal.
Answer (B) is incorrect because shrinkage usually
does not result in scrap or waste products that can be
sold and accounted for as a revenue.
Answer (C) is incorrect because shrinkage usually
does not result in scrap or waste products that can be
sold and accounted for as a contra cost.
Answer (D) is correct. Shrinkage consists of
materials lost through the manufacturing process (e.g.,
heat, compression, etc.). It is accounted for in the
same manner as spoilage. If shrinkage is normal, it is
charged to the product. If it is abnormal, it is charged
as period cost (a loss).
[27] Source: CIA 0591 IV-9
Answer (A) is incorrect because perfection standards
are based on perfect operating conditions, and
negative deviation from such standards is expected.
Answer (B) is incorrect because abnormal spoilage
may result from any of a variety of conditions or
circumstances that are usually controllable by first-line
supervisors.
Answer (C) is incorrect because abnormal spoilage
may result from any of a variety of conditions or
circumstances that are not necessarily related to
standards.
Answer (D) is correct. Abnormal spoilage is spoilage
that is not expected to occur under normal, efficient
operating conditions. The cost of abnormal spoilage
should be separately identified and reported to
management. Abnormal spoilage is typically treated
as a period cost (a loss) because of its unusual
nature.
[28] Source: CIA 1185 IV-6
Answer (A) is incorrect because abnormal spoilage
costs are not considered a component of the cost of
good units produced.
Answer (B) is incorrect because abnormal spoilage
costs are not considered a component of the cost of
good units produced.
Answer (C) is correct. Abnormal spoilage is spoilage
that is not expected to occur under normal, efficient
operating conditions. Because of its unusual nature,
abnormal spoilage is typically treated as a loss in the
period in which it is incurred.
Answer (D) is incorrect because abnormal spoilage
costs must be taken out of the manufacturing account.

[29] Source: Publisher
Answer (A) is correct. If scrap material is sold on a
regular basis, e.g., daily, its value should be
recorded
either as a contra cost or as a revenue on a regular
basis, and income will be accounted for properly. If
it
is not sold regularly and not recorded in inventory,
income may be misstated.
Answer (B) is incorrect because failure to record
significant scrap value can misstate income.
Answer (C) is incorrect because the issue is timing
the recognition of scrap value, not the account
used.
Answer (D) is incorrect because this would be an
example of when it is necessary to record the value
of
scrap in inventory.
[30] Source: CIA 1189 IV-7
Answer (A) is correct. Normal rework costs incurred
because of factors common to all units produced
ordinarily are charged to factory overhead control
to
spread the costs over all good units.
Answer (B) is incorrect because, in a process-
costing
application, normal rework is customarily charged
to
overhead. In a job-order costing application, normal
rework costs related to specific jobs are usually
charged to the work-in-process account for the
given
job, not the control account.
Answer (C) is incorrect because rework costs are
not charged to finished goods.
Answer (D) is incorrect because rework costs are
applied to good units or, in the case of abnormal
rework, charged to a loss account.
[31] Source: Publisher
Answer (A) is incorrect because the quantity of
production report is only concerned with the units
put
into and transferred out of the process in the
current
period.
Answer (B) is correct. A quantity of production
report adds the units in BWIP and those entering
the
process during the period, and indicates the
disposition of those units, i.e., the units completed,
spoiled, and in EWIP, respectively.
Answer (C) is incorrect because the cost of goods
manufactured statement gives the cost of goods
completed rather than an accounting for all of the
units that went into the process.
Answer (D) is incorrect because a cost of production
report details the costs debited to and credited from
the manufacturing account.
[32] Source: CIA 0577 IV-3
Answer (A) is incorrect because items such as
additional processing costs, competitive conditions in
sales markets, and the relative contribution margins of
all products derived from the common process must
be considered in setting selling prices.
Answer (B) is incorrect because items such as
additional processing costs, competitive conditions in
sales markets, and the relative contribution margins of
all products derived from the common process must
be considered in determining whether to continue
producing an item.
Answer (C) is incorrect because management of one
department may have no control over joint costs.
Answer (D) is correct. Joint costs are useful for
inventory costing when two or more identifiable
products emerge from a common production
process. The joint costs of production must be
allocated on some basis, such as relative sales value.
[33] Source: CIA 1190 IV-10
Answer (A) is incorrect because a joint product has
relatively significant sales value when compared with
the other products. A by-product is identifiable as an
individual product only upon reaching the split-off
point, and it has relatively minor sales value when
compared to the other products.
Answer (B) is incorrect because products that are
separately identifiable before the production process
are not classified as joint products. Furthermore,
physical volume has nothing to do with determining a
joint product. Some joint products with significant
physical volume may not have significant sales value.
Answer (C) is correct. Joint products are two or
more separate products generated by a common
process from a common input that are not separable
prior to the split-off point. Moreover, in contrast to
by-products, they have significant sales values in
relation to each other either before or after additional
processing.
Answer (D) is incorrect because products do not
have to be salable at the split-off point to be
considered joint products; in fact, many joint
products have to be processed after the split-off
point before they can be sold.
[34] Source: CIA 0585 IV-11
Answer (A) is incorrect because treating the net
realizable value of a by-product as an addition to the
revenues of the other products attributes the
allocation characteristics of main products to
by-products.

Answer (B) is incorrect because the NRV is
ordinarily recognized as a contra cost in the period
the by-product is produced.
Answer (C) is correct. Because of the relatively
small
sales value, a cost-effective allocation method is
used
for by-products. The net realizable value of
by-products is usually deducted from the cost of
the
main products.
Answer (D) is incorrect because recognition of a
separate net realizable value upon which to
allocate
some of the common costs attributes the allocation
characteristics of main products to by-products.
[35] Source: Publisher
Answer (A) is incorrect because cost objectives may
be final, and should be logically related to the cost
pool, preferably on a cause-and-effect basis.
Answer (B) is incorrect because cost objectives may
be intermediate if the costs charged are later
reallocated to another cost objective. Furthermore,
cost objectives should be logically linked with the
cost pool.
Answer (C) is incorrect because cost objectives may
be intermediate or final, and should be logically
related to the cost pool, preferably on a
cause-and-effect basis.
Answer (D) is correct. Cost objectives are the
intermediate and final dispositions of cost pools.
Cost
objectives may be intermediate as cost pools move
from their originating points to the final cost
objectives. Cost objectives may be final, e.g., a job,
product, or process itself, and should be logically
related to the cost pool, preferably on a
cause-and-effect basis.
[36] Source: Publisher
Answer (A) is incorrect because, with respect to
plant-wide and departmental overhead rates, a
plant-wide overhead rate requires only one
overhead
control account. Conversely, using a departmental
overhead rate, a separate overhead cost pool is
required for each production department, which
makes the departmental overhead rate concept
more
complex and more accurate than the plant-wide
overhead rate concept.
Answer (B) is incorrect because, with respect to
plant-wide and departmental overhead rates, a
plant-wide overhead rate requires only one
overhead
control account. Conversely, using a departmental
overhead rate, a separate overhead cost pool is
required for each production department, which
makes the departmental overhead rate concept more
complex and more accurate than the plant-wide
overhead rate concept.
Answer (C) is incorrect because, with respect to
plant-wide and departmental overhead rates, a
plant-wide overhead rate requires only one overhead
control account. Conversely, using a departmental
overhead rate, a separate overhead cost pool is
required for each production department, which
makes the departmental overhead rate concept more
complex and more accurate than the plant-wide
overhead rate concept.
Answer (D) is correct. A firm with a relatively simple
production and accounting system may use only one
overhead control account with one plant-wide
overhead rate. In a more complex environment, the
firm may need a separate overhead cost pool for
each department. The departmental rate is relatively
more complex than the plant-wide rate because of
the number of accounts as well as the number of rates
that must be established prior to implementation. A
departmental rate allows for a more accurate
application of overhead to a specific job when
products require different methods of production;
e.g., product A may require more machine hours but
fewer labor hours than product B. If a plant-wide
rate were used based on labor hours, product A
would not be allocated its fair share of overhead.
[37] Source: CIA 1188 IV-4
Answer (A) is correct. Cost pools are accounts in
which a variety of similar costs are accumulated prior
to allocation to cost objectives. The overhead
account is a cost pool into which various types of
overhead are accumulated prior to their allocation.
Indirect manufacturing costs are an element of
overhead allocated to a cost pool. Ordinarily,
different allocation methods are applied to variable
and fixed costs, thus requiring them to be separated.
Establishing separate pools allows the determination
of dual overhead rates. As a result, the assessment of
capacity costs, the charging of appropriate rates to
user departments, and the isolation of variances are
facilitated.
Answer (B) is incorrect because prime costs are
direct costs, and variable administrative costs are
period, not manufacturing, costs. The question
inquires about indirect manufacturing costs.
Answer (C) is incorrect because establishing a
separate pool for each assembly line worker to
account for wages is not necessary under most cost
allocation schemes.
Answer (D) is incorrect because different allocation
methods are usually applied to variable costs and
fixed costs.
[38] Source: CIA 0581 IV-17
Answer (A) is incorrect because determining the
income of a product or functional unit requires
absorption (full-cost) data.
Answer (B) is correct. In the short run, management
 decisions are made in reference to incremental
costs
without regard to fixed overhead costs because
fixed
overhead cannot be changed in the short run. Thus,
the emphasis in the short run should be on
controllable costs. For example, service department
costs allocated as a part of overhead may not be
controllable in the short run.
Answer (C) is incorrect because determining the
costs for the federal government's cost-plus
contracts
requires absorption (full-cost) data.
Answer (D) is incorrect because absorption costing
(full-costing) is currently required for tax purposes.
[39] Source: CIA 0590 IV-8
Answer (A) is incorrect because the physical units
method is not a service department cost allocation
method. It is a method for allocating joint costs.
Answer (B) is incorrect because the step-down
method gives only partial recognition to services
rendered by service departments to other service
departments. Once a service department's costs
have
been allocated, the costs of subsequent service
departments are not reallocated to it.
Answer (C) is incorrect because the Massachusetts
Formula is only used when there is no apparent
causal relationship. In this instance, the
relationship
between the service departments and the
operating
departments is known.
Answer (D) is correct. The reciprocal method uses
simultaneous equations to allocate costs by
explicitly
recognizing the mutual services rendered among
all
departments. Because it acknowledges all sources
of
cost, it should be used when management is using
the
results of allocations to make decisions on pricing
products.
[40] Source: Publisher
Answer (A) is correct. The most appropriate method
of overhead allocation of variable service
department
costs to production departments is to multiply the
actual usage of the production department by the
predetermined rate. This basis establishes the user
department's responsibility for the actual usage at
the
predetermined rate.
Answer (B) is incorrect because the actual rate may
differ substantially from the estimated rate, and the
production department usually has no control over
the actual rate.
Answer (C) is incorrect because the capacity costs of
the service department should be allocated by a fixed
overhead rate or lump-sum charge based upon the
capacity needs of the production department.
Answer (D) is incorrect because the user department
does not control service department costs.
[41] Source: Publisher
Answer (A) is incorrect because fixed service
department cost allocation based on actual short-run
use transfers any efficiencies or inefficiencies of the
service department to the production department.
Answer (B) is incorrect because allocating fixed
service department costs based on actual short-run
units or actual rates transfers any efficiencies or
inefficiencies of the service department to the
production department.
Answer (C) is correct. The fixed costs of service
departments should be allocated to production
departments in lump-sum amounts on the basis of the
service department's budgeted costs of long-term
capacity to serve. This basis allows the production
department to develop (budget) a certain capacity
needed from the service departments and to agree on
the assessment of costs. Analysis of actual results
permits evaluation of the service departments' ability
to provide the estimated volume of service.
Answer (D) is incorrect because allocating the
service department's actual costs based on actual use
of services transfers any efficiencies or inefficiencies
of the service department to the production
department.
[42] Source: CIA 1190 IV-3
Answer (A) is correct. The cause-and-effect criterion
seeks a relationship between cost and the cost
objective (for example, an operating division) such
that changes in total costs can be predicted based on
activities of the cost objective. Thus, the number of
employees in an operating division is likely to
correlate with incurrence of costs by the personnel
department.
Answer (B) is incorrect because square footage
would be more appropriate for allocating building and
maintenance costs than personnel costs.
Answer (C) is incorrect because total service years
of employees in each division is not a basis for
predicting changes in personnel department costs.
Answer (D) is incorrect because total book value of
identifiable division assets is not a basis for predicting
changes in personnel department costs.
[43] Source: CMA 1295 3-14
Answer (A) is incorrect because external failure
occurs after the product is shipped; thus, statistical
quality control is not an external failure cost.

Answer (B) is incorrect because internal failure
costs
arise after poor quality has been found; statistical
quality control is designed to detect quality
problems.
Answer (C) is incorrect because statistical quality
control is not a training cost.
Answer (D) is correct. SMA 4-R lists four categories
of quality costs: prevention, appraisal, internal
failure,
and external failure (lost opportunity). Appraisal
costs
include quality control programs, inspection, and
testing.
[44] Source: CMA 1290 3-1
Answer (A) is incorrect because theoretical capacity
assumes all personnel and equipment will operate
at
peak efficiency and total plant capacity will be
used.
Answer (B) is correct. Practical capacity is the
maximum level at which output is produced
efficiently. It includes consideration of idle time
caused by human and equipment inefficiencies but
not
by inadequate sales demand. Practical capacity
exceeds the other commonly used denominator
levels
included in the calculation of the fixed factory
overhead rate. Because practical capacity will
almost
always exceed the actual use of capacity, it will
result
in an unfavorable production volume variance.
Moreover, this variance (the difference between
budgeted fixed overhead and the fixed overhead
applied based on standard input allowed for the
actual output) will be greatest given a practical
capacity measure. The unfavorable production
volume variance is charged to income summary, so
the effect of using a larger denominator volume is
the
more rapid write-off of fixed overhead (practical
capacity may be used for federal income tax
purposes).
Answer (C) is incorrect because practical capacity
ignores demand.
Answer (D) is incorrect because the production
volume to meet a given production level may be
more
or less than practical capacity. Horngren and Foster
call this volume the master-budget volume.
[45] Source: CMA 1290 3-12
Answer (A) is correct. Full absorption costing treats
fixed factory overhead costs as product costs. Thus,
inventory and cost of goods sold include (absorb)
fixed factory overhead.
Answer (B) is incorrect because marginal costing
considers only the incremental costs of producing an
additional unit of product. In most cases marginal
costs are variable costs.
Answer (C) is incorrect because direct (variable)
costing treats only variable costs as product costs.
Answer (D) is incorrect because direct (variable)
costing treats only variable costs as product costs.
[46] Source: CMA 0692 3-5
Answer (A) is incorrect because behavior in
response to volume changes is a factor only if the
cost object is a product.
Answer (B) is incorrect because the timing of an
expense is not a means of classifying a cost as direct
or indirect.
Answer (C) is correct. A direct cost can be
specifically associated with a single cost object in an
economically feasible way. An indirect cost cannot be
specifically associated with a single cost object. Thus,
the specific cost object influences whether a cost is
direct or indirect. For example, a cost might be
directly associated with a single plant. The same cost,
however, might not be directly associated with a
particular department in the plant.
Answer (D) is incorrect because both direct and
indirect costs can be either avoidable or unavoidable,
depending upon the cost object.
[47] Source: CMA 1292 3-1
Answer (A) is incorrect because a revenue center is
evaluated on the basis of revenue generated, without
regard to costs.
Answer (B) is correct. Cost allocation is the process
of assigning and reassigning costs to cost objects. It is
used for those costs that cannot be directly
associated with a specific cost object. Cost allocation
is often used for purposes of measuring income and
assets for external reporting purposes. Cost
allocation is less meaningful for internal purposes
because responsibility accounting systems emphasize
controllability, a process often ignored in cost
allocation.
Answer (C) is incorrect because cost allocation is not
necessary for cash budgeting and controlling
expenditures.
Answer (D) is incorrect because allocations are not
needed for variable costing, which concerns direct,
not indirect, costs.
[48] Source: CMA 1292 3-3
Answer (A) is incorrect because the graphic
approach can be used to estimate a linear function.
Answer (B) is incorrect because simple regression,
which is based on one independent variable, is the
best means of expressing a linear cost function.
 Answer (C) is incorrect because the high-low
method, although unsophisticated, can often give a
good approximation of a linear cost function.
Answer (D) is correct. Regression analysis can be
used to find an equation for the linear relationship
among variables. However, multiple regression is
not
used to generate an equation of the type Y = a +
bX
because multiple regression has more than one
independent variable. In other words, a multiple
regression equation would take the form: Y = a +
bX1 + cX2 + dX3 + . . . .
[49] Source: CMA 1292 3-4
Answer (A) is correct. Joint products are created
from processing a common input. Common costs
are
incurred prior to the split-off point and cannot be
identified with a particular joint product. As a
result,
common costs are irrelevant to the timing of sale.
However, separable costs incurred after the split-off
point are relevant because, if incremental revenues
exceed the separable costs, products should be
processed further, not sold at the split-off point.
Answer (B) is incorrect because joint costs
(common
costs) have no effect on the decision as to when to
sell a product.
Answer (C) is incorrect because sales salaries for
the
production period do not affect the decision.
Answer (D) is incorrect because purchase costs are
joint costs.
[50] Source: CMA 0693 3-5
Answer (A) is incorrect because overhead costs as
well as prime costs (direct materials and labor) are
included in inventory.
Answer (B) is incorrect because materials costs are
also included.
Answer (C) is incorrect because inventory costs are
expensed when the goods are sold, not when they
are transferred to finished goods.
Answer (D) is correct. Under an absorption costing
system, inventoriable (product) costs include all
costs
necessary for good production. These include direct
materials and conversion costs (direct labor and
overhead). Both fixed and variable overhead is
included in inventory under an absorption costing
system. Inventoriable costs are treated as assets
until
the products are sold because they represent
future
economic benefits. These costs are expensed at the
time of sale.
[51] Source: CMA 1293 3-9
Answer (A) is incorrect because operation costing
differs from process costing in the treatment of
materials.
Answer (B) is correct. Operation costing is a hybrid
of job-order and process costing systems wherein
materials are allocated on the basis of batches of
production. It is used by companies that manufacture
goods that undergo some similar and some dissimilar
processes. Operation costing accumulates total
conversion costs and determines a unit conversion
cost for each operation. However, direct materials
costs are charged specifically to products or batches
as in job-order systems.
Answer (C) is incorrect because operation costing
differs from process costing in the treatment of
materials.
Answer (D) is incorrect because overhead allocations
are made in operation costing.
[52] Source: CMA 0694 3-5
Answer (A) is incorrect because rent is an example
of fixed factory overhead.
Answer (B) is incorrect because property taxes are
an example of fixed factory overhead.
Answer (C) is incorrect because depreciation is an
example of fixed factory overhead.
Answer (D) is correct. A fixed cost is one that
remains unchanged within the relevant range for a
given period despite fluctuations in activity. Such
items as rent, property taxes, depreciation, and
supervisory salaries are normally fixed costs because
they do not vary with changes in production. Power
costs, however, are at least partially variable because
they increase as usage increases.
[53] Source: CMA 0694 3-8
Answer (A) is incorrect because committed costs
have not been amortized.
Answer (B) is incorrect because discretionary costs
are those that do not have a clear cause and effect
relationship between inputs and outputs.
Answer (C) is incorrect because engineered costs are
those that have a measurable relationship between
inputs and outputs.
Answer (D) is correct. Committed costs result when
a going concern holds fixed assets such as property,
plant, and equipment. The related committed costs
include depreciation, long-term lease payments, and
insurance. Such costs establish the present level of
operating capacity and cannot be altered in the short
run.
[54] Source: CMA 0694 3-9
Answer (A) is incorrect because variable costs are
 fixed per unit; they do not fluctuate. Fixed costs per
unit change as production changes.
Answer (B) is correct. Fixed costs remain
unchanged
within the relevant range for a given period despite
fluctuations in activity, but per unit fixed costs do
change as the level of activity changes. Thus, fixed
costs are fixed in total but vary per unit as activity
changes. Total variable costs vary directly with
activity. They are fixed per unit, but vary in total.
Answer (C) is incorrect because all costs are
variable
in the long term.
Answer (D) is incorrect because unit variable costs
are fixed in the short term.
[55] Source: CMA 1294 3-1
Answer (A) is incorrect because conversion costs
consist of direct labor and overhead.
Answer (B) is incorrect because separable costs are
incurred beyond the point at which jointly produced
items become separately identifiable.
Answer (C) is incorrect because committed costs
result when an entity holds fixed assets; examples
of
committed costs include long-term lease payments
and depreciation.
Answer (D) is correct. Raw materials and direct
labor (such as machining and assembly) are a
manufacturer's prime costs.
[56] Source: CMA 1294 3-2
Answer (A) is incorrect because contribution margin
ratio is the ratio of contribution margin (sales -
variable costs) to sales.
Answer (B) is correct. Gross profit is the difference
between sales price and the full absorption cost of
goods sold.
Answer (C) is incorrect because contribution
(margin) is the difference between unit selling price
and unit variable costs. Fixed costs are not
considered.
Answer (D) is incorrect because the gross profit
margin ratio equals gross profit divided by sales.
[57] Source: CMA 1294 3-3
Answer (A) is incorrect because a carrying cost is
the
cost of carrying inventory; examples are insurance
and rent on warehouse facilities.
Answer (B) is incorrect because a discretionary cost
(a managed or program cost) results from a
periodic
decision about the total amount to be spent. It is
also
characterized by uncertainty about the relationship
between input and the value of the related output.
Examples are advertising and R&D costs.
Answer (C) is incorrect because a sunk cost is a past
cost or a cost that the entity has irrevocably
committed to incur. Because it is unavoidable, it is not
relevant to future decisions.
Answer (D) is correct. A mixed cost is a combination
of fixed and variable elements. Consequently, the $27
of total overhead cost is mixed because it contains
both fixed overhead and variable overhead.
[58] Source: CMA 1294 3-4
Answer (A) is incorrect because conversion costs are
composed of direct labor and factory overhead, that
is, costs incurred to convert materials into a finished
product.
Answer (B) is correct. Before they are incurred,
R&D costs are often considered to be discretionary.
However, Huron's R&D costs have already been
incurred. Thus, they are sunk costs. A sunk cost is a
past cost or a cost that the entity has irrevocably
committed to incur. Because it is unavoidable, it is not
relevant to future decisions.
Answer (C) is incorrect because relevant costs are
expected future costs that vary with the action taken.
A cost that has already been incurred is not relevant
to future decisions.
Answer (D) is incorrect because avoidable costs may
be eliminated by not engaging in an activity or by
performing it more efficiently.
[59] Source: CMA 1294 3-5
Answer (A) is correct. A discretionary cost (a
managed or program cost) results from a periodic
decision about the total amount to be spent. It is also
characterized by uncertainty about the relationship
between input and the value of the related output.
Examples are advertising and R & D costs.
Answer (B) is incorrect because an opportunity cost
is the maximum benefit forgone by using a scarce
resource for a given purpose. It is the benefit
provided by the next best use of a particular
resource.
Answer (C) is incorrect because committed costs are
those for which management has made a long-term
commitment. They typically result when a firm holds
fixed assets. Examples include long-term lease
payments and depreciation.
Answer (D) is incorrect because incremental costs
are the differences in costs between two decision
choices.
[60] Source: CMA 1294 3-6
Answer (A) is incorrect because joint (common)
costs are incurred in the production of two or more
 inseparable products up to the point at which the
products become separable.
Answer (B) is correct. Committed costs are those
for
which management has made a long-term
commitment. They typically result when a firm
holds
fixed assets. Examples include long-term lease
payments and depreciation. Committed costs are
typically fixed costs.
Answer (C) is incorrect because an opportunity cost
is the maximum benefit forgone by using a scarce
resource for a given purpose; it is the benefit
provided by the next best use of a particular
resource.
Answer (D) is incorrect because prime costs are
composed of raw material and direct labor costs.
[61] Source: CMA 0695 3-9
Answer (A) is incorrect because residual income is
the excess of earnings over an imputed charge for
the
given investment base.
Answer (B) is incorrect because a marginal rate of
return is the return on the next investment.
Answer (C) is correct. The margin of safety is the
excess of budgeted revenues over breakeven
revenues. It is considered in sensitivity analysis.
Answer (D) is incorrect because a target or hurdle
rate of return is the required rate of return. It is also
known as the discount rate or the opportunity cost
of
capital.
[62] Source: CMA 1295 3-15
Answer (A) is incorrect because the direct method
does not recognize the fact that service
departments
might provide services to each other; all costs are
assigned directly to production departments.
Answer (B) is incorrect because the variable
method
is a nonsense term as used here.
Answer (C) is correct. The three most common
methods of allocating service department costs are
the direct method, the step method, and the
reciprocal method (also called the simultaneous
equations method). The reciprocal method is
theoretically the preferred method because it
recognizes reciprocal services among service
departments.
Answer (D) is incorrect because the linear method
is
not one of the methods used to allocate
departmental
costs.
[63] Source: CMA 1295 3-16
Answer (A) is incorrect because the step method can
be used on a single- or dual-rate basis.
Answer (B) is incorrect because the reciprocal
method can be used on a single- or dual-rate basis.
Answer (C) is incorrect because the direct method
can be used on a single-or dual-rate basis.
Answer (D) is correct. The single-rate method
combines fixed and variable costs. However, dual
rates are preferable because they allow variable costs
to be allocated on a different basis from fixed costs.
[64] Source: CMA 1295 3-26
Answer (A) is incorrect because direct costing is a
system that treats fixed costs as period costs; in other
words, production costs consist only of variable
costs, while fixed costs are expensed as incurred.
Answer (B) is correct. An activity-based costing
(ABC) system identifies the causal relationship
between the incurrence of cost and the underlying
activities that cause those costs. Under an ABC
system, costs are applied to products on the basis of
resources consumed (drivers).
Answer (C) is incorrect because cycle time is the
period from the time a customer places an order to
the time that product is delivered.
Answer (D) is incorrect because variable costing is
the same as direct costing, which expenses fixed
costs as incurred.
[65] Source: CMA 0694 3-1
Answer (A) is incorrect because product costing is
an objective of a cost accounting system.
Answer (B) is incorrect because department
efficiency is an objective of a cost accounting system.
Answer (C) is incorrect because inventory valuation
is an objective of a cost accounting system.
Answer (D) is correct. A cost accounting system has
numerous objectives, including product costing,
assessing departmental efficiency, inventory valuation,
income determination, and planning, evaluating, and
controlling operations. Determining sales commissions
is not an objective of a cost accounting system
because such commissions are based on sales, not
costs.
[66] Source: CMA 0694 3-3
Answer (A) is incorrect because all factory overhead
is included in conversion costs, not just indirect labor.
Answer (B) is incorrect because direct materials are
not an element of conversion costs; they are a prime
cost.
 Answer (C) is correct. Conversion costs consist of
direct labor and factory overhead. These are the
costs of converting raw materials into a finished
product.
Answer (D) is incorrect because direct labor is also
an element of conversion costs.
[67] Source: CIA 1196 III-82
Answer (A) is incorrect because $1.66 is the
average
cost over 4 months.
Answer (B) is correct. Using the high-low method,
the variable and fixed costs for shipping can be
calculated. The difference in cost levels divided by
the difference in unit volume equals the variable
cost
per unit of $1.40 [($114,000 - $93,000) ・(70,000 -
55,000)]. The variable cost for 70,000 units is
$98,000 ($1.40 x 70,000). Subtracting the variable
cost from total shipping cost results in the fixed
cost
of $16,000 ($114,000 - $98,000).
Answer (C) is incorrect because $30,000 per month
plus $35.00 per sales order is based on orders
instead of sales, and the March shipping costs are
incorrectly matched with the April orders.
Answer (D) is incorrect because $58,000 per month
plus $23.33 per sales order is based on orders.
[68] Source: CIA 1196 III-83
Answer (A) is incorrect because advertising cost is
considered fixed.
Answer (B) is incorrect because sales salaries are
considered fixed in terms of dollar sales.
Answer (C) is incorrect because advertising and
sales
salaries are considered fixed costs in terms of
dollar
sales.
Answer (D) is correct. Both advertising and sales
salaries should be classified as fixed costs. The
advertising was constant for 3 of the 4 months and
would be considered fixed in terms of dollar sales.
Sales salaries also did not vary with dollar sales.
[69] Source: CIA 1194 III-50
Answer (A) is incorrect because the variable cost
per
unit and the total fixed costs will remain constant if
the
activity level increases within the relevant range.
Answer (B) is incorrect because the variable cost
per
unit and the total fixed costs will remain constant if
the
activity level increases within the relevant range.
Answer (C) is correct. Total variable cost changes
when changes in the activity level occur within the
relevant range. The cost per unit for a variable cost is
constant for all activity levels within the relevant
range. Thus, if the activity volume increases within the
relevant range, total variable costs will increase. A
fixed cost does not change when volume changes
occur in the activity level within the relevant range. If
the activity volume increases within the relevant
range, total fixed costs will remain unchanged.
Answer (D) is incorrect because the variable cost per
unit and the total fixed costs will remain constant if the
activity level increases within the relevant range.
[70] Source: CIA 0596 III-94
Answer (A) is incorrect because a variable cost
would remain a constant percentage of standard
dollars shipped.
Answer (B) is incorrect because a fixed cost would
be a lower percentage when standard dollars shipped
were high than when they were low.
Answer (C) is incorrect because a semi-fixed cost as
a percentage would move up and down with
standard dollars shipped, with a base level higher
than zero percent.
Answer (D) is correct. There is no systematic
relationship between standard dollars shipped and the
percentage of scrap.
[71] Source: CMA 0696 3-1
Answer (A) is incorrect because normal capacity is
the long-term average level of activity that will
approximate demand over a period that includes
seasonal, cyclical, and trend variations.
Answer (B) is incorrect because expected annual
activity is an approximation of actual volume levels
for a specific year.
Answer (C) is correct. Theoretical (ideal) capacity is
the maximum capacity given continuous operations
with no holidays, downtime, etc. It assumes perfect
efficiency at all times. Consequently, it can never be
attained and is not a reasonable estimate of actual
volume.
Answer (D) is incorrect because master-budget
capacity is the expected level of activity used for
budgeting for a given year.
[72] Source: CMA 0696 3-2
Answer (A) is correct. The choice of practical rather
than master budget capacity as the denominator level
will result in a lower absorption costing net income.
Practical capacity is the maximum level at which
output is produced efficiently, with an allowance for
unavoidable interruptions, for example, for holidays
and scheduled maintenance. Because this level will be
higher than master-budget (expected) capacity, its
use will usually result in the underapplication of fixed
 factory overhead. For example, given costs of
$100,000 and master-budget capacity of 800,000
units, $.125 per unit is the application rate. If
practical capacity is 1,250,000 units, the
application
rate is $.08 per unit. If actual production is 800,000
units, fixed factory overhead will not be over- or
underapplied given the use of master-budget
capacity. However, there will be $36,000 (450,000
units x $.08) of underapplied fixed factory
overhead
if practical capacity is the denominator level.
Consequently, given t hat the beginning inventory
is
zero and that production exceeded sales, less fixed
factory overhead will be inventoried at the lower
practical capacity rate than at the master-budget
rate.
The effect is that master-budget net income will be
greater.
Answer (B) is incorrect because a normal capacity
rate results in a larger ending inventory and a
greater
net income than a theoretical or practical capacity
rate.
Answer (C) is incorrect because the master-budget
rate exceeds the theoretical capacity rate. It results
in
a greater ending inventory and a greater net
income.
Answer (D) is incorrect because a practical capacity
rate results in a lower ending inventory and a lower
net income than a normal capacity rate.
[73] Source: CMA 0696 3-12
Answer (A) is correct. The breakeven point is the
level of sales at which revenues equal the sum of
variable and fixed costs. Consequently, the
contribution margin equals fixed costs at the
breakeven point. Because this relationship is true,
the
breakeven point in units sold can be determined by
dividing fixed costs by the difference between unit
selling price and unit variable cost (unit
contribution
margin).
Answer (B) is incorrect because the profit margin is
the difference between revenues and cost of goods
sold.
Answer (C) is incorrect because operating profit is
the difference between operating revenues and
expenses.
Answer (D) is incorrect because the contribution
margin ratio equals unit selling price minus unit
variable cost, divided by unit selling price. Dividing
fixed costs by the CMR yields the breakeven point
in
dollars.
[74] Source: CMA 0696 3-15
Answer (A) is correct. Target costing begins with a
target price, which is the expected market price given
the company's knowledge of its customers and
competitors. Subtracting the unit target profit margin
determines the long-term target cost. If this cost is
lower than the full cost, the company may need to
adopt comprehensive cost-cutting measures. For
example, in the furniture industry, certain price points
are popular with buyers: a couch might sell better at
$400 than at $200 because consumers question the
quality of a $200 couch and thus will not buy the
lower-priced item. The result is that furniture
manufacturers view $400 as the target price of a
couch, and the cost must be somewhat lower.
Answer (B) is incorrect because all product cost
categories are addressed by target costing.
Answer (C) is incorrect because all product cost
categories are addressed by target costing.
Answer (D) is incorrect because the manner in which
raw materials costs are accounted for is irrelevant.
[75] Source: CMA 0696 3-16
Answer (A) is correct. SMA 4X states that
value-chain analysis for assessing competitive
advantage is an integral part of the strategic planning
process. Value-chain analysis is a continuous process
of gathering, evaluating, and communicating
information for business decision making. A value
chain depicts how customer value accumulates along
a chain of activities that lead to an end product or
service. A value chain consists of the activities
required to research and develop, design, produce,
market, deliver, and support its product. Extended
value-chain analysis expands the view of the parties
involved to include those upstream (e.g., suppliers)
and downstream (e.g., customers).
Answer (B) is incorrect because process value
analysis relates to a single process.
Answer (C) is incorrect because computer-integrated
manufacturing uses computers to control all aspects
of manufacturing in a single location.
Answer (D) is incorrect because ABC identifies the
activities associated with cost incurrence and the
drivers of those activities. Costs are then assigned to
cost objects based on the demands they make on
activities.
[76] Source: CMA 0696 3-17
Answer (A) is incorrect because excess capacity is
unused capacity.
Answer (B) is incorrect because manufacturing lead
(cycle) time is the sum of setup time and
manufacturing time for a customer order. It is a
component of customer response time.
Answer (C) is correct. Practical capacity is the
maximum level at which output is produced
efficiently, with an allowance for unavoidable
interruptions, for example, for holidays and scheduled
maintenance. Because this level will be higher than
 expected capacity, its use will ordinarily result in
underapplied fixed factory overhead.
Answer (D) is incorrect because theoretical
capacity
makes no allowance for unavoidable interruptions.
[77] Source: CMA 0696 3-18
Answer (A) is incorrect because depreciation is a
factory overhead cost and therefore is a conversion
cost.
Answer (B) is correct. Conversion costs are
necessary to convert raw materials into finished
products. They include all manufacturing costs, for
example, direct labor and factory overhead, other
than direct materials.
Answer (C) is incorrect because indirect labor is a
factory overhead cost and therefore is a conversion
cost.
Answer (D) is incorrect because indirect materials
are factory overhead costs and therefore are
conversion costs.
[78] Source: CMA 0696 3-20
Answer (A) is incorrect because revenues minus
cost
of goods sold is gross profit (margin).
Answer (B) is incorrect because nonmanufacturing
variable costs are also part of the calculation.
Answer (C) is incorrect because a direct cost is a
cost that can be feasibly associated with a single
cost
object.
Answer (D) is correct. Contribution margin is the
excess of revenues over all variable costs
(including
both manufacturing and nonmanufacturing variable
costs) that vary with an output-related cost driver.
The contribution margin equals the revenues that
contribute toward covering the fixed costs and
providing a net income.
[79] Source: CMA 1296 3-3
Answer (A) is incorrect because conversion cost
pricing does not place any emphasis on raw
materials
cost.
Answer (B) is correct. Conversion costs consist of
direct labor and factory overhead, the costs of
converting raw materials into finished goods.
Normally, a company does not consider only
conversion costs in making pricing decisions, but if
the customer were to furnish the raw materials,
conversion cost pricing would be appropriate.
Answer (C) is incorrect because direct labor is an
element of conversion costs.
Answer (D) is incorrect because factory overhead is
an indirect cost that is an element of conversion costs.
[80] Source: CMA 1296 3-29
Answer (A) is correct. Life-cycle costing estimates a
product's revenues and expenses over its expected
life cycle. This approach is especially useful when
revenues and related costs do not occur in the same
periods. It emphasizes the need to price products to
cover all costs, not just those for production. Hence,
costs are determined for all value-chain categories:
upstream (R&D, design), manufacturing, and
downstream (marketing, distribution, and customer
service). The result is to highlight upstream and
downstream costs in the cost planning process that
often receive insufficient attention.
Answer (B) is incorrect because the life-cycle model
includes the upstream (R&D and design) and
downstream (marketing, distribution, and customer
service) elements of the value chain as well as
manufacturing costs.
Answer (C) is incorrect because the life-cycle model
includes the upstream (R&D and design) and
downstream (marketing, distribution, and customer
service) elements of the value chain as well as
manufacturing costs.
Answer (D) is incorrect because life-cycle costing
emphasizes the significance of locked-in costs, target
costing, and value engineering for pricing and cost
control. Thus, cost savings at all stages of the life
cycle are important.
[81] Source: Publisher
Answer (A) is incorrect because scrap consists of
raw materials left over from the production cycle but
still usable for purposes other than those for which it
was originally intended. Scrap may be sold to outside
customers, usually for a nominal amount, or may be
used for a different production process.
Answer (B) is correct. By-products are products of
relatively small total value that are produced
simultaneously from a common manufacturing
process with products of greater value and quantity
(joint products).
Answer (C) is incorrect because waste is the amount
of raw materials left over from a production process
or production cycle for which there is no further use.
Waste is usually not salable at any price and must be
discarded.
Answer (D) is incorrect because abnormal spoilage is
spoilage that is not expected to occur under normal,
efficient operating conditions. The cost of abnormal
spoilage should be separately identified and reported
to management. Abnormal spoilage is typically
treated as a period cost (a loss) because of its
unusual nature.
[82] Source: Publisher
Answer (A) is incorrect because target costing
 (pricing) begins with a target price, which is the
expected market price given the company's
knowledge of its customers and competitors.
Subtracting the unit target profit margin
determines
the long-term target cost.
Answer (B) is correct. Kaizen costing supports the
cost reduction process in the manufacturing phase
of
existing products. Kaizen is a Japanese word that
refers to continuous improvement. Kaizen makes
improvements through the accumulations of small
betterment activities rather than innovative
improvements.
Answer (C) is incorrect because variable (direct)
costing considers only variable manufacturing costs
to
be product costs, i.e., inventoriable. Fixed
manufacturing costs are considered period costs
and
are expensed as incurred.
Answer (D) is incorrect because process costing is
used to assign costs to similar products that are
mass
produced on a continuous basis. Costs are
accumulated by departments or cost centers rather
than by jobs, work-in-process is stated in terms of
equivalent units, and unit costs are established on
a to assign costs to products. The result is that detailed
departmental basis. Process costing is an averaging
process that calculates the average cost of all
units.
[83] Source: CMA 0697 3-1
Answer (A) is incorrect because direct labor is also
a include variable and fixed manufacturing costs
product cost.
Answer (B) is incorrect because a period cost is
expensed when incurred. Direct labor cost is
inventoriable.
Answer (C) is incorrect because direct labor is also
a Answer (A) is incorrect because gross operating
prime cost.
Answer (D) is correct. Direct labor is both a product
cost and a prime cost. Product costs are incurred to
produce units of output and are deferred to future
periods to the extent that output is not sold. Prime
costs are defined as direct materials and direct
labor.
[84] Source: Publisher
Answer (A) is incorrect because margin of safety is
the excess of budgeted revenues over the
breakeven
point.
Answer (B) is incorrect because opportunity cost is
the maximum benefit forgone by using a scarce
resource for a given purpose. It is the benefit, for
example, the contribution to income, provided by
the
best alternative use of that resource.
Answer (C) is correct. A marginal cost is the sum of
the costs necessary to effect a one-unit increase in the
activity level.
Answer (D) is incorrect because differential (or
incremental) cost is the difference in total cost
between two decisions.
[85] Source: Publisher
Answer (A) is incorrect because activity-based
costing "identifies the causal relationship between the
incurrence of cost and activities, determines the
underlying driver of the activities, establishes cost
pools related to individual drivers, develops costing
rates, and applies cost to product on the basis of
resources consumed (drivers)" (SMA 2A).
Answer (B) is incorrect because variable (direct)
costing considers only variable manufacturing costs to
be product costs, i.e., inventoriable. Fixed
manufacturing costs are considered period costs and
are expensed as incurred.
Answer (C) is correct. Backflush costing is often
used with a just-in-time (JIT) inventory system. It
delays costing until goods are finished. Standard
costs are then flushed backward through the system
tracking of costs is eliminated. The system is best
suited to companies that maintain low inventories
because costs then flow directly to cost of goods
sold.
Answer (D) is incorrect because absorption costing
(sometimes called full absorption costing) treats all
manufacturing costs as product costs. These costs
whether direct or indirect. Thus, fixed manufacturing
overhead is inventoried. Compare with variable
costing.
[86] Source: CMA 1295 3-28
profit is the net result after deducting all manufacturing
costs from sales, including both fixed and variable
costs.
Answer (B) is incorrect because net profit is the
remainder after deducting from revenue all costs,
both fixed and variable.
Answer (C) is incorrect because the breakeven point
is the level of sales that equals the sum of fixed and
variable costs.
Answer (D) is correct. Contribution margin is
calculated by subtracting all variable costs from sales
revenue. It represents the portion of sales that is
available for covering fixed costs and profit.
[87] Source: Publisher
Answer (A) is incorrect because cost accounting is
 concerned with more than just reporting to be used
in
making nonroutine decisions.
Answer (B) is incorrect because cost accounting
also
provides information for internal reporting.
Answer (C) is correct. Cost accounting is a
combination of (1) managerial accounting in the
sense
that its purpose can be to provide internal reports
for
use in planning and control and in making
nonroutine
decisions, and (2) financial accounting because its
product-costing function satisfies external reporting
requirements for reporting to shareholders,
government, and various outside parties.
Answer (D) is incorrect because managerial
accounting entails internal reporting for use in
planning
and controlling routine operations.
[88] Source: CMA 1293 3-1
Answer (A) is correct. According to SMA 2A, a
cost driver is "a measure of activity, such as direct
labor hours, machine hours, beds occupied,
computer time used, flight hours, miles driven, or
contracts, that is a causal factor in the incurrence
of
cost to an entity." It is a basis used to assign costs
to
cost objects.
Answer (B) is incorrect because cost drivers are
measures of activities that cause the incurrence of
costs.
Answer (C) is incorrect because cost drivers are not
accounting measurements but measures of
activities
that cause costs.
Answer (D) is incorrect because, although cost
drivers may be used to assign costs, they are not
necessarily mechanical. For example, a cost driver
for pension benefits is employee salaries.
[89] Source: Publisher
Answer (A) is correct. Abnormal spoilage is spoilage
that is not expected to occur under normal,
efficient
operation conditions.
Answer (B) is incorrect because actual spoilage is
the
spoilage that occurred.
Answer (C) is incorrect because normal spoilage is
expected to occur.
Answer (D) is incorrect because residual spoilage is
a represent the results for a single period.
nonsense term.
[90] Source: Publisher
Answer (A) is incorrect because scrap consists of
raw materials left over from the production cycle but
still usable for purposes other than those for which it
was originally intended. Scrap may be sold to outside
customers, usually for a nominal amount, or may be
used for a different production process.
Answer (B) is incorrect because abnormal spoilage is
spoilage that is not expected to occur under normal,
efficient operating conditions. The cost of abnormal
spoilage should be separately identified and reported
to management. Abnormal spoilage is typically
treated as a period cost (a loss) because of its
unusual nature.
Answer (C) is correct. Waste is the amount of raw
materials left over from a production process or
production cycle for which there is no further use.
Waste is usually not salable at any price and must be
discarded.
Answer (D) is incorrect because normal spoilage is
the spoilage that occurs under normal operating
conditions. It is essentially uncontrollable in the short
run. Normal spoilage arises under efficient operations
and is treated as a product cost.
[91] Source: Publisher
Answer (A) is incorrect because gross margin (profit)
is the difference between sales and the absorption
cost of goods sold. It should be contrasted with
contribution margin (sales - variable costs) and profit
margin (income ・revenue).
Answer (B) is incorrect because residual income is
the excess of the return on an investment over a
targeted amount equal to an imputed interest charge
on invested capital. The rate used is ordinarily the
weighted-average cost of capital. Some enterprises
prefer to measure managerial performance in terms of
the amount of residual income rather than the
percentage ROI. The principle is that the enterprise is
expected to benefit from expansion as long as
residual income is earned. Using a percentage ROI
approach, expansion might be rejected if it lowered
ROI even though residual income would increase.
Answer (C) is incorrect because practical capacity is
the maximum level at which output is produced
efficiently. It allows for unavoidable delays in
production for maintenance, holidays, etc. Use of
practical capacity as a denominator value usually
results in underapplied overhead because it always
exceeds the actual use of capacity.
Answer (D) is correct. Partial productivity equals the
quantity of output divided by the quantity of one
input.
[92] Source: CIA 1195 III-79
Answer (A) is incorrect because both measures
Answer (B) is correct. Residual income equals
 earnings in excess of a minimum desired return.
Thus,
it is measured in dollars. If performance is
evaluated
using ROI, a manager may reject a project that
exceeds the minimum return if the project will
decrease overall ROI. For example, given a target
rate of 20%, a project with an ROI of 22% might be
rejected if the current ROI is 25%.
Answer (C) is incorrect because the target rate for
ROI is the same as the imputed interest rate used
in
the residual income calculation.
Answer (D) is incorrect because the same
investment
base should be employed in both methods.
[93] Source: CIA 0593 IV-14
Answer (A) is incorrect because budgeted, not
actual, UCM is used to calculate this variance.
Answer (B) is incorrect because the flexible budget
volume is the actual volume, resulting in a zero
variance.
Answer (C) is incorrect because budgeted, not
actual, UCM is used to calculate this variance.
Answer (D) is correct. For a single-product
company, the sales volume variance is the
difference
between flexible budget and master budget sales
quantity, times master budget unit contribution
margin
(UCM). This amount can also be calculated for each
product in a sales mix, and the results are added to
determine the total sales volume variance. This
variance may be further decomposed into quantity
and mix variances.
[94] Source: Publisher
Answer (A) is incorrect because opportunity cost is
the maximum benefit forgone by using a scarce
resource for a given purpose. It is the benefit, for
example, the contribution to income, provided by
the
best alternative use of that resource.
Answer (B) is correct. Avoidable costs are those
that
may be eliminated by not engaging in an activity or
by
performing it more efficiently.
Answer (C) is incorrect because cost driver "is a
measure of activity, such as direct labor hours,
machine hours, beds occupied, computer time
used,
flight hours, miles driven, or contracts, that is a
causal
factor in the incurrence of cost to an entity" (SMA
2A).
Answer (D) is incorrect because indirect costs cannot
be specifically associated with a given cost object in
an economically feasible way. They are also defined
as costs that are not directly identified with one final
cost object but that are identified with two or more
final cost objects or with at least one intermediate
cost object.
[95] Source: Publisher
Answer (A) is incorrect because periodic inventory
systems rely on physical counts to determine
quantities.
Answer (B) is incorrect because step-down method
of service department cost allocation is a sequential
(but not a reciprocal) process. These costs are
allocated to other service departments as well as to
users. The starting point may be the service
department that rendered the greatest percentage of
its services to other service departments or that
incurred the greatest dollar amount of services to
other service departments.
Answer (C) is correct. Perpetual inventory records
provide for continuous record keeping of the
quantities of inventory (and possibly unit costs and/or
total costs). This method requires a journal entry
every time items are added to or taken from
inventory.
Answer (D) is incorrect because reciprocal method
uses simultaneous equations to allocate each service
department's costs among the departments providing
mutual services before reallocation to other users.
[96] Source: Publisher
Answer (A) is correct. Price (rate) variance equals
the difference between the actual and standard price
of an input, multiplied by the actual quantity.
Answer (B) is incorrect because controllable variance
in two-way analysis is the part of the total factory
overhead variance not attributable to the volume
variance.
Answer (C) is incorrect because spending variance is
an overhead variance. For variable overhead, it is the
difference between actual costs and the product of
the actual activity and the budgeted application rate.
For fixed overhead, the spending (also known as the
budget or flexible budget) variance is the difference
between actual and budgeted fixed costs. In
three-way analysis, the two spending variances
isolated in four-way analysis are combined. In
two-way analysis, the two spending variances and the
variable overhead efficiency variance are combined.
Answer (D) is incorrect because quantity (usage)
variance is an efficiency variance for direct materials.
[97] Source: Publisher
Answer (A) is incorrect because actual costing is
based on actual rates and quantities for indirect as
 well as direct costs.
Answer (B) is correct. Benchmarking (also called
competitive benchmarking or best practices)
compares one's own product, service, or practice
with the best known similar activity. The objective
is
to measure the key outputs of a business process
or
function against the best and to analyze the
reasons
for the performance difference. Benchmarking
applies
to services and practices as well as to products and
is
an ongoing systematic process. It entails both
quantitative and qualitative measurements that
allow
both an internal and an external assessment.
Answer (C) is incorrect because backflush costing is
often used with a just-in-time (JIT) inventory
system.
It delays costing until goods are finished. Standard
costs are then flushed backward through the
system
to assign costs to products. The result is that
detailed
tracking of costs is eliminated. The system is best
suited to companies that maintain low inventories
because costs then flow directly to cost of goods
sold.
Answer (D) is incorrect because budgeting is the
formal quantification of management's plans.
Budgets
are usually expressed in quantitative terms and are
used to motivate management and evaluate its
performance in achieving goals. In this sense,
standards are established.
[98] Source: CMA 0697 3-5
Answer (A) is incorrect because target pricing is
used
on products that have not yet been developed.
Answer (B) is incorrect because target pricing
considers all costs in the value chain.
Answer (C) is incorrect because target pricing can
be
used in any situation, but it is most likely to
succeed
when costs can be well controlled.
Answer (D) is correct. Target pricing and costing
may result in a competitive advantage because it is
a thereby assigning the cost of normal spoilage to the
customer-oriented approach that focuses on what
products can be sold at what prices. It is also
advantageous because it emphasizes control of
costs
prior to their being locked in during the early links
in
the value chain. The company sets a target price
for a
potential product reflecting what it believes
consumers will pay and competitors will do. After
subtracting the desired profit margin, the long-run
target cost is known. If current costs are too high to
allow an acceptable profit, cost-cutting measures are
implemented or the product is abandoned. The
assumption is that the target price is a constraint.
[99] Source: Publisher
Answer (A) is incorrect because the controller (or
comptroller) is a financial officer having responsibility
for the accounting functions (management and
financial) as well as budgeting and internal control.
Answer (B) is incorrect because the chief financial
officer (CFO) is the senior officer empowered with
oversight of the entire financial operations of a
company.
Answer (C) is incorrect because the controller (or
comptroller) is a financial officer having responsibility
for the accounting functions (management and
financial) as well as budgeting and internal control.
Answer (D) is correct. The treasurer has
responsibility for safeguarding financial assets
(including the management of cash) and arranging
financing.
[100] Source: CMA Samp Q3-6
Answer (A) is incorrect because normal spoilage
arises more frequently from factors that are inherent
in the manufacturing process.
Answer (B) is incorrect because abnormal spoilage
costs are treated as a loss, and normal spoilage costs
are inventoried.
Answer (C) is correct. Spoiled goods are defective
items that cannot be feasibly reworked. Traditional
cost accounting systems distinguish between normal
and abnormal spoilage because, in some operations,
a degree of spoilage is viewed as inevitable.
However, organizations that have adopted rigorous
approaches to quality regard normal spoilage as
minimal or even nonexistent. Thus, all spoilage may
be identified as abnormal. Normal spoilage occurs
under normal, efficient operating conditions. It is
spoilage that is uncontrollable in the short run and
therefore should be expressed as a function of good
output (treated as a product cost). Accordingly,
normal spoilage is assigned to all good units in
process costing systems, that is, all units that have
passed the inspection point at which the spoilage was
detected. If normal spoilage is attributable to a
specific job, only the disposal value of the normally
spoiled goods is removed from work-in-process,
good units remaining in the specific job. Abnormal
spoilage is not expected to occur under normal,
efficient operating conditions. The cost of abnormal
spoilage should be separately identified and reported.
Abnormal spoilage is typically treated as a period
cost (a loss) because it is unusual.
Answer (D) is incorrect because the tighter the
standards, the more likely that any spoilage will be
deemed to be abnormal.

[101] Source: CMA 0690 4-6
Answer (A) is incorrect because $75,000 is the
amount allocated to MSB based on the relative
sales
value method.
Answer (B) is correct. Given 60,000 units of MSB
and 90,000 units of CBL (a total of 150,000 units),
CBL makes up 60% of the total quantity (90,000 ・
150,000). Hence, CBL should be charged with 60%
of the joint costs (60% x $300,000 = $180,000).
Answer (C) is incorrect because $225,000 is the
amount allocated to CBL based on the relative
sales
value method.
Answer (D) is incorrect because $120,000 equals
the joint costs that should be allocated to MSB
under
the physical quantities method.
[102] Source: CMA 0690 4-7
Answer (A) is correct. At $2 each, the 60,000 units
of MSL sell for $120,000. At $4 each, the 90,000
units of CBL sell for $360,000. Because 25%
[$120,000 ・($120,000 + $360,000)] of the total
sales are produced by MSB, it should absorb 25%
of the joint cost. Thus, $75,000 (25% x $300,000
joint cost) is allocated to MSB.
Answer (B) is incorrect because $180,000 is the
joint cost allocated to CBL based on physical
quantities.
Answer (C) is incorrect because $225,000 is the
joint cost allocated to CBL based on the relative
sales value method.
Answer (D) is incorrect because $120,000 is the
joint cost allocated to MSB based on physical
quantities.
[103] Source: CMA 0690 4-8
Answer (A) is incorrect because the total cost of
CBL is $425,000 ($225,000 + $200,000). The unit
cost is $5.3125 ($425,000 ・80,000).
Answer (B) is incorrect because $5.625 is
calculated
using costs of $225,000 instead of $200,000.
Answer (C) is incorrect because $2.50 is calculated
by dividing $200,000 by 80,000 units.
Answer (D) is correct. The first step is to compute
the sales for each product. The 60,000 units of MSB
sell for $5 each after $100,000 of additional costs
are incurred. The NRV is therefore $200,000 [($5 x
60,000 units) - $100,000]. The 80,000 units of CBL
sell for $10 each, or $800,000, after further
processing. But to determine the NRV for CBL, the
costs of this processing must be deducted from
sales.
Consequently, the NRV for CBL is $600,000
($800,000 - $200,000). CBL contributes 75%
[$600,000 ・($200,000 + $600,000)] of the
realizable value and should bear an equal proportion
of the $300,000 of joint costs, or $225,000. The
total cost of CBL is $425,000 ($225,000 +
$200,000), and the unit cost is $5.3125 ($425,000 ・
80,000).
[104] Source: CMA 0690 4-9
Answer (A) is incorrect because the contribution
from the joint milling process would be $80,000
lower ($200,000 - $120,000).
Answer (B) is incorrect because the contribution
from the joint milling process would be $80,000
lower ($200,000 - $120,000).
Answer (C) is incorrect because the contribution
from the joint milling process would be $80,000
lower ($200,000 - $120,000).
Answer (D) is correct. MSB sells for $120,000 ($2
x 60,000 units) at the split-off point. By processing
further, the company earns $200,000 ($300,000 in
sales - $100,000 in preservative costs). Thus, the
contribution from the joint milling process would be
$80,000 lower ($200,000 - $120,000) if MSB is
sold at the split-off point.
[105] Source: CMA 0689 4-21
Answer (A) is incorrect because $168,000 is the
joint cost allocated to Silken Skin on a
physical-quantity basis.
Answer (B) is correct. Under the NRV method,
additional separable costs are deducted from sales
revenue to determine the NRV. In this problem, no
additional costs are incurred, so the NRV equals the
total sales revenue for the joint products.
Liquid Skin 180,000 gals. x $2.40 = $432,000
Silken Skin 120,000 gals. x $3.90 = 468,000
--------
Total Sales $900,000
========
Because sales of Liquid Skin make up 48% of total
sales ($432,000 ・$900,000), it should be allocated
48% of the joint cost. Thus, Liquid Skin's share is
$201,600 (48% x $420,000).
Answer (C) is incorrect because $218,400 is Silken
Skin's share of joint costs under the NRV method.
Answer (D) is incorrect because $252,000 is the
joint cost allocated to Liquid Skin on a
physical-quantity basis.
[106] Source: CMA 0689 4-22
Answer (A) is correct. The total physical quantity is
300,000 gallons (180,000 + 120,000). Because
Silken Skin accounts for 120,000 gallons, or 40% of
the total, it should be allocated $168,000 (40% x
$420,000 joint cost).

Answer (B) is incorrect because $201,600 is the
joint cost allocated to Liquid Skin on the NRV basis.
Answer (C) is incorrect because $218,400 is Silken
Skin's share of joint costs under the NRV method.
Answer (D) is incorrect because $252,000 is the
joint cost allocated to Liquid Skin on a
physical-quantity basis.
[107] Source: CMA 0689 4-23
Answer (A) is incorrect because $140,000 is the
joint cost allocated to Liquid Skin under the NRV
method given additional processing costs.
Answer (B) is incorrect because $168,000 is the
joint cost allocated to Silken Skin on a
physical-quantity basis.
[110] Source: CIA 1192 IV-6
Answer (C) is incorrect because $252,000 is the
joint cost allocated to Liquid Skin on a
physical-quantity basis.
Answer (D) is correct. If the products cannot be sold
at split-off, additional processing costs must be
incurred. Under the NRV method, these additional
costs are deducted from sales to determine NRV.
Total sales of the joint products are $432,000 for
Liquid Skin and $468,000 for Silken Skin. The costs
incurred beyond the split-off point are
Liquid Skin 180,000 gals. x $1.40 = $252,000
Silken Skin 120,000 gals. x $ .90 = 108,000
The NRVs are $180,000 ($432,000 - $252,000) for
Liquid Skin and $360,000 ($468,000 - $108,000)
for Silken Skin, a total of $540,000. Consequently,
Silken Skin should be allocated $280,000 of the
joint
cost [$420,000 x ($360,000 ・$540,000)].
[108] Source: CMA 0689 4-24
Answer (A) is incorrect because $140,000 is the
joint cost allocated to Liquid Skin under the NRV
method given additional processing costs.
[111] Source: CIA 0594 III-75
Answer (B) is incorrect because $168,000 is the
joint cost allocated to Silken Skin on a
physical-quantity basis.
Answer (C) is correct. If a physical-quantity
allocation method is used, sales, costs, and NRVs
are irrelevant. The total physical quantity is
300,000
gallons (180,000 + 120,000). Because Liquid Skin
is
60% of the total, it should be allocated $252,000
(60% x $420,000 joint cost).
Answer (D) is incorrect because $280,000 is the
joint cost allocated to Silken Skin under the NRV
method.
[109] Source: CIA 0593 IV-5
Answer (A) is correct. Beginning inventory is 40%
complete. Hence, direct materials have already been
added. Ending inventory has not reached the 25%
stage of completion, so direct materials have not yet
been added to these units. Thus, the equivalent units
for direct materials calculated on a FIFO basis are
equal to the units started and completed in the current
period (85,000 units completed - 15,000 units in
BWIP = 70,000 units started and completed).
Answer (B) is incorrect because 80,000 total units
were transferred in from Department 1.
Answer (C) is incorrect because 85,000 equals the
equivalent units for direct materials calculated on a
weighted-average basis.
Answer (D) is incorrect because 90,000 units equals
the sum of units transferred in from Department 1 and
ending work-in-process inventory.
Answer (A) is incorrect because 170,000 is the
number of equivalent units of materials for the period.
Answer (B) is correct. The number of equivalent units
computed under this method excludes work done on
BWIP in the prior period. Thus, the total of
equivalent units of conversion cost for the period is
calculated as follows:
10,000 units in EWIP x 50% = 5,000
180,000 completed units x 100% = 180,000
-------
185,000
20,000 units in BWIP x 50% = (10,000)
-------
175,000
=======
Answer (C) is incorrect because 180,000 is the total
amount of work done on the completed units.
Answer (D) is incorrect because 185,000 is the
amount determined using the weighted-average
method.
Answer (A) is incorrect because $37,500 results
from allocating the cost based on total kilowatt hours
used by service and production departments.
Answer (B) is incorrect because $15,625 is the
amount allocated to the assembly department.
Answer (C) is incorrect because $39,062.50 results
from allocating the cost based on direct costs for
each production department.
Answer (D) is correct. Under the direct method,
service department costs are allocated directly to the
producing departments without recognition of
services provided to other service departments.
Allocation of service department costs are made only
to production departments based on their relative use
of services, in this case, kilowatt hours. Thus, the cost
allocated to the Machining Department is $46,875
[$62,500 x (150,000 ・200,000)].

[112] Source: CIA 0594 III-76
Answer (A) is incorrect because no cost should be
allocated.
Answer (B) is incorrect because no cost should be
allocated.
Answer (C) is incorrect because no cost should be
allocated.
Answer (D) is correct. Under the direct method,
service department costs are allocated directly to
the
producing departments without recognition of
services provided to other service departments.
Allocation of service department costs are made
only
to production departments based on their relative
use
of services. Thus, none of the cost will be allocated
to
the maintenance department.
[113] Source: CIA 0594 III-77
Answer (A) is incorrect because, under the step
method, service costs are allocated to both
production and service departments.
Answer (B) is correct. Under the step method,
service costs are allocated to producing
departments
and to other service departments. This method
does
not allocate any cost back to the departments
whose
costs have already been allocated. This company
will
allocate Power Department costs first because the
Maintenance Department receives relatively more
service from the Power Department. The amount of
Power Department cost allocated to the
Maintenance
Department is $12,500 [$62,500 x (50,000 ・
250,000)]. This allocation is based on the total
kilowatt hours used by all departments (service and
production).
Answer (C) is incorrect because $6,250 results from
allocating Power Department costs based on
maintenance hours used.
Answer (D) is incorrect because $8,000 results from
allocating the Maintenance Department's direct
costs
to itself based on kilowatt hours used.
[114] Source: CIA 1193 IV-7
Answer (A) is incorrect because 904 equals 4% of
units failing final inspection.
Answer (B) is incorrect because normal spoilage is
4% of the total goods inspected, not 4% of the
completed units passing inspection.
Answer (C) is incorrect because normal spoilage is
4% of the units inspected, not of the units entering
production.
Answer (D) is correct. Normal spoilage equals 4% of
the units inspected. The equivalent units of normal
spoilage equal 19,336 [.04 x (460,800 units passing
inspection + 22,600 units failing inspection)]. The
equivalent units of abnormal spoilage are simply the
residual of the spoiled units, or 3,264 (22,600 total
spoiled units - 19,336 normal spoilage).
[115] Source: CIA 0578 IV-1
Answer (A) is incorrect because LIFO is equally
applicable to either job-order costing or process
costing.
Answer (B) is incorrect because process costing is
equally useful for the estimation of overhead.
Answer (C) is incorrect because control of costs
does not vary between job-order and
process-costing systems.
Answer (D) is correct. Job-order costs are used in
determining the costs of a specific, clearly identifiable
job or project. In contrast, process costing averages
the costs of all production.
[116] Source: CIA 1186 IV-4
Answer (A) is correct. A cost system accounts for
the costs of manufacturing inventoriable output. The
objective is to determine the portion of manufacturing
cost to be expensed (because the output was sold)
and the portion to be deferred (because the output
was still on hand). Process costing is used for
continuous process manufacturing of units that are
relatively homogeneous (e.g., oil refining, automobile
production, etc.). Job-order costing is used to
account for the cost of specific jobs or projects when
output is heterogeneous. The difference is often
overemphasized. Job-order costing simply requires
subsidiary ledgers (to keep track of the specific jobs)
for the same work-in-process (manufacturing)
account and finished goods inventory account that are
basic to process costing.
Answer (B) is incorrect because how orders are
taken is irrelevant to whether job-order or process
costing is used.
Answer (C) is incorrect because profit is determined
in the same way in both job-order and process
costing.
Answer (D) is incorrect because the cost system is
not necessarily related to the manufacturing
processes.
[117] Source: CIA 0590 IV-3
Answer (A) is correct. Job-order costing is used by
companies whose products or services are readily
identified by individual units or a specific job, each of
which receives varying amounts and types of input.
 The dissimilarity of the various loan services
provided
makes job-order costing appropriate.
Answer (B) is incorrect because process costing is
used by companies whose products or services are
relatively uniform and are produced in a series of
production steps or processes.
Answer (C) is incorrect because differential costing
is
not a cost accumulation method. It is useful for
decision-making.
Answer (D) is incorrect because joint product
costing
is not a cost accumulation method. It is a method
of
allocating joint costs to joint products.
[118] Source: CIA 1187 IV-5
Answer (A) is incorrect because road building
involves unique projects which require job-order
costing.
Answer (B) is incorrect because electrical
contracting
involves unique projects which require job-order
costing.
Answer (C) is correct. Process costing is used for
continuous process manufacturing of relatively
homogeneous units. Newspapers are published in
long runs of identical items, hence process costing
is
applicable.
Answer (D) is incorrect because the manufacture of
clothing requires different sizes and styles to be
produced. Operations costing is required.
[119] Source: Publisher
Answer (A) is incorrect because, when the products
are unique, job-order costing is appropriate.
Answer (B) is correct. Operation costing is used
when goods are produced in batches or production
runs. While the production procedures or
operations
are similar, the types of items processed are
different,
e.g., different models of furniture, etc.
Answer (C) is incorrect because, when the product
is
homogeneous, process costing is appropriate.
Answer (D) is incorrect because the products of the
food and beverage industry may be either unique
or
homogeneous, and produced in jobs, lots, or
batches.
[120] Source: Publisher
Answer (A) is correct. When operation costing is
employed, the basic materials usually vary by
production run, but the processes used are similar
(e.g., milling, grinding, finishing, painting, polishing,
etc.).
Answer (B) is incorrect because direct materials
rather than direct labor vary by production run.
Answer (C) is incorrect because direct materials
rather than overhead vary by production run.
Answer (D) is incorrect because direct materials
rather than conversion costs vary by production run.
[121] Source: Publisher
Answer (A) is incorrect because operation costing is
a hybrid form of job-order and process costing.
Answer (B) is incorrect because operation costing is
a hybrid form of job-order and process costing.
Answer (C) is incorrect because direct costing
includes only variable manufacturing costs in unit cost.
Answer (D) is correct. Operation costing is a hybrid
of job-order costing and process costing. As in
process costing, a single average unit conversion cost
is applied based on operations. Direct materials costs
are applied to the individual batches in the same
manner as in job-order costing. It is used to account
for the costs of batch processing of relatively large
numbers of similar units in individual production runs.
Operation costing is appropriate for the processing of
different types of materials through the same basic
operations, such as woodworking, finishing, and
polishing for different product lines of furniture. It
usually has many more WIP accounts because there
is one for each process or operation.
[122] Source: Publisher
Answer (A) is incorrect because shoes are produced
in production runs or batches, but with different styles
or materials.
Answer (B) is incorrect because clothing is produced
in production runs or batches, but with different styles
or materials.
Answer (C) is incorrect because furniture is
produced in production runs or batches, but with
different styles or materials.
Answer (D) is correct. The products of the oil
refining industry are homogeneous and are not
produced in batches. Although refineries can vary the
nature of their output slightly, they essentially produce
a continuous flow of products.
[123] Source: CIA 1188 IV-6
Answer (A) is incorrect because the EUP for
conversion costs would be 8,330 [8,780
weighted-average EUP - (30% x 1,500 units in
BWIP)] if the FIFO method were used.
 Answer (B) is correct. The weighted-average
method
of process costing commingles prior period (BWIP)
and current costs. It does not consider the degree
of
completion of BWIP when computing EUP.
Units % CC EUP
----- --- ------
Completed 7,400 100 7,400
EWIP 2,300 60 1,380
------
Equivalent units 8,780
======
Answer (C) is incorrect because 9,230 includes 30%
of BWIP in the total.
Answer (D) is incorrect because 9,700 is the sum of
the physical, not equivalent, units completed and in
EWIP.
[124] Source: CIA 0591 IV-4
Answer (A) is incorrect because 26,000 (31,000
weighted-average EUP - 5,000 EUP in BWIP) is the
number of direct materials equivalent units
calculated
using the FIFO method.
Answer (B) is incorrect because 28,500 is the
number of units transferred out to finished goods
inventory.
Answer (C) is correct. The weighted-average
approach averages the costs in beginning
work-in-process with those incurred during the
period. Accordingly, the degree of completion of
the
BWIP is ignored in computing the equivalent units
for
direct materials. Direct materials equivalent units
therefore consist of units transferred to finished
goods
(28,500) and units that failed inspection (2,500), or
31,000. Ending work-in-process inventory has not
reached the point at which materials are added.
Answer (D) is incorrect because 34,000 [5,000 units
in BWIP + 32,000 units transferred in - (60% x
5,000 units in BWIP)] is the number of physical
units
minus the conversion work previously done on the
BWIP.
[125] Source: Publisher
Answer (A) is correct. EUP assigned to spoilage are
based upon the actual processing costs incurred. If
700 spoiled units are 60% complete, 420
equivalent
units have been produced. Accordingly, 420 EUP
should be assigned to both normal and abnormal
spoilage. The most accurate equivalent unit
calculation includes spoilage, both abnormal and
normal.
Answer (B) is incorrect because the 700 units of
abnormal spoilage are only 60% complete.
Answer (C) is incorrect because the 700 units of
normal spoilage are only 60% complete.
Answer (D) is incorrect because the 700 units each
of both normal and abnormal spoilage are only 60%
complete.
[126] Source: CIA 0586 IV-6
Answer (A) is incorrect because $33 is the normal
spoilage cost [(.03 x 2,000) x $.55].
Answer (B) is incorrect because $20.35 is based on
calculating normal spoilage as 3% of the number of
baseballs completed [(100 - (.03 x 2,100)) x $.55].
Answer (C) is correct. Abnormal spoilage is
calculated as the total unit cost times the amount of
spoilage in excess of expected normal spoilage. Total
unit cost is
Materials cost ($840 ・2,100 EUP) $0.40
Conversion cost ($315 ・2,100 EUP) 0.15
-----
$0.55
=====
Spoilage in excess of normal spoilage is 40 units [100
spoiled units - (.03 x 2,000 good units)]. Abnormal
spoilage is thus $22 ($.55 x 40).
Answer (D) is incorrect because $1,100 is the cost
of good baseballs produced ($.55 x 2,000).
[127] Source: CIA 0587 IV-5
Answer (A) is incorrect because normal spoilage
($120), not abnormal spoilage ($80), should be
included in the cost of good units produced.
Answer (B) is correct. Abnormal spoilage is not
expected to occur under efficient operating
conditions. Thus, abnormal spoilage is excluded from
the cost of the good units. Hence, the total
production cost of $2,200 is reduced by $80 [20
units x ($2,200 ・550 total units)] to arrive at the
$2,120 cost of good units.
Answer (C) is incorrect because the total production
costs should be reduced by the abnormal spoilage
($80) to find the cost of good units produced.
Answer (D) is incorrect because $2,332 results from
basing the cost per unit on 500 good units rather than
550 total units.
[128] Source: CIA 1190 IV-9
Answer (A) is incorrect because spoilage is
calculated using the normal input (not total units) of
30,000 units (28,500 ・.95).
Answer (B) is correct. Normal input (input for the
good units and normal spoilage) is calculated by
dividing the good units produced by the proportion
left after the spoiled units are removed, or 95%
 (100% - 5%). Thus, normal input is the input for
30,000 units (28,500 ・.95), normal spoilage is
1,500 units (30,000 - 28,500), and abnormal
spoilage is the difference between total and normal
spoilage [(31,000 - 28,500) - 1,500].
Answer (C) is incorrect because spoilage is
calculated using the normal input (not good units)
of
30,000 units (28,500 ・.95).
Answer (D) is incorrect because spoilage is
calculated using the normal input (not total units)
of
30,000 units (28,500 ・.95). Abnormal spoilage
would then be determined by subtracting 1,500
(30,000 x .05) units of normal spoilage from 2,500
total spoiled units.
[129] Source: CIA 0586 IV-11
Answer (A) is correct. To determine the proportion
of joint costs to be allocated to F1, the net
realizable
values of the three products must be calculated.
Net
realizable value per unit is selling price minus
additional processing costs.
F1: 5($30 - $28) = $10
F2: 2($35 - $30) = 10
F3: 3($35 - $25) = 30
---
$50
===
The amount of joint costs to be allocated to F1 is
20% ($10 ・$50).
Answer (B) is incorrect because the proportion of
joint costs allocated to F1 is calculated based on
the
proportion of net realizable value attributable to F1,
not on the proportion of selling price attributable to
F1.
Answer (A) is incorrect because $5,000 is the cost
to further process product X after split-off. The
amount of joint costs allocated to product X is
$6,000 [($12,000 sales price at split-off for product
X ・$20,000 total sales price for X and Y) x
$10,000 joint processing costs].
Answer (B) is correct. Under the net realizable value
method, joint costs are allocated to products based
on their relative net realizable values unless sales price
quotations are available at split-off. Split-off sales
price quotations are available, so the amount of joint
costs allocated to product X can be computed as
follows:
Sales value of product X
------------------------ x Joint costs
Total sales value
$12,000
= ------- X $10,000
$20,000
= $6,000
Answer (C) is incorrect because, since sales prices at
split-off are known, joint costs will be allocated
based on each product's proportional sales value.
Answer (D) is incorrect because $10,000 is the total
joint processing cost. The total needs to be allocated
to each product based on their net realizable values.
[131] Source: CIA 1184 IV-23
Answer (A) is incorrect because the common cost
allocations of $450 to cheese and $150 to whey
were arrived at by allocating total common costs of
$600 instead of $1,000, which includes overhead of
$400.
Answer (B) is incorrect because the common cost
allocation of $500 to both cheese and whey was
arrived at by allocating the total common cost of
$1,000 by output in pounds instead of the sales
values.

Answer (C) is incorrect because the allocation of Answer (C) is incorrect because the common costs
joint costs is based on net realizable value; joint are allocated based on net realizable values (price per
costs pound x demand in pounds), not sales prices per
are not divided equally among the three products. pound.
The amount of joint costs to be allocated to F1 is
20% ($10 net realizable value for five units of F1 ・ Answer (D) is correct. The relative sales value
$50 total net realizable value). method allocates costs in proportion to the relative
sales value of the individual products. The total
Answer (D) is incorrect because the portion of joint common costs are
costs allocated to F1 is based on net realizable
value. Milk (1,000 lb. x $.20) $ 200
The net realizable value for F1 is $2 per unit ($30 Labor (40 hr. x $10) 400
selling price - $28 additional processing costs) and O/H (1.0 x $400 DL cost) 400
each ton of material yields five units of F1, for a ------
total Common costs $1,000
net realizable value of $10 per ton. Net realizable ======
value for all three products is $50 per ton. Sales Value:
Therefore, Cheese ($2 x 450) $ 900 75%
the portion of joint costs allocated to F1 is 20% Whey ($.80 x 375) 300 25%
($10 ------
・$50). Total $1,200
======
Cost to cheese (75% x 1,000) $ 750
[130] Source: CIA 1185 IV-11 Cost to whey (25% x 1,000) 250
 ------
$1,000
======
If only 375 pounds of whey can be sold, the other
75
pounds are worthless and are not allocated any
common cost.
[132] Source: CIA 0587 IV-6
Answer (A) is incorrect because the net revenue
from
the sale of the by-product is $1,700, not $2,000.
The
costs related to the packaging and selling of the
by-product must be deducted.
Answer (B) is incorrect because the $.10-per-pound
packaging cost for the sawdust must be deducted
from the by-product revenue.
Answer (C) is correct. The net revenue from sale of
the by-product is $1,700 [($2 price x 1,000 lb.) -
($.10 x 1,000 lb.) - (.1 x $2 x 1,000 lb.)]. Joint
processing costs to be allocated to joint products
are
therefore $48,300 ($50,000 - $1,700 net
by-product revenue). Of this amount, $32,200
should be assigned to the two-by-fours [$48,300 x
(200,000 board feet of two-by-fours ・300,000 total
board feet)].
Answer (D) is incorrect because the net revenue of
$1,700 [($2 sale price - $.10 packaging - $.20 sales
cost) x 1,000 lb.] from the by-product should be
subtracted from the joint processing costs before
the
joint processing costs are allocated.
[133] Source: CMA 1294 4-1
Answer (A) is incorrect because the joint
manufacturing costs are the only irrelevant item.
Answer (B) is correct. Common, or joint, costs
cannot be identified with a particular joint product.
By definition, joint products have common costs
until
the split-off point. Costs incurred after the split-off
point are separable costs. The decision to continue
processing beyond split-off is made separately for
each product. The costs relevant to the decision are
the separable costs because they can be avoided
by
selling at the split-off point. They should be
compared
with the incremental revenues from processing
further. Thus, items I (revenue from selling at split-
off
point), II (variable costs of upgrade), III (avoidable
fixed costs of upgrade), and IV (revenue from
selling
after further processing) are considered in making
the
upgrade decision.
Answer (C) is incorrect because the joint
manufacturing costs are the only irrelevant item.
Answer (D) is incorrect because the joint
manufacturing costs are the only irrelevant item.
[134] Source: CMA 1295 3-19
Answer (A) is correct. Prime costs are defined as
direct materials and direct labor. The first step is to
calculate the cost of raw materials used during the
month:
Beginning materials inventory $ 67,000
Plus purchases 163,000
Plus transportation in 4,000
Minus purchase returns (2,000)
Materials available for use $232,000
Minus ending materials inventory (62,000)
Materials used $170,000
Adding the $170,000 of materials used to the
$200,000 of direct labor results in a total of
$370,000 for prime costs.
Answer (B) is incorrect because $168,000 equals
purchases of raw materials adjusted for the change in
inventories.
Answer (C) is incorrect because $363,000
incorporates the change in finished goods inventories.
Answer (D) is incorrect because the $170,000 is
only the raw materials used.
[135] Source: CMA 1295 3-20
Answer (A) is incorrect because $502,000 is based
on actual overhead.
Answer (B) is incorrect because $503,000
incorporates the change in finished goods inventories.
Answer (C) is incorrect because $363,000 excludes
overhead but includes the change in finished goods
inventory.
Answer (D) is correct. Total manufacturing costs
consist of materials, labor, and overhead. Total prime
costs were $370,000. Overhead applied was
$140,000 (70% x $200,000 of direct labor).
Therefore, total manufacturing cost is $510,000
($170,000 + $200,000 + $140,000).
[136] Source: CMA 1295 3-21
Answer (A) is incorrect because $469,000 uses
actual overhead and adjusts the figures for the change
in finished goods inventory.
Answer (B) is incorrect because $477,000 includes
the change in finished goods inventory in the
calculation.
Answer (C) is incorrect because $495,000 uses
materials purchased rather than materials used and
also fails to adjust properly for transportation in.
Answer (D) is correct. Total manufacturing costs
consist of materials, labor, and overhead. That
amount is then adjusted for the change in
work-in-process inventories to arrive at the cost of
 goods transferred to finished goods. Total
manufacturing cost was $510,000. Thus, the cost of
goods transferred to finished goods inventory is
$484,000 ($510,000 + $145,000 - $171,000).
[138] Source: CMA 1295 3-23
Answer (A) is incorrect because an overapplication
of overhead would be represented by a credit in the
overhead control account.
Answer (B) is incorrect because the overhead was
overapplied for the month.
Answer (C) is correct. The factory overhead control
account would have been debited for $132,000 of
actual overhead. Credits would have totaled
$140,000 representing 70% of direct labor costs of
$200,000. Therefore, the $140,000 credit exceeds
the $132,000 debit, and there has been an
overapplication of overhead in the amount of
$8,000.
Answer (D) is incorrect because the overhead was
overapplied for the month.
[139] Source: CMA 1286 4-14
Answer (A) is correct. The computation of
equivalent
units for a period using the FIFO method of process
costing includes only the conversion costs and
material added to the product in that period and
excludes any work done in previous periods.
Accordingly, FIFO equivalent units include work and
material to complete BWIP, plus work and material
to complete units started this period, minus work
and
material needed to complete EWIP. Since all
materials are added at the beginning of the
process,
only those units started during November would
have
received materials in that month. Because 5,000
units
were started, the equivalent units for direct
materials
equal 5,000.
Answer (B) is incorrect because 6,000 is the total
units to account for.
Answer (C) is incorrect because 4,400 equals units
completed and transferred out from BI plus units
started and completed in November plus 20% of
work-in-process on November 30 (1,000 + 3,000 +
400).
Answer (D) is incorrect because 3,800 is not the
equivalent units for direct materials. Only those
units
started during November would have received
materials in that month. Therefore, equivalent units
for
direct materials equal 5,000.
[140] Source: CMA 1286 4-15
Answer (A) is incorrect because 3,400 units consist
of the units started and completed during November
plus the 20% of work-in-process complete as to
conversion costs (3,000 + 400).
Answer (B) is correct. Since BWIP (1,000 units)
was already 60% complete, 400 equivalent units
were needed for completion. In addition, 3,000 units
were started and completed during the period. The
2,000 units in EWIP equal 400 equivalent units since
they are 20% complete. Total equivalent units are
3,800 (400 + 3,000 + 400).
Answer (C) is incorrect because 4,000 units consist
of the units started and completed in November and
the units completed and transferred out from BI
(3,000 + 1,000).
Answer (D) is incorrect because 4,400 units consist
of the units started and completed in November, plus
the units completed and transferred out from BI plus
the 20% of work-in-process complete as to
conversion costs (3,000 + 1,000 + 400).
[141] Source: CMA 1286 4-16
Answer (A) is incorrect because 3,400 units equals
units started and completed in November plus 20%
of ending work-in-process (3,000 + 400).
Answer (B) is incorrect because 4,400 units equals
units started and completed in November plus units
completed and transferred out from BI plus 20% of
ending work-in-process (3,000 + 1,000 + 400).
Answer (C) is incorrect because 5,000 units are the
number of units started in November.
Answer (D) is correct. The difference between the
weighted-average and FIFO methods of process
costing is how BWIP is handled. FIFO makes a
distinction between the costs in BWIP and the costs
of goods started this period. Weighted average does
not. Thus, when there is no BWIP, there is no
difference between the two costing methods. Since
6,000 units have been started (1,000 BWIP + 5,000
started this period), and all materials are added at the
beginning of the process, equivalent units for materials
equal 6,000.
[142] Source: CMA 1286 4-17
Answer (A) is incorrect because 3,400 units consist
of the units started and completed in November plus
the 20% of work-in-process complete as to
conversion costs (3,000 + 400).
Answer (B) is incorrect because 3,800 units equal
the 400 units in BWIP needed for completion plus
the units started and completed in November plus the
20% of work-in-process complete as to conversion
costs (400 + 3,000 + 400).
Answer (C) is incorrect because 4,000 units equal
the units completed and transferred out from BI plus
units started and completed during November (1,000
+ 3,000).
 Answer (D) is correct. Under the weighted-average
method, work in the previous period on the
beginning
inventories is included along with the work added
this
period. Thus, the only difference between the FIFO
calculations and the weighted-average calculation
is
the equivalent units for the beginning inventory.
The
4,000 completed units (1,000 BWIP + 3,000 started
this period) equal 4,000 equivalent units. The 2,000
units in EWIP are equivalent to 400 units (20%
complete x 2,000 units). Thus, there are 4,400
conversion cost equivalent units.
[143] Source: CMA 0694 3-25
Answer (A) is correct. If direct labor hours are used
as the allocation base, the $50,000 of costs is
allocated over 400 hours of direct labor. Multiplying
the 25 units of each product times 200 hours
results
in 5,000 labor hours for each product, or a total of
10,000 hours. Dividing $50,000 by 10,000 hours
results in a cost of $5 per direct labor hour.
Multiplying 200 hours times $5 results in an
allocation
of $1,000 of overhead per unit of product.
Answer (B) is incorrect because $500 is the
allocation based on number of material moves.
Answer (C) is incorrect because $2,000 assumes
that all the overhead is allocated to the wall
mirrors.
Answer (D) is incorrect because $5,000 assumes
overhead of $250,000.
[144] Source: CMA 0694 3-26
Answer (A) is incorrect because $1,000 uses direct
labor as the allocation basis.
Answer (B) is correct. An activity-based costing
(ABC) system allocates overhead costs on the basis
of some causal relationship between the incurrence
of
cost and activities. Because the moves for wall
mirrors constitute 25% (5 ・20) of total moves, the
mirrors should absorb 25% of the total materials
handling costs. Thus, $12,500 (25% x $50,000) is
allocated to mirrors. The remaining $37,500 is
allocated to specialty windows. Dividing the
$12,500
by 25 units produces a cost of $500 per unit of
mirrors.
Answer (C) is incorrect because $1,500 is the
allocation per unit of specialty windows.
Answer (D) is incorrect because $2,500 is not
based
on the number of material moves.
[145] Source: CMA 0691 3-16
Answer (A) is incorrect because the total of the
service department costs allocated to the Assembly
Department is $167,500.
Answer (B) is incorrect because the total of the
service department costs allocated to the Assembly
Department is $167,500.
Answer (C) is incorrect because the total of the
service department costs allocated to the Assembly
Department is $167,500.
Answer (D) is correct. Under the direct method,
service department costs are allocated directly to the
production departments, with no allocation to other
service departments. The total budgeted hours of
service by the Quality Control Department to the two
production departments is 28,000 (21,000 + 7,000).
Given that the Assembly Department is expected to
use 25% (7,000 ・28,000) of the total hours
budgeted for the production departments, it will
absorb 25% of total quality control costs (25% x
$350,000 = $87,500). The total budgeted hours of
service by the Maintenance Department to the
production departments is 30,000 (18,000 +
12,000). The Assembly Department is expected to
use 40% (12,000 ・30,000) of the total maintenance
hours budgeted for the production departments.
Thus, the Assembly Department will be allocated
40% of the $200,000 of maintenance costs, or
$80,000. The total service department costs
allocated to the Assembly Department is $167,500
($87,500 + $80,000).
[146] Source: CMA 0691 3-17
Answer (A) is incorrect because the overhead cost
per machine hour is $15.65.
Answer (B) is incorrect because the overhead cost
per machine hour is $15.65.
Answer (C) is incorrect because the overhead cost
per machine hour is $15.65.
Answer (D) is correct. Machining uses 75% (21,000
・28,000) of the total quality control hours and 60%
(18,000 ・30,000) of the total maintenance hours
budgeted for the production departments. Under the
direct method, it will therefore be allocated $262,500
(75% x $350,000) of quality control costs and
$120,000 (60% x $200,000) of maintenance costs.
In addition, Machining is expected to incur another
$400,000 of overhead costs. Thus, the total
estimated Machining overhead is $782,500
($262,500 + $120,000 + $400,000), and the
overhead cost per machine hour is $15.65
($782,500 ・50,000 hours).
[147] Source: CMA 0691 3-19
Answer (A) is incorrect because the Assembly
Department will be allocated maintenance costs of
$108,000.
Answer (B) is correct. The step-down method
allocates service costs to both service and production
departments but does not permit mutual allocations.
 Accordingly, Quality Control will receive no
allocation of maintenance costs. The first step is to
allocate quality control costs to the Machining
Department. Maintenance is expected to use 20%
(7,000 ・35,000) of the available quality control
hours and will be allocated $70,000 (20% x
$350,000) of quality control costs. Thus, total
allocable maintenance costs equal $270,000
($70,000 + $200,000). The Assembly Department
is
estimated to use 40% (12,000 ・30,000) of the
available maintenance hours. Consequently, it will
be
allocated maintenance costs of $108,000 (40% x
$270,000).
Answer (C) is incorrect because the Assembly
Department will be allocated maintenance costs of
$108,000.
Answer (D) is incorrect because the Assembly
Department will be allocated maintenance costs of
$108,000.
[148] Source: CMA 0691 3-20
Answer (A) is incorrect because the total quality
control costs to be allocated equal $421,053.
Answer (B) is incorrect because the total quality
control costs to be allocated equal $421,053.
Answer (C) is incorrect because the total quality
control costs to be allocated equal $421,053.
Answer (D) is correct. The reciprocal method
permits mutual allocations of service costs among
service departments. For this purpose, a system of
simultaneous equations is necessary. The total
costs
for the Quality Control Department consist of
$350,000 plus 25% (10,000 hours ・40,000 hours)
of maintenance costs. The total costs for the
Maintenance Department equal $200,000 plus 20%
(7,000 hours ・35,000 hours) of quality control
costs. These relationships can be expressed by the
following equations:
Q = $350,000 + .25M
M = $200,000 + .2Q
To solve for Q, the second equation can be
substituted into the first as follows:
Q = $350,000 + .25($200,000 + .2Q)
Q = $350,000 + $50,000 + .05Q
.95Q = $400,000
Q = $421,053
[149] Source: CMA 0691 3-18
Answer (A) is incorrect because the overhead cost
applied per direct labor hour will be $12.
Answer (B) is incorrect because the overhead cost
applied per direct labor hour will be $12.
Answer (C) is correct. With no allocation of service
department costs, the only overhead applicable to
the
Assembly Department is the $300,000 budgeted for
that department. Hence, the overhead cost applied
per direct labor hour will be $12 ($300,000
budgeted overhead ・25,000 hours).
Answer (D) is incorrect because the overhead cost
applied per direct labor hour will be $12.
[150] Source: CMA 1273 4-1
Answer (A) is incorrect because it is a characteristic
of absorption costing systems.
Answer (B) is correct. In a direct (variable) costing
system, only the variable manufacturing costs are
recorded as product costs. All fixed manufacturing
costs are expensed in the period incurred. Because
changes in the relationship between production levels
and sales levels do not cause changes in the amount
of fixed manufacturing cost expensed, profits more
directly follow the trends in sales.
Answer (C) is incorrect because it is a characteristic
of absorption costing systems.
Answer (D) is incorrect because neither variable nor
absorption costing includes administrative costs in
inventory.
[151] Source: CMA 1273 4-2
Answer (A) is incorrect because, since profit is a
function of both sales and production, it will not
always move in the same direction as sales.
Answer (B) is correct. In an absorption costing
system, fixed overhead costs are included in
inventory. When sales exceed production, more
overhead is expensed under absorption costing due
to fixed overhead carried over from the prior
inventory. If sales increase over production, more
than one period's factory overhead is recognized as
expense. Accordingly, if the increase in factory
overhead expensed is greater than the contribution
margin of the increased units sold, there may be less
profit with an increased level of sales.
Answer (C) is incorrect because decreased output
will increase the unit cost of items sold since fixed
factory overhead per unit will increase.
Answer (D) is incorrect because, given that profit is a
function of both sales and productivity, it will not
always move in the same direction as sales.
[153] Source: CMA 1285 4-15
Answer (A) is correct. The contribution margin from
manufacturing (sales - variable costs) is $10 ($40 -
$30) per unit sold, or $1,200,000 (120,000 units x
$10). The fixed costs of manufacturing ($600,000)
and selling and administrative costs ($400,000) are
deducted from the contribution margin to arrive at an
operating income of $200,000. The difference
between the absorption income of $440,000 and the
$200,000 of direct costing income is attributable to
 capitalization of the fixed manufacturing costs
under
the absorption method. Since 40% of the goods
produced are still in inventory (80,000 ・200,000),
40% of the $600,000 in fixed costs, or $240,000,
was capitalized under the absorption method. That
amount was expensed under the direct costing
method.
Answer (B) is incorrect because $440,000 is the
operating income using absorption costing.
Answer (C) is incorrect because $800,000 equals
the contribution margin minus the selling and
administrative costs ($1,200,000 - $400,000).
Answer (D) is incorrect because $600,000 equals
the fixed manufacturing costs.
[154] Source: CMA 1286 4-18
Answer (A) is incorrect because $400,000 does not
include the variable factory overhead. In addition,
this
is the amount of inventoriable costs using
absorption
costing.
Answer (B) is correct. Under direct costing, the only
costs that are capitalized are the variable costs of
manufacturing. These include
Direct materials used $300,000
Direct labor 100,000
Variable factory overhead 50,000
--------
Total inventoriable costs $450,000
========
Answer (C) is incorrect because $490,000 includes
the variable selling and administrative costs.
Answer (D) is incorrect because $530,000 includes
the fixed factory overhead.
[155] Source: CMA 1286 4-19
Answer (A) is incorrect because $400,000 does not
include the variable factory overhead or the fixed
factory overhead.
Answer (B) is incorrect because $450,000 does not
include the fixed factory overhead. In addition, this
is
the amount of inventoriable costs using direct
costing.
Answer (C) is correct. The absorption method is
required for financial statements prepared
according
to GAAP. It charges all costs of production to
inventories. The variable cost of materials
($300,000), direct labor ($100,000), variable
factory
overhead ($50,000), and the fixed factory overhead
($80,000) are included. They total $530,000.
Answer (D) is incorrect because $590,000 includes
the fixed and variable selling and administrative costs.
[156] Source: CMA 1290 3-24
Answer (A) is incorrect because ending inventory
was $1,200,000.
Answer (B) is correct. Under the absorption method,
unit cost is $30 ($12 direct materials + $9 direct
labor + $4 variable overhead + $5 fixed overhead).
Given beginning inventory of 35,000 units, the ending
inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Hence, ending inventory
was $1,200,000 ($30 x 40,000 units).
Answer (C) is incorrect because ending inventory
was $1,200,000.
Answer (D) is incorrect because ending inventory
was $1,200,000.
[157] Source: CMA 1290 3-25
Answer (A) is incorrect because ending inventory
was $1,000,000.
Answer (B) is incorrect because ending inventory
was $1,000,000.
Answer (C) is correct. Using variable costing, the unit
cost of ending inventory is $25 ($12 direct materials
+ $9 direct labor + $4 variable overhead). Given
beginning inventory of 35,000 units, the ending
inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Thus, ending inventory
was $1,000,000 ($25 x 40,000).
Answer (D) is incorrect because ending inventory
was $1,000,000.
[158] Source: CMA 1290 3-29
Answer (A) is correct. Absorption costing results in a
higher income figure than variable costing whenever
production exceeds sales. The reason is that
absorption costing capitalizes some fixed factory
overhead as part of inventory. These costs are
expensed during the period incurred under variable
costing. Consequently, variable costing recognizes
greater expenses and lower income. The reverse is
true when sales exceed production. In that case, the
absorption method results in a lower income because
some fixed costs of previous periods absorbed by the
beginning inventory are expensed in the current
period as cost of goods sold. Variable costing
income is never burdened with fixed costs of previous
periods.
Answer (B) is incorrect because an increase in
inventory results in a higher income under absorption
costing.
Answer (C) is incorrect because the important
relationship is that between actual production and
actual sales, not that between actual and planned
production.
Answer (D) is incorrect because planned sales do not
 determine actual income.
[159] Source: CMA 1290 3-28
Answer (A) is correct. Under the absorption
method,
all selling and administrative fixed costs are
charged
to the current period. Accordingly, $980,000 of
selling expenses and $425,000 of actual fixed
administrative expenses were expensed during the
year. The fixed manufacturing costs must be
calculated after giving consideration to the
increase in
inventory during the period (some fixed costs were
capitalized) and to the underapplied overhead. The
beginning finished goods inventory included 35,000
units, each of which had absorbed $5 of fixed
manufacturing overhead. Each unit produced
during
the year also absorbed $5 of fixed manufacturing
overhead. Given that 125,000 of those units were
sold, cost of goods sold was debited for $625,000
of
fixed overhead (125,000 units x $5). At year-end,
the underapplied overhead was also added to cost
of
goods sold. Because production was expected to be
140,000 units, the overhead application rate for the
$700,000 of planned fixed manufacturing overhead
was $5 per unit. Only 130,000 units were
manufactured. Hence, $650,000 ($5 x 130,000
units) of overhead was applied to units in process.
Because inventory increased from 35,000 to 40,000
units, $25,000 (5,000-unit increase x $5) of the
applied fixed manufacturing overhead for the
period
was inventoried, not expensed. Actual overhead
was
$715,000, so the underapplied overhead was
$65,000 ($715,000 - $650,000). This amount was
charged to cost of goods sold at year-end. The total
of the fixed costs expensed was therefore
$2,095,000 ($980,000 selling expenses + $425,000
administrative expenses + $625,000 standard
manufacturing overhead costs of units sold +
$65,000 underapplied overhead).
Answer (B) is incorrect because the total fixed costs
under the absorption costing basis were
$2,095,000.
Answer (C) is incorrect because the total fixed costs
under the absorption costing basis were
$2,095,000.
Answer (D) is incorrect because the total fixed
costs
under the absorption costing basis were
$2,095,000.
[160] Source: CMA 1290 3-26
Answer (A) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (B) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (C) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (D) is correct. At $70 per unit, actual sales
revenue was $8,750,000 for 125,000 units. Actual
variable costs of manufacturing were $25 per unit
($12 + $9 + $4). The unit incurred costs for a
production level of 130,000 units were the same as
the unit planned costs, which were the same for all
units, whether made in the previous or current year.
For example, total planned direct materials cost for
140,000 units was $1,680,000, or $12 per unit. The
incurred unit cost was also $12 ($1,560,000 ・
130,000 units). Thus, total variable manufacturing
cost was $3,125,000 ($25 x 125,000 units).
Consequently, manufacturing contribution margin was
$5,625,000 ($8,750,000 - $3,125,000).
[161] Source: CMA 1290 3-27
Answer (A) is correct. The unit variable
manufacturing cost was $25 ($12 direct materials +
$9 direct labor + $4 variable overhead). Other
variable costs included selling expenses ($8 per unit)
and administrative expenses ($2 per unit). The unit
selling and administrative costs actually incurred for
sales of 125,000 units were the same as the planned
unit costs. For example, actual unit variable selling
expense was $8 ($1,000,000 ・125,000 units sold),
which equaled the planned unit cost. Thus, total unit
variable cost was $35 ($25 + $8 + $2). The total
expensed was therefore $4,375,000 ($35 x 125,000
units sold).
Answer (B) is incorrect because the total variable
cost expensed under the variable costing basis was
$4,375,000.
Answer (C) is incorrect because the total variable
cost expensed under the variable costing basis was
$4,375,000.
Answer (D) is incorrect because the total variable
cost expensed under the variable costing basis was
$4,375,000.
[162] Source: CMA 1290 3-30
Answer (A) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (B) is correct. The difference is caused by
the capitalization of some of the fixed manufacturing
overhead. When inventories increase during the
period, the absorption method capitalizes that
overhead and transfers it to future periods. The
variable costing method deducts it in the current
period. Inventories increased by 5,000 units during
the period, and each of those units would have
included $5 of fixed manufacturing overhead under
absorption costing. Accordingly, $25,000 of fixed
manufacturing overhead would have been capitalized.
Recognizing $25,000 of fixed costs in the balance
sheet instead of the income statement results in a
$25,000 difference in income between the two
costing methods.
Answer (C) is incorrect because the difference
 between absorption costing and variable costing
income was $25,000.
Answer (D) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
[163] Source: CMA 1292 3-5
Answer (A) is incorrect because manufacturing
supplies are variable costs inventoried under both
methods.
Answer (B) is incorrect because factory insurance is
a fixed manufacturing cost inventoried under
absorption costing but written off as a period cost
under variable costing.
Answer (C) is incorrect because direct labor cost is
a determined by dividing the $1,000 cost increase for
product cost under both methods.
Answer (D) is correct. Under absorption costing, all
manufacturing costs, both fixed and variable, are
treated as product costs. Under variable costing,
only
variable costs of manufacturing are inventoried as
product costs. Fixed manufacturing costs are
expensed as period costs. Packaging and shipping
costs not product costs under either method
because
they are incurred after the goods have been
manufactured. Instead, they are included in selling
and administrative expenses for the period.
[164] Source: CMA 1292 3-6
Answer (A) is correct. Activity-based costing,
job-order costing, process costing, and standard
costing can all be used for both internal and
external
purposes. Variable costing is not acceptable under
GAAP for external reporting purposes.
Answer (B) is incorrect because job costing is
acceptable for external reporting purposes.
Answer (C) is incorrect because variable costing is
acceptable for internal purposes only.
Answer (D) is incorrect because process costing is
acceptable for external reporting purposes.
[165] Source: CMA 1292 3-26
Answer (A) is incorrect because producing more of
the products requiring the most direct labor will
permit more fixed overhead to be capitalized in the
inventory account.
Answer (B) is incorrect because deferring expenses
such as maintenance will increase income in the
current period (but may result in long-range losses
caused by excessive down-time).
Answer (C) is incorrect because increasing
production without a concurrent increase in
demand
applies more fixed costs to inventory.
Answer (D) is correct. Under an absorption-costing
system, income can be manipulated by producing
more products than are sold because more fixed
manufacturing overhead will be allocated to the
ending inventory. When inventory increases, some
fixed costs are capitalized rather than expensed.
Decreasing production, however, will result in lower
income because more of the fixed manufacturing
overhead will be expensed.
[166] Source: CIA 0593 IV-10
Answer (A) is incorrect because total variable cost
would be $1,100 if 200,000 copies were made in
February.
Answer (B) is correct. Unit variable cost can be
the additional copies made in February by the
increase in copies made. Hence, total variable cost
for 110,000 copies is $2,200 {[$1,000 ・(150,000 -
100,000)] x 110,000}.
Answer (C) is incorrect because variable cost per
unit would have to be $.05 to total $5,500.
Answer (D) is incorrect because $7,920 results from
calculating an average cost per copy for January and
February and then multiplying by 110,000 copies.
[167] Source: CIA 1193 IV-10
Answer (A) is incorrect because a change in a
variable period cost will affect absorption and
variable costing in the same way.
Answer (B) is incorrect because, if the beginning
inventory is less than the ending finished goods
inventory, absorption costing assigns more fixed
overhead costs to the balance sheet and less to the
cost of goods sold on the income statement than does
variable costing.
Answer (C) is correct. Absorption costing (full
costing) is the accounting method that considers all
manufacturing costs as product costs. These costs
include variable and fixed manufacturing costs,
whether direct or indirect. However, variable costing
treats fixed factory overhead as a period cost instead
of charging it to the product (inventory). Thus, when
sales exceed production, the absorption costing
method recognizes fixed factory overhead inventoried
in a prior period. Direct costing does not.
Accordingly, net income under variable costing will
be greater than net income under absorption costing.
Answer (D) is incorrect because inflationary effects
will usually affect both absorption and variable
costing in the same way.
[168] Source: CIA 0594 III-46
Answer (A) is incorrect because increasing
inventories increases absorption costing profit as a
result of capitalizing fixed factory overhead.

Answer (B) is incorrect because when sales volume
exceeds production, inventories decline. Thus, fixed
factory overhead expensed will be greater under
absorption costing.
Answer (C) is correct. Absorption (full) costing is the
accounting method that considers all
manufacturing
costs as product costs. These costs include variable
and fixed manufacturing costs whether direct or
indirect. Variable (direct) costing considers only
variable manufacturing costs to be product costs,
i.e.,
inventoriable. Fixed manufacturing costs are
considered period costs and are expensed as
incurred. If production is increased without
increasing
sales, inventories will rise. However, all fixed costs
associated with production will be an expense of
the
period under variable costing. Thus, this action will
not artificially increase profits and improve the
manager's review.
Answer (D) is incorrect because, under variable
costing, operating profit is a function of sales.
Under
absorption costing, it is a function of sales and
production.
[169] Source: CIA 0577 IV-18
Answer (A) is incorrect because variable
manufacturing costs, whether direct (direct
materials
and direct labor) or indirect (variable factory
overhead), are accounted for as product costs, not
period costs.
Answer (B) is incorrect because nonvariable
indirect
costs are treated as period costs in direct costing.
Answer (C) is correct. Direct (variable) costing
considers only variable manufacturing costs to be
product costs. Variable indirect costs included in
variable factory overhead are therefore treated as
inventoriable. Fixed costs are considered period
costs and are expensed as incurred.
Answer (D) is incorrect because, in direct costing,
nonvariable direct costs are treated as period costs,
not product costs.
[170] Source: CIA 1186 IV-8
Answer (A) is incorrect because administrative
costs
and fixed manufacturing overhead costs are
treated
separately although both are period costs in a
direct
costing system.
Answer (B) is incorrect because selling and fixed
manufacturing overhead costs are treated
separately
although both are period costs in a direct costing
system.
Answer (C) is incorrect because inventoriable costs
are directly related to the products produced, unlike
fixed manufacturing overhead which is, under variable
costing, a period cost.
Answer (D) is correct. The distinction between
absorption costing and direct costing is in the
treatment of fixed manufacturing costs. Absorption
costing treats them as product costs by allocating
them to inventory and cost of goods sold. Direct
costing treats all fixed costs as period costs by
expensing them as incurred.
[171] Source: CIA 1187 IV-9
Answer (A) is incorrect because direct costing
arguably understates inventory.
Answer (B) is incorrect because variable factory
overhead is a product cost under any cost system.
Answer (C) is incorrect because it states an argument
against absorption costing.
Answer (D) is correct. Direct costing treats fixed
manufacturing costs as period costs, whereas
absorption costing accumulates them as product
costs. If product costs are viewed as all
manufacturing costs incurred to produce output, fixed
factory overhead should be inventoried because it is
necessary for production. The counter argument in
favor of direct costing is that fixed factory overhead is
more closely related to capacity to produce than to
the production of individual units. Internal reporting
for cost behavior analysis is more useful if it
concentrates on the latter.
[172] Source: CIA 1187 IV-51
Answer (A) is incorrect because indirect labor is a
product cost and sales commissions and depreciation
on the administration building are period costs.
Answer (B) is incorrect because direct labor and
factory utilities are product costs. Sales materials and
administrative supplies are period costs.
Answer (C) is incorrect because product costs
include direct materials and indirect factory materials.
Product costs do not include advertising costs,
administrative labor, or demographic research.
Answer (D) is correct. Product costs are the costs of
producing the product and are usually directly
identifiable with it. Thus, product costs include the
costs of the factors of production identifiable with the
product, which usually include direct materials, direct
labor, and factory (not general) overhead. Factory
overhead includes both fixed and variable elements in
an absorption-costing system, e.g., factory utilities,
indirect labor, and indirect materials. Product costs
are inventoried until the product is sold, at which time
they are expensed as cost of goods sold.
[173] Source: CIA 0585 IV-5
 Answer (A) is incorrect because the gross margins
for Years 1 and 3 are equal.
Answer (B) is incorrect because, with other factors
held constant, the greater sales volume in Year 2
should have produced a greater gross margin than
in
Years 1 or 3.
Answer (C) is correct. Gross margin equals sales
minus CGS (BI + CGM - EI). An absorption-costing
system applies fixed as well as variable overhead
to
products. Because Blue's production has always
been less than planned activity, overhead was
underapplied each year. Hence, Blue must have
debited underapplied overhead each year to CGS,
WIP, and FG. Because production always equaled
sales, however, no inventories existed at any
year-end, and thus each annual underapplication
should have been debited entirely to CGS.
Consequently, the gross margins for Years 1 and 3
must be the same because the gross revenue and
CGS were identical for the two periods.
Answer (D) is incorrect because Year 3 includes the
same amount of fixed overhead costs as in Year 2,
but it has less revenue than in Year 2; therefore,
the
gross margin will be lower.
[174] Source: CIA 0584 IV-1
Answer (A) is incorrect because 34% gross margin
includes all of the listed expenses. The period costs
should not be included in the gross margin
calculation.
Answer (B) is incorrect because sales salaries and
advertising expenses should not be included in the
determination of the gross margin percentage.
Answer (C) is incorrect because 44% gross margin
includes all of the rent and supervision expenses.
Only their respective percentages of 9/10 and 2/3
should be included in the gross margin percentage
calculation.
Answer (D) is correct. The gross margin percentage
equals gross profit (sales - CGS) divided by sales.
Sales are given as $40,000, and expenses included
in
cost of goods sold are listed as follows. The gross
margin is $18,400, which is 46% of $40,000.
Sales $40,000
Cost of goods sold
Direct materials $9,050
Direct labor 6,050
Rent (9/10 x $3,000) 2,700
Depreciation 2,000
Supervision (2/3 x $1,500) 1,000
Insurance (2/3 x $1,200) 800 (21,600)
------ -------
$18,400
=======
Office expenses are usually general and
administrative
expenses, which are period rather than product
costs.
[175] Source: CIA 0584 IV-6
Answer (A) is incorrect because $6.83 is computed
by assuming two-thirds of the order is produced at
$6.50 per unit and one-third of the order is produced
at $7.50 per unit.
Answer (B) is incorrect because $7.00 is the simple
average of the two variable cost amounts.
Answer (C) is correct. Variable cost is equal to the
direct costs associated with a product, an order, or
other decision. In this case, one-third of the order has
a variable cost of $6.50, and two-thirds of the order
has a variable cost of $7.50. Thus, the average
variable cost is $7.17 {($6.50 ・3) + [(2 x $7.50) ・
3]}.
Answer (D) is incorrect because the sales price per
unit of the new order is $7.25.
[176] Source: CIA 0584 IV-7
Answer (A) is correct. The unit contribution margin
of the new order is the selling price of $7.25 minus
the average variable cost. The average variable cost
is $7.17. Accordingly, the unit contribution margin on
the order is $.08.
Answer (B) is incorrect because a $.25 contribution
margin assumes a cost per unit of $7.00.
Answer (C) is incorrect because the contribution
margin is determined by subtracting the average
variable cost ($7.17) from the unit sales price
($7.25).
Answer (D) is incorrect because the contribution
margin is determined by subtracting the average
variable cost ($7.17) from the unit sales price
($7.25).
[177] Source: CIA 0591 IV-13
Answer (A) is incorrect because operating income
under variable costing equals sales, minus all fixed
costs, minus the variable cost of the goods sold.
Answer (B) is incorrect because $700 results from
multiplying variable manufacturing costs per unit
($5.50) by units produced (1,200) rather than units
sold (1,000).
Answer (C) is correct. Operating income under
variable costing equals sales, minus all fixed costs,
minus the variable cost of the goods sold. No fixed
costs are inventoried. The unit variable cost of the
goods sold was $6.00 ($5.50 + $.50), so variable
CGS was $6,000 (1,000 units x $6.00). Total fixed
costs equaled $2,200 ($1,200 + $1,000). Given
sales of $10,000 (1,000 units x $10), operating
income was $1,800 ($10,000 - $6,000 - $2,200).
Answer (D) is incorrect because $2,300 does not
include variable selling and administrative costs of
$500 (10,000 units x $.50).

[178] Source: CIA 0591 IV-14
Answer (A) is incorrect because $1,800 is the
operating income under variable costing.
Answer (B) is incorrect because fixed
manufacturing
overhead costs are allocated to CGS and inventory.
Fixed selling and administrative costs are not
allocated, but are treated as period costs.
Answer (C) is correct. Absorption costing
inventories
(treats as a product cost) fixed manufacturing
overhead. Variable costing treats all fixed
manufacturing overhead as a period cost.
Assuming a
fixed manufacturing overhead application rate of
$1
per unit ($1,200 ・1,200 units produced), ending
inventory and operating income will be $200
greater
under absorption than variable costing.
Accordingly,
absorption costing operating income is $2,000
($1,800 variable costing operating income + $200).
Answer (D) is incorrect because only fixed
manufacturing overhead costs are allocated to CGS
and inventory. Fixed selling and administrative
costs
are treated as period costs.
[179] Source: CIA 1190 IV-12
Answer (A) is correct. Absorption-costing operating
income will exceed variable-costing operating
income
because production exceeds sales, resulting in a
deferral of fixed manufacturing overhead in the
inventory calculated using the absorption method.
The difference of $200,000 is equal to the fixed
manufacturing overhead per unit ($2,200,000 ・
275,000 = $8.00) times the difference between
production and sales (275,000 - 250,000 = 25,000,
which is the inventory change in units).
Answer (B) is incorrect because units produced, not
units sold, should be used as the denominator to
calculate the fixed manufacturing cost per unit.
Answer (C) is incorrect because fixed selling and
administrative costs are not properly inventoriable
under absorption costing.
Answer (D) is incorrect because variable selling and
administrative costs are period costs under both
variable- and absorption-costing systems in the
determination of operating income.
[180] Source: CMA 0696 3-3
Answer (A) is incorrect because a portion of the
total
costs is still in work-in-process.
Answer (B) is incorrect because $40,000 assumes
that work-in-process is 100% complete as to
conversion costs.
Answer (C) is incorrect because $53,000 exceeds
the actual costs incurred during the period. Given no
beginning inventory, the amount transferred out
cannot exceed the costs incurred during the period.
Answer (D) is correct. The total equivalent units for
raw materials equals 10,000 because all materials for
the ending work-in-process had already been added
to production. Hence, the materials cost per unit was
$3.30 ($33,000 ・10,000). For conversion costs,
the total equivalent units equals 8,500 [8,000
completed + (25% x 2,000 in EWIP)]. Thus, the
conversion cost was $2.00 per unit ($17,000 ・
8,500). The total cost transferred was therefore
$42,400 [8,000 units x ($3.30 + $2.00)].
[181] Source: CMA 0696 3-4
Answer (A) is incorrect because $10,000 assumes
that work-in-process inventory is 100% complete as
to conversion costs.
Answer (B) is incorrect because $2,500 assumes that
work-in-process inventory is 100% complete as to
conversion costs and that 500 bats are in inventory.
Answer (C) is incorrect because $20,000 assumes
that work-in-process is 100% complete as to
conversion costs and that 6,000 units were
transferred out.
Answer (D) is correct. $42,400 of costs were
transferred out. Consequently, the cost of the ending
work-in-process must have been $7,600 ($50,000
total costs incurred - $42,400).
[182] Source: CMA 0696 3-19
Answer (A) is incorrect because $101,400 assumes
zero ending inventory.
Answer (B) is incorrect because $127,650 results
from reversing the treatment of beginning and ending
inventories.
Answer (C) is correct. Purchases equals usage
adjusted for the inventory change. Hence, purchases
equals $130,150 ($128,900 used - $27,500 BI +
$28,750 EI).
Answer (D) is incorrect because $157,650 assumes
zero beginning inventory.
[183] Source: CMA 0696 3-29
Answer (A) is incorrect because $6.50 includes
selling and administrative expenses.
Answer (B) is incorrect because $6.30 includes
selling costs.
Answer (C) is incorrect because $5.70 includes
administrative expenses.
 Answer (D) is correct. Cost of goods sold is based
on the manufacturing costs incurred in production
but
does not include selling or general and
administrative
expenses. Manufacturing costs equal $38,500
[$13,700 DM + $4,800 DL + (800 hours x $25)
FOH]. Thus, per-unit cost is $5.50 ($38,500 ・
7,000 units).
[184] Source: CMA 0696 3-30
Answer (A) is incorrect because the ABC
assignment
of $4,513 is at a rate of $180.52 for each of the 25
orders.
Answer (B) is incorrect because ABC yields a higher
allocation.
Answer (C) is incorrect because the total is $4,513
on the ABC basis.
Answer (D) is correct. ABC identifies the causal
relationship between the incurrence of cost and
activities, determines the drivers of the activities,
establishes cost pools related to the drivers and
activities, and assigns costs to ultimate cost objects
on the basis of the demands (resources or drivers
consumed) placed on the activities by those cost
objects. Hence, ABC assigns overhead costs based
on multiple allocation bases or cost drivers. Under
the traditional, single-base system, the amount
allocated is $3,987.50 ($27,500 x 14.5%). Under
ABC, the amount allocated is $4,513 [($11.50 x 12)
+ ($.14 x 17,500) + ($77 x 25)], or $525.50 more
than under the traditional system.
[185] Source: CMA 1296 3-18
Answer (A) is incorrect because a wallpaper
manufacturer would use a process costing system.
Answer (B) is incorrect because a public accounting
firm would use a job costing system.
Answer (C) is incorrect because a paint
manufacturer
would use a process costing system.
Answer (D) is correct. A job costing system is used
when products differ from one customer to the
next,
that is, when products are heterogeneous. A
process
costing system is used when similar products are
mass produced on a continuous basis. A print shop,
for example, would use a job costing system
because
each job will be unique. Each customer provides
the
specifications for the product desired. A beverage
manufacturer, however, would use a process
costing
system because homogenous units are produced
continuously.
[186] Source: CIA 1193 IV-4
Answer (A) is incorrect because $25,000 excludes
the indirect materials.
Answer (B) is correct. Factory (manufacturing)
overhead consists of all costs, other than direct
materials and direct labor, that are associated with
the manufacturing process. It includes both fixed and
variable costs. The factory overhead control account
should have the following costs:
Indirect materials $ 5,000
Indirect labor ($45,000-$40,000) 5,000
Other factory overhead 20,000
-------
Total overhead $30,000
=======
Answer (C) is incorrect because $45,000 is the total
labor cost.
Answer (D) is incorrect because $50,000 is the
direct materials cost.
[187] Source: CMA Samp Q3-5
Answer (A) is incorrect because $11,000 equals the
difference between budgeted and actual overhead.
Answer (B) is correct. Pane applies overhead to
products on the basis of direct labor cost. The rate is
1.4 ($448,000 budgeted OH ・$320,000 budgeted
DL cost). Thus, $483,000 (1.4 x $345,000 actual
DL cost) of overhead was applied, of which $24,000
($483,000 - $459,000 actual OH) was overapplied.
Answer (C) is incorrect because $11,000 equals the
difference between budgeted and actual overhead.
Answer (D) is incorrect because the overhead was
overapplied.
[188] Source: CIA 0594 III-47
Answer (A) is incorrect because marketing and
distribution costs should be allocated to specific
products.
Answer (B) is correct. ABC determines the activities
that will serve as cost objects and then accumulates a
cost pool for each activity using the appropriate
activity base (cost driver). It is a system that may be
employed with job order or process costing methods.
Thus, when there is only one product, the allocation
of costs to the product is trivial. All of the cost is
assigned to the one product; the particular method
used to allocate the costs does not matter.
Answer (C) is incorrect because ABC determines the
activities that will serve as cost objects and then
accumulates a cost pool for each activity using the
appropriate activity base (cost driver).
Answer (D) is incorrect because, under ABC, a
product is allocated only those costs that pertain to its
production; that is, products are not
cross-subsidized.
[189] Source: CIA 1194 III-49
Answer (A) is incorrect because $19,800 equals the
sum of 40% of S1's pre-allocation costs and 50% of
S2's pre-allocation costs.
Answer (B) is incorrect because $21,949 is the total
service cost allocated to P1.
Answer (C) is incorrect because $22,500 equals the
average of the pre-allocation costs of S1 and S2.
Answer (D) is correct. The reciprocal method
allocates service department costs to other service
departments as well as to production departments
by
means of simultaneous equations, as shown below.
Thus, total service cost allocated to P2 is $23,051
[(40% x $31,224) + (50% x $21,122)].
S1 = $27,000 + .2S2 S2 = $18,000
+ .1($31,224)
$27,000 + [.2($18,000 + .1S1)] $18,000
+ $3,122
$27,000 + $3,600 + .02S1 S2 = $21,122
.98S1 = $30,600
S1 = $31,224
[190] Source: CIA 0595 III-89
Answer (A) is incorrect because the
weighted-average method tends to smooth costs
over
time.
Answer (B) is incorrect because the FIFO method is
more precise. It is based only on the work
completed
in the current period.
Answer (C) is incorrect because the two methods
will provide dissimilar results when physical
inventory
levels and the production costs (materials and
conversion costs) fluctuate greatly from period to
period.
Answer (D) is correct. The calculation of the cost
per
equivalent unit using the FIFO method keeps the
costs in one period separate from the costs of prior
periods. Under the weighted-average method, the
costs in the beginning work-in-process inventory
are
combined with current-period costs.
[192] Source: CIA 1195 III-41
Answer (A) is correct. A cost allocation base is the
common denominator for systematically correlating
indirect costs and a cost object. The cost driver of
the indirect costs is ordinarily the allocation base.
In a
homogeneous cost pool, all costs should have the
same or a similar cause-and-effect relationship with
the cost allocation base.
Answer (B) is incorrect because, if an allocation base
uniformly assigns costs to cost objects when the cost
objects use resources in a nonuniform way, the base
is smoothing or spreading the costs. Smoothing can
result in undercosting or overcosting of products, with
adverse effects on product pricing, cost management
and control, and decision making.
Answer (C) is incorrect because financial measures
(e.g., sales dollars and direct labor costs) and
nonfinancial measures (e.g., setups and units shipped)
can be used as allocation bases.
Answer (D) is incorrect because high correlation
between the cost items in a pool and the allocation
base does not necessarily mean that a
cause-and-effect relationship exists. Two variables
may move together without such a relationship. The
perceived relationship between the cost driver
(allocation base) and the indirect costs should have
economic plausibility and high correlation.
[193] Source: CIA 1195 III-93
Answer (A) is incorrect because $5.39 assumes that
80 machine hours are required for the total
production of 20,000 units.
Answer (B) is incorrect because $5.44 is based on
the machining overhead rate ($18).
Answer (C) is correct. Given that manufacturing
overhead is applied on the basis of machine hours,
the overhead rate is $60 per hour ($1,800,000 ・
30,000) or $.96 per unit [($60 x 80 machine hours
per batch) ・5,000 units per batch]. Accordingly, the
unit full cost is $6.11 ($5.15 unit prime cost + $.96).
Answer (D) is incorrect because $6.95 is based on
the direct labor hour manufacturing overhead rate.
[194] Source: CIA 1195 III-94
Answer (A) is incorrect because $6.00 assumes one
setup per batch and that total machine hours equaled
80.
Answer (B) is incorrect because $6.08 assumes that
only 80 machine hours were used.
Answer (C) is incorrect because $6.21 assumes one
setup per batch.
Answer (D) is correct. Materials handling cost per
part is $.12 ($720,000 ・6,000,000), cost per setup
is $420 ($315,000 ・750), machining cost per hour
is $18 ($540,000 ・30,000), and quality cost per
batch is $450 ($225,000 ・500). Hence, total
manufacturing overhead applied is $22,920 [(5 parts
per unit x 20,000 units x $.12) + (4 batches x 2
setups per batch x $420) + (4 batches x 80 machine
hours per batch x $18) + (4 batches x $450)]. The
total unit cost is $6.296 [$5.15 prime cost +
($22,920 ・20,000 units) overhead].
[195] Source: CIA 1196 III-84
 Answer (A) is incorrect because activity-based
costing develops cost pools for activities and then
allocates those costs to cost objects based on the
drivers of the activities.
Answer (B) is incorrect because job-order costing
accumulates costs by job or lot, for example, when
the company produces varied items on a
custom-order basis.
Answer (C) is incorrect because operation costing is
a hybrid of job-order costing and process costing.
Answer (D) is correct. Process costing is used to
assign costs to similar products that are mass
produced on a continuous basis. Because the
company has a continuous flow of a single product,
process costing is most likely to be used for its
manufacturing operations.
[196] Source: CIA 0596 III-77
Answer (A) is correct. Job-order costing is
appropriate when producing products with
individual
characteristics and/or when identifiable groupings
are
possible, e.g., batches of certain styles or types of
furniture. The unique aspect of job-order costing is
the identification of costs to specific units or a
particular job. Thus, job-order costing is appropriate
for auto repair. Operation costing is a hybrid of
job-order and process costing systems. It is used by
companies that manufacture goods that undergo
some similar and some dissimilar processes.
Operation costing accumulates total conversion
costs
and determines a unit conversion cost for each
operation. However, direct materials costs are
charged specifically to products as in job-order
systems. Operation costing is appropriate for
clothing
manufacturing. Process costing should be used to
assign costs to similar products that are mass
produced on a continuous basis. Costs are
accumulated by departments or cost centers rather
than by jobs, work in process is stated in terms of
equivalent units, and unit costs are established on
a an allocation base of 50,000 square feet, the base
departmental basis. Process costing is an averaging
process that calculates the average cost of all
units.
Process costing is appropriate for oil refining.
Answer (B) is incorrect because custom printing
requires job-order costing.
Answer (C) is incorrect because process costing
should be used for paint manufacturing.
Answer (D) is incorrect because job-order costing is
appropriate for motion picture production.
[197] Source: CIA 1196 III-85
Answer (A) is incorrect because 175,000 units does
not include 20,000 units from BWIP.
Answer (B) is incorrect because 181,500 units
includes 150,000 units plus 40% of BWIP, 80% of
EWIP, and 70% of the defective units.
Answer (C) is correct. The equivalent units for direct
materials equals 195,000 units (20,000 BWIP +
150,000 units started and completed + 25,000
EWIP). This calculation recognizes that direct
materials had not been added to beginning inventory
(60% complete) and spoiled units (70% complete),
but that ending inventory (80% complete) includes
direct materials.
Answer (D) is incorrect because 200,000 units
includes 100% of the defective units.
[198] Source: CIA 1196 III-86
Answer (A) is incorrect because abnormal spoilage is
not a normal result of efficient operations. In this
case, the percentage of spoiled units is within the
normal tolerance limit.
Answer (B) is correct. The units that failed inspection
are classified as normal scrap because they have
minimal value and can be sold without further
reworking. The defective units are less than the 4%
tolerance limit for normal spoilage. Scrap can be
sold, disposed of, or reused.
Answer (C) is incorrect because reworked units are
defective units that require further processing for them
to be sold. This company does not rework defective
units.
Answer (D) is incorrect because waste has no
monetary value and may have a disposal cost
associated with it.
[199] Source: CIA 0596 III-82
Answer (A) is incorrect because $140,000 is 40% of
other traceable costs.
Answer (B) is incorrect because $160,000 assumes
an allocation base of 55,000 square feet.
Answer (C) is incorrect because $176,000 assumes
that would be used under the step method if the costs
of building operations are allocated first.
Answer (D) is correct. The direct method does not
allocate service costs to other service departments.
Hence, the allocation base is the square footage in the
two production departments. Fabricating's share is
40% (16,000 ・40,000) of the total cost incurred by
Building Operations, or $220,000 (40% x
$550,000).
[200] Source: CIA 0596 III-83
Answer (A) is incorrect because $657,000 results
from allocating building operations costs first. Also,
the information services costs are allocated using total
computer hours.
Answer (B) is incorrect because $681,600 results
from allocating building operations costs to
 Information Services.
Answer (C) is incorrect because $730,000 allocates
the costs of both service departments according to
the direct method rather than the step method.
Answer (D) is correct. The step method of service
department cost allocation is a sequential (but not
a which detection occurs because it is not normal or
reciprocal) process. These costs are allocated to
other service departments as well as to users. The
process usually starts with the service department
that
renders the greatest percentage of its services to
other service departments, the department that
provides services to the greatest number of other
departments, or the department with the greatest
costs of services provided to other service
departments. If the $1,200,000 of information
services costs is allocated first, the allocation base
is
2,000 computer hours (200 + 1,200 + 600). Thus,
$120,000 [(200 ・2,000) x $1,200,000] will be
allocated to Building Operations and $360,000
[(600
・2,000) x $1,200,000] to Finishing. The total of the
building operations costs to be allocated to
production equals $670,000 ($550,000 +
$120,000). The allocation base will be 40,000
square feet because no costs are allocated back to
Information Services. Accordingly, the total of
service costs allocated to Finishing equals
$762,000
{$360,000 + [$670,000 x (24,000 ・40,000)]}.
[201] Source: CIA 0596 III-99
Answer (A) is incorrect because the number of
customer phone calls has little relation to
distribution.
It is probably more closely related to customer
service.
Answer (B) is correct. The number of shipments is
an
appropriate cost driver. A cause-and-effect
relationship may exist between the number of
shipments and distribution costs.
Answer (C) is incorrect because the number of
sales
persons is not related to distribution. It is more
closely related to marketing.
Answer (D) is incorrect because the dollar sales
volume is not necessarily related to distribution. It
is
more likely related to marketing.
[202] Source: CMA 0680 4-5
Answer (A) is incorrect because normal spoilage
costs end up in inventory, not abnormal spoilage.
Answer (B) is incorrect because material variance
accounts are charged only for the variances in
material usage or material price, not for the
spoilage
of product.
Answer (C) is incorrect because, while charging
abnormal spoilage to manufacturing overhead is an
occasional practice, it is not the ordinary practice,
which is to charge it to a special loss account.
Answer (D) is correct. Abnormal spoilage is usually
charged to a special loss account in the period in
anticipated.
[203] Source: CMA 0697 3-4
Answer (A) is incorrect because operation costing is
used for goods that undergo some similar and some
dissimilar processes. Direct materials are costed on a
job-order basis, whereas a unit conversion cost is
determined for each operation.
Answer (B) is incorrect because ABC emphasizes
activities as the basic cost objects. It establishes cost
pools for the activities and then reassigns those costs
to other cost objects (e.g., products) on the basis of
their consumption of the related cost drivers.
Answer (C) is incorrect because job-order costing
accumulates costs by job rather than by department.
Answer (D) is correct. Process costing is used to
assign costs to similar products that are mass
produced on a continuous basis. Costs are
accumulated by departments or cost centers rather
than by jobs. Process costing is an averaging process
that calculates the average cost of all units.
[204] Source: CMA 0695 3-1
Answer (A) is incorrect because 97,600 units omits
the 6,400 EUP added to beginning work-in-process.
Answer (B) is correct. Under FIFO, EUP are based
solely on work performed during the current period.
The EUP equals the sum of the work done on the
beginning work-in-process inventory, units started
and completed in the current period, and the ending
work-in-process inventory. Given that beginning
work-in-process was 60% complete as to materials,
the current period is charged for 6,400 EUP (40% x
16,000 units). Because 92,000 units were completed
during the period, 76,000 (92,000 - 16,000 in
BWIP) must have been started and completed during
the period. They represent 76,000 EUP. Finally, the
EUP for ending work-in-process equal 21,600 (90%
x 24,000 units). Thus, total EUP for May are
104,000 (6,400 + 76,000 + 21,600).
Answer (C) is incorrect because 107,200 units
assumes beginning work-in-process was 40%
complete.
Answer (D) is incorrect because 108,000 units
equals the sum of the physical units in beginning
work-in-process and the physical units completed.
[205] Source: CMA 0695 3-2
Answer (A) is incorrect because 85,600 units omits
the work done on beginning work-in-process.

Answer (B) is incorrect because 88,800 units omits
the work done on ending work-in-process.
Answer (C) is incorrect because 95,200 units
assumes the beginning work-in-process was 40%
complete as to conversion costs.
Answer (D) is correct. The beginning inventory was
20% complete as to conversion costs. Hence,
12,800 EUP (80% x 16,000 units) were required for
completion. EUP for units started and completed
equaled 76,000 [100% x (92,000 completed units -
16,000 units in BWIP)]. The work done on ending
work-in-process totaled 9,600 EUP (40% x 24,000
units). Thus, total EUP for May are 98,400 (12,800
+ 76,000 + 9,600).
[206] Source: CMA 0695 3-3
Answer (A) is incorrect because $4.12 is based on
EUP calculated under the weighted-average
method.
Answer (B) is correct. Under the FIFO method,
EUP for materials equal 104,000 [(16,000 units in
BWIP x 40%) + (76,000 units started and
completed x 100%) + (24,000 units in EWIP x
90%)]. Consequently, the equivalent unit cost of
materials is $4.50 ($468,000 total materials cost in
May ・104,000 EUP).
Answer (C) is incorrect because $4.60 is the
weighted-average cost per equivalent unit.
Answer (D) is incorrect because $4.80 omits the
6,400 EUP added to beginning work-in-process.
[207] Source: CMA 0695 3-4
Answer (A) is incorrect because $5.65 is based on
EUP calculated under the weighted-average
method.
Answer (B) is correct. Under the FIFO method,
EUP for conversion costs equal 98,400 [(16,000
units in BWIP x 80%) + (76,000 units started and
completed x 100%) + (24,000 units in EWIP x
40%)]. Conversion costs incurred during the current
period equal $574,040 ($182,880 DL + $391,160
FOH). Hence, the equivalent unit cost for
conversion
costs is $5.83 ($574,040 ・98,400).
Answer (C) is incorrect because $6.00 is the cost
per equivalent unit calculated under the
weighted-average method.
Answer (D) is incorrect because $6.20 results from
combining conversion costs for May with those in
beginning work-in-process and dividing by 98,400
EUP.
[208] Source: CMA 0695 3-5
Answer (A) is correct. The FIFO costs per
equivalent unit for materials and conversion costs are
$4.50 and $5.83, respectively. EUP for materials in
ending work-in-process equal 21,600 (90% x
24,000). Thus, total FIFO materials cost is $97,200
(21,600 EUP x $4.50). EUP for conversion costs in
ending work-in-process equal 9,600 (40% x
24,000). Total conversion costs are therefore
$55,968 (9,600 EUP x $5.83). Consequently, total
work-in-process costs are $153,168 ($97,200 +
$55,968).
Answer (B) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion costs.
Answer (C) is incorrect because $155,328 is based
on a weighted-average calculation for materials and a
FIFO calculation for conversion costs.
Answer (D) is incorrect because $156,960 is the
weighted-average cost of ending work-in-process.
[209] Source: CMA 0695 3-6
Answer (A) is incorrect because $4.12 equals
materials costs for May divided by weighted-average
EUP.
Answer (B) is incorrect because $4.50 is the
equivalent unit cost based on the FIFO method.
Answer (C) is correct. The weighted-average
method averages the work done in the prior period
with the work done in the current period. There are
two layers of units to analyze: those completed during
the period, and those still in ending inventory. The
units completed totaled 92,000. The 24,000 ending
units are 90% complete as to materials, so EUP
equal 21,600. Hence, total EUP for materials are
113,600 (92,000 + 21,600). The total materials
costs incurred during the period and accumulated in
beginning work-in-process is $522,560 ($468,000 +
$54,560). Thus, weighted-average unit cost is $4.60
($522,560 ・113,600 EUP).
Answer (D) is incorrect because $5.02 is based on a
FIFO calculation of equivalent units and a
weighted-average calculation of costs.
[210] Source: CMA 0695 3-7
Answer (A) is incorrect because $5.65 omits the
conversion costs in beginning work-in-process.
Answer (B) is incorrect because $5.83 is the
equivalent unit conversion cost based on FIFO.
Answer (C) is correct. The weighted-average
method does not distinguish between the work done
in the prior period and the work done in the current
period. Accordingly, the 92,000 completed units
represent 92,000 weighted-average EUP. The
24,000 units in ending work-in-process are 40%
complete as to conversion costs, so they equal 9,600
EUP. Hence, total EUP for conversion costs are
101,600 (92,000 + 9,600). The sum of the
conversion costs accumulated in beginning
work-in-process and incurred during the period is
 $609,600 ($20,320 + $15,240 + $182,880 +
$391,160). Thus, weighted-average unit cost is
$6.00 ($609,600 ・101,600 EUP).
Answer (D) is incorrect because $6.20 is based on a
FIFO calculation of equivalent units and a
weighted-average calculation of costs.
[211] Source: CMA 0695 3-8
Answer (A) is incorrect because $99,360 is the
weighted-average cost of materials in ending
work-in-process.
Answer (B) is incorrect because $153,168 is the
FIFO cost of ending work-in-process.
Answer (C) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion costs.
Answer (D) is correct. The weighted-average costs
per equivalent unit for materials and conversion
costs
are $4.60 and $6.00, respectively. EUP for materials
in ending work-in-process equal 21,600 (90% x
24,000). Thus total weighted-average materials
cost
is $99,360 ($4.60 x 21,600). EUP for conversion
costs in ending work-in-process equal 9,600 (40% x
24,000 units). Total conversion costs are therefore
$57,600 ($6.00 x 9,600 EUP). Consequently, total
ending work-in-process costs are $156,960
($99,360 + $57,600).
[212] Source: CMA 1290 3-4
Answer (A) is incorrect because the number of units
of production may have no logical relationship to
overhead when several different products are
made.
Answer (B) is incorrect because a low level of direct
labor costs means that fixed overhead is
substantial,
and an appropriate cost driver should be used to
make the allocation.
Answer (C) is incorrect because the allocation
should
be made on the basis of the appropriate cost
drivers
without regard to the relationship between direct
materials and labor costs.
Answer (D) is correct. Allocating overhead on the
basis of the number of units produced is usually not
appropriate. Costs should be allocated on the basis
of some plausible relationship between the cost
object and the incurrence of the cost, preferably
cause and effect. Overhead costs may be incurred
regardless of the level of production. When multiple
products are involved, the number of units of
production may bear no relationship to the
incurrence
of the allocated cost. If overhead is correlated with
machine hours but different products require
different
quantities of that input, the result may be an illogical
allocation. However, if a firm manufactures only one
product, this allocation method may be acceptable
because all costs are to be charged to the single
product.
[213] Source: CMA 0696 3-21
Answer (A) is incorrect because a material amount
should be allocated among cost of goods sold,
work-in-process, and finished goods.
Answer (B) is incorrect because a material amount
should be allocated among cost of goods sold,
work-in-process, and finished goods.
Answer (C) is incorrect because a material amount
should be allocated among cost of goods sold,
work-in-process, and finished goods.
Answer (D) is correct. Overapplied or underapplied
factory overhead should be disposed of at the end of
an accounting period by transferring the balance
either to cost of goods sold (if the amount is not
material) or to cost of goods sold, finished goods
inventory, and work-in-process inventory.
Theoretically, the allocation is preferred, but, because
the amount is usually immaterial, the entire balance is
often transferred directly to cost of goods sold. Thus,
the entry depends upon the significance of the
amount.
[214] Source: CMA 0697 3-6
Answer (A) is incorrect because $72,000 is the
variable cost allocation.
Answer (B) is incorrect because $122,000 assumes
that fixed costs are allocated equally between A and
B.
Answer (C) is incorrect because $132,000 assumes
fixed costs are allocated at a per-page rate based on
available capacity ($100,000 ・4,000,000 pages =
$.025 per page), not on budgeted usage ($100,000
・3,600,000 pages = $.0278 per page).
Answer (D) is correct. Department B is budgeted to
use 66 2/3% of total production (2,400,000 ・
3,600,000), so it should be allocated fixed costs of
$66,667 (66 2/3% x $100,000). The variable cost
allocation is $72,000 (2,400,000 pages x $.03 per
page), and the total allocated is therefore $138,667
($66,667 + $72,000).
[215] Source: CMA 0697 3-7
Answer (A) is incorrect because $42,000 equals the
variable costs allocated to Department A.
Answer (B) is incorrect because $72,000 is the
allocation to Department B using a single rate.
Answer (C) is correct. Based on budgeted usage,
Department A should be allocated 33-1/3%
[1,200,000 pages ・(1,200,000 pages + 2,400,000
pages)] of fixed costs, or $33,333 (33-1/3% x
$100,000). The variable costs are allocated at $.03
 per unit for 1,400,000 pages, or $42,000. The sum
of the fixed and variable elements is $75,333.
Answer (D) is incorrect because $82,000 assumes
fixed costs are allocated at a per-page rate based
on
actual usage ($100,000 ・3,500,000 pages =
$.0286 per page).
[216] Source: CMA 0697 3-8
Answer (A) is correct. The direct method allocates
service department costs directly to the producing
departments without recognition of services
provided
among the service departments. Hence, no service
cost is allocated to the Tool Department because it
is
a service department.
Answer (B) is incorrect because the direct method
does not recognize any allocation between or
among
service departments; only production departments
receive cost allocations.
Answer (C) is incorrect because the direct method
does not recognize any allocation between or
among
service departments; only production departments
receive cost allocations.
Answer (D) is incorrect because the direct method
does not recognize any allocation between or
among
service departments; only production departments
receive cost allocations.
[217] Source: CMA 0697 3-9
Answer (A) is incorrect because, under the
step-down method, other service departments
share
in the allocation of costs.
Answer (B) is correct. Under the step-down method,
service costs are allocated to all departments.
However, no reciprocal allocations are allowed. The
process may begin with the department that
supports
the greatest number of departments, that incurs
the
greatest costs, or that provides the greatest
percentage of its services to other service
departments. Thus, the Repair Department is the
logical starting point. Given that service costs are
allocated to each department (service or
production)
on the basis of its proportion of employees
(excluding
employees in the allocating department), the
allocation of the Repair Department's overhead to
the
Tool Department is $875 {$35,000 x [1 employee
・ Answer (C) is correct. Materials used equals
(1 + 2 + 25 + 12)]}.
Answer (C) is incorrect because this amount is far
greater than could be allocated to a service
department with one employee.
Answer (D) is incorrect because this amount is far
greater than could be allocated to a service
department with one employee.
[218] Source: Publisher
Answer (A) is correct. The total equivalent units for
raw materials equal 10,000 units (the total units
placed into production) because all direct materials
were added to production. The materials cost per
equivalent unit is therefore $6.60 ($66,000 total DM
costs ・10,000 equivalent units). The total equivalent
units for conversion costs equal 7,000 units [6,000
finished units + (25% x 4,000 units in EWIP]. Hence,
conversion cost per equivalent unit is $4.86 ($34,000
total CC ・7,000 equivalent units). Total product
cost per equivalent unit is $11.46 ($6.60 + $4.86),
so total transferred-out cost is $68,760 ($11.46 x
6,000 units transferred).
Answer (B) is incorrect because $60,000 assumes
conversion costs are added at the beginning of the
process in the same manner as raw materials.
Answer (C) is incorrect because $39,600 assumes
that only raw materials costs are transferred out.
Answer (D) is incorrect because $29,160 is the
amount of conversion costs transferred out.
[219] Source: Publisher
Answer (A) is incorrect because $11,460 assumes
that the work-in-process inventory is only 1,000
units.
Answer (B) is incorrect because $26,400 includes
only the cost of raw materials.
Answer (C) is correct. Direct materials cost and
conversion cost per equivalent unit are $6.60 and
$4.86, respectively. Because the ending
work-in-process contains 4,000 equivalent units of
direct materials costs (4,000 physical units x 100%)
and 1,000 equivalent units of conversion costs (4,000
physical units x 25%), its recorded balance is
$31,260 (4,000 x $6.60) + (1,000 x $4.86).
Answer (D) is incorrect because $45,840 assumes
that the units are 100% complete as to conversion
costs as well as materials.
[220] Source: Publisher
Answer (A) is incorrect because $255,300
transposed the ending and beginning inventory
amounts.
Answer (B) is incorrect because $257,800 is the
amount of materials used without regard to changes in
inventory levels.
beginning inventory, plus purchases, minus ending
inventory. Given that purchases are not known, the
calculation is as follows:
 $37,000 + P - $39,500 = $257,800
P = $257,800 + $39,500 - $37,000
P = $260,300
Answer (D) is incorrect because $297,300 fails to
consider the beginning inventory.
[221] Source: Publisher
Answer (A) is incorrect because $9.25 fails to
include overhead.
Answer (B) is correct. Cost of goods sold is based
on the manufacturing costs incurred in production.
It
does not include selling or general and
administrative
expenses. Manufacturing costs consist of direct
materials, $27,400; direct labor, $9,600; and
factory
overhead, $20,000 (400 direct labor hours x $50
per
hour). The total of these three cost elements is
$57,000. Dividing the $57,000 of total
manufacturing
costs by the 4,000 units produced results in a
per-unit cost of $14.25.
Answer (C) is incorrect because $14.95 includes
administrative costs.
Answer (D) is incorrect because $17.75 includes
selling and administrative costs.
[222] Source: Publisher
Answer (A) is incorrect because $150 per order
equals $4,500 divided by 30 orders.
Answer (B) is incorrect because ABC yields an
allocation $404 higher than the traditional system.
Answer (C) is incorrect because $4,500 is the
quality
control cost under the traditional system.
Answer (D) is correct. ABC assigns overhead costs
on the basis of multiple cost drivers instead of only
one driver. Using the three cost drivers in the
question produces the following calculation:
Number of types
of materials ($12 x 12) $ 144
Number of units ($.14 x 17,500) 2,450
Number of orders ($77 x 30) 2,310
------
Total $4,904
======
Under the old method of allocation based on direct
labor, the allocated amount would have been 4,500
(15% x $30,000), or $404 lower than under ABC.
[223] Source: Publisher
Answer (A) is correct. Prime costs are incurred for
direct materials and direct labor. The first step is to
calculate the cost of materials used during the
month:
Beginning materials inventory $ 67,000
Purchases 179,300
Transportation in 4,400
Purchase returns and allowances (2,200)
--------
Materials available for use $248,500
Ending materials inventory (60,000)
========
Materials used $188,500
Prime costs were $408,500 ($188,500 DM +
$220,000 DL).
Answer (B) is incorrect because $188,500 equals
materials used.
Answer (C) is incorrect because $181,500 equals
purchases adjusted for purchase returns and
allowances and transportation.
Answer (D) is incorrect because $365,200 equals
conversion costs.
[224] Source: Publisher
Answer (A) is incorrect because $553,700 is based
on actual overhead.
Answer (B) is incorrect because $569,500 equals
total manufacturing costs plus the decrease in material
inventory.
Answer (C) is incorrect because $408,500 equals
prime costs.
Answer (D) is correct. Total manufacturing costs
consist of materials, labor, and overhead. The cost of
materials used during the month was $188,500.
Given $220,000 of direct labor and overhead applied
of $154,000 (70% x $220,000 of direct labor), the
total production costs are $562,500 ($188,500 +
$220,000 + $154,000).
[225] Source: Publisher
Answer (A) is incorrect because $543,700 results
from using actual instead of applied overhead and
adding the decrease in finished goods to the cost of
goods completed, which is not done.
Answer (B) is incorrect because $552,500 results
from adding the decrease in finished goods to the
cost of goods completed.
Answer (C) is incorrect because $528,700 results
from using actual instead of applied overhead.
Answer (D) is correct. Total manufacturing costs
incurred during the period consist of materials, labor,
and overhead. That amount is then adjusted for the
change in work-in-process inventories to arrive at the
cost of goods transferred to finished goods (cost of
goods manufactured). The total manufacturing costs
incurred during the month were $562,500.
Work-in-process increased during October by
$25,000 ($170,000 EWIP - $145,000 BWIP).
Accordingly, the cost of goods completed (cost of
goods manufactured) during October was $537,500
 ($562,500 manufacturing costs - $25,000 increase
in
EWIP).
[226] Source: Publisher
Answer (A) is incorrect because $537,500 is the
cost of goods manufactured.
Answer (B) is correct. The cost of goods sold equals
cost of goods manufactured ($537,500) adjusted
for
the change in finished goods.
Beginning finished goods $ 85,000
Cost of goods manufactured 537,500
--------
Goods available for sale $622,500
Ending finished goods (70,000)
--------
Cost of goods sold $552,500
========
Answer (C) is incorrect because $522,500 results
from reversing the beginning and ending finished
goods inventories.
Answer (D) is incorrect because $543,700 is based
on actual overhead costs.
[227] Source: Publisher
Answer (A) is incorrect because an overapplication
of overhead is represented by a credit in the
overhead control account. Actual costs are debited
and applied costs are credited.
Answer (B) is incorrect because the overhead was
overapplied. Actual costs were less than those
charged to production.
Answer (C) is correct. Factory overhead control is
debited for actual overhead and, if a single control
account is used, credited for applied overhead. This
account should have been debited for $145,200 of
actual overhead and credited for $154,000 (70% x
$220,000 DL) of applied overhead. Thus, a net
credit of $8,800 ($154,000 - $145,200) resulted
from an overapplication of overhead.
Answer (D) is incorrect because the $8,800 credit is
an overapplication of overhead.
[228] Source: CMA 1296 3-19
Answer (A) is incorrect because a standard cost
system can be based on individual or multiple
application rates.
Answer (B) is incorrect because whether production
is machine intensive affects the nature but not
necessarily the number of cost drivers.
Answer (C) is incorrect because a single plant-wide
application rate is acceptable, even with high
overhead, if all overhead is highly correlated with a
single application base.
Answer (D) is correct. Factory overhead is usually
assigned to products based on a predetermined rate
or rates. The activity base for overhead allocation
should have a high correlation with the incurrence of
overhead. Given only one cost driver, one overhead
application rate is sufficient. If products differ in the
resources consumed in individual departments,
multiple rates are preferable.
[229] Source: CMA 1296 3-28
Answer (A) is correct. ABC differs from traditional
product costing because it uses multiple allocation
bases and therefore allocates overhead more
accurately. The result is that ABC often charges
low-volume products with more overhead than a
traditional system. For example, the cost of machine
setup may be the same for production runs of widely
varying sizes. This relationship is reflected in an ABC
system that allocates setup costs on the basis of the
number of setups. However, a traditional system
using an allocation base such as machine hours may
underallocate setup costs to low-volume products.
Many companies adopting ABC have found that they
have been losing money on low-volume products
because costs were actually higher than originally
thought.
Answer (B) is incorrect because low-volume
products are usually charged with greater unit costs
under ABC.
Answer (C) is incorrect because greater setup costs
are usually charged to low-volume products under
ABC.
Answer (D) is incorrect because setup costs will not
be equalized unless setup time is equal for all
products.
[230] Source: CMA 1293 3-15
Answer (A) is incorrect because one rate may be
cost beneficial when a single product proceeds
through homogeneous processes.
Answer (B) is correct. Multiple rates are appropriate
when a process differs substantially among
departments or when products do not go through all
departments or all processes. The trend in cost
accounting is toward activity-based costing, which
divides production into numerous activities and
identifies the cost driver(s) most relevant to each. The
result is a more accurate tracing of costs.
Answer (C) is incorrect because, if cost drivers are
the same for all processes, multiple rates are
unnecessary.
Answer (D) is incorrect because individual cost
drivers for all relationships must be known to use
multiple application rates.
[231] Source: Publisher
Answer (A) is incorrect because $32,000 is based
on 10,000 equivalent units of conversion costs.

Answer (B) is correct. The equivalent units of
materials equal 10,000 because all materials are
added at the beginning of the process, and 10,000
units were started. The equivalent units of
conversion
costs equal 9,400 [8,000 units completed + (70% x
2,000 units in ending inventory)]. The unit cost of
materials is $1.50 ($15,000 ・10,000 EU). The unit
cost of conversion is $2.66 ($25,000 ・9,400 EU).
Thus, the cost of goods transferred was $33,280
[8,000 units x ($1.50 + $2.66)].
Answer (C) is incorrect because $36,280 assumes
transfer of 10,000 units of materials.
Answer (D) is incorrect because $40,000 equals
total costs incurred in production.
[232] Source: Publisher
Answer (A) is correct. The cost transferred out was
$33,280. Hence, the ending inventory must equal
the
production costs for the month (given no beginning
inventories), minus costs transferred out, or $6,720
[($15,000 materials + $25,000 conversion cost) -
$33,280].
Answer (B) is incorrect because $8,000 assumes
that
ending work-in-process contains 2,000 equivalent
units of conversion costs.
Answer (C) is incorrect because $3,720 assumes
that ending work-in-process contains only
conversion
costs.
Answer (D) is incorrect because some units remain
in
work-in-process.
[233] Source: Publisher
Answer (A) is incorrect because $32,000 is based
on 10,000 equivalent units of conversion costs.
Answer (B) is correct. The only difference between
weighted average and FIFO relates to the beginning
inventories. Because there were no beginning
inventories in this problem, the two valuation
methods
produce the same results. The equivalent units of
materials equal 10,000 because all materials are
added at the beginning of the process, and 10,000
units were started. The equivalent units of
conversion
costs equal 9,400 [8,000 units completed + (70% x
2,000 units in ending inventory)]. The unit cost of
materials is $1.50 ($15,000 ・10,000 EU). The unit
cost of conversion is $2.66 ($25,000 ・9,400 EU).
Thus, the cost of goods transferred was $33,280
[8,000 units x ($1.50 + $2.66)].
Answer (C) is incorrect because $36,280 assumes
transfer of 10,000 units of materials.
Answer (D) is incorrect because $40,000 equals
total costs incurred in production.
[234] Source: Publisher
Answer (A) is incorrect because $69,259 results
from using the equivalent units calculated under FIFO
(81,000) in determining the unit conversion cost
under the weighted-average method.
Answer (B) is correct. For conversion costs, the
equivalent-unit calculation under the
weighted-average method is as follows:
Beginning WIP 10,000 units x 100% = 10,000
Started and completed 75,000 units x 100% =
75,000
Ending WIP 5,000 units x 60% = 3,000
------
88,000
======
The conversion costs consisted of $16,000 in
beginning inventory and $50,000 incurred during the
month, for a total of $66,000. Unit conversion cost is
therefore $.75 ($66,000 ・$88,000 EU). Thus, the
total conversion cost transferred was $63,750 [$.75
x (10,000 units in BWIP + 80,000 units started -
5,000 units in EWIP)].
Answer (C) is incorrect because $66,000 equals the
total conversion costs to be accounted for.
Answer (D) is incorrect because $64,148 is the
conversion cost transferred out under a FIFO
assumption.
[235] Source: Publisher
Answer (A) is incorrect because $88,000 is the
materials costs incurred during the month.
Answer (B) is incorrect because $93,500 results
from using a unit cost based on the FIFO method.
Answer (C) is correct. For materials, the
equivalent-unit calculation under the
weighted-average method is
Beginning WIP 10,000 units x 100% = 10,000
Started and completed 75,000 units x 100% =
75,000
Ending WIP 5,000 units x 100% = 5,000
------
90,000
======
The materials costs consisted of $30,000 in beginning
inventory and $88,000 incurred during the month, for
a total of $118,000. The equivalent unit cost of
materials is therefore $1.31 ($118,000 ・90,000
EU). Total materials cost transferred is $111,350
(85,000 units transferred x $1.31).
Answer (D) is incorrect because $112,500 is the
materials cost transferred out under FIFO.
[236] Source: Publisher
Answer (A) is incorrect because 75,000 units is the
amount started and completed during the month; it
 ignores the impact of inventories.
Answer (B) is incorrect because $111,350 is based
Answer (B) is incorrect because 80,000 units is on the weighted-average method.
based on the FIFO method.
Answer (C) is correct. For materials, the
Answer (C) is incorrect because 81,000 units is equivalent-unit calculation under the FIFO method is
based on the equivalent units for conversion costs
calculated under the FIFO method. Beginning WIP 10,000 units x 0% = 0
Started and completed 75,000 units x 100% =
Answer (D) is correct. The equivalent units for 75,000
transferred-in costs are calculated in the same way Ending WIP 5,000 units x 100% = 5,000
as ------
those for materials added at the beginning of the 80,000
process. The equivalent-unit calculation under the ======
weighted-average method is The materials cost includes $30,000 in beginning
inventory, all of which would have been transferred
Beginning WIP 10,000 units x 100% = out. The $88,000 incurred during the month is
10,000 divided by the 80,000 equivalent units to arrive at a
Started and completed 75,000 units x 100% = unit cost for the current period of $1.10. Thus, given
75,000 that 75,000 equivalent units (85,000 physical units
Ending WIP 5,000 units x 100% = 5,000 transferred out - 10,000 EU in BWIP completed in
------ the prior period) of current-period production were
90,000 completed and transferred, total materials cost
======
transferred out equals $112,500 [$30,000 BWIP +
($1.10 x 75,000 FIFO EU)].
[237] Source: Publisher
Answer (D) is incorrect because $114,615 is based
on the equivalent units for conversion costs.
Answer (A) is incorrect because $63,750 is based
on the weighted-average method.
[239] Source: Publisher
Answer (B) is correct. For conversion costs, the
equivalent-unit calculation under the FIFO method Answer (A) is correct. The FIFO unit conversion
is cost for the current period is $.62. Moreover, ending
work-in-process consists of 3,000 equivalent units of
Beginning WIP 10,000 units x 30% = conversion cost (5,000 physical units x 60%).
3,000 Accordingly, the conversion cost in the ending
Started and completed 75,000 units x 100% = work-in-process inventory consists of $1,860 ($.62
75,000 x 3,000 EU) of current-period cost. The conversion
Ending WIP 5,000 units x 60% = 3,000 cost incurred in the prior period and attached to the
------ beginning work-in-process inventory is deemed to
81,000 have been transferred out.
======
The conversion cost includes $16,000 in beginning Answer (B) is incorrect because $2,250 is based on
inventory, all of which would have been transferred the weighted-average method.
out. The $50,000 incurred during the month is
divided by the 81,000 equivalent units to arrive at Answer (C) is incorrect because $3,100 is based on
a the equivalent units for materials.
unit cost for the current period of $.62. Given that
78,000 equivalent units (85,000 physical units Answer (D) is incorrect because $5,500 is the
transferred out - 7,000 EU in BWIP completed in the amount of materials cost in the ending
prior period) of current-period production were work-in-process inventory.
completed and transferred, the total conversion
cost
transferred out was $64,360 [$16,000 BWIP + [240] Source: Publisher
($.62 x 78,000 FIFO EU)].
Answer (A) is incorrect because $1,860 is the
Answer (C) is incorrect because $66,000 equals amount of conversion costs.
total conversion costs incurred.
Answer (B) is incorrect because $3,300 assumes that
Answer (D) is incorrect because $74,500 is based materials are added proportionately throughout the
on the weighted-average unit cost per equivalent process.
unit.
Answer (C) is correct. The unit cost of materials
under FIFO is $1.10. Because the 5,000 units in
[238] Source: Publisher ending work-in-process inventory are 100%
complete as to materials, its materials cost consists of
Answer (A) is incorrect because $88,000 is the $5,500 (5,000 EU x $1.10) of current-period costs.
amount of materials costs incurred during the Materials costs incurred in the prior period and
month. attached to the beginning work-in-process inventory
 are deemed to have been transferred out.
Answer (D) is incorrect because $6,450 is based on
the unit cost under the weighted-average method.
[241] Source: Publisher
Answer (A) is incorrect because 195,200 units
omits
the 12,800 equivalent units of work on BWIP during
the current period.
Answer (B) is correct. Under the FIFO method,
equivalent units are determined based only on
work
performed during the current period. They include
work performed to complete BWIP, work on units
started and completed during the period, and work
done on EWIP. Thus, total FIFO equivalent units of
materials are
[243] Source: Publisher
Answer (A) is incorrect because $2.06 results from
dividing May's costs by the equivalent units calculated
under the weighted-average method.
Answer (B) is correct. The FIFO equivalent units of
materials equal 208,000. Accordingly, unit cost of
materials under FIFO is $2.25 ($468,000 materials
cost in May ・208,000 EU).
Answer (C) is incorrect because $2.30 is the
weighted-average cost per equivalent unit.
Answer (D) is incorrect because $2.51 equals total
materials cost divided by FIFO equivalent units of
materials.
[244] Source: Publisher

BWIP 32,000 units x 40% = Answer (A) is correct. The FIFO equivalent units of
12,800 conversion cost equal 196,800. Conversion cost
Started and completed incurred during May was $574,040 ($182,880 DL +
(184,000 - 32,000 in BWIP) 152,000 units x 100% $391,160 FOH). Hence, the equivalent-unit
= 152,000 conversion cost under FIFO is $2.92 ($574,040 ・
EWIP 48,000 units x 90% = 196,800).
43,200
------- Answer (B) is incorrect because $3.00 is the cost per
Total equivalent units 208,000 equivalent unit under the weighted-average method.
=======
Answer (C) is incorrect because $3.10 equals total
Answer (C) is incorrect because 214,400 units conversion cost divided by FIFO equivalent units of
assumes that BWIP was 40% complete. conversion cost.

Answer (D) is incorrect because 227,200 units is Answer (D) is incorrect because $3.23 assumes
based on the weighted-average method. EWIP is 0% complete as to conversion cost.

[242] Source: Publisher [245] Source: Publisher

Answer (A) is incorrect because 171,200 units Answer (A) is correct. Under FIFO, the
omits equivalent-unit materials cost is $2.25, and the EWIP
work on BWIP. contains 43,200 equivalent units of materials. The
equivalent-unit conversion cost is $2.92, and the
Answer (B) is incorrect because 177,600 units EWIP contains 19,200 equivalent units of conversion
omits cost. Consequently, EWIP equals $153,264 [($2.25
work on EWIP. x 43,200) + ($2.92 x 19,200)].

Answer (C) is incorrect because 184,000 equals the
physical units completed.
Answer (D) is correct. Under FIFO, equivalent units
are determined based only on work performed
during
the current period. They include work performed to
complete BWIP, work on units started and
completed during the period, and work done on
EWIP. Thus, total FIFO equivalent units of
conversion cost are
Answer (B) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion cost.
Answer (C) is incorrect because $155,424 is based
on a weighted-average calculation for materials and a
FIFO calculation for conversion cost.
Answer (D) is incorrect because $156,960 is based
on the unit costs under the weighted-average method.

BWIP 32,000 units x 80% = 25,600 [246] Source: Publisher

Started and completed
(184,000 - 32,000 BWIP) 152,000 units x 100% = Answer (A) is incorrect because $2.06 is based on
152,000 weighted-average equivalent units and FIFO costs.
EWIP 48,000 units x 40% = 19,200
------- Answer (B) is incorrect because $2.25 is the cost
Total equivalent units 196,800 based on the FIFO method.
=======
Answer (C) is correct. The weighted-average
 method averages the work done in the prior period
with the work done in the current period. The two
layers of units to analyze are those completed
during
the period and those still in EWIP. The units
completed totaled 184,000. The equivalent units of
materials in EWIP equaled 43,200 (48,000 physical
units x 90%). Hence, the total equivalent units of
materials equaled 227,200 (184,000 + 43,200).
The
materials cost in BWIP is combined in the
weighted-average calculation with the materials
cost
incurred during the current period. The
equivalent-unit materials cost is therefore $2.30
[($54,560 BWIP + $468,000 incurred in May) ・
227,200 EU].
Answer (D) is incorrect because $2.51 equals total
materials costs divided by FIFO equivalent units of
materials.
[247] Source: Publisher
Answer (A) is incorrect because $2.92 is the FIFO
unit cost.
Answer (B) is correct. The weighted-average
method
averages the work performed in the prior period
with
the work done in the current period. The two layers
of units to analyze are those completed during the
period and those still in EWIP. The units completed
totaled 184,000. The 48,000 units in EWIP are 40%
complete as to conversion cost, the equivalent of
19,200 units. Thus, total equivalent units for
conversion cost under the weighted-average
method
equaled 203,200. Moreover, the conversion cost in
BWIP is combined in the weighted-average
calculation with the conversion cost incurred during
the current period. The equivalent-unit conversion
cost is therefore $3.00 [($20,320 DL in BWIP +
$15,240 FOH in BWIP + $182,880 DL in May +
$391,160 FOH in May) ・203,200].
Answer (C) is incorrect because $3.10 is based on
FIFO equivalent units and weighted-average cost.
Answer (D) is incorrect because $3.31 results from
omitting the equivalent units in EWIP.
[248] Source: Publisher
Answer (A) is incorrect because $153,264 is the
FIFO EWIP.
Answer (B) is incorrect because $154,800 is based
on a FIFO calculation for materials and a
weighted-average calculation for conversion cost.
Answer (C) is incorrect because $155,424 is based
on a weighted-average calculation for materials
and a
FIFO calculation for conversion cost.
Answer (D) is correct. Given a weighted-average
assumption, the unit materials cost was $2.30, and
the unit conversion cost was $3.00. Furthermore, the
equivalent units for materials equaled 43,200 (48,000
physical units x 90%), and the equivalent units for
conversion cost equaled 19,200 (48,000 physical
units x 40%). The total weighted-average cost of
EWIP was therefore $156,960 [($2.30 x 43,200 EU
of materials) + ($3.00 x 19,200 EU of conversion
cost)].
[249] Source: CIA 0597 III-75
Answer (A) is incorrect because any identification
method may fail to record the movement of some
parts.
Answer (B) is correct. Bar-code scanning is a form
of optical character recognition. Bar codes are a
series of bars of different widths that represent critical
information about the item. They can be read and the
information can be instantly recorded using a scanner.
Thus, bar coding records the movement of parts with
minimal labor costs.
Answer (C) is incorrect because each vendor has its
own part-numbering scheme.
Answer (D) is incorrect because each vendor has its
own identification method, although vendors in the
same industry often cooperate to minimize the
number of bar-code systems they use.
[250] Source: Publisher
Answer (A) is correct. This service organization
produces three "products" (the three occupant
categories), and the "units produced" equal occupant
days. According to the ABC analysis, production
involves two activities: (1) provision of residential
space and meals and (2) OOA. The drivers of these
activities are occupant days and nursing hours,
respectively. Thus, the cost pool rate for the first
activity (residential space and meals) is $120 per
occupant day ($7,200,000 ・60,000 days), and the
cost pool rate for the second activity (OOA) is $25
($7,500,000 ・300,000 hours). The total cost for
providing services to occupants in the low-usage
category is $6,570,000 [($120 x 36,000 days) +
($25 x 90,000 hours)]. The daily cost rate for these
occupants is therefore $182.50 ($6,570,000 ・
36,000 occupant days).
Answer (B) is incorrect because $145.00 equals the
sum of the cost pool rates ($120 + $25).
Answer (C) is incorrect because $245 equals the rate
per day for medium-usage occupants.
Answer (D) is incorrect because $620 is the rate per
day for high-usage occupants.
[251] Source: CMA 0693 3-2
Answer (A) is incorrect because one effect of
computerization is that the amount of direct labor
relative to other costs has been decreasing. For this
reason, some companies have found that it is no
longer expedient to track direct labor costs as closely
 as was once done. Thus, some companies are
treating direct labor as an indirect factory overhead
cost.
Answer (B) is incorrect because throughput time is
one of the cost drivers that is beginning to be used
more often as an overhead application base.
Throughput is the rate of production over a stated
time. This rate clearly drives (influences) costs.
Answer (C) is correct. With the recent automation
of
factories and the corresponding emphasis on
activity-based costing (ABC), companies are finding
new ways of allocating indirect factory overhead.
One change is that plant-wide application rates are
being used less often because a closer matching of
costs with cost drivers provides better information
to
management. ABC results in a more accurate
application of indirect costs because it provides
more
refined data. Instead of a single cost goal for a
process, a department, or even an entire plant, an
indirect cost pool is established for each identified
activity. The related cost driver, the factor that
changes the cost of the activity, is also identified.
Answer (D) is incorrect because multiple cost pools
are preferable. They permit a better matching of
indirect costs with cost drivers.
[252] Source: CMA 1292 3-2
Answer (A) is incorrect because making allocations
on the basis of units sold may not meet the
cause-and-effect criterion.
Answer (B) is incorrect because the salary of
service
department employees is the cost allocated, not a
basis of allocation.
Answer (C) is correct. Service department costs are
considered part of factory overhead and should be
allocated to the production departments that use
the
services. A basis reflecting cause and effect should
be
used to allocate service department costs. For
example, the number of kilowatt hours used by
each
producing department is probably the best
allocation
base for electricity costs.
Answer (D) is incorrect because making allocations
on the basis of materials usage may not meet the
cause-and-effect criterion.
[253] Source: Publisher
Answer (A) is incorrect because $360,000 results
from subtracting the difference between beginning
and ending work-in-process inventories from the
cost
of goods sold.
Answer (B) is correct. Beginning finished goods
inventory ($500,000) + cost of goods manufactured
($860,000) - ending finished goods inventory
($990,000) = cost of goods sold ($370,000). The
work-in-process inventories are irrelevant.
Answer (C) is incorrect because $490,000
represents the difference between beginning and
ending inventories.
Answer (D) is incorrect because $1,350,000 is the
result of reversing the treatment of beginning and
ending finished goods inventories.
[254] Source: Publisher
Answer (A) is correct. The predetermined overhead
application rate is found by dividing the total
budgeted overhead by the budgeted direct labor
cost. Therefore, the predetermined overhead
application rate is 1.78 [$961,200 ・(36,000 x
$15)].
Answer (B) is incorrect because 1.83 results from
dividing total budgeted overhead by the actual direct
labor cost.
Answer (C) is incorrect because 2.09 results from
dividing total actual overhead by the budgeted direct
labor cost.
Answer (D) is incorrect because 2.15 results from
dividing total actual overhead by the actual direct
labor cost.
[255] Source: Publisher
Answer (A) is incorrect because $195,500 is the
amount underapplied.
Answer (B) is incorrect because $168,800 results
from subtracting actual incurred overhead from total
budget overhead.
Answer (C) is incorrect because $168,800 results
from subtracting actual incurred overhead from total
budget overhead.
Answer (D) is correct. The amount of factory
overhead overapplied/underapplied is found by
subtracting the actual incurred overhead from the
actual applied overhead. The actual applied overhead
is $934,500 [(35,000 hours x $15) x 1.78].
Therefore, the amount of underapplied overhead is
$195,500 ($934,500 - $1,130,000).
[256] Source: Publisher
Answer (A) is incorrect because $0 is the amount
allocated to work-in-process inventory.
Answer (B) is incorrect because $39,100 is the
amount allocated to finished goods inventory.
Answer (C) is correct. Since the amount of
underapplied overhead is considered material, the
proper accounting treatment is to prorate this amount
to work-in-process, finished goods inventory, and the
cost of goods sold. Thus, the ending balances must
 be added together to get $2,151,200 ($1,720,960
+ manufacturing labor cost ($9,000) + indirect
$430,240). The amount of underapplied overhead
is
then multiplied by .8 ($1,720,960 ・$2,151,200) to
get the amount of underapplied overhead allocated
to
cost of goods sold, which is $156,400.
Answer (D) is incorrect because $195,500 is the
amount of overhead underapplied.
[257] Source: Publisher
Answer (A) is incorrect because $10.46 per
machine
hour results from dividing the actual overhead by
the
budgeted machine hours.
Answer (B) is correct. The predetermined overhead
rate is found by dividing total budget overhead by
budgeted machine hours. Therefore, the budgeted
overhead of $961,200 is divided by the budget
machine hours of 108,000 to get a predetermined
overhead rate of $8.90 per machine hour.
Answer (C) is incorrect because $8.69 per machine
hour results from dividing the actual overhead by
the
actual machine hours.
Answer (D) is incorrect because $7.39 per machine
hour results from dividing budgeted overhead by
the
actual machine hours.
[258] Source: Publisher
Answer (A) is incorrect because the $20,000 is
overhead.
Answer (B) is incorrect because $79,000 results
from using the cost of material purchases instead
of
materials used.
Answer (C) is correct. Prime costs are all direct
manufacturing costs--in this case, direct materials
cost ($78,000) + direct manufacturing labor cost
($9,000), or $87,000.
Answer (D) is incorrect because $98,000 uses
overhead instead of labor.
[259] Source: Publisher
Answer (A) is incorrect because $4,000 is the
difference between the beginning and ending
work-in-process inventories.
Answer (B) is incorrect because $20,000 excludes
direct labor.
Answer (C) is correct. Conversion costs are all
manufacturing costs other than direct material
costs.
In this case, conversion costs are equal to the direct
manufacturing costs ($20,000), or $29,000.
Answer (D) is incorrect because $98,000
erroneously includes materials and excludes labor.
[260] Source: Publisher
Answer (A) is incorrect because 0 units of abnormal
spoilage means all 13,000 rejected units were normal
spoilage.
Answer (B) is incorrect because 1,000 units of
abnormal spoilage is the amount on the initial
production cost report.
Answer (C) is incorrect because 1,300 units of
abnormal spoilage is found by subtracting the initial
number of abnormal spoilage units from the correct
amount.
Answer (D) is correct. The number of units of
abnormal spoilage in this process is found by taking
10% of good output as normal spoilage, and then
calculating the difference to find abnormal spoilage.
Therefore, 10% of 107,000 good output units is
10,700, and 13,000 rejected units minus 10,700
normal spoilage units is equal to 2,300 units of
abnormal spoilage.
[261] Source: Publisher
Answer (A) is incorrect because $40,446 is the total
cost of good units completed without regard to
normal spoilage.
Answer (B) is correct. The first step in finding the
total cost of good units produced is to calculate the
unit cost of production. This number is equal to the
total cost of production divided by total input units, or
$.378 ($45,360 ・120,000 units). The next step is to
multiply the unit cost of production times the number
of good units completed to get a total cost of good
units of $40,446 (107,000 x .378). This number is
then added to the total cost of normal spoilage
$4,044.60 (10,700 x .378) to get a total cost of
good units of $44,490.60.
Answer (C) is incorrect because $44,940 is the total
cost of good units completed in the initial production
cost report.
Answer (D) is incorrect because $45,360 is the total
cost of all production.
[262] Source: Publisher
Answer (A) is incorrect because $420 is the total
cost of abnormal spoilage in the initial production cost
report.
Answer (B) is correct. The total cost of abnormal
spoilage is found by multiplying the number of units of
abnormal spoilage times the unit cost of production.
Therefore, the total cost of abnormal spoilage is
$869.40 (2,300 units x $.378).
 Answer (C) is incorrect because $966 is found by
multiplying the number of units of abnormal
spoilage
by the initial unit cost of good units.
Answer (D) is incorrect because $4,914 is the
combined cost of normal spoilage and abnormal
spoilage.
[263] Source: Publisher
Answer (A) is incorrect because 20,000 units is the
amount completed and transferred.
Answer (B) is incorrect because 21,000 units is the
result of adding the number of equivalent units in
the
ending work-in-process inventory that still need to
be
completed to the 20,000 units.
Answer (C) is correct. The amount of conversion
equivalent units produced using the weighted-
average
method is found by adding the number of units
completed and transferred to the equivalent
amount
of units in the ending work-in-process inventory.
Since there are 5,000 gallons in the ending
work-in-process inventory that are 80% completed,
the equivalent amount of units is 4,000 (5,000 x
80%). Therefore, 4,000 equivalent units in ending
work-in-process inventory plus 20,000 units
completed and transferred is equal to 24,000
equivalent units.
Answer (D) is incorrect because 25,000 units is the
result of adding the total number of units in the
ending
work-in-process inventory to the 20,000 units.
[264] Source: Publisher
Answer (A) is incorrect because 16,000 units is the
amount completed and transferred.
Answer (B) is incorrect because 19,000 units does
not include the equivalent units from ending
work-in-process inventory.
Answer (C) is correct. The number of conversion
equivalent units produced using the FIFO method is
found by adding together the equivalent units
produced from beginning work-in-process
inventory,
the current production transferred, and the
equivalent
units produced in ending work-in-process inventory.
Since there were 4,000 units in beginning
work-in-process inventory that were 25%
completed, then 3,000 equivalent units were
produced this month [4,000 units x (1 - .25)]. Since
there were 5,000 units in ending work-in-process
inventory that were 80% completed, there were
4,000 equivalent units from ending inventory
(5,000 x
.8). Therefore, 3,000 equivalent units from
beginning
WIP inventory plus 16,000 (21,000 - 5,000) units
completed and transferred plus 4,000 equivalent units
from ending WIP inventory is equal to 23,000
equivalent units.
Answer (D) is incorrect because 25,000 units does
not take into consideration work previously
completed or work still needing to be completed in
work-in-process inventories.
[265] Source: Publisher
Answer (A) is incorrect because $11.91 is the result
of dividing the total cost using the weighted-average
method, by the number of equivalent units using the
FIFO method.
Answer (B) is correct. The cost per equivalent unit
for a cost element using the weighted-average
method is found by dividing the total cost by the
equivalent units. In this case, the total cost was
$274,000 ($45,600 from beginning work-in-process
+ $228,400 from May's production). This number is
divided by the 24,000 equivalent units to get a cost
per equivalent unit of $11.42.
Answer (C) is incorrect because $9.93 is the cost
per equivalent unit using the FIFO method.
Answer (D) is incorrect because $9.52 is the result of
dividing the $228,400 from May's production by the
number of equivalent units.
[266] Source: Publisher
Answer (A) is incorrect because $1.90 is the result of
dividing the total cost of the FIFO method by the
equivalent units of the weighted-average method.
Answer (B) is correct. The cost per equivalent unit
for a cost element using the FIFO method is found by
dividing the total cost by the equivalent units. While
using the FIFO method, the only costs are those
incurred during the month of May, $45,500 ($35,000
+ $10,500) and the equivalent units are the ones
completed from beginning work-in-process
inventory, 3,000 ($4,000 x .75), those completed
and transferred out, 16,000 units, and the amount in
ending work-in-process, 4,000 (5,000 x .8).
Therefore, the cost per equivalent unit is $1.98
($45,500 ・23,000 units).
Answer (C) is incorrect because $2.23 is the
equivalent cost per unit using the weighted-average
method.
Answer (D) is incorrect because $2.33 is the result of
dividing the total cost of the weighted-average
method by the equivalent units of the FIFO method.
[267] Source: CMA Samp Q3-4
Answer (A) is incorrect because 74,000 results from
the omission of all spoiled units from the computation.
Answer (B) is incorrect because 74,150 results from
the omission of normal spoilage from the
computation.
 Answer (C) is incorrect because 74,600 results from
the omission of abnormal spoilage from the
computation.
Answer (D) is correct. Given no BWIP, the total
equivalent units for July equal 74,750.
Physical
Equivalent
Units Units
-------- ----------
Started and completed during July 65,000
65,000
Normal spoilage (30% complete) 2,000
600
Abnormal spoilage (100% complete)
150 150
Ending work-in-process inventory (60% complete)
15,000 9,000
------ ------
82,150 74,750
======
======
[268] Source: CMA 0683 4-7
Answer (A) is correct. According to the budget,
sales of 250 units would produce a contribution
margin of $700, or $2.80 per unit. Dividing the
$448
of budgeted fixed costs by $2.80 gives a breakeven
point of 160 units. The 260 actual units sold
produced a contribution margin of $650, or $2.50
per unit. Dividing the $420 of fixed costs by $2.50
gives a breakeven point of 168 units. Consequently,
the actual breakeven point is 5% (8 ・160) above
the
budget.
Answer (B) is incorrect because 6.67% is the
percentage difference between the actual and the
budgeted fixed costs [(420 - 448) ・448].
Answer (C) is incorrect because 6.67% is the
percentage difference between the actual and the
budgeted fixed costs [(420 - 448) ・448].
Answer (D) is incorrect because the percentage
difference between the actual and the budgeted
breakeven point was 5.00% above (not below) the
budget.
[269] Source: CMA 0683 4-8
Answer (A) is incorrect because only 20% of the
increased volume is due to an improved market
share, while the other 80% is due to the increased
industry volume.
Answer (B) is incorrect because 80% of the
increased volume was due to the increased
industry
volume.
Answer (C) is correct. Based on the revised industry
volume, Xerbert should have sold 258,000 units
(10% x 2,580,000). Since 260,000 were actually
sold, the company increased its market share by
2,000 which is 20% of the 10,000 (260,000 -
250,000) increase.
Answer (D) is incorrect because 4% is the
percentage increase in actual unit sales over budgeted
unit sales [(260 units - 250 units) ・250 units].
[270] Source: CMA 0683 4-9
Answer (A) is incorrect because the total variance
between actual and budgeted sales is $115,000
(favorable). The sales price variance is $65,000
(unfavorable) and the sales quantity variance is
$180,000 (favorable), for a total favorable variance
of $115,000. The sales price variance is unfavorable
because actual sales were less than budgeted sales,
and the sales quantity variance is favorable because
actual quantity exceeded budgeted quantity.
Answer (B) is incorrect because the total variance
between actual and budgeted sales is $115,000
(favorable). The sales price variance is $65,000
(unfavorable) and the sales quantity variance is
$180,000 (favorable), for a total favorable variance
of $115,000. The sales price variance is unfavorable
because actual sales were less than budgeted sales,
and the sales quantity variance is favorable because
actual quantity exceeded budgeted quantity.
Answer (C) is incorrect because the actual sales
price for Xeon was less than the budgeted sales
price, creating a $65,000 unfavorable sales price
variance.
Answer (D) is correct. First, compute what sales
would have been if all sales had been made at
budgeted prices. The budgeted prices were $6 and
$10 per unit, respectively. Actual sales in units
multiplied by the budgeted prices equals total sales of
$2,080,000. Since actual sales were only
$2,015,000, the variance of $65,000 is unfavorable
(fewer sales than budgeted).
[271] Source: CMA 0683 4-10
Answer (A) is incorrect because the variable quantity
(not unit cost) variance is $165,000 (unfavorable).
The variable quantity variance is unfavorable because
actual expenses are greater than budgeted expenses.
Answer (B) is incorrect because $137,000 is the
total variance for variable and fixed expenses. It is
unfavorable because actual expenses are greater than
budgeted expenses.
Answer (C) is incorrect because $137,000 is the
total variance for variable and fixed expenses. It is
unfavorable because actual expenses are greater than
budgeted expenses.
Answer (D) is correct. The proper procedure is to
calculate variable costs by multiplying actual units
sold by the budgeted costs per unit. The budgeted
costs were $3 and $7.50, respectively. The actual
costs ($3 x 130 = $390 and $7.50 x 130 = $975)
were identical to budgeted variable costs at the actual
volume, i.e., zero variance.
 $20X = $1,200,000
[272] Source: CMA 1285 4-4 X = 60,000 units
At a selling price of $60 each, the total revenue is
Answer (A) is incorrect because $80,000 is the $3,600,000 ($60 x 60,000 units).
income before the tax expense of $(24,000)
($80,000 x 30%). Answer (B) is incorrect because $3,312,000 is the
annual sales revenue that results when the $96,000 of
Answer (B) is incorrect because ($800,000) is the income tax is ignored.
loss that would result if sales volume per year
(instead Answer (C) is incorrect because $1,656,000 is the
of per month) were 4,000 units. annual sales revenue when the $96,000 of income tax
is ignored and the sum of the fixed costs and net
Answer (C) is correct. The income statement for a income ($1,104,000 = $880,000 fixed costs +
volume of 48,000 units (4,000 per month x 12 $224,000 net income) is divided by the variable unit
months) would appear as follows: cost of $40 (instead of the contribution margin of
$20).
Sales ($60/unit) $2,880,000
Variable manufacturing ($35/unit) Answer (D) is incorrect because $3,110,400 is the
(1,680,000) annual sales revenue when the $96,000 of income is
Variable selling ($5/unit) (240,000) subtracted from (instead of added to) the $224,000.
----------
Contribution margin $ 960,000
Fixed costs (880,000) [275] Source: CMA 1285 4-7
----------
Income before tax $ 80,000 Answer (A) is incorrect because 30% is the
Tax expense (30%) (24,000) contribution margin percentage that results from
---------- including manufacturing overhead as a prime cost.
Net income $ 56,000
========== Answer (B) is incorrect because 76% is the
contribution margin percentage that results from
Answer (D) is incorrect because a $(560,000) loss dividing total variable costs by the sales price
would result if the $(800,000) loss was reduced for ($45.60 ・60).
the tax savings of $240,000 ($800,000 x 30%).
Answer (C) is incorrect because 20% is the
contribution margin percentage that results from
[273] Source: CMA 1285 4-5 treating all variable costs as prime costs.

Answer (A) is incorrect because 22,000 units is
fixed
cost ($880,000) divided by variable costs ($40).
Answer (B) is correct. The breakeven point in units
equals fixed costs divided by the contribution
margin
per unit. At a selling price of $60 per unit and with
variable costs of $40 per unit, the unit contribution
margin is $20. Thus, the breakeven point is 44,000
units ($880,000 ・$20).
Answer (D) is correct. Prime costs are direct
materials and direct labor. Since these two elements
totaled $28 ($16 + $12) before the increase, the new
total would be $33.60 ($28 x 1.2). In other words,
prime costs would increase by $5.60, and total
variable costs would increase to $45.60. Subtracting
$45.60 from the $60 selling price leaves a
contribution margin of $14.40. The contribution
margin percentage thus becomes 24% ($14.40 ・
$60).

Answer (C) is incorrect because the contribution
margin should reflect selling expenses.
Answer (D) is incorrect because there are no
income
taxes at the breakeven point.
[274] Source: CMA 1285 4-6
Answer (A) is correct. The formula for solving this
problem is Sales - Variable costs - Fixed costs -
Taxes = $224,000. The $224,000 is equal to 70%
(the complement of the tax rate) of before-tax
income. Thus, before-tax income must equal
$320,000 ($224,000 ・.7) and taxes would be
$96,000. If sales equal $60 times X units and
variable costs are $40 times X units, the following
is
the equation to solve for units sold (X):
[276] Source: CMA 0686 4-28
Answer (A) is incorrect because fixed costs should
be divided by the contribution margin, not unit
variable costs.
Answer (B) is incorrect because 91,000 units is total
cost ・selling price.
Answer (C) is incorrect because selling and
administrative costs are included in the contribution
margin.
Answer (D) is correct. The breakeven point in units is
found by dividing the fixed costs ($210,000) by
contribution margin per unit ($3). Variable costs are
$700,000 at 100,000 units, or $7 per unit. Selling
price is $10 per unit. Dividing $210,000 by $3 per
unit results in a breakeven point of 70,000 units.

$60X - $40X - $880,000 - $96,000 = 224,000 units [277] Source: CMA 0686 4-29

Answer (A) is incorrect because selling 100,000
units
results from ignoring incomes.
[280] Source: CMA 0687 4-11
Answer (B) is correct. Since the tax rate is 40%, the
$90,000 would consist of 60% of before-tax
income.
Thus, to earn an income of $90,000 after tax, the
before-tax income must be $150,000 ($90,000 ・
.6). Dividing the fixed costs of $210,000 plus the
desired before-tax income of $150,000 by the $3
contribution margin per unit gives a breakeven
point
of 120,000 units.
Answer (C) is incorrect because 102,858 units
disregards the $50,000 of selling and
administrative
costs in computing the contribution margin.
Answer (D) is incorrect because 145,000 units
results from using a 60% tax rate rather than a
40%
tax rate.
[278] Source: CMA 0686 4-30
[281] Source: CMA 0687 4-12
Answer (A) is incorrect because fixed costs should
be divided by the contribution margin, not the unit
variable cost.
Answer (B) is correct. The breakeven point is fixed
costs divided by the contribution margin per unit.
With the increase, the new total for fixed costs
would
be $241,500; the contribution margin per unit
would
still be $3. The breakeven point is 80,500 units.
Answer (C) is incorrect because selling and
administrative costs are reflected in the
contribution
margin.
Answer (D) is incorrect because 94,150 units is
total
costs of $941,500 divided by selling price of $10.
[279] Source: CMA 0687 4-10
Answer (A) is incorrect because $9.00 is the
expected price, not the price with the same CMR.
[282] Source: CMA 0687 4-13
Answer (B) is incorrect because $8.25 is the sum of
the old UCM and the new unit variable cost.
Answer (C) is correct. Last year, unit variable cost
was $2.25, so the unit contribution margin (UCM)
was $5.25 ($7.50 price - $2.25), and the
contribution margin rate (CMR) was 70% ($5.25 ・
$7.50). If variable costs increase by one-third, the
new variable cost will be $3 [$2.25 x (4 ・3)]. If a
70% CMR is desired, the $3 variable cost will be
30% of sales, and the unit sales price will be $10
($3
・30%).
Answer (D) is incorrect because $9.75 is the sum of
last year's sales price of $7.50 and last year's variable
cost of $2.25.
Answer (A) is incorrect because 17,500 is based on
the preceding year's fixed costs.
Answer (B) is correct. The breakeven point (BEP) in
units equals fixed cost divided by UCM. Fixed cost
for the previous year was $105,000 (20,000 units at
breakeven x $5.25 UCM). Fixed cost for the current
year is $115,500 (110% x $105,000). The new
UCM is $6 ($9 selling price - $3 variable cost).
Accordingly, the BEP is 19,250 units ($115,500 ・
$6).
Answer (C) is incorrect because 20,000 is the
preceding year's BEP.
Answer (D) is incorrect because 22,000 is the
breakeven point if the current year's fixed costs of
$115,500 (110% x $105,000) is divided by last
year's contribution margin of $5.25.
Answer (A) is correct. Since last year's after-tax
profit was $5,040, pretax net income must have been
$8,400 [$5,040 ・(1 - 40% tax rate)]. Because fixed
cost has been fully recovered at the BEP, all of the
UCM beyond that sales level is included in pre-tax
net income. The UCM was $5.25, so the units sold in
excess of the 20,000-unit BEP equaled 1,600
($8,400 ・$5.25). If 21,600 total units were sold last
year, an increase of 1,000 units results in sales of
22,600 units.
Answer (B) is incorrect because 21,960 units
assumes the last year's after-tax profit was the pretax
net income.
Answer (C) is incorrect because sales volume is
estimated to be 22,600 units [20,000 ・($8,400
pretax NI ・$5.25 UCM) ・1,000].
Answer (D) is incorrect because sales volume is
estimated to be 22,600 units [20,000 ・($8,400
pretax NI ・$5.25 UCM) ・1,000].
Answer (A) is incorrect because $213,750 is the
sales revenue when fixed costs are not increased by
10%.
Answer (B) is incorrect because $257,625 results
from using a 60% tax rate rather than a 40% tax rate.
Answer (C) is incorrect because $207,000 results
from failing to convert the after-tax income of
$22,500 to pre-tax income of $37,500 [$22,500 ・
(1 - 40% tax rate)].
Answer (D) is correct. An after-tax net income of
$22,500 equals a pretax income of $37,500
 [$22,500 ・(1 - 40% tax rate)]. With a UCM of $6
contributing toward the $153,000 total of fixed cost
($115,500) and desired profit ($37,500), 25,500
units ($153,000 ・$6) must be sold. At $9 per unit,
sales revenue is $229,500.
[283] Source: CMA 0687 4-14
Answer (A) is incorrect because the sales quantity
(volume) variance focuses on the firm's aggregate
results. It assumes a constant product mix and an
average contribution margin for the composite unit.
The sales volume variance equals the budgeted
average UCM calculated for the composite unit
multiplied by the difference between the actual and
budgeted unit sales.
Answer (B) is incorrect because it is the rate of
return
a potential investment must earn before it is
acceptable to management.
Answer (C) is incorrect because it is a nonsense
term.
Answer (D) is correct. The margin of safety
measures
the amount by which sales may decline before
losses
occur. It equals budgeted or actual sales minus
sales
at the BEP. It may be stated in either units sold or
sales revenue.
[284] Source: CMA 1296 3-25
Answer (A) is incorrect because, given excess
capacity, any price less than $47 is advantageous.
Answer (B) is incorrect because, given excess
capacity, any price greater than $47
uneconomical.
Answer (C) is correct. The total unit cost includes
$20 of fixed costs ($17 + $3) that is not avoidable
if
the units are purchased. Moreover, the company
has
excess capacity. The opportunity cost of making the
table tops is zero because no production will be
displaced. Consequently, the relevant unit cost of
making the table tops is the $47 unit variable cost,
and the supplier's price must be less to justify the
buy
decision.
Answer (D) is incorrect because the decision to
reject a price of $50 or more may depend on
whether the firm must displace other production to
make the table tops.
[285] Source: CMA 1286 4-18
Answer (A) is incorrect because $400,000 does not
include $50,000 of variable factory overhead.
Answer (B) is correct. Under variable costing, the
only costs that are capitalized are the variable costs
of manufacturing. These include
Direct materials used $300,000
Direct labor 100,000
Variable factory overhead 50,000
--------
Total inventoriable costs $450,000
========
Answer (C) is incorrect because the $40,000 of
variable selling and administrative costs should not be
included in the inventoriable costs.
Answer (D) is incorrect because $530,000 is the
inventoriable cost under absorption (full) costing.
[286] Source: CMA 1286 4-19
Answer (A) is incorrect because $400,000 equals
prime costs.
Answer (B) is incorrect because $450,000 is the
inventoriable cost under variable costing.
Answer (C) is correct. The absorption method is
required for financial statements prepared according
to GAAP. It charges all costs of production to
inventories. The variable cost of materials
($300,000), direct labor ($100,000), variable factory
overhead ($50,000), and the fixed factory overhead
($80,000) are included. They total $530,000.
Answer (D) is incorrect because $590,000 includes
the fixed and variable selling and administrative costs.
[287] Source: CMA 1290 3-24
Answer (A) is incorrect because ending inventory
was $1,200,000.
is Answer (B) is correct. Under the absorption method,
unit cost is $30 ($12 direct materials + $9 direct
labor + $4 variable overhead + $5 fixed overhead).
Given beginning inventory of 35,000 units, the ending
inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Hence, ending inventory
was $1,200,000 ($30 x 40,000 units).
Answer (C) is incorrect because ending inventory
was $1,200,000.
Answer (D) is incorrect because ending inventory
was $1,200,000.
[288] Source: CMA 1290 3-25
Answer (A) is incorrect because ending inventory
was $1,000,000.
Answer (B) is incorrect because ending inventory
was $1,000,000.
Answer (C) is correct. Using variable costing, the unit
cost of ending inventory is $25 ($12 direct materials
+ $9 direct labor + $4 variable overhead). Given
beginning inventory of 35,000 units, the ending
 inventory equals 40,000 units (35,000 BI + 130,000
produced - 125,000 sold). Thus, ending inventory
was $1,000,000 ($25 x 40,000).
Answer (D) is incorrect because ending inventory
was $1,000,000.
[289] Source: CMA 1290 3-29
Answer (A) is correct. Absorption costing results in
a was inventoried, not expensed. Actual overhead was
higher income figure than variable costing
whenever
production exceeds sales because absorption
costing
capitalizes some fixed factory overhead as part of
inventory. These costs are expensed during the
period incurred under variable costing.
Consequently,
variable costing recognizes greater expenses and
lower income. The reverse is true when sales
exceed
production. In that case, the absorption method
results in a lower income because some fixed costs
of
previous periods absorbed by the beginning
inventory
are expensed in the current period as cost of goods
sold. Variable costing income is never burdened
with
fixed costs of previous periods.
Answer (B) is incorrect because an increase in
inventory results in a higher income under
absorption
costing.
Answer (C) is incorrect because the important
relationship is between actual production and
actual
sales, not between actual and planned production.
Answer (D) is incorrect because planned sales do
not
determine actual income.
[290] Source: CMA 1290 3-28
Answer (A) is correct. Under the absorption
method,
all selling and administrative fixed costs are
charged
to the current period. Accordingly, $980,000 of
selling expenses and $425,000 of actual fixed
administrative expenses were expensed during the
year. The fixed manufacturing costs must be
calculated after giving consideration to the
increase in
inventory during the period (some fixed costs were
capitalized) and to the underapplied overhead. The
beginning finished goods inventory included 35,000
units, each of which had absorbed $5 of fixed
manufacturing overhead. Each unit produced
during
the year also absorbed $5 of fixed manufacturing
overhead. Given that 125,000 of those units were
sold, cost of goods sold was debited for $625,000
of
fixed overhead (125,000 units x $5). At year-end,
the underapplied overhead was also added to cost of
goods sold. Because production was expected to be
140,000 units, the overhead application rate for the
$700,000 of planned fixed manufacturing overhead
was $5 per unit. Only 130,000 units were
manufactured. Hence, $650,000 ($5 x 130,000
units) of overhead was applied to units in process.
Because inventory increased from 35,000 to 40,000
units, $25,000 (5,000-unit increase x $5) of the
applied fixed manufacturing overhead for the period
$715,000, so the underapplied overhead was
$65,000 ($715,000 - $650,000). This amount was
charged to cost of goods sold at year-end. The total
of the fixed costs expensed was therefore
$2,095,000 ($980,000 selling expenses + $425,000
administrative expenses + $625,000 standard
manufacturing overhead costs of units sold +
$65,000 underapplied overhead).
Answer (B) is incorrect because the total fixed costs
on the absorption costing basis were $2,095,000.
Answer (C) is incorrect because the total fixed costs
on the absorption costing basis were $2,095,000.
Answer (D) is incorrect because the total fixed costs
on the absorption costing basis were $2,095,000.
[291] Source: CMA 1290 3-27
Answer (A) is correct. The unit variable
manufacturing cost was $25 ($12 direct materials +
$9 direct labor + $4 variable overhead). Other
variable costs included selling expenses ($8 per unit)
and administrative expenses ($2 per unit). The unit
selling and administrative costs actually incurred for
sales of 125,000 units were the same as the planned
unit costs. For example, actual unit variable selling
expense was $8 ($1,000,000 ・125,000 units sold),
which equaled the planned unit cost. Thus, total unit
variable cost was $35 ($25 + $8 + $2). The total
expensed was $4,375,000 ($35 x 125,000 units
sold).
Answer (B) is incorrect because the total variable
cost expensed on the variable costing basis was
$4,375,000.
Answer (C) is incorrect because the total variable
cost expensed on the variable costing basis was
$4,375,000.
Answer (D) is incorrect because the total variable
cost expensed on the variable costing basis was
$4,375,000.
[292] Source: CMA 1290 3-30
Answer (A) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (B) is correct. The difference is caused by
the capitalization of some of the fixed manufacturing
overhead. When inventories increase during the
period, the absorption method capitalizes that
 overhead and transfers it to future periods. The
variable costing method expenses it in the current
period. Inventories increased by 5,000 units during
the period, and each of those units would have
included $5 of fixed manufacturing overhead under
absorption costing. Accordingly, $25,000 of fixed
manufacturing overhead would have been
capitalized.
Recognizing $25,000 of fixed costs in the balance
sheet instead of the income statement results in a
$25,000 difference in income between the two
costing methods.
Answer (C) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
Answer (D) is incorrect because the difference
between absorption costing and variable costing
income was $25,000.
[293] Source: CMA 1290 3-26
Answer (A) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (B) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (C) is incorrect because the variable costing
contribution margin was $5,625,000.
Answer (D) is correct. At $70 per unit, actual sales
revenue was $8,750,000 for 125,000 units. Actual
variable costs of manufacturing were $25 per unit
($12 + $9 + $4). The unit costs incurred for the
actual production level of 130,000 units were the
same as the unit costs for a planned production
level
of 140,000 units. These unit costs were the same
for
units manufactured in both the current and
previous
year. For example, total planned direct materials
cost
for 140,000 units was $1,680,000, or $12 per unit.
The incurred unit cost was also $12 ($1,560,000 ・
130,000 units). Thus, total variable manufacturing
cost was $3,125,000 ($25 x 125,000 units).
Consequently, manufacturing contribution margin
was
$5,625,000 ($8,750,000 - $3,125,000).
[294] Source: CMA 1292 3-5
Answer (A) is incorrect because manufacturing
supplies are variable costs inventoried under both
methods.
Answer (B) is incorrect because factory insurance is
a fixed manufacturing cost inventoried under
absorption costing but written off as a period cost
under variable costing.
Answer (C) is incorrect because direct labor cost is
a production levels and sales levels do not cause
product cost under both methods.
Answer (D) is correct. Under absorption costing, all
manufacturing costs, both fixed and variable, are
treated as product costs. Under variable costing, only
variable costs of manufacturing are inventoried as
product costs. Fixed manufacturing costs are
expensed as period costs. Packaging and shipping
costs are not product costs under either method
because they are incurred after the goods have been
manufactured. Instead, they are included in selling
and administrative expenses for the period.
[295] Source: CMA 1292 3-6
Answer (A) is incorrect because ABC is appropriate
for external as well as internal purposes.
Answer (B) is incorrect because job-order costing is
acceptable for external reporting purposes.
Answer (C) is correct. Activity-based costing,
job-order costing, process costing, and standard
costing can all be used for both internal and external
purposes. Variable costing is not acceptable under
GAAP for external reporting purposes.
Answer (D) is incorrect because process costing is
acceptable for external reporting purposes.
[296] Source: CMA 1292 3-26
Answer (A) is incorrect because producing more of
the products requiring the most direct labor will
permit more fixed overhead to be capitalized in the
inventory account.
Answer (B) is incorrect because deferring expenses
such as maintenance will increase income in the
current period (but may result in long-range losses
caused by excessive down-time).
Answer (C) is incorrect because increasing
production without a concurrent increase in demand
applies more fixed costs to inventory.
Answer (D) is correct. Under an absorption costing
system, income can be manipulated by producing
more products than are sold because more fixed
manufacturing overhead will be allocated to the
ending inventory. When inventory increases, some
fixed costs are capitalized rather than expensed.
Decreasing production, however, will result in lower
income because more of the fixed manufacturing
overhead will be expensed.
[297] Source: CMA 1273 4-1
Answer (A) is incorrect because the cost of a unit of
product changing because of a change in number of
units manufactured is a characteristic of absorption
costing systems.
Answer (B) is correct. In a variable costing system,
only the variable costs are recorded as product costs.
All fixed costs are expensed in the period incurred.
Because changes in the relationship between
changes in the amount of fixed manufacturing cost
 expensed, profits more directly follow the trends in Selling and administrative expenses
sales. (400,000)
----------
Answer (C) is incorrect because idle facility Operating income $ 440,000
variation ==========
is a characteristic of absorption costing systems.
Answer (C) is incorrect because $600,000 is the
Answer (D) is incorrect because neither variable nor operating income that results from capitalizing
absorption costing includes administrative costs in $240,000 fixed manufacturing costs and $160,000 of
inventory. selling and administrative costs (the $160,000 is
incorrect as all selling and administrative costs should
be expensed).
[298] Source: CMA 1273 4-2
Answer (D) is incorrect because $840,000 is the
Answer (A) is incorrect because profit is a function gross profit under absorption costing, i.e., before
of selling and administrative expenses.
both sales and production, so it will not always
move
in the same direction as sales. [300] Source: CMA 1285 4-15

Answer (B) is incorrect because profit is a function
of
both sales and production, so it will not always
move
in the same direction as sales.
Answer (C) is correct. In an absorption costing
system, fixed overhead costs are included in
inventory. When sales exceed production, more
overhead is expensed under absorption costing due
to fixed overhead carried over from the prior
inventory. If sales increase over production, more
than one period's factory overhead is recognized as
expense. Accordingly, if the increase in factory
overhead expensed is greater than the contribution
margin of the increased units sold, there may be
less
profit with an increased level of sales.
Answer (D) is incorrect because decreased output
will increase the unit cost of items sold. Fixed
factory
overhead per unit will increase.
Answer (A) is correct. The contribution margin from
manufacturing (sales - variable costs) is $10 ($40 -
$30) per unit sold, or $1,200,000 (120,000 units x
$10). The fixed costs of manufacturing ($600,000)
and selling and administrative costs ($400,000) are
deducted from the contribution margin to arrive at an
operating income of $200,000. The difference
between the absorption income of $440,000 and the
$200,000 of variable costing income is attributable to
capitalization of the fixed manufacturing costs under
the absorption method. Since 40% of the goods
produced are still in inventory (80,000 ・200,000),
40% of the $600,000 in fixed costs, or $240,000,
was capitalized under the absorption method. That
amount was expensed under the variable costing
method.
Answer (B) is incorrect because $440,000 is the
operating income under absorption costing.
Answer (C) is incorrect because $800,000 is the
operating income if fixed costs of manufacturing are
not deducted.

Answer (D) is incorrect because $600,000 is the

[299] Source: CMA 1285 4-14 operating income that results from capitalizing 40% of
both fixed manufacturing costs and selling and
Answer (A) is incorrect because $200,000 is the administrative costs.
operating income under variable costing.

Answer (B) is correct. Absorption costing net [301] Source: CMA 0694 3-4
income
is computed as follows: Answer (A) is correct. The breakeven point in units is
calculated by dividing the fixed costs by the
Sales (120,000 x $40) contribution margin per unit. If selling price is constant
$4,800,000 and costs increase, the unit contribution margin will
---------- decline, resulting in an increase of the breakeven
Variable production costs ($30 x 200,000 units) point.
$6,000,000
Fixed production costs Answer (B) is incorrect because a decrease in costs
600,000 will lower the breakeven point. The unit contribution
---------- margin will increase.
Total production costs (200,000 units)
$6,600,000 Answer (C) is incorrect because an increase in the
Ending inventory (80,000 x $33) selling price will also increase the unit contribution
(2,640,000) margin, resulting in a lower breakeven point.
----------
Cost of goods sold Answer (D) is incorrect because both a cost
$3,960,000 decrease and a sales price increase will increase the
---------- unit contribution margin, resulting in a lower
Gross profit $ 840,000 breakeven point.

[302] Source: CMA 0697 3-2
Answer (A) is incorrect because variable costs will
change in total, but unit variable costs will be
constant.
Answer (B) is correct. The relevant range is the
range
of activity over which unit variable costs and total
fixed costs are constant. The incremental cost of
one
additional unit of production will be equal to the
variable cost.
Answer (C) is incorrect because actual fixed costs
should not vary greatly from budgeted fixed costs
for
the relevant range.
Answer (D) is incorrect because the relevant range
can change whenever production activity changes;
the
relevant range is merely an assumption used for
budgeting and control purposes.
[303] Source: CMA 0697 3-3
Answer (A) is incorrect because variable (direct)
costing does not inventory fixed factory overhead.
Answer (B) is incorrect because variable (direct)
costing does not inventory fixed factory overhead.
Answer (C) is correct. Absorption (full) costing
considers all manufacturing costs to be
inventoriable
as product costs. These costs include variable and
fixed manufacturing costs, whether direct or
indirect.
The alternative to absorption is known as variable
(direct) costing.
Answer (D) is incorrect because conversion costs
include direct labor and factory overhead but not
direct materials.
[304] Source: CMA 0697 3-10
Answer (A) is incorrect because fixed factory
overhead is treated differently under the two
methods.
Answer (B) is correct. Under variable costing,
inventories are charged only with the variable costs
of
production. Fixed manufacturing costs are
expensed
as period costs. Absorption costing charges to
inventory all costs of production. If finished goods
inventory increases, absorption costing results in
higher income because it capitalizes some fixed
costs
that would have been expensed under variable
costing. When inventory declines, variable costing
results in higher income because some fixed costs
capitalized under the absorption method in prior
periods are expensed in the current period.
Answer (C) is incorrect because variable costs are
the same under either method.
Answer (D) is incorrect because gross margins will
be different. Fixed factory overhead is expensed
under variable costing and capitalized under the
absorption method.
[305] Source: CMA adap
Answer (A) is incorrect because $3,000 is the value
of the by-product.
Answer (B) is correct. The NRV at split-off for each
of the joint products must be determined. Given that
Alfa has a $4 selling price and an additional $2 of
processing costs, the value at the split-off is $2 per
pound. the total value at split-off for 10,000 pounds
is $20,000. Betters has a $10 selling price and an
additional $2 of processing costs. Thus, the value at
split-off is $8 per pound. The total value of 5,000
pounds of Betters is therefore $40,000. The 1,000
pounds of Morefeed has a split-off value of $3 per
pound, or $3,000. Assuming that Morefeed (a
by-product) is inventoried (recognized in the
accounts when produced) and treated as a reduction
of joint costs, the allocable joint cost is $90,000
($93,000 - $3,000). (NOTE: Several other methods
of accounting for by-products are possible.) The total
net realizable value of the main products is $60,000
($20,000 Alfa + $40,000 Betters). The allocation to
Alfa is $30,000 [($20,000 ・$60,000) x $90,000].
Answer (C) is incorrect because $31,000 fails to
adjust the joint processing cost for the value of the
by-product.
Answer (D) is incorrect because $60,000 is the
amount allocated to Betters.
[306] Source: CMA 1293 3-7
Answer (A) is incorrect because $30,000 is the
amount allocated to Alfa when the by-product is
inventoried.
Answer (B) is incorrect because $31,000 is the
amount allocated to Alfa when the by-product is not
inventoried.
Answer (C) is incorrect because $52,080 assumes
that a weighting method using caloric value is used.
Answer (D) is correct. The NRV of Alfa is $20,000,
and the NRV of Betters is $40,000. If the joint cost
is not adjusted for the value of the by-production, the
amount allocated to Betters is $62,000 {[$40,000 ・
($20,000 + $40,000)] x $93,000}.
[307] Source: CMA 1293 3-4
Answer (A) is incorrect because $3,000 is the value
of the by-product.
Answer (B) is incorrect because $30,000 is based on
the net realizable value method.
 Answer (C) is incorrect because $31,000 is based
on the net realizable value method and fails to
adjust
the joint processing cost for the value of the
by-product.
Answer (D) is correct. Joint cost is $93,000 and
Morefeed has a split-off value of $3,000 (see
preceding question). Assuming the latter amount is
treated as a reduction in joint cost, the allocable
joint
cost is $90,000. The total physical quantity
(volume)
of the two joint products is 15,000 pounds (10,000
Alfa + 5,000 Betters). Hence, $60,000 of the net
joint costs [(10,000 ・15,000) x $90,000] should be
allocated to Alfa.
[308] Source: CMA 1293 3-5
Answer (A) is incorrect because $39,208 is the
amount allocated to Alfa if the 1,000,000 calories
attributable to Morefeed is included in the
computation.
Answer (B) is incorrect because $39,600 is the
allocation to Alfa.
Answer (C) is incorrect because $40,920 is the
allocation to Alfa if the sales value of the by-
product
is not treated as a reduction of joint cost.
Answer (D) is correct. The net allocable joint cost is
$90,000, assuming the value of Morefeed is
inventoried and treated as a reduction in joint
costs.
The caloric value of Alfa is 44,000,000 (4,400 x
10,000 pounds), the caloric value of Betters is
56,000,000 (11,200 x 5,000 pounds), and the total
is 100,000,000. Of this total volume, Alfa makes up
44% and Betters 56%. Thus, $50,400 (56% x
$90,000) should be allocated to Betters.
[309] Source: CMA 1293 3-6
Answer (A) is incorrect because $36,000 is based
on 40%, not 4/9.
Answer (B) is correct. The gross market value of
Alfa is $40,000 ($4 x 10,000 pounds), Betters has a
total gross value of $50,000 ($10 x 5,000 pounds),
and Morefeed has a split-off value of $3,000. If the
value of Morefeed is inventoried and treated as a
reduction in joint cost, the allocable joint cost is
$90,000 ($93,000 - $3,000). The total gross value
of the two main products is $90,000 ($40,000 +
$50,000). Of this total value, $40,000 should be
allocated to Alfa [($40,000 ・$90,000) x $90,000].
Answer (C) is incorrect because $41,333 fails to
adjust the joint cost by the value of the by-product.
Answer (D) is incorrect because $50,000 is the joint
cost allocated to Betters.
[310] Source: CMA 1295 3-29
Answer (A) is correct. The total production costs
incurred are $10,000,000, consisting of crude oil of
$5,000,000, direct labor of $2,000,000, and factory
overhead of $3,000,000. The total physical output
was 660,000 barrels, consisting of 300,000 barrels
of Two Oil, 240,000 barrels of Six Oil, and 120,000
barrels of distillates. Thus, the allocation (rounded) is
$3,636,000 {[240,000 ・(300,000 + 240,000 +
120,000)] x $10,000,000}.
Answer (B) is incorrect because $3,750,000 is
based on the physical quantity of units sold, not units
produced.
Answer (C) is incorrect because $1,818,000 is the
amount that would be assigned to distillates.
Answer (D) is incorrect because Six Oil does not
compose 75% of the total output in barrels.
[311] Source: CMA 1295 3-30
Answer (A) is incorrect because $4,800,000 is the
amount that would be assigned to Six Oil.
Answer (B) is correct. The total production costs
incurred are $10,000,000, consisting of crude oil of
$5,000,000, direct labor of $2,000,000, and factory
overhead of $3,000,000. The total value of the
output is as follows:
Two Oil (300,000 x $20) $ 6,000,000
Six Oil (240,000 x $30) 7,200,000
Distillates (120,000 x $15) 1,800,000
-----------
Total sales value $15,000,000
===========
Because Two Oil composes 40% of the total sales
value ($6,000,000 ・$15,000,000), it will be
assigned 40% of the $10,000,000 of joint costs, or
$4,000,000.
Answer (C) is incorrect because $2,286,000 is
based on the relative sales value of units sold.
Answer (D) is incorrect because $2,500,000 is
based on the physical quantity of barrels sold.
[312] Source: CIA 1194 III-47
Answer (A) is incorrect because $375,000 is the
total cost of R.
Answer (B) is incorrect because $390,000 is based
on the physical units method of allocating the joint
costs.
Answer (C) is correct. Total sales value at split-off is
$800,000 [(2,500 x $100) + (5,000 x $80) + (7,500
x $20)]. Product S accounts for 50% (5,000 x $80 =
$400,000) of the sales value and therefore $360,000
(50% x $720,000) of the joint costs. The total cost
of Product S is $510,000 ($360,000 allocated costs
+ $150,000 differential costs).
Answer (D) is incorrect because $571,463 uses the
sales value at split-off based on actual sales.

[313] Source: CIA 1194 III-48
Answer (A) is correct. The net realizable value
(NRV) method is an appropriate method of
allocation when products cannot be sold at split-off.
Further processing of R, which is salable at split-off,
is not economical because the cost ($150,000)
exceeds the benefit [($150 - $100) x 2,500 units =
$125,000]. Thus, R's NRV is $250,000 ($100 price
at split-off x 2,500 units). However, S and T must
be
processed further. S's NRV is $425,000 [($115 x
5,000 units) - $150,000], and T's NRV is $125,000
[($30 x 7,500 units) - $100,000]. Given that the
NRV of T is a reduction of joint cost, the total joint
cost to be allocated is therefore $595,000
($720,000
- $125,000 NRV of T). Accordingly, based on the
NRV method, the joint cost allocated to R is
$220,370 {[$250,000 R's NRV ・($250,000 R's
NRV + $425,000 S's NRV)] x $595,000 allocable
joint cost}. Because further processing of R is
uneconomical, the total cost of R is $220,370.
Answer (B) is incorrect because $370,370 includes
additional processing costs.
Answer (C) is incorrect because $374,630 is the
joint cost allocated to S.
Answer (D) is incorrect because $595,000 is the
allocable joint cost.
[314] Source: CMA 1293 3-8
Answer (A) is correct. Joint costs are most often
assigned on the basis of relative sales values or net
realizable values. Basing allocations on physical
quantities, such as pounds, gallons, etc., is usually
not
desirable because the costs assigned may have no
relationship to value. When large items have low
selling prices and small items have high selling
prices,
the large items might always sell at a loss when
physical quantities are used to allocate joint costs.
Answer (B) is incorrect because physical quantities
are usually easy to measure.
Answer (C) is incorrect because additional
processing costs will have no more effect on the
allocation of joint costs based on physical
quantities
than any other base.
Answer (D) is incorrect because the purpose of
allocating joint costs, under any method, is to
separate such costs on a unit basis.
[315] Source: CMA 1296 3-30
Answer (A) is incorrect because $1,200,000
assumes that the by-product is charged with a
portion
of the net joint cost.
Answer (B) is incorrect because $1,260,000
assumes that the by-product is charged with a portion
of the gross joint cost.
Answer (C) is correct. The joint cost to be allocated
is $2,400,000 [$2,520,000 total joint cost - ($2 x
60,000 pounds of the by-product)]. Accordingly, the
joint cost to be allocated to the Second Main
Product on a physical-volume basis is $1,500,000
{$2,400,000 x [150,000 pounds ・(90,000 pounds
+ 150,000 pounds)]}.
Answer (D) is incorrect because $1,575,000 does
not deduct by-product NRV from the joint cost.
[316] Source: Publisher
Answer (A) is correct. Total joint production costs
incurred were $9,000,000 ($4,000,000 +
$2,000,000 + $3,000,000). The total physical output
was 660,000 barrels (300,000 barrels of Grade One
+ 240,000 barrels of Grade Two + 120,000 barrels
of Grade Three). Thus, on a physical output basis,
Grade Two should be allocated $3,273,000
[$9,000,000 x (240,000 ・660,000)].
Answer (B) is incorrect because $3,375,000 is
based on the physical quantity of units sold, not units
produced.
Answer (C) is incorrect because $1,636,000 is the
amount assigned to Grade Three.
Answer (D) is incorrect because $3,512,000 is the
amount assigned to Grade Two if the relative sales
value method is used.
[317] Source: Publisher
Answer (A) is incorrect because $3,512,000 is the
amount assigned to Grade Two.
Answer (B) is correct. Total joint production costs
incurred were $9,000,000, ($4,000,000 +
$2,000,000 + $3,000,000). The sales values of the
three products are as follows:
Grade One (300,000 x $30) $ 9,000,000
Grade Two (240,000 x $40) 9,600,000
Grade Three (120,000 x $50) 6,000,000
------------
Total sales value $ 24,600,000
============
Consequently, Grade One should be assigned joint
costs of $3,293,000 [$9,000,000 x ($9,000,000 ・
$24,600,000)].
Answer (C) is incorrect because $1,636,000 is
based on the relative sales values of units sold, not
units produced.
Answer (D) is incorrect because $4,091,000 is
based on the physical quantity of barrels produced.
[318] Source: Publisher
Answer (A) is incorrect because $3,512,000 is the
total joint cost assigned to the output of Grade Two.
 Answer (B) is correct. The total sales value of the
oil
produced was determined in the preceding
question
to be $24,600,000. The total sales value of Grade
Two was determined to be $9,600,000.
Accordingly, costs assigned to Grade Two on a
relative sales value basis (rounded) equal
$3,512,000
[($4,000,000 + $3,000,000 + $2,000,000) x
($9,600,000 ・ $24,600,000)]. Thus, the value of
the
ending inventory of Grade Two should be
$1,756,000 [($3,512,000 ・240,000 barrels
produced) x 120,000 barrels in EI].
Answer (C) is incorrect because $1,636,000 is
based on the relative sales values of units sold.
Answer (D) is incorrect because $3,375,000 is the
total joint cost assigned to the output of Grade Two
based on the relative physical volume of units sold.
[319] Source: Publisher
Answer (A) is correct. The absorption-costing
breakeven point in units sold equals the sum of (1)
the total fixed costs and (2) the product of the fixed
manufacturing cost application rate and the
difference
between the BEP in units sold (X) and units
produced, with the sum divided by the UCM. Thus,
the absorption-costing breakeven point in units sold
is
425,000 units:
($2 x 1,000,000 denominator
capacity)
+ $1,500,000 + $2(X -
900,000)
X = -------------------------------------
$6
$3,500,000 + $2X - $1,800,000
X = -----------------------------
$6
$6X = $1,700,000 + $2X
X = 425,000
Answer (B) is incorrect because 583,333 units is the
variable-costing BEP.
Answer (C) is incorrect because 900,000 units is
the
actual production level.
Answer (D) is incorrect because 1,000,000 units is
the capacity used to calculate the fixed overhead
application rate.
[320] Source: Publisher
Answer (A) is incorrect because $5,000,000 is the
fixed cost and 4,000 is the number served given a
reduced appropriation.
Answer (B) is incorrect because $8,333,333 and
$833 are the appropriation amount per patient
annual
cost, respectively, that for the next year result from a
10% increase in the appropriation of the current year
instead of a 10% decrease in the next year's
appropriation.
Answer (C) is correct. This question applies CVP
analysis in a not-for-profit context in which the
agency wishes to assist as many people as possible.
Thus, a breakeven point must be calculated. Total
revenue (the appropriation) equals fixed cost plus the
product of unit variable cost (per-patient annual cost)
and the number of patients who can be assisted given
the available resources. The following are
simultaneous equations stated in the two unknowns:
X - 5,000 Y = $5,000,000
.9X - 4,000 Y = $5,000,000
Because X must equal 5,000Y + $5,000,000, the
second equation may be solved as follows for the
per-patient annual cost (Y):
.9(5,000 Y + $5,000,000) - 4,000Y =
$5,000,000
4,500y + $4,500,000 - 4,000Y =
$5,000,000
500Y = $500,000
Y = $1,000
Accordingly, the budgeted appropriation (X) must be
$10,000,000 [(5,000 x $1,000) VC + $5,000,000
FC], and the reduced appropriation must be
$9,000,000 (90% x $10,000,000).
Answer (D) is incorrect because $10,000,000 is the
budgeted appropriation and 5,000 is the number of
people it would serve.
[321] Source: Publisher
Answer (A) is incorrect because $.05 results from
inverting the numerator and denominator in the
calculation.
Answer (B) is correct. The breakeven point in units is
equal to the fixed costs divided by the contribution
margin per unit. Thus, 44,000 = $880,000 ・CM, or
CM = $20.
Answer (C) is incorrect because $44.00 results from
using variable cost as part of the calculation.
Answer (D) is incorrect because $88.00 results from
dividing by an erroneous denominator.
[322] Source: Publisher
Answer (A) is incorrect because 250 results from
using an erroneous contribution margin.
Answer (B) is correct. The breakeven point is where
profit is zero and sales = fixed costs + variable costs,
so 10x = 4,000 + 2x. Thus, 8x = 4,000, or x = 500
units. Alternatively, dividing the $4,000 of fixed costs
by the $8 per unit contribution margin gives the same
result.
Answer (C) is incorrect because 800 results from
using the inverse of the contribution margin.
Answer (D) is incorrect because 2,000 results from
 applying the 20% to fixed costs instead of sales.
[323] Source: Publisher
Answer (A) is incorrect because 5,514 results from
adding the profit margin to the contribution margin.
Answer (B) is incorrect because 9,273 is the
breakeven point.
Answer (C) is incorrect because 13,600 results from
using profit as the contribution margin.
Answer (D) is correct. Sales = Fixed Costs +
Variable Costs + Profit. The profit is the selling price
of the good multiplied by the percent profit that is
desired/stated. Thus,
$15x = $51,000 + $9.50x + .25($15x), or
$15x = $51,000 + $13.25x, or
$1.75x = $51,000, or
x = 29,143 bears
A trial-and-error approach could also be used to
solve this problem by preparing an income
statement
for each of the four alternative production levels.
[324] Source: Publisher
Answer (A) is incorrect because .67 is the inverse of
the degree of operating leverage.
Answer (B) is incorrect because .75 results from
adding fixed costs in the denominator.
Answer (C) is correct. The degree of operating
leverage (DOL) can be calculated from the formula
[Q(P - V)] ・[Q(P - V) - F], if Q is the number of
units sold, P is the unit selling price, V is the unit
variable cost, and F is the fixed cost. Thus, (4,000 x
75) ・[(4,000 x 75) - 100,000], or $300,000 ・
200,000 = 1.5.
Answer (D) is incorrect because 3.0 results from
failing to use contribution margin in the
denominator.
[325] Source: CMA 1286 4-18
Answer (A) is incorrect because $800,000 equals
the prime costs.
Answer (B) is correct. The only costs capitalized are
the variable costs of manufacturing. Prime costs
(direct materials and direct labor) are variable.
Prime costs, direct materials,
and direct labor $800,000
Variable manufacturing overhead 100,000
--------
Total inventoriable costs $900,000
========
Answer (C) is incorrect because $980,000 includes
the variable selling and other expenses.
Answer (D) is incorrect because $1,060,000 equals
inventoriable costs under absorption costing.
[326] Source: CMA 1286 4-19
Answer (A) is incorrect because $800,000 equals
prime costs.
Answer (B) is incorrect because $900,000 equals
inventoriable costs under variable costing.
Answer (C) is correct. The absorption method is
required for financial statements prepared according
to GAAP. It charges all costs of production to
inventories. The prime costs ($800,000), variable
manufacturing overhead ($100,000), and the fixed
manufacturing overhead ($160,000) are included.
They total $1,060,000.
Answer (D) is incorrect because $1,060,000
includes the fixed and variable selling and other
expenses.
[327] Source: Publisher
Answer (A) is correct. The contribution margin
equals sales minus variable costs. Direct costing
considers only variable costs as product costs, so the
contribution margin appears in a direct costing
income statement. Absorption costing treats both
variable and fixed costs as product costs. Thus,
variable costs are not stated separately, and the
contribution margin would not appear in the income
statement. Accordingly, the contribution margin for
the whole company is $480,000 ($1,000,000 net
revenue - $400,000 variable CGS - $120,000
variable selling and administrative costs), and the
contribution margin for Division 1 is $120,000
($300,000 net revenues - $140,000 variable CGS -
$40,000 variable selling and administrative costs).
Thus, the ratio of the contribution margin of Division
1 to the contribution margin of the whole company is
0.25.
Answer (B) is incorrect because 0.2083 is the ratio
of the contribution margin of Division 2 to the
contribution margin of the whole company.
Answer (C) is incorrect because it is the ratio of
division net income to total net income.
Answer (D) is incorrect because it is the ratio of
division net income to total net income, with the
exception of president's salary.
[328] Source: Publisher
Answer (A) is incorrect because the contribution of
Division 1 is $50,000, which is less than $105,000.
Answer (B) is incorrect because the contribution of
Division 2 is $50,000, which is less than $105,000.
Answer (C) is correct. The contribution margin for
Division 3 is $150,000 ($250,000 net revenue -
$100,000 total variable costs). The contribution
controllable by Division 3's manager is $130,000
($150,000 contribution margin - $20,000
controllable fixed cost). The total contribution by
Division 3 equals its net revenue minus all costs
 traceable to it. Accordingly, the total contribution is
$105,000 ($130,000 controllable contribution -
$25,000 allocated but controllable by others).
Unallocated costs are excluded from the
calculation.
If separate amounts are determined for the
division's
contribution and the controllable contribution, the
difference between the division's and the
manager's
performance may be ascertained (assuming
controllability of fixed costs can be assigned).
Answer (D) is incorrect because the contribution of
Division 4 is $65,000, which is less than $105,000.
[329] Source: Publisher
Answer (A) is incorrect because 167 units is the
result of adding variable cost to the sales price.
Answer (B) is incorrect because 250 units results
from a failure to subtract the variable cost from the
sales price.
Answer (C) is correct. At breakeven, the profit is
zero, therefore sales must be equal to fixed cost
and
variable cost. In this case, the formula is
$400x = $200x + $100,000
$200x = $100,000
x = 500 units
Answer (D) is incorrect because 1,700 units results
from adding the after-tax profit objective to the
fixed
cost.
[330] Source: Publisher
Answer (A) is incorrect because 1,250 units results
from a failure to subtract variable costs from the
sales
price.
Answer (B) is incorrect because 1,700 units results
from using the after-tax profit, not the pretax profit
objective.
Answer (C) is incorrect because 2,000 units results
from a failure to include fixed cost in the equation.
Answer (D) is correct. The number of units to be
sold for Almo to achieve its after-tax profit objective
of $240,000 is the point where revenue equals total
costs plus the pretax profit objective. The pretax
profit objective is found by dividing the after-tax
profit objective by (1 - tax rate) or .6. Hence, the
formula to find the desired point is
$400x = $200x + $100,000 + ($240,000 ・.6)
$400x = $200x + $100,000 + $400,000
$200x = $500,000
x = 2,500 units
[331] Source: Publisher
Answer (A) is incorrect because $157,200 results
from a failure to add in the first 5 months' revenue.
Answer (B) is incorrect because $160,800 is the
result of multiplying operating profit by .4 instead of
.6.
Answer (C) is correct. The after-tax profit of a selling
price alternative is found by initially finding the year's
combined revenue. Therefore, the first 5 months'
revenue of $140,000 ($400 x 350) is added to the
final 7 months' revenue of $972,000 ($360 x 2,700)
to get a yearly revenue of $1,112,000. From this
number, the variable costs of $610,000 ($200 x
3,050) and the fixed costs of $100,000 are
subtracted to get an operating profit of $402,000.
The 40% tax rate is taken out of this amount by
multiplying the $402,000 by .6 (1 - .4) to get an
after-tax profit of $241,200.
Answer (D) is incorrect because $301,200 results
from a failure to subtract fixed costs from the
revenue.
[332] Source: Publisher
Answer (A) is incorrect because $1,327,700 results
from a failure to include fringe benefit expense.
Answer (B) is incorrect because $1,484,480 results
from a failure to include overtime wages expense.
Answer (C) is correct. In this problem, the fixed
expenses incurred are from advertising, rent, property
insurance, utilities, malpractice insurance,
depreciation, and wages and fringe benefits. The first
step is to add all of these expenses except for wages
and fringe benefits. Therefore, you must add
$500,000 from advertising, rent is $168,000 ($28 x
6,000), $22,000 for property insurance, $32,000 for
utilities, $180,000 for malpractice insurance, and
depreciation is $15,000 ($60,000 ・4). This total is
$917,000. The next step is to determine regular
wages of $403,200 [($25 + $20 + $15 + $10) x 16
hours x 360 days] plus overtime wages of $7,500
[(200 x $15 x 1.5) + (200 x $10 x 1.5)] to get total
wages of $410,700. This number multiplied by 40%
gives a fringe benefit expense of $164,280.
Therefore, total fixed expenses is equal to
$1,491,980 ($917,000 + $410,700 + $164,280).
Answer (D) is incorrect because $1,536,980 results
from depreciating all of the office equipment in the
first year.
[333] Source: Publisher
Answer (A) is incorrect because 9,947 clients results
from a failure to subtract variable costs.
Answer (B) is correct. In a breakeven analysis, the
profit is equal to zero and sales must be equal to the
sum of fixed costs and variable costs. In the analysis,
there are two forms of revenue, $30 for the initial
consultation, and the inflow from favorable
settlements. Therefore, the formula is
$30x + ($2,000 x .2x x .3) = $4x + $1,491,980
 $30x + $120x = $4x + $1,491,980
$146x = $1,491,980
x = $10,219 clients
Answer (C) is incorrect because 12,862 clients
results from a failure to add the $30 from the initial
consultation.
Answer (D) is incorrect because 57,384 clients
results from a failure to add the inflow from the
favorable settlements.
[334] Source: Publisher
Answer (A) is incorrect because 47.5 results from
averaging the possible outcomes without respect to
its probability.
Answer (B) is correct. The expected value in a
probability distribution is found by adding the
values
created by multiplying each possible outcome by
its
respective probability. Therefore, the expected
value
is (20 x .10) + (30 x .30) + (55 x .40) + (85 x .20),
or 2 + 9 + 22 + 17, giving an expected value of 50
clients per day.
Answer (C) is incorrect because 52.5 results from
adding the high and low outcomes and dividing by
2.
Answer (D) is incorrect because 55 is the most
probable outcome, not the expected value.
[335] Source: Publisher
Answer (A) is incorrect because $667,550 results
from a failure to add the beginning balance of the
work-in-process inventory.
Answer (B) is incorrect because $675,600 is the
cost
of goods available for sale under absorption
costing.
Answer (C) is correct. The cost of goods available
for sale under the variable costing method is found
by
adding the beginning balances of finished goods
and
work-in-process inventories to the manufacturing
costs incurred. To find the beginning balances of
the
variable inventories, fixed overhead must be
subtracted from the absorption inventory. The fixed
overhead is applied at $1 per direct labor hour
($25,000 of fixed overhead ・25,000 direct labor
hours). Therefore, the variable inventory balance
for
finished goods is $16,950 [$18,000 - ($1,050 hours
x $1)], and the variable inventory balance for
work-in-process is $46,400 [$48,000 - (1,600
hours x $1)]. The manufacturing costs incurred are
found by adding the cost of direct materials,
$370,000, plus the cost of direct labor, $138,000
(23,000 hours x $6 per hour), plus the cost of
variable overhead, $142,600 (23,000 hours x $6.20
per hour) to get manufacturing costs of $650,600.
The application rates for direct labor and variable
overhead are found by dividing $150,000 and
$155,000 by 25,000 hours, respectively. Therefore,
the cost of goods available for sale is equal to
$713,950 ($16,950 + $46,400 + $650,600).
Answer (D) is incorrect because $716,600 results
from a failure to reduce the beginning balances by the
fixed overhead.
[336] Source: Publisher
Answer (A) is incorrect because $635,950 results
from a failure to decrease the inventory balances by
the fixed overhead.
Answer (B) is correct. The variable manufacturing
cost of goods sold is found by subtracting the ending
balances of work-in-process and finished goods
inventories from cost of goods available for sale. The
ending balances of the inventories are found by
subtracting fixed overhead from the absorption
inventories. Therefore, the work-in-process ending
inventory is found by subtracting $2,100 (2,100
hours x $1) from $64,000 to get $61,900. The
ending finished goods balance is found by subtracting
$820 (820 hours x $1) from $14,000 to get
$13,180. Thus, the variable manufacturing cost of
goods sold is equal to $638,870 ($713,950 -
$61,900 - $13,180).
Answer (C) is incorrect because $652,050 results
from a failure to subtract the finished goods inventory.
Answer (D) is incorrect because $700,770 results
from a failure to subtract the work-in-process
inventory.
[337] Source: Publisher
Answer (A) is incorrect because $281,130 is the
result of subtracting the entire selling expense.
Answer (B) is correct. The contribution margin is
found by subtracting total variable costs from sales
revenue. In this example, variable costs are equal to
variable cost of goods sold plus variable selling
expenses. Since variable cost of goods sold has been
found to be $638,870, the only issue remaining is
selling expenses. Because the variable portion of
selling expenses is 5% of sales revenue, variable
selling expense is equal to $50,750 ($1,015,000 x
.05). Therefore, the contribution margin is equal to
$325,380 ($1,015,000 - $638,870 - $50,750).
Answer (C) is incorrect because $331,880 is the
result of subtracting the fixed portion of selling
expense.
Answer (D) is incorrect because $363,130 is the
result of subtracting the increase in selling expense
this year.
[338] Source: Publisher
Answer (A) is correct. The variable operating income
for a corporation is found by subtracting total fixed
 costs from the contribution margin. In this example,
total fixed costs are comprised of factory overhead,
selling expenses, and administrative costs. With
fixed
selling expenses being $44,250 ($95,000 -
$50,750), total fixed costs are equal to $156,650
($37,400 + $44,250 + $75,000). Therefore, with a
contribution margin of $325,380, variable operating
income is equal to $168,730 ($325,380 -
$156,650).
Answer (B) is incorrect because $206,130 results
from a failure to subtract fixed factory overhead
from
the contribution margin.
Answer (C) is incorrect because $212,980 results
from a failure to subtract fixed selling expenses
from
the contribution margin.
Answer (D) is incorrect because $243,730 results
from a failure to subtract fixed administrative
expenses from the contribution margin.
[339] Source: CMA Samp Q3-3
Answer (A) is incorrect because unit sales
multiplied
by the sales price equals sales revenue, but this
amount does not necessarily correlate with
operating
income. A change in unit variable costs may cause
revenue and operating income to move in different
directions.
Answer (B) is incorrect because operating income is
not necessarily correlated positively or negatively
with
finished goods inventory, however valued.
Answer (C) is correct. In a variable costing system,
only the variable costs are recorded as product
costs.
All fixed costs are expensed in the period incurred.
Because changes in the relationship between
production levels and sales levels do not cause
changes in the amount of fixed manufacturing cost
expensed, profits more directly follow the trends in
sales, especially when the UCM (selling price per
unit
- variable costs per unit) is constant. Unit sales
times
the UCM equals the total CM, and operating income
(a pretax amount) equals the CM minus fixed costs
of
operations. If the UCM is constant and fixed costs
are stable, the change in operating income will
approximate the change in the CM (UCM x unit
sales).
Answer (D) is incorrect because operating income
is
not necessarily correlated positively or negatively
with
finished goods inventory, however valued.
[340] Source: Publisher
Answer (A) is incorrect because it uses the variable
cost percentage in the denominator instead of the
contribution margin percentage.
Answer (B) is incorrect because it uses the same
contribution margin percentage (20%) in both
calculations.
Answer (C) is incorrect because it reverses the two
contribution margin percentages.
Answer (D) is correct. The original breakeven level
was:
$800,000
-------- = $2,500,000
.32
The new level is:
$700,000
-------- = $3,500,000
.20
Thus, there is an increase of $1,000,000.
[341] Source: Publisher
Answer (A) is correct. The $4 million breakeven
level was calculated as follows:
$1,200,000
---------- = $4,000,000
CM%
Solving for CM% results in CM% = 30%. Thus,
30% of every dollar, or $0.30, contributes towards
profits.
Answer (B) is incorrect because, when substituted
into the original breakeven formula, they would not
have produced a breakeven level of $4 million.
Answer (C) is incorrect because, when substituted
into the original breakeven formula, they would not
have produced a breakeven level of $4 million.
Answer (D) is incorrect because, when substituted
into the original breakeven formula, they would not
have produced a breakeven level of $4 million.
[342] Source: Publisher
Answer (A) is correct. Assume that sales were
previously $1,000, with profits of $150 (15% x
$1,000). If sales increase to $1,250, profits will
increase to $187.50 (15% x $1,250). The $37.50
increase is 25% of the previous $150.
Answer (B) is incorrect because profit margin
increases by 25%.
Answer (C) is incorrect because profit grows at the
same rate as sales.
Answer (D) is incorrect because 15% of sales
translates to net income.
[343] Source: Publisher
 Answer (A) is incorrect because a progressive tax is
a tax in which individuals with higher (lower)
incomes
pay a higher (lower) percentage of their income in
tax. For example, income taxes are progressive.
Answer (B) is correct. With a regressive tax, the
percentage paid in taxes decreases as income
increases. For example, excise taxes and payroll
taxes are both regressive taxes. An excise tax is
regressive because its burden falls
disproportionally
on lower-income persons. As personal income
increases, the percentage of income paid declines
because an excise tax is a flat amount per quality
of
the good or service purchased.
Answer (C) is incorrect because a proportional tax
is
a tax in which the individual pays a constant
percentage in taxes, regardless of income level. A
sales tax is a proportional tax.
Answer (D) is incorrect because a progressive tax is
a tax in which individuals with higher (lower)
incomes
pay a higher (lower) percentage of their income in
tax. For example, income taxes are progressive.
[344] Source: CMA 0686 1-20
Answer (A) is incorrect because personal income
taxes and Social Security taxes levied against the
employee are direct taxes.
Answer (B) is incorrect because personal income
taxes and Social Security taxes levied against the
employee are direct taxes.
Answer (C) is correct. Indirect taxes are those
levied
against someone other than individual taxpayers
and
thus only indirectly affect the individual. Sales
taxes
are levied against businesses and are then passed
along to the individual purchaser. Social Security
taxes are levied against both the employer and the
employee. Those levied against the employee are
direct taxes; those levied against the employer are
indirect.
Answer (D) is incorrect because personal income
taxes and Social Security taxes levied against the
employee are direct taxes.
[345] Source: CMA 0690 4-27
Answer (A) is incorrect because the effect is to
increase gains and decrease losses.
Answer (B) is correct. An accelerated method
reduces the book value of the asset more rapidly in
the early years of the useful life than does the
straight-line method. Hence, the effect of an early
sale
is to increase the gain or decrease the loss that
would
have been recognized under the straight-line method.
Answer (C) is incorrect because the effect is to
increase gains and decrease losses.
Answer (D) is incorrect because the effect is to
increase gains and decrease losses.
[346] Source: Publisher
Answer (A) is incorrect because $17,700 is the gross
tax liability.
Answer (B) is incorrect because $15,300 is the net
tax liability found when incorrectly treating the tax
credit as a direct reduction in taxable income.
Answer (C) is correct. The first step in calculating
HCC's net tax liability is to subtract the exclusion for
tax-exempt interest from income, for a gross income
amount of $69,000 ($80,000 - $11,000). Next, the
deprecation deduction is subtracted from gross
income, for a taxable income of $59,000 ($69,000 -
$10,000). Then, the taxable income is multiplied by
the tax rate, for a gross tax liability of $17,700
($59,000 x 30%). Finally, net tax liability is
computed by subtracting the tax credits from the
gross tax liability. Therefore, HCC's net tax liability is
$9,700 ($17,700 - $8,000).
Answer (D) is incorrect because $2,000 is the net tax
liability found when incorrectly treating the exclusion
as a credit.
[347] Source: Publisher
Answer (A) is incorrect because an exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Therefore, the exclusion will reduce HCC's gross tax
liability by $3,300 ($11,000 x .30), and the
deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x .30).
Answer (B) is incorrect because an exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Therefore, the exclusion will reduce HCC's gross tax
liability by $3,300 ($11,000 x .30), and the
deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x .30).
Answer (C) is incorrect because an exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Therefore, the exclusion will reduce HCC's gross tax
liability by $3,300 ($11,000 x .30), and the
deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x .30).
Answer (D) is correct. Credits directly reduce taxes,
whereas exclusions and deductions reduce income
prior to the computation of the gross tax liability.
Thus, the credit reduces the gross tax liability on a
dollar-for-dollar basis, or $8,000. An exclusion or
deduction reduces gross tax liability by the amount of
the exclusion or deduction multiplied by the tax rate.
Accordingly, the exclusion will reduce HCC's gross
tax liability by $3,300 ($11,000 x 30%), and the
 deduction will reduce HCC's gross tax liability by
$3,000 ($10,000 x 30%). Gross income does not
reduce the gross tax liability; rather, it increases
the
gross tax liability by $24,000 ($80,000 x 30%).
[348] Source: CMA 1291 2-11
Answer (A) is incorrect because warranty expenses
are not deductible until paid.
Answer (B) is incorrect because dividends on
common stock are never deductible by a
corporation; they are distributions of after-tax
income.
Answer (C) is incorrect because amounts accrued
by
an accrual-basis taxpayer to be paid to a related
cash-basis taxpayer in a subsequent period are not
deductible until the latter taxpayer includes the
items
in income. This rule effectively puts related
taxpayers
on the cash basis.
Answer (D) is correct. Sec. 162(a) states that a
deduction is allowed for the ordinary and necessary
expenses incurred during the year in any trade or
business. A corporation may therefore deduct a
reasonable amount for compensation. Accrued
vacation pay is a form of compensation that results
in
an allowable deduction for federal income tax
purposes.
[349] Source: CMA 1291 2-12
Answer (A) is incorrect because the gain on an
installment sale of real property in excess of
$150,000 is an adjustment to taxable income for
purposes of computing alternative minimum
taxable
income.
Answer (B) is incorrect because mining exploration
and development costs are adjustments to taxable
income for purposes of computing alternative
minimum taxable income.
Answer (C) is incorrect because a charitable
contribution of appreciated property is an
adjustment
to taxable income for purposes of computing
alternative minimum taxable income.
Answer (D) is correct. Taxable income is adjusted to
arrive at alternative minimum taxable income.
Some
of the common adjustments include gains or losses
from long-term contracts, gains on installment
sales of
real property, mining exploration and development
costs, charitable contributions of appreciated
property, accelerated depreciation, the
accumulated
current earnings adjustment, and tax-exempt
interest
on private activity bonds issued after August 7, 1986.
A sales commission accrued in the current year but
paid in the following year is not an example of an
AMT adjustment.
[350] Source: CMA 1294 1-29
Answer (A) is correct. An increase in the corporate
income tax rate might encourage a company to
borrow because interest on debt is tax deductible,
whereas dividends are not. Accordingly, an increase
in the tax rate means that the after-tax cost of debt
capital will decrease. Given equal interest rates, a firm
with a high tax rate will have a lower after-tax cost of
debt capital than a firm with a low tax rate.
Answer (B) is incorrect because increased
uncertainty encourages equity financing. Dividends do
not have to be paid in bad years, but interest on debt
is a fixed charge.
Answer (C) is incorrect because an increase in
interest rates discourages debt financing.
Answer (D) is incorrect because an increase in the
price-earnings ratio means that the return to
shareholders (equity investors) is declining; therefore,
equity capital is a more attractive financing alternative.
[351] Source: Publisher
Answer (A) is incorrect because a reorganization that
is a mere change in the form of investment is
nontaxable.
Answer (B) is incorrect because a like-kind exchange
allows for the deferral of gain.
Answer (C) is correct. Like-kind exchanges,
involuntary conversions, and tax-free reorganizations
are examples of transactions that result in the deferral
or nonrecognition of gain. A reorganization is
nontaxable when it is considered a mere change in
investment, not a disposition of assets.
Answer (D) is incorrect because an involuntary
conversion allows for the deferral of gain.
[352] Source: CMA 0689 4-9
Answer (A) is incorrect because the unit contribution
margin ratio is the unit contribution margin divided by
the unit selling price.
Answer (B) is correct. The $44.00 unit cost includes
fixed overhead as well as variable costs. Thus, it is
determined in accordance with full absorption
costing. The difference between selling price and the
full absorption (inventory) cost is gross profit (gross
margin).
Answer (C) is incorrect because the unit contribution
margin is the difference between unit selling price and
unit variable cost.
Answer (D) is incorrect because the unit gross profit
margin ratio is the unit gross profit divided by the unit
selling price.

[353] Source: CMA 0689 4-10
Answer (A) is incorrect because carrying cost is the
cost of holding inventory, e.g., insurance expense,
storage costs, and the opportunity cost of the
investment.
Answer (B) is incorrect because a sunk
(unavoidable) cost is irrelevant to a decision
because
it has been or must be incurred.
Answer (C) is correct. A mixed (semivariable) cost
has fixed and variable components. An example is
the
electric utility charge. It includes a minimum (fixed
cost) and a variable amount for usage above a
certain
level.
Answer (D) is incorrect because committed costs
result when a going concern holds fixed assets.
Examples are insurance, long-term lease payments,
and depreciation.
[354] Source: CMA 0689 4-11
Answer (A) is incorrect because conversion costs
are
incurred to transform raw materials into a finished
product. They include direct labor and factory
overhead.
Answer (B) is correct. The R&D costs have already
been incurred. Thus, they are costs resulting from a
past irrevocable decision. These sunk costs are
irrelevant to the decision because they are
unavoidable.
Answer (C) is incorrect because relevant costs are
those that must be weighed in making decisions
because they will vary among the options
considered.
Answer (D) is incorrect because opportunity costs
are the returns from the alternative uses of
resources.
These returns are forgone by using resources in a
specific way.
[355] Source: CMA 0689 4-12
Answer (A) is correct. Advertising costs are
discretionary costs. Unlike engineered costs (such
as
direct materials), a specific, measurable
relationship
between a discretionary cost and its output is not
possible. Other examples are training costs, public
relations, and R&D.
Answer (B) is incorrect because opportunity costs
are the returns from the alternative uses of
resources.
These returns are forgone when resources are used
in
a specific way.
Answer (C) is incorrect because committed costs
result when a going concern holds fixed assets.
Examples are insurance, long-term lease payments,
and depreciation.
Answer (D) is incorrect because mixed costs are
those that include both variable and fixed elements.
[356] Source: CMA 0689 4-13
Answer (A) is incorrect because sunk costs are fixed
or variable costs that are unavoidable, for example,
because they have already been incurred.
Answer (B) is incorrect because discretionary costs
are ordinarily not inventoriable. Examples of
discretionary costs include advertising and R&D
expenditures.
Answer (C) is correct. Committed costs result when
a going concern holds fixed assets. Examples are
insurance, long-term lease payments, and
depreciation. Committed costs tend not to be
variable in the short-run because they are the results
of capital budgeting decisions, e.g., the construction
of a plant and the purchase and installation of
equipment. For this reason, they are classified as
fixed overhead.
Answer (D) is incorrect because prime costs are the
variable costs of direct materials and direct labor.
[357] Source: CMA 1290 3-3
Answer (A) is incorrect because the direct method
does not make allocations to other service
departments.
Answer (B) is incorrect because the term variable
method is nonsensical.
Answer (C) is incorrect because the reciprocal
method recognizes reciprocal interdepartmental
service.
Answer (D) is correct. The three major methods of
allocating service department costs, in order of
increasing sophistication, are the direct method, the
step-down method, and the reciprocal (or
simultaneous-equations) method. The direct method
is the simplest. It involves allocating all service
department costs to production departments without
recognizing any service provided by one service
department to another. The step-down method is a
sequential process that allocates service costs among
service as well as production departments. However,
once a department's costs have been allocated, no
additional allocations are made back to that
department. The reciprocal method uses simultaneous
equations to recognize mutual services. The latter
method is the most complex.
[358] Source: CMA 1291 3-5
Answer (A) is incorrect because ROI does not have
to be maximized under the residual income approach.
 Answer (B) is incorrect because maximizing the
imputed interest rate charge would diminish the
residual return.
Answer (C) is incorrect because the residual income
method is based on net income rather than cash
flows.
Answer (D) is correct. Residual income is the excess
of the return on an investment over the targeted
amount. This amount may be defined as the
imputed
interest on invested capital. Some firms prefer to
measure managerial performance in terms of the
amount of residual income rather than the
percentage
ROI. The principle is that the firm is expected to
benefit from expansion as long as residual income
is
earned. Using a percentage ROI approach,
expansion might be rejected if it lowered ROI even
though residual income would increase.
[359] Source: CMA 1291 3-6
Answer (A) is correct. The purpose of the residual
income approach is to maximize income in excess
of
an imputed interest charge on invested capital.
Thus,
any returns in excess of the cost of capital are
beneficial to the firm. The cost of capital is a
weighted
average of the various debt and equity components
of
the capital structure.
Answer (B) is incorrect because to use only the cost
of new capital would ignore the contribution of old
capital to a department. The purpose of the
residual
income approach is to maximize income in relation
to
capital employed.
Answer (C) is incorrect because use of the average
ROI might result in rejection of projects with returns
in excess of the cost of capital.
Answer (D) is incorrect because the objective is to
maximize income in relation to costs; the
comparison
is not to other years or averages.
[360] Source: CMA 0692 3-2
Answer (A) is incorrect because 30,000 units were
started and completed during the period.
Answer (B) is incorrect because 38,000 units were
transferred out, not to, the assembly department.
Answer (C) is incorrect because 40,800 equals the
equivalent units for conversion costs.
Answer (D) is correct. This problem seemingly asks
a technical question, but in reality was designed to
test the candidate's alertness. The equivalent units
transferred from the molding department are simply
the total units transferred from the molding
department--42,000 units.
[361] Source: CMA 0692 3-3
Answer (A) is incorrect because 30,000 units ignores
the 8,000 units in process at the beginning of the
period.
Answer (B) is correct. Direct materials are added
when the units are 60% complete as to conversion
costs. The beginning inventory of 8,000 units was
only 25% complete at the start of the period, and
42,000 units were transferred in. Given that the
ending inventory of 12,000 units was only 40%
complete, neither beginning nor ending inventory had
received direct materials in the assembly department.
Accordingly, the equivalent units in the assembly
department for direct materials must have been
38,000 units (8,000 units BI + 42,000 units
transferred in - 12,000 units EI).
Answer (C) is incorrect because 40,800 equals the
equivalent units for conversion costs, not direct
materials.
Answer (D) is incorrect because the 42,000 units
were transferred in during the month. Not all received
an input of direct materials.
[362] Source: CMA 0692 3-4
Answer (A) is incorrect because 34,800 units
assumes the beginning inventory was 100%
complete.
Answer (B) is correct. The equivalent units for
conversion costs equal total units to account for,
minus work done on beginning inventory, minus work
not done on ending inventory. Hence, the equivalent
units for conversion costs equal 40,800 units [50,000
units - (25% x 8,000 units) - (60% x 12,000 units)].
Answer (C) is incorrect because 42,800 units is the
answer derived using the weighted-average
assumption.
Answer (D) is incorrect because the ending inventory
was only 40% complete (not 60%), resulting in
equivalent units for those 12,000 items of 4,800 units.
[363] Source: CMA 1277 5-5
Answer (A) is incorrect because the difference in
total costs that results from selecting one alternative
instead of another is an incremental cost.
Answer (B) is incorrect because a cost that cannot
be avoided because it has already been incurred is a
sunk cost.
Answer (C) is correct. An imputed cost does not
entail any dollar outlay but is relevant to the
decision-making process.
Answer (D) is incorrect because a cost that continues
to be incurred even though there is no activity is a
 fixed cost.
[364] Source: CMA 0678 4-6
Answer (A) is incorrect because manufacturing
costs
incurred to produce units of output are
inventoriable
(product) costs.
Answer (B) is incorrect because all costs associated
with manufacturing other than direct labor costs
and
raw materials costs are overhead costs. Conversion
costs consist of both direct labor and overhead.
Answer (C) is correct. Conversion costs are the
direct labor, indirect materials, and factory
overhead
incurred to convert raw materials and transferred-in
goods in a cost center to finished goods.
Answer (D) is incorrect because raw materials costs
and direct labor costs are prime costs.
[365] Source: CMA 0678 4-7
Answer (A) is incorrect because all costs associated
with manufacturing other than direct labor costs
and
raw materials costs are overhead costs.
Answer (B) is incorrect because predetermined
costs
are standard costs.
Answer (C) is incorrect because the sum of direct
labor and overhead is conversion cost.
Answer (D) is correct. Prime costs are raw materials
costs and direct labor costs.
[366] Source: CMA 0678 4-9
Answer (A) is incorrect because marketing,
shipping,
etc., are selling and administrative costs.
Answer (B) is incorrect because costs that do not
change in total for a given period and relevant
range
are fixed costs. Fixed costs also become
progressively smaller on a per unit basis as volume
increases.
Answer (C) is incorrect because manufacturing
costs
incurred to produce output are inventoriable
(product) costs.
Answer (D) is correct. Variable costs fluctuate
directly and proportionately with sales or
production
volume, facility usage, or other activity measure.
[367] Source: CMA 0678 4-10
Answer (A) is incorrect because costs incurred in a
current period to achieve objectives other than the
filling of orders by customers are known as
discretionary costs.
Answer (B) is incorrect because costs likely to
respond to the amount of attention devoted to them
by a specified manager are controllable costs.
Answer (C) is correct. Committed costs are required
as a result of past decisions. They are the fixed costs
of plant, equipment, and other items that are basic to
the entity. Because they result from long-term
decisions about capacity, they are unlikely to change
in the short run.
Answer (D) is incorrect because costs that fluctuate
with small changes in volume are variable costs.
[368] Source: CMA 0678 4-11
Answer (A) is correct. Discretionary costs are fixed
in the short-run because they arise from periodic
(e.g., annual) appropriation decisions by management
about the total to be incurred. Discretionary costs
have no well-defined input-output relationship; that is,
they are only indirectly related to filling customer
orders. Advertising and research are examples.
Answer (B) is incorrect because costs likely to
respond to the amount of attention devoted to them
by a specified manager are controllable costs.
Answer (C) is incorrect because costs required as a
result of past decisions are committed costs.
Answer (D) is incorrect because costs unaffected by
managerial decisions are costs such as committed
costs and depreciation that were determined by
decisions of previous periods.
[369] Source: CMA 0678 4-12
Answer (A) is incorrect because costs incurred in a
current period to achieve objectives other than the
filling of orders by customers are discretionary costs.
Answer (B) is correct. Controllable costs are directly
regulated by management at a given level of
production within a given time span. For example,
fixed costs are not controllable.
Answer (C) is incorrect because costs required as a
result of past decisions are committed costs.
Answer (D) is incorrect because costs unaffected by
managerial decisions are costs such as committed
costs and depreciation that were determined by
decisions of previous periods.
[370] Source: CMA 0680 4-5
Answer (A) is incorrect because normal spoilage
costs end up in inventory, not abnormal spoilage.
Answer (B) is incorrect because material variance
accounts are only charged for the variances in
material usage or material price, not the spoilage of
 product.
Answer (C) is incorrect because, while charging
abnormal spoilage to manufacturing overhead is an
occasional practice, it is not the ordinary practice,
which is to charge it to a special loss account.
Answer (D) is correct. Abnormal spoilage is usually
charged to a special loss account because it is not
expected to occur under normal, efficient operating
conditions. Because it is unusual, it should be
separately reported as a period cost.
[371] Source: CMA 1282 4-101
Answer (A) is incorrect because property taxes and
interest charges are independent of production
levels.
Answer (B) is incorrect because the president's
salary usually does not vary with production levels.
They are therefore fixed costs and are treated as
elements of overhead.
Answer (C) is incorrect because property taxes and
interest charges are independent of production
levels.
Answer (D) is correct. Variable costs vary directly
with the level of production. As production
increases
or decreases, materials costs increase or decrease,
usually in direct proportion to production, sales, or
other activity measure.
[372] Source: CMA 0685 5-1
Answer (A) is incorrect because some overhead
costs are variable but cannot be directly traced to a
particular product.
Answer (B) is incorrect because it includes costs
that
cannot be directly traced.
Answer (C) is incorrect because it includes costs
that
cannot be directly traced.
Answer (D) is correct. Prime costs are direct
materials and direct labor. They are directly
identifiable elements of production costs and are
directly traceable to the product.
[373] Source: CMA 0685 5-6
Answer (A) is incorrect because a variable cost is
one that varies directly with production activity.
Answer (B) is incorrect because conversion cost is
the cost of labor and overhead incurred to convert
raw materials into a finished product.
Answer (C) is incorrect because prime costs are the
costs of materials and labor that are directly
traceable
to a cost objective.
Answer (D) is correct. A cost incurred for the benefit
of more than one cost objective is known as a
common cost. Allocation of common costs is a
persistent problem in responsibility accounting. For
example, how should the costs of corporate
headquarters be allocated to the segments of a
conglomerate? Common cost is also a synonym for
joint cost. In this sense, common costs are incurred in
the production of two or more inseparable products
(e.g., costs of refining petroleum into gasoline, diesel
fuel, kerosene, lubricating oils, etc.) up to the point at
which the products become separable (the split-off
point).
[374] Source: CMA 1285 4-25
Answer (A) is incorrect because total direct labor
cost is calculated as follows: total manufacturing cost
of $2,500,000 equals raw materials, plus direct
labor, plus factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor, direct labor
cost is $937,500 ($750,000 ・80%).
Answer (B) is incorrect because total direct labor
cost is calculated as follows: total manufacturing cost
of $2,500,000 equals raw materials, plus direct
labor, plus factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor, direct labor
cost is $937,500 ($750,000 ・80%).
Answer (C) is incorrect because total direct labor
cost is calculated as follows: total manufacturing cost
of $2,500,000 equals raw materials, plus direct
labor, plus factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor, direct labor
cost is $937,500 ($750,000 ・80%).
Answer (D) is correct. Total manufacturing cost of
$2,500,000 is composed of raw materials, direct
labor, and factory overhead. Factory overhead is
30% of total manufacturing costs, or $750,000. If
factory overhead is 80% of direct labor cost, direct
labor cost is $937,500 ($750,000 ・80%).
[375] Source: CMA 1285 4-26
Answer (A) is incorrect because $750,000 is factory
overhead (30% x $2,500,000).
Answer (B) is correct. Factory overhead is 30% of
total manufacturing costs, or $750,000. Direct labor
is $937,500. Thus, raw materials must account for
the remaining $812,500 ($2,500,000 - $750,000 -
$937,500).
Answer (C) is incorrect because direct material is
$812,500 ($2,500,000 manufacturing costs -
$750,000 factory overhead - $937,500 direct labor
costs).
Answer (D) is incorrect because direct material is
$812,500 ($2,500,000 manufacturing costs -
$750,000 factory overhead - $937,500 direct labor
costs).

[376] Source: CMA 1285 4-27
Answer (A) is correct. Cost of goods manufactured
($2,425,000) equals total manufacturing costs
($2,500,000) plus beginning work-in-process (75%
of EWIP) minus ending work-in-process. The ending
work-in-process is $300,000.
$2,500,000 + .75 EWIP - EWIP = $2,425,000
$2,500,000 - .25 EWIP = $2,425,000
EWIP = $75,000 ・.25
EWIP = $300,000
Answer (B) is incorrect because the carrying value
of
the work-in-process inventory is calculated as
follows: costs of goods manufactured ($2,425,000)
equals total manufacturing costs ($2,500,000), plus
beginning work-in-process (75% of EWIP), minus
ending work-in-process. The ending
work-in-process is $300,000.
Answer (C) is incorrect because the carrying value
of
the work-in-process inventory is calculated as
follows: costs of goods manufactured ($2,425,000)
equals total manufacturing costs ($2,500,000), plus
beginning work-in-process (75% of EWIP), minus
ending work-in-process. The ending
work-in-process is $300,000.
Answer (D) is incorrect because the carrying value
of
the work-in-process inventory is calculated as
follows: costs of goods manufactured ($2,425,000)
equals total manufacturing costs ($2,500,000), plus
beginning work-in-process (75% of EWIP), minus
ending work-in-process. The ending
work-in-process is $300,000.
[377] Source: CIA 0593 IV-3
Answer (A) is incorrect because direct labor hours is
a traditional base for assigning overhead costs to
production. However, it is not necessarily an
appropriate basis for assigning overhead costs
because direct labor is a small percentage of the
total
cost of most products.
Answer (B) is incorrect because number of units
produced is an output related measure. Materials
handling costs should be related to an input
measure.
Answer (C) is incorrect because the number of
vendors might be appropriate for receiving and
inspection, but materials handling in this situation
encompasses more than costs related to the
number
of vendors.
Answer (D) is correct. Cost drivers should be
related
to the costs accumulated in cost pools. The number
of parts used has a direct cause-and-effect
relationship with materials handling costs. The
more
parts used, the more handling is involved.
[378] Source: CIA 1193 IV-1
Answer (A) is correct. The cost of small tools used in
mounting tires cannot be identified solely with the
manufacture of a specific automobile. This cost
should be treated as factory overhead because it is
identifiable with the production process.
Answer (B) is incorrect because tire costs are readily
and directly identifiable with each automobile and,
thus, are direct materials costs.
Answer (C) is incorrect because the cost of the
laborers who place tires on each automobile is readily
and directly identifiable with each automobile. Hence,
it is a direct labor cost.
Answer (D) is incorrect because delivery costs are
readily and directly identifiable with the tires
delivered. Thus, they are direct materials costs.
[379] Source: CIA 1193 IV-4
Answer (A) is incorrect because $20,000 only
includes other factory overhead. Indirect materials
and indirect labor should also be included.
Answer (B) is incorrect because $25,000 excludes
the indirect materials.
Answer (C) is correct. Factory (manufacturing)
overhead consists of all costs, other than direct
materials and direct labor, that are associated with
the manufacturing process. It includes both fixed and
variable costs. The factory overhead control account
should have the following costs:
Indirect materials $ 5,000
Indirect labor ($45,000-$40,000) 5,000
Other factory overhead 20,000
-------
Total overhead $30,000
=======
Answer (D) is incorrect because $45,000 is the total
labor cost.
[380] Source: CIA 1193 IV-5
Answer (A) is incorrect because the straight-time
wages times the overtime hours should still be treated
as direct labor.
Answer (B) is incorrect because only the overtime
premium times the overtime hours is charged to
overhead.
Answer (C) is incorrect because labor costs are not
related to repairs and maintenance expense.
Answer (D) is correct. Direct labor costs are wages
paid to labor that can feasibly be specifically
identified with the production of finished goods.
Factory overhead consists of all costs, other than
direct materials and direct labor, that are associated
 with the manufacturing process. Thus, straight-time
wages would be treated as direct labor; however,
because the overtime premium cost is a cost that
should be borne by all production, the overtime
hours
times the overtime premium should be charged to
manufacturing overhead.
[381] Source: CIA 1193 IV-3
Answer (A) is incorrect because the direct
allocation
method ignores any services that are rendered by
one
service department to another service department.
Answer (B) is incorrect because the step-down
allocation method allows for limited recognition of
services rendered by service departments to other
service departments.
Answer (C) is incorrect because the linear allocation
method is nonsensical.
Answer (D) is correct. The reciprocal method uses
simultaneous equations to allocate each service
department's costs. It allocates costs by explicitly
including the mutual services rendered among all
departments. When service departments render
services to each other, the use of the direct method
or the step-down method would not be theoretically
accurate. Accordingly, in such situations, the
reciprocal method would result in the most
accurate
allocation.
[382] Source: CIA 0592 IV-6
Answer (A) is incorrect because a quantity variance
is not recorded for scrap that is anticipated.
Furthermore, work-in-process inventory is credited
only when scrap is unique to a job.
Answer (B) is incorrect because an accounting
entry
is not needed. The amount is not material.
Answer (C) is correct. Making a memorandum entry
at the time of recovery is appropriate. The value of
the scrap is then recognized at the time of sale.
The
factory overhead control account is credited
because
scrap is inevitable to the company's production
operations and not attributable to a specific job.
This
accounting method has the effect of spreading the
revenue from scrap sales over all jobs or products.
Answer (D) is incorrect because normal scrap is not
the basis for recording a variance.
[383] Source: CIA 0594 III-70
Answer (A) is correct. Job order costing is
appropriate when producing products with
individual
characteristics and/or when identifiable groupings are
possible. Process costing should be used to assign
costs to similar products that are mass produced on a
continuous basis. Operations costing is a hybrid of
job order and process costing systems. It is used by
companies that manufacture goods that undergo
some similar and some dissimilar processes. Thus,
job order costing would be appropriate for auto
repair, operations costing for clothing manufacturing,
and process costing for oil refining.
Answer (B) is incorrect because custom printing
would not use process costing.
Answer (C) is incorrect because paint manufacturing
would not use operations costing.
Answer (D) is incorrect because motion picture
production would not use process costing.
[384] Source: Publisher
Answer (A) is correct. The correct entry to record a
purchase of materials on account is to increase the
appropriate asset and liability accounts. Materials are
charged to an inventory; the corresponding liability is
accounts payable. The asset account(s) could be
stores control and/or supplies or a number of other
accounts. Also, subsidiary ledgers may be used to
account for various individual items (a perpetual
inventory system). The term control implies that a
subsidiary ledger is being used.
Answer (B) is incorrect because the entry to record
the return of materials to suppliers debits accounts
payable and credits raw materials inventory.
Answer (C) is incorrect because this entry reclassifies
credit balances in accounts receivable as liabilities or
debit balances in accounts payable as assets.
Answer (D) is incorrect because this entry would
record the purchase of materials for cash.
[385] Source: Publisher
Answer (A) is incorrect because overhead must be
budgeted before a rate can be calculated.
Answer (B) is correct. Annual overhead application
rates smooth seasonal variability of overhead costs
and activity levels. If overhead were applied to the
product as incurred, the overhead rate per unit in
most cases would vary considerably from week to
week or month to month. The purpose of an annual
overhead application rate is to simulate constant
overhead throughout the year.
Answer (C) is incorrect because overhead
application rates are used to smooth seasonal
variability of overhead costs.
Answer (D) is incorrect because an overhead rate
applies overhead to the product.
[386] Source: Publisher
Answer (A) is correct. The overhead application rate
 is established at the beginning of each year to
determine how much overhead to accumulate for
each job throughout the period. The estimated
annual
overhead costs are divided by the annual activity
level
or capacity in terms of units to arrive at the desired
rate.
Answer (B) is incorrect because actual overhead is
not known at the beginning of the period; the
overhead rate is predetermined.
Answer (C) is incorrect because the estimated
activity level is the rate's denominator.
Answer (D) is incorrect because the actual activity
level is not known until year-end. Also, activity is a
denominator value.
[387] Source: Publisher
Answer (A) is incorrect because direct labor hours is
appropriate when overhead is incurred uniformly by
all types of employees.
Answer (B) is incorrect because direct materials
cost
would be inappropriate for a labor intensive
industry.
Answer (C) is incorrect because machine hours is
an
appropriate activity base when overhead varies
with
machine time used.
Answer (D) is correct. In labor intensive industries,
overhead is usually allocated based on a labor
activity
base. If more overhead is incurred by the more
highly
skilled and paid employees, the overhead rate
should
be based upon direct labor cost rather than direct
labor hours.
[388] Source: Publisher
Answer (A) is incorrect because theoretical
(maximum or ideal) capacity is the absolute
capacity
assuming continuous operations, i.e., on Sundays,
holidays, etc., and can never be attained.
Answer (B) is correct. Overhead is applied
according to a rate found by dividing budgeted
overhead for a period by an estimated activity
level.
If actual activity differs from the denominator value
(the predetermined activity level), a volume
variance
will occur. This variance equals the amount of over-
or underapplied overhead attributable solely to the
difference between budgeted and actual activity.
The
expected volume is that predicted for the period.
Thus, the use of expected volume as a
denominator
should minimize expected over- or underapplied
overhead.
Answer (C) is incorrect because normal volume is an
average expected volume over a series of years. It
will vary from the expected volume on a
year-by-year basis.
Answer (D) is incorrect because practical capacity is
theoretical capacity adjusted downward for holidays,
maintenance time, etc. It is very difficult to attain.
[389] Source: Publisher
Answer (A) is correct. The larger the denominator in
the overhead application rate, the smaller the rate and
the lower the cost assigned to the product.
Theoretical capacity, which is the absolute capacity
during continuous operations, ignoring holidays,
maintenance time, etc., provides the largest
denominator in the ratio.
Answer (B) is incorrect because normal volume is
less than theoretical capacity.
Answer (C) is incorrect because practical capacity is
theoretical capacity adjusted downward for holidays,
maintenance time, etc.
Answer (D) is incorrect because minimum volume
relates to the lowest production level that would be
required to operate a particular function and would
result in the largest amount of applied overhead.
[390] Source: CIA 1185 IV-10
Answer (A) is incorrect because cost of goods sold
should be credited (not debited) for its share of
overapplied overhead.
Answer (B) is incorrect because cost of goods sold,
finished goods inventory, and work-in-process
inventory should be credited (not debited).
Answer (C) is incorrect because, although commonly
used, the immediate write-off method is not as
conceptually sound as the allocation among cost of
goods sold, finished goods inventory, and
work-in-process inventory.
Answer (D) is correct. Under a normal costing
system, overhead is applied to all jobs worked on
during the period at a predetermined rate. Because
cost of goods sold, finished goods inventory, and
work-in-process inventory all relate to these jobs,
each should be adjusted by its proportionate share of
over- or underapplied overhead. This apportionment
may be based on either the percentage of total
overhead (theoretically preferable) or the percentage
of total cost. The entry to close overapplied overhead
requires credits to these three accounts.
[391] Source: Publisher
Answer (A) is incorrect because a debit to cost of
goods sold and a credit to finished goods expenses
inventoried costs related to items sold.
 Answer (B) is incorrect because the entry to close
the overhead accounts credits CGS when overhead
has been overapplied.
Answer (C) is incorrect because debiting CGS and
crediting overhead applied does not close the
overhead accounts.
Answer (D) is correct. Although not theoretically
sound, total under- or overapplied overhead is
often
debited (credited) to CGS. The correct entry to
close
the overhead accounts and to charge underapplied
overhead to CGS is to debit the factory overhead
applied account for the amount of overhead
applied
for the period and to credit factory overhead
control
for the amount of overhead actually incurred for
the
period. The amount actually incurred exceeds the
amount of overhead applied because overhead is
underapplied. The difference is the amount charged
to CGS.
[392] Source: Publisher
Answer (A) is incorrect because, if the cost of goods
started last period and completed this period and
the
cost of goods started and completed this period are
kept separate, separate layers will continue to
multiply as the units of product are passed through
additional WIP accounts. Thus, these costs are
combined before transfer to the next department.
Answer (B) is incorrect because, if the cost of goods
started last period and completed this period and
the
cost of goods started and completed this period are
kept separate, separate layers will continue to
multiply as the units of product are passed through
additional WIP accounts. Thus, these costs are
combined before transfer to the next department.
Answer (C) is correct. Under FIFO, goods started
last period and completed this period are
differentiated from goods started and completed
this
period. The goods started last period but
completed
this period include the costs from last period as
well
as this period's costs to complete, whereas goods
started and completed this period only include
current
costs. In the weighted-average method, the costs
of
the prior and current periods are averaged.
When the goods are transferred to the next
department or to finished goods under FIFO,
however, they are considered transferred out at
one
average cost so that a multitude of layers of
inventory
is not created. This procedure is consistent with the
basic concept of process costing.
Answer (D) is incorrect because, under FIFO, the
goods that were started last period and completed
this period are deemed to be completed first and
transferred first.
[393] Source: CMA 0694 3-6
Answer (A) is incorrect because fixed indirect
manufacturing costs are included in the calculation of
gross margin.
Answer (B) is incorrect because fixed costs are also
included in the calculation of gross margin.
Answer (C) is correct. Gross margin or gross profit is
the excess of sales over cost of goods sold,
calculated on a full absorption basis. Cost of goods
sold would include all manufacturing costs, both fixed
and variable.
Answer (D) is incorrect because fixed costs are also
included in the calculation of gross margin.
[395] Source: CMA 0690 4-2
Answer (A) is correct. The sum of direct materials
used, direct labor, and factory overhead applied
(60% of direct labor) is $681,000.
Answer (B) is incorrect because $665,000 equals the
cost of goods manufactured.
Answer (C) is incorrect because $489,000 equals
the direct materials purchased plus direct labor.
Answer (D) is incorrect because $673,000 equals
the cost of goods sold.
[396] Source: CMA 0690 4-3
Answer (A) is correct. The cost of the goods
manufactured is the cost of goods completed during
the year. For a retailer, the equivalent is purchases.
The CGM for Alex is $665,000 [501,000 + (60% x
$300,000) + $235,000 - $251,000].
Answer (B) is incorrect because $681,000 equals
total manufacturing costs.
Answer (C) is incorrect because $673,000 is the
cost of goods sold.
Answer (D) is incorrect because $657,000 results
from adding ending inventory and subtracting
beginning inventory in the CGS calculation.
[397] Source: CMA 0690 4-4
Answer (A) is incorrect because $697,000 equals
prime cost, plus overhead applied, plus (instead of
minus) the change in the work-in-process.
Answer (B) is incorrect because $681,000 equals
prime cost plus overhead applied.
 Answer (C) is correct. The calculation of the cost of
goods sold requires the preparation of a partial
income statement:
Beginning finished goods inventory $125,000
Plus cost of goods manufactured 665,000
--------
Goods available for sale $790,000
Minus ending finished goods inventory (117,000)
--------
Cost of goods sold $673,000
========
Answer (D) is incorrect because $657,000 results
from adding ending inventory and subtracting
beginning inventory in the CGS calculation.
[398] Source: CMA 0690 4-5
Answer (A) is incorrect because overapplied
overhead results in a credit to overhead control.
Answer (B) is incorrect because overhead is
overapplied.
Answer (C) is incorrect because overhead is
overapplied.
Answer (D) is correct. The factory overhead control
account should have a debit of $175,000 for the
actual costs incurred and a credit for the $180,000
(60% of direct labor) applied to production. Thus,
the net effect is a $5,000 credit balance resulting
from
the overapplication of overhead.
[399] Source: CMA 0690 4-10
Answer (A) is incorrect because $50,000 is
abnormal spoilage.
Answer (B) is incorrect because $20,000 equals
normal spoilage for the month.
Answer (C) is incorrect because $70,000 is the sum
of normal spoilage and abnormal spoilage.
Answer (D) is correct. Normal spoilage is an
inventoriable cost of production that is charged to
cost of goods sold when the units are sold.
Abnormal
spoilage is a period cost recognized when incurred.
The $50,000 of abnormal spoilage is therefore
expensed during May. In addition, 50% of the
normal
spoilage is debited to cost of goods sold because
50% (25,000 ・50,000) of the units completed were
sold during the period. No spoilage is allocated to
work-in-process because inspection occurs after
completion. Thus, the normal spoilage expensed
during the month is $10,000 (50% x $20,000). Total
spoilage charged against revenue is $60,000
($50,000 + $10,000).
[400] Source: CMA 1290 3-2
Answer (A) is incorrect because costs can be
controlled by the service departments without
allocation. However, allocation encourages cost
control by the production departments. If the costs
are allocated, managers have an incentive not to use
services indiscriminately.
Answer (B) is incorrect because allocation does not
affect the coordination of production activity.
Answer (C) is correct. Service department costs are
indirect costs allocated to production departments to
better determine overhead rates when the
measurement of full (absorption) costs is desired.
Overhead should be charged to production on some
equitable basis to provide information useful for such
purposes as allocation of resources, pricing,
measurement of profits, and cost reimbursement.
Answer (D) is incorrect because allocation of costs
has no effect on the efficiency of the provision of
services when the department that receives the
allocation has no control over the costs being
controlled.
[401] Source: CMA 0693 3-1
Answer (A) is incorrect because cost allocation
permits a company to determine the profitability of a
department and to make decisions relative to
expanding or contracting its operations.
Answer (B) is correct. According to SMA 2A,
allocation of costs is a distribution of costs that
cannot be directly assigned to the cost objects that
are assumed to have caused them. The process
entails choosing a cost object, determining the direct
and indirect costs that should be traced to the cost
object, deciding how costs are to be aggregated
(accumulated in cost pools) prior to allocation, and
selecting the allocation base. Cost allocation is
necessary for, among other things, product costing,
pricing, investment and disinvestment decisions,
managerial performance measurement, make-or-buy
decisions, and determination of profitability.
However, an allocation of costs does not enable a
company to determine why the sales of a particular
product have increased. Many factors affect
consumer demand, such as advertising, consumer
confidence, availability of substitutes, and changes in
tastes. Cost allocation is an internal matter that does
not affect demand except to the extent it results in a
change in price.
Answer (C) is incorrect because cost allocation
permits a company to determine the profitability of a
product line and to decide whether to discontinue that
line.
Answer (D) is incorrect because make-or-buy
decisions depend on cost analyses.
[402] Source: CMA 0693 3-4
Answer (A) is incorrect because a cost accountant's
salary cannot be directly associated with a single
product. Cost accountants work with many different
products during a pay period.
Answer (B) is incorrect because warehouse rent is
not directly traceable to the Purchasing Department.
 Other departments have influence over the level of
inventories stored.
Answer (C) is correct. A direct cost is one that can
be specifically associated with a single cost
objective
in an economically feasible way. Thus, a production
supervisor's salary can be directly associated with
the
department (s)he supervises.
Answer (D) is incorrect because directors' fees
cannot be directly associated with the Marketing
Department. Directors provide benefits to all
departments within a corporation.
[403] Source: CMA 1293 3-2
Answer (A) is correct. Service department costs
should be allocated to the production departments
that use the services. When service departments
also
render services to each other, their costs are
usually
allocated to each other before allocation to
production departments. A basis reflecting cause
and
effect should be used to allocate service
department
costs. Because of interactions among service
departments, the best allocation method is the
reciprocal (simultaneous-equations) method. It is
superior to the direct method because the latter
allocates no service costs to other service
departments. It is also superior to the step (or
step-down) method because this method allocates
no
service cost back to service departments, the costs
of
which have been allocated in a preceding step.
Answer (B) is incorrect because the step method is
less sophisticated than the reciprocal method.
Answer (C) is incorrect because the direct method
allocates service costs directly without
consideration
of interactions with other service departments; the
direct method is the least sophisticated method.
Answer (D) is incorrect because accretion method
is
a nonsense term.
[404] Source: CMA 1295 3-27
Answer (A) is correct. A cost that bears an
observable and known relationship to a quantifiable
activity base is known as an engineered cost.
Engineered costs have a clear relationship to
output.
Direct materials would be an example of an
engineered cost.
Answer (B) is incorrect because an indirect cost
does
not have a clear relationship to output.
Answer (C) is incorrect because a sunk cost is the
result of a past irrevocable action; it is not important
to future decisions.
Answer (D) is incorrect because a target cost is the
maximum allowable cost of a product and is
calculated before the product is designed or
produced.
[405] Source: CIA 0593 IV-6
Answer (A) is incorrect because assigning spoilage
costs to finished goods is an appropriate method of
accounting for normal spoilage traceable to a job or
process.
Answer (B) is incorrect because allocating spoilage
costs between finished goods and work-in-process is
an appropriate method of accounting for normal
spoilage traceable to a job or process, provided the
units in process have passed the inspection point.
Answer (C) is incorrect because charging spoilage
costs to manufacturing overhead is an appropriate
method of accounting for normal spoilage, assuming
the allowance for normal spoilage is incorporated into
the predetermined overhead rate.
Answer (D) is correct. Abnormal spoilage should be
written-off to a special account that is separately
reported in the income statement. Costs associated
with abnormal spoilage are not inventoried and are
therefore treated as a loss in the period of detection.
[406] Source: CIA 1194 III-46
Answer (A) is incorrect because waste is input
material that is either lost in the production process or
has no sales value.
Answer (B) is incorrect because scrap is input
material that has a relatively minor sales value at the
end of the production process.
Answer (C) is correct. Rejected units that are
discarded are classified as spoilage. Spoilage is
separated into abnormal or normal spoilage. Normal
spoilage is an inherent result of the normal production
process. Abnormal spoilage is spoilage that is not
expected to occur under normal, efficient operating
conditions.
Answer (D) is incorrect because rework costs are
incurred to make unacceptable units appropriate for
sale or use.
[407] Source: CIA 1193 IV-6
Answer (A) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
Answer (B) is incorrect because factory overhead
should be charged for direct materials, supplies,
direct labor, and applied overhead incurred for
rework.
 Answer (C) is incorrect because $19,300 excludes
the predetermined manufacturing overhead.
Answer (D) is correct. The rework charge for direct
materials, indirect materials (supplies), direct labor,
and overhead applied on the basis of direct labor
cost is $40,300 [$5,000 + $300 + $14,000 + (1.5 x
$14,000)]. If an allowance for rework is included in
a input to the formulation of the production budget. In
company's manufacturing overhead budget, rework
of defective units is spread over all jobs or batches
as
part of the predetermined overhead application
rate.
Hence, the debit is to overhead control.
[408] Source: CIA 1196 III-93
Answer (A) is incorrect because $1,440 (360 x
$4.00) ignores the manufacturing overhead.
Answer (B) is correct. Normal spoilage equals 1,140
units (4% x 28,500 good units), so abnormal
spoilage
equals 360 units (1,500 total spoiled units - 1,140
units of normal spoilage). Given that .25 DLH is
needed to rework a spoiled unit, the loss from
abnormal spoilage is $4,140 {360 units x [(.25 x
$16) direct labor + (.25 x $30) manufacturing
overhead]}.
Answer (C) is incorrect because $3,450 [300 x
($4.00 + $7.50)] uses the wrong amount for
abnormal spoilage.
Answer (D) is incorrect because a loss should be
charged for abnormal spoilage. Total spoilage
exceeded the 4% normal rate.
[409] Source: CIA 1194 III-54
Answer (A) is incorrect because responsibility
centers are determined prior to budgeting, budgets
do not fix blame but rather measure performance,
and goal congruence is promoted but not ensured
by
budgets.
Answer (B) is incorrect because responsibility
centers are determined prior to budgeting, budgets
do not fix blame but rather measure performance,
and goal congruence is promoted but not ensured
by
budgets.
Answer (C) is correct. A budget is a realistic plan for
the future expressed in quantitative terms. The
process of budgeting forces a company to establish
goals, determine the resources necessary to
achieve
those goals, and anticipate future difficulties in
their
achievement. A budget is also a control tool
because
it establishes standards and facilitates comparison
of
actual and budgeted performance. Because a
budget
establishes standards and accountability, it motivates
good performance by highlighting the work of
effective managers. Moreover, the nature of the
budgeting process fosters communication of goals to
company subunits and coordination of their efforts.
Budgeting activities by entities within the company
must be coordinated because they are
interdependent. Thus, the sales budget is a necessary
turn, production requirements must be known before
purchases and expense budgets can be developed,
and all other budgets must be completed before
preparation of the cash budget.
Answer (D) is incorrect because responsibility
centers are determined prior to budgeting, budgets
do not fix blame but rather measure performance,
and goal congruence is promoted but not ensured by
budgets.
[410] Source: CIA 1193 IV-27
Answer (A) is incorrect because a production budget
does not include revenues.
Answer (B) is incorrect because a cash budget does
not include non-cash items.
Answer (C) is incorrect because a capital budget
does not include revenues and costs.
Answer (D) is correct. A flexible budget includes
different cost levels for different levels of activity, for
example, sales. Hence, it is actually a series of
budgets. Thus, a budget based on the behavior of
costs and revenues over a range of sales is a flexible
budget.
[411] Source: CIA 1196 III-80
Answer (A) is incorrect because $7,500 unfavorable
equals the difference between actual and budgeted
direct materials, multiplied by the standard price per
pound of direct materials.
Answer (B) is incorrect because zero equals the
difference between the budgeted direct materials
purchases at standard cost and the actual cost of the
direct materials.
Answer (C) is correct. The direct materials price
variance measures the difference between what was
actually paid for the goods purchased and the
standard price allowed for the goods purchased.
Thus, it equals the difference between actual price
and standard price, multiplied by the actual quantity
purchased. The direct materials price variance is
$5,000 favorable {[$2.50 - ($120,000 ・50,000
units)] x 50,000 units}.
Answer (D) is incorrect because $5,100 unfavorable
equals the difference between the standard and actual
costs of direct materials per pound, multiplied by the
actual pounds used instead of the actual pounds
purchased.
[412] Source: CIA 1196 III-81
 Answer (A) is correct. The direct materials
efficiency
variance measures the difference between the
actual
use of inputs and the budgeted quantity of inputs
allowed for the activity level achieved. The direct
materials efficiency variance equals the standard
unit
price times the difference between inputs actually
used and standard inputs. The direct materials
efficiency variance is $500 favorable {[(32,000 x
1.60) - 51,000] x $2.50}.
Answer (B) is incorrect because $3,000 favorable
uses the amount of direct materials purchased
instead
of the actual amount used.
Answer (C) is incorrect because $7,500 unfavorable
equals the difference between the standard amount
allowed for the budgeted units to be produced and
the amount of direct materials used, multiplied by
the
standard price per pound.
Answer (D) is incorrect because $8,000 unfavorable
equals the difference between the budgeted
finished
units and the actual finished units, multiplied by
the
standard cost of a finished unit.
[413] Source: CIA 1195 III-84
Answer (A) is correct. Before redesign, productivity
equaled 4 units per hour (2,000 units ・500 hours).
After redesign, productivity equaled 4.2 units per
hour (2,520 units ・ 600 hours). Thus, the
percentage
change in productivity was 5% [(4.2 - 4.0) ・4.0].
Answer (B) is incorrect because a 10% change
requires output of 2,640 units.
Answer (C) is incorrect because 20% is the
percentage change in labor hours per day.
Answer (D) is incorrect because 26% is the
percentage change in units of output per day.
[414] Source: CIA 0596 III-90
Answer (A) is incorrect because inventory shrinkage
measures the effectiveness of internal control.
Answer (B) is incorrect because inventory turnover
measures the efficiency of asset usage.
Answer (C) is correct. A partial productivity
measure
may be stated as the ratio of output to the quantity
of
a single factor of production (e.g., materials, labor,
or
capital). Partial productivity measures, for example,
the number of finished units per direct labor hour
or
per pound of direct materials, are useful when
compared over time among different factories or with
benchmarks. A partial productivity measure
comparing results over time determines whether the
actual relationship between inputs and outputs has
improved or deteriorated.
Answer (D) is incorrect because scrap is neither an
input nor a good output.
[415] Source: CIA 1192 IV-17
Answer (A) is incorrect because Product A does
have the greatest contribution margin ratio (53%), but
when resources are limited, maximum profits are
achieved by maximizing dollar contribution margin per
limited or constraining factor, which in this case is
machine hours.
Answer (B) is correct. When resources are limited,
maximum profits are achieved by maximizing dollar
contribution margin per limited or constraining factor.
In this situation, machine hours are the constraining
factor. Product B has a contribution margin per
machine hour of $28 [4 x ($18 - $11)], which is
greater than that of Product A [3 x ($15 - $7) =
$24], Product C [2 x ($20 - $10) = $20], or
Product D [3 x ($25 - $16) = $27].
Answer (C) is incorrect because Product C does
have the greatest dollar unit contribution margin
($10), but when resources are limited, maximum
profits are achieved by maximizing dollar contribution
margin per limited or constraining factor, which in this
case is machine hours.
Answer (D) is incorrect because Product D does
have the greatest selling price per unit ($25), but
when resources are limited, maximum profits are
achieved by maximizing dollar contribution margin per
limited or constraining factor, which in this case is
machine hours.
[416] Source: CIA 0592 IV-18
Answer (A) is incorrect because $100 F ($48,500 -
$48,600) is the direct labor price (rate) variance.
Answer (B) is correct. The total flexible budget direct
labor variance equals the difference between cost at
actual hours and actual wages and the cost at
standard hours and standard wages, or $1,900 U
($48,500 - $46,600).
Answer (C) is incorrect because the flexible budget
direct labor variance is unfavorable, not favorable.
Total actual cost exceeds the total flexible budget
amount.
Answer (D) is incorrect because $2,000 U ($48,600
- $46,600) is the direct labor efficiency (usage)
variance.
[417] Source: CIA 1195 III-96
Answer (A) is incorrect because a transfer at full cost
means that the selling division will not make a profit.
In addition, the selling division may be forgoing profits
that could be obtained by selling to outside
 customers. Thus, full-cost transfer prices can lead
to
suboptimal decisions.
Answer (B) is incorrect because a transfer at full
cost
plus markup results in no incentive for the selling
division to control its costs. Hence, a sustained
level
of management effort may not be maintained.
Answer (C) is incorrect because a transfer at
variable
cost plus markup has the same weaknesses as full
cost plus markup.
Answer (D) is correct. A market price transfer price
promotes goal congruence and a sustained level of
management effort. It is also consistent with
divisional
autonomy. A market transfer price is most
appropriate when the market is competitive,
interdivisional dependency is low, and buying in the
market involves no marginal costs or benefits.
[418] Source: CIA 1196 III-94
Answer (A) is correct. The outlay costs represent
cash outflows related to the production and
transfer
of goods/services. The opportunity costs are the
maximum contribution forgone by the supplying
division if the goods/services are sold internally. An
opportunity cost will exist if the supplier has no idle
capacity and an external market exists. Thus, this
guideline should promote goal congruence (actions
of
the divisional manager benefit the company and
the
division), a sustained high level of managerial effort
(exertion toward a goal), and subunit autonomy
(freedom in decision making). The guideline will
vary
depending on whether an external market exists
and
whether the supplier has idle capacity.
Answer (B) is incorrect because the opportunity
cost
of the buying division is irrelevant.
Answer (C) is incorrect because the full cost may
not
represent the outlay cost incurred to the point of
transfer, and a markup is an arbitrary percentage.
The result may be suboptimization. For example,
the
buyer may purchase at a lower price from an
outside
supplier even though the price exceeds the
company's
outlay cost.
Answer (D) is incorrect because, if the supplying
division recovers only its variable production costs,
it
becomes a cost center for internal transfers. The
supplying division will earn no return on internal
sales,
which could lead to suboptimization.
[419] Source: CIA 0595 III-95
Answer (A) is correct. Segment reporting is an
aspect of responsibility accounting. It facilitates
evaluation of company management and of the quality
of the economic investment in particular segments.
Answer (B) is incorrect because interdependence of
segments is not affected by reporting methods.
Answer (C) is incorrect because masking the effects
of intersegment transfers is a disadvantage of segment
reporting.
Answer (D) is incorrect because providing
information to competitors is a disadvantage of
segment reporting.
[420] Source: CIA 1196 III-97
Answer (A) is incorrect because rent is not
controllable at the product-line level.
Answer (B) is incorrect because advertising is not
controllable at the product-line level.
Answer (C) is correct. Commissions, cost of sales,
and salaries are all traceable to each of the product
lines and are therefore controllable. Administrative
expenses are common or corporate-level expenses,
advertising does not promote a specific product line,
and rent is paid on a building shared by all product
lines.
Answer (D) is incorrect because administration,
advertising, and rent are not controllable at the
product-line level.
[422] Source: CIA 1196 III-99
Answer (A) is incorrect because an increase of
$50,000 assumes the revenue will be lost and all of
its costs will be avoided.
Answer (B) is incorrect because a decrease of
$94,000 results from treating rent as an avoidable
cost.
Answer (C) is correct. The operating income will
decrease. Product Line 2 income will be lost, but
only the traceable costs of commissions, cost of
sales, and salaries will be avoided. Accordingly, the
decrease will be $234,000 [-$700,000 + ($14,000
+ 420,000 + 32,000)]. The other shared costs will
have to be absorbed by the two remaining product
lines.
Answer (D) is incorrect because an increase of
$416,000 subtracts the costs that will not be avoided
if Product Line 2 is dropped from the lost sales
revenue.
[423] Source: CIA 1196 III-100
 Answer (A) is correct. Product Line 1 needs to
cover its variable out-of-pocket costs as a minimum
on this special-order product; therefore, any selling
price greater than the variable cost will contribute
towards profits. Thus, the minimum selling price of
the special-order product is the variable cost
divided
by 1 minus the commission rate, or $15 [$14.70 ・
(1.0 - .02)].
Answer (B) is incorrect because $17.30 includes the
average cost of salaries (at the new volume level of
24,000 units) as a cost that needs to be covered
when determining the minimum selling price.
Answer (C) is incorrect because $27.50 is
calculated
based on a full cost approach.
Answer (D) is incorrect because $30.20 adds all
costs and expenses (except cost of sales) and
divides
them by the original volume level of 20,000 units to
determine the average operating costs. The new
cost
of sales is added to the average operating costs to
determine the minimum selling price.
[424] Source: CIA 1194 III-42
Answer (A) is incorrect because fixed
manufacturing
overhead costs are neither direct nor period costs.
Answer (B) is incorrect because fixed
manufacturing
overhead costs are not period costs.
Answer (C) is incorrect because fixed
manufacturing
overhead costs are not direct costs.
Answer (D) is correct. Using absorption costing,
fixed manufacturing overhead is included in
inventoriable (product) costs. Fixed manufacturing
overhead costs are indirect costs because they
cannot be directly traced to specific units produced.
[425] Source: CIA 0594 III-46
Answer (A) is incorrect because increasing
inventories increases absorption costing profit as a
result of capitalizing fixed factory overhead.
Answer (B) is incorrect because when sales volume
exceeds production, inventories decline. Thus, fixed
factory overhead expensed will be greater under
absorption costing.
Answer (C) is correct. Absorption (full) costing is the
accounting method that considers all
manufacturing
costs as product costs. These costs include variable
and fixed manufacturing costs whether direct or
indirect. Variable (direct) costing considers only
variable manufacturing costs to be product costs,
i.e.,
inventoriable. Fixed manufacturing costs are
considered period costs and are expensed as
incurred. If production is increased without increasing
sales, inventories will rise. However, all fixed costs
associated with production will be an expense of the
period under variable costing. Thus, this action will
not artificially increase profits and improve the
manager's review.
Answer (D) is incorrect because, under variable
costing, operating profit is a function of sales. Under
absorption costing, it is a function of sales and
production.
[426] Source: CIA 0596 III-86
Answer (A) is incorrect because $57,600 equals
10,000 units times $5.76 per unit (total budgeted
fixed manufacturing overhead ・500,000 units).
Answer (B) is correct. The difference between
variable costing and absorption costing is that the
former treats fixed manufacturing overhead as a
period cost. The latter method treats it as a product
cost. Given that sales exceeded production, both
methods expense all fixed manufacturing overhead
incurred during the year. However, 10,000 units
(510,000 sales - 500,000 production) manufactured
in a prior period were also sold. These units
presumably were recorded at $10 under variable
costing and $16 under absorption costing.
Consequently, absorption costing operating income is
$60,000 (10,000 units x $6) less than that under
variable costing.
Answer (C) is incorrect because $90,000 is the
difference between planned sales (495,000 units) and
actual sales (510,000 units), times the fixed
manufacturing overhead per unit ($6).
Answer (D) is incorrect because $120,000 is the
volume variance under absorption costing.
[427] Source: CIA 0596 III-80
Answer (A) is incorrect because $(120,000)
considers only the production costs of the good units
sold. Moreover, it includes fixed overhead, a cost
that is not affected by the choice of materials.
Answer (B) is incorrect because $120,000 considers
only the variable costs of the good units produced.
Answer (C) is correct. If a different direct material is
used, incremental revenue will be $1,500,000
{[(12% defect rate - 2%) x 300,000 units] x $50}.
Incremental cost will be $750,000 ($2.50 x 300,000
units). Thus, the net benefit will be $750,000
($1,500,000 - $750,000).
Answer (D) is incorrect because $1,425,000
includes only the incremental direct materials cost of
the increase in the number of good units produced.
[428] Source: CIA 0596 III-95
Answer (A) is incorrect because $61,300 is the
savings for 6 months.
Answer (B) is correct. The assumption is that a third
 of the costs can be eliminated if the error rate is
cut
by a third. Moreover, the study covered only a
6-month period, but annual savings are requested.
Thus, the savings for 6 months equals $61,300
{[(.03
- .02) x 33,000 invoices x $110 per invoice] +
($75,000 ・3) lost contribution margins}, and the
projected annual savings is $122,600 (2 x
$61,300).
Answer (C) is incorrect because $222,600 assumes
the full amount of lost contribution margins can be
saved.
Answer (D) is incorrect because $267,800 assumes
the error rate will be reduced to 0%.
[429] Source: CIA 1195 III-91
Answer (A) is incorrect because $9.70 omits all of
the fixed costs.
Answer (B) is incorrect because $11.05 bases the
cost per unit on 600,000 units.
Answer (C) is incorrect because $11.50 uses a fixed
cost per unit based on 600,000 units.
Answer (D) is correct. The company expects to
incur
variable costs of $3,500,000 ($7 x 500,000 lbs.)
and
fixed costs of $1,080,000 ($810,000 + $270,000).
To earn a 20% return on invested capital (20% x
$6,750,000 = $1,350,000), the company must
charge a price of $11.86 [($3,500,000 +
$1,080,000 + $1,350,000) ・500,000].
[430] Source: CIA 1195 III-92
Answer (A) is correct. The minimum selling price
equals the incremental costs of the special order
(variable manufacturing costs, variable packaging
costs, distribution costs, and setup costs) divided
by
the units ordered. The fixed costs do not change
because the manufacturer has excess capacity.
Total
variable manufacturing costs are $190,000
[$40,000
x ($4.85 - $.45 + $.35)], distribution costs are
$32,000, and setup costs are $60,000. Thus, the
minimum unit price is $7.05 [($190,000 + $32,000
+ usually considered.
$60,000) ・$40,000].
Answer (B) is incorrect because $8.85 adds the
additional distribution costs to the original
distribution
costs [$1.80 + .80].
Answer (C) is incorrect because $9.05 adds an
amount for the fixed costs to the relevant costs.
Answer (D) is incorrect because $9.55 adds an
amount for the target return on investment to the
relevant costs.
[431] Source: Publisher
Answer (A) is incorrect because managerial
accounting is future oriented.
Answer (B) is correct. Financial accounting is
primarily concerned with historical accounting, i.e.,
traditional financial statements, and with external
financial reporting to creditors and shareholders.
Managerial accounting applies primarily to the
planning and control of organizational operations,
considers nonquantitative information, and is usually
less precise.
Answer (C) is incorrect because financial accounting
is primarily concerned with quantitative information.
Answer (D) is incorrect because decision analysis
and implementation are characteristics of managerial
accounting.
[432] Source: Publisher
Answer (A) is incorrect because it is economically
irrational to implement a system in which the cost
exceeds the benefits.
Answer (B) is incorrect because cost-benefit analysis
should not be ignored. An accounting system should
be selected on an objective basis.
Answer (C) is incorrect because dictation of a
change by the board of directors implies a system
selection on an other than objective basis.
Answer (D) is correct. Changing to a different and/or
more expensive accounting system requires
cost-benefit analysis. Changes should be undertaken
only if the benefits of the proposed change exceed its
cost.
[433] Source: Publisher
Answer (A) is correct. Users, i.e., managers, must be
both willing and able to use new accounting systems.
Accordingly, they should be encouraged to
participate in the design and implementation of the
new system. If they do not, they may not understand
or want to use the new information.
Answer (B) is incorrect because the costs of
gathering and analyzing data are more direct costs of
changing managerial accounting systems and are
Answer (C) is incorrect because training costs for
staff are usually considered.
Answer (D) is incorrect because report preparation is
explicitly considered in systems development.
[434] Source: Publisher
Answer (A) is incorrect because the preparation of
tax returns is a typical controller's responsibility.
Answer (B) is incorrect because external reporting is
 a function of the controller.
Answer (C) is incorrect because the accounting
system helps to safeguard assets.
Answer (D) is correct. Controllers are usually in
charge of budgets, accounting, accounting reports,
and related controls. Treasurers are most often
involved with control over cash, receivables,
short-term investments, financing, and insurance.
Thus, treasurers rather than controllers are
concerned
with investor relations.
[435] Source: Publisher
Answer (A) is correct. Treasurers are usually
concerned with investing cash and near-cash
assets,
the provision of capital, investor relations,
insurance,
etc. Controllers, on the other hand, are responsible
for the reporting and accounting activities of an
organization, including financial reporting.
Answer (B) is incorrect because short-term
financing
lies within the normal range of a treasurer's
functions.
Answer (C) is incorrect because the treasurer has
custody of assets.
Answer (D) is incorrect because credit operations
are often within the treasurer's purview.
[436] Source: Publisher
Answer (A) is correct. Management accounting is
used by management for (1) control, (2) assurance
of
accountability, (3) planning, (4) evaluation, and (5)
reporting. Management accounting includes the
following processes: (1) measurement, (2)
identification, (3) accumulation, (4) preparation, (5)
interpretation, (6) communication, and (7) analysis.
Marketing is supported by accounting data, but
management does not use management
accounting
for marketing, per se. See SMA 1A, Objectives of
Management Accounting.
Answer (B) is incorrect because it is an explicit use
of
management accounting by an organization's
management.
Answer (C) is incorrect because it is an explicit use
of management accounting by an organization's
management.
Answer (D) is incorrect because it is an explicit use
of management accounting by an organization's
management.
[437] Source: Publisher
Answer (A) is incorrect because it is superior to the
"ability to bear" criterion for allocating service and
administrative costs. See SMA 4B, Allocation of
Service and Administrative Costs.
Answer (B) is incorrect because it is superior to the
"ability to bear" criterion for allocating service and
administrative costs. See SMA 4B, Allocation of
Service and Administrative Costs.
Answer (C) is incorrect because it is superior to the
"ability to bear" criterion for allocating service and
administrative costs. See SMA 4B, Allocation of
Service and Administrative Costs.
Answer (D) is correct. Ability to bear, measured in
terms of the cost object's profitability, is not an
acceptable method because it has a dysfunctional
effect on management behavior. It penalizes high
performance instead of rewarding profitability.
[438] Source: Publisher
Answer (A) is incorrect because, in the growth stage,
growth is rapid, and net income and cash from
operations are positive. Investment requirements later
slacken, and positive operating cash flows result.
ROI improves.
Answer (B) is incorrect because, in the maturity
stage, revenues slow, net income remains positive,
investment of capital is low, and a high return is
earned on their assets employed.
Answer (C) is incorrect because, in the decline stage,
revenues decline and operations remain profitable,
but cash flows increase because of a reduction in
working capital.
Answer (D) is correct. Revenue growth, negligible
profits, negative cash flows, and negative return on
assets are common during an organization's start-up
stage. This is in contrast to the growth stage, maturity
stage, and decline stage. See SMA 4D, Measuring
Entity Performance.
[439] Source: CMA 0697 3-13
Answer (A) is incorrect because both tactical and
strategic goals should be attainable.
Answer (B) is incorrect because top management is
responsible for both types of goals.
Answer (C) is incorrect because both types of goals
may or may not address profitability.
Answer (D) is correct. Tactical goals are short term
and strategic goals are long range. Tactical goals
concern operational matters such as production,
materials procurement, and routine operating
expenses. Strategic goals may have a duration of 10
years or more. They concern such matters as new
product development, capital budgeting, major
financing, and business combinations.
[440] Source: Publisher
Answer (A) is correct. According to SMA 5D,
 Developing Comprehensive Competitor
Intelligence,
objectives include early warning of opportunities
and
threats, such as new acquisitions, alliances,
products,
and services.
Answer (B) is incorrect because SMA 5D concerns
broad-scope competitive intelligence, not business
intelligence issues such as environmental
scannings.
Answer (C) is incorrect because SMA 5D concerns
broad-scope competitive intelligence, not business
intelligence issues such as market research.
Answer (D) is incorrect because SMA 5D concerns
broad-scope competitive intelligence, not business
intelligence issues.
[441] Source: Publisher
Answer (A) is incorrect because effective capacity
management maximizes value delivered to
customers.
Answer (B) is incorrect because effective capacity
management minimizes required future
investment.
Answer (C) is correct. According to SMA 4Y,
Measuring the Cost of Capacity, maximizing the
value
created within an organization starts with
understanding the nature and capabilities of all of
the
company's resources. Capacity is defined from
several different perspectives. Managing capacity
cost starts when a product or process is first
envisioned. It continues through the subsequent
disposal of resources downstream. Effective
capacity
cost management requires supporting effective
matching of a firm's resources with current and
future
market opportunities.
Answer (D) is incorrect because effective capacity
management minimizes waste in the short,
intermediate, and long run.
[442] Source: Publisher
Answer (A) is incorrect because estimates are used
in the calculation of direct material costs only if
they
are sufficiently accurate.
Answer (B) is correct. Direct material costs consist
of quantities of materials that can be specifically
identified with the cost object in an economically
feasible manner priced at the unit price of direct
material. It includes sales taxes, customs duties,
cost
of delivery, and is net of trade discounts, refunds,
and
rebates. Cash discounts should be deducted from
the
unit cost direct materials only if the rate of discount
exceeds reasonable interest rates, i.e., in effect are
trade discounts or rebates. See SMA 4A, Definition
of Measurement of Direct Material Cost.
Answer (C) is incorrect because purchasing,
receiving, inspection, and storage costs are not a
direct material cost, per se.
Answer (D) is incorrect because cash discounts
should not be reflected whether the discounts are
taken or not. If they are taken, they should be
recorded as an interest saving, not as a reduction in
the cost of materials.
[443] Source: Publisher
Answer (A) is incorrect because it is an attribute of
performance indicators.
Answer (B) is incorrect because it is an attribute of
performance indicators.
Answer (C) is incorrect because it is an attribute of
performance indicators.
Answer (D) is correct. A broad-based performance
indicator system must be forward looking, focus on
significant external as well as internal relationships,
and track nonfinancial as well as financial indicators.
Accordingly, they cannot rely on traditional,
historical, internal financial measures. See SMA 4U,
Developing Comprehensive Indicators.
[444] Source: Publisher
Answer (A) is incorrect because it ignores the tax
deductibility of interest payments.
Answer (B) is correct. The cost of debt capital is
simply the debt interest rate times (1 - the firm's tax
rate). Thus, if the tax rate is 40%, the effective cost of
debt capital is 60% times the interest rate because the
interest is tax deductible. See SMA 4A, Cost of
Capital.
Answer (C) is incorrect because it ignores the tax
deductibility of interest payments.
Answer (D) is incorrect because the capital asset
pricing model is one means of determining the cost of
common equity.
[445] Source: CIA 1195 III-67
Answer (A) is incorrect because ROI is certain to
increase only if revenue increases and costs and
investment decrease.
Answer (B) is incorrect because ROI is certain to
increase only if revenue increases and costs and
investment decrease.
Answer (C) is incorrect because ROI is certain to
increase only if revenue increases and costs and
investment decrease.
Answer (D) is correct. An increase in revenue and a
 decrease in costs will increase the ROI numerator. A
decrease in investment will decrease the
denominator.
The ROI must increase in this situation.
[446] Source: Publisher
Answer (A) is incorrect because cost of capital is
used to make capital investment decisions so that
each investment returns more than the cost of
capital.
Answer (B) is incorrect because the cost of
maintaining working capital is based on the cost of
capital.
Answer (C) is correct. The cost of capital is the
minimum, not maximum, rate of return that must
be
earned on new investments so as not to dilute
shareholder interest. If new investments have a
rate of
return less than the cost of capital, a loss will be
incurred on those investments. Thus, the cost of
capital must be the minimum rate of return. See
SMA
4A, Cost of Capital.
Answer (D) is incorrect because the performance of
individual investments, investment managers, and
others can be related to the cost of capital.
[447] Source: Publisher
Answer (A) is correct. Responsibility costs are
designed to motivate managers of a responsibility
center to act in the best interest of the
organization.
Therefore, the costs should be allocated only if they
(1) can be influenced by the actions of the center's
management, (2) are helpful in measuring support
given to the responsibility center, (3) improve
comparability, or (4) are used in product pricing.
Whether the costs are from staff, line, or other
services has no bearing on whether they should be
allocated. Furthermore, some organizations
encourage the use of services such as consulting or
internal audit by not charging their costs to
responsibility centers. See SMA 4B, Allocation of
Service and Administrative Cost.
Answer (B) is incorrect because it provides
justification for allocating cost to responsibility
centers.
Answer (C) is incorrect because it provides
justification for allocating cost to responsibility
centers.
Answer (D) is incorrect because it provides
justification for allocating cost to responsibility
centers.
[448] Source: Publisher
Answer (A) is incorrect because 0.0743 is the
simple
average.
Answer (B) is incorrect because 0.0820 is the cost of
common stock.
Answer (C) is incorrect because 0.0660 is the cost
of debt.
Answer (D) is correct. According to SMA 4A, the
cost of capital is defined as the composite cost of
various sources of funds included in a firm's capital
structure. It is the minimum rate of return that must be
earned on new investments that will not dilute the
interests of the shareholder. In this problem,
Company X has three sources of funds: debt,
common stock, and preferred stock. The cost of
debt capital is the after-tax cost of debt to the firm.
Given that the firm is taxed at 40% and interest is a
tax deduction, the cost to the firm is only 0.066 [(1.0
- 0.4) x (.11)]. The cost of preferred stock is the
annual dividend requirement divided by the current
price per share or the proceeds from issuance per
share. Thus, the component cost of preferred stock
for Company X is 0.075 ($2.25 ・30). The cost of
common stock is difficult to determine accurately, but
one of the most common estimations involves using
the capital asset pricing model to determine the cost.
Thus, the cost of common stock equals the risk-free
rate plus the product of beta for Company X and the
market risk premium. The component cost of
common stock for Company X is 0.082 [.04 + (.7 x
.06)]. To determine the weighted-average cost of
capital, each component cost is multiplied by its
respective weight in the company capital structure,
and these values are summed to arrive at 0.0733
[(.066 x .5) + (.082 x .4) + (.075 x .1)].
[449] Source: CMA 1296 3-30
Answer (A) is incorrect because $1,200,000
assumes that the by-product is charged with a portion
of the net joint cost.
Answer (B) is incorrect because $1,260,000
assumes that the by-product is charged with a portion
of the gross joint cost.
Answer (C) is correct. The joint cost to be allocated
is $2,400,000 [$2,520,000 total joint cost - ($2 x
60,000 pounds of the by-product)]. Accordingly, the
joint cost to be allocated to the Second Main
Product on a physical-volume basis is $1,500,000
{$2,400,000 x [150,000 pounds ・(90,000 pounds
+ 150,000 pounds)]}.
Answer (D) is incorrect because $1,575,000 does
not deduct by-product NRV from the joint cost.
[450] Source: Publisher
Answer (A) is incorrect because this standard is
violated by a financial manager/management
accountant who fails to act upon discovering unethical
conduct.
Answer (B) is incorrect because this standard is
violated by a financial manager/management
accountant who fails to act upon discovering unethical
 conduct.
Answer (C) is incorrect because this standard is
violated by a financial manager/management
accountant who fails to act upon discovering
unethical
conduct.
Answer (D) is correct. A financial
manager/management accountant displays his/her
competence and objectivity and maintains integrity
by
taking the appropriate action within the
organization
to resolve an ethical problem. Failure to act would
condone wrongful acts, breach the duty to convey
unfavorable as well as favorable information,
undermine the organization's legitimate aims,
discredit
the profession, and violate the duty of objectivity
owed to users of the subordinate's work product.
[451] Source: Publisher
Answer (A) is incorrect because the code does not
address these matters.
Answer (B) is incorrect because the code does not
address these matters.
Answer (C) is correct. Financial
managers/management accountants may not dis
close
confidential information acquired in the course of
their
work unless authorized or legally obligated to do
so.
They must inform subordinates about the
confidentiality of information and monitor their
activities to maintain that confidentiality. Moreover,
financial managers/management accountants
should
avoid even the appearance of using confidential
information to their unethical or illegal advantage.
Answer (D) is incorrect because other employment
may be accepted unless it constitutes a conflict of
interest.
[452] Source: Publisher
Answer (A) is incorrect because the competence
standard pertains to the financial
manager/management accountant's responsibility
to
maintain his/her professional skills and knowledge.
It
also pertains to the performance of activities in a
professional manner.
Answer (B) is incorrect because legality is not
addressed in the IMA Code of Ethics.
Answer (C) is correct. Objectivity is the fourth part
of the IMA Code of Ethics. It requires that
information be communicated "fairly and
objectively,"
and that all information that could reasonably
influence users be fully disclosed.
Answer (D) is incorrect because the confidentiality
standard concerns the financial manager/management
accountant's responsibility not to disclose or use the
firm's confidential information.
[453] Source: Publisher
Answer (A) is correct. One of the responsibilities of
the financial manager/management accountant under
the integrity standard is to "recognize and
communicate professional limitations or other
constraints that would preclude responsible judgment
or successful performance of an activity."
Answer (B) is incorrect because the objectivity
standard requires the financial manager/management
accountant to "disclose fully all relevant information
that could reasonably be expected to influence an
intended user's understanding of the reports,
comments, and recommendations presented."
Answer (C) is incorrect because the confidentiality
standard requires the financial manager/management
accountant to "refrain from disclosing confidential
information acquired in the course of his/her work
except when authorized, unless legally obligated to do
so."
Answer (D) is incorrect because the integrity
standard requires the financial manager/ management
accountant to "refuse any gift, favor, or hospitality
that would influence or would appear to influence
his/her actions."
[454] Source: Publisher
Answer (A) is incorrect because the integrity
standard requires the financial manager/management
accountant to "communicate unfavorable as well as
favorable information and professional judgments or
opinions."
Answer (B) is correct. One of the responsibilities of
the financial manager/management accountant under
the competence standard is to "maintain an
appropriate level of professional competence by
ongoing development of his/her knowledge and
skills."
Answer (C) is incorrect because one of the
suggestions from the "Resolution of Ethical Conflict"
paragraph is to "clarify relevant ethical issues by
confidential discussion with an objective advisor (e.g.,
IMA Ethics Counseling Service) to obtain a better
understanding of possible courses of action."
Answer (D) is incorrect because the confidentiality
standard requires the financial manager/management
accountant to "inform subordinates as appropriate
regarding the confidentiality of information acquired in
the course of their work and monitor their activities to
assure the maintenance of that confidentiality."
[455] Source: CMA 1

Answer (A) is incorrect because the competence
standard pertains to the financial
manager/management accountant's responsibility
to
maintain his/her professional skills and knowledge.
It
also pertains to the performance of activities in a
professional manner.
the competence standard is to "maintain an
appropriate level of professional competence by
ongoing development of his/her knowledge and
skills." (S)he must also "perform professional duties in
accordance with relevant laws, regulations, and
technical standards." The third requirement under this
standard is to "prepare complete and clear reports
and recommendations after appropriate analyses of
relevant and reliable information."

Answer (B) is incorrect because the confidentiality
standard concerns the financial
manager/management
accountant's responsibility not to disclose or use
the
firm's confidential information.
Answer (C) is correct. One of the responsibilities of
the financial manager/management accountant
under
the integrity standard is to "recognize and
communicate professional limitations or other
constraints that would preclude responsible
judgment
or successful performance of an activity."
Answer (D) is incorrect because objectivity is the
fourth part of the IMA Code of Ethics. It requires
that information be communicated "fairly and
objectively," and that all information that could
reasonably influence users be fully disclosed.
Answer (B) is incorrect because the confidentiality
standard concerns the financial manager/management
accountant's responsibility not to disclose or use the
firm's confidential information.
Answer (C) is incorrect because the integrity
standard pertains to conflicts of interest, refusal of
gifts, professional limitations, professional
communications, avoidance of acts discreditable to
the profession, and refraining from activities that
prejudice the ability to carry out duties ethically.
Answer (D) is incorrect because objectivity is the
fourth part of the IMA Code of Ethics. It requires
that information be communicated "fairly and
objectively," and that all information that could
reasonably influence users be fully disclosed.

[456] Source: CMA 2

Answer (A) is incorrect because the competence

standard pertains to the financial
manager/management accountant's responsibility
to
maintain his/her professional skills and knowledge.
It
also pertains to the performance of activities in a
professional manner.

Answer (B) is incorrect because the confidentiality

standard concerns the financial
manager/management
accountant's responsibility not to disclose or use
the
firm's confidential information.

Answer (C) is correct. The integrity standard

requires
the financial manager/management accountant to
"refuse any gift, favor, or hospitality that would
influence or would appear to influence his/her
actions.

Answer (D) is incorrect because objectivity is the

fourth part of the IMA Code of Ethics. It requires
that information be communicated "fairly and
objectively," and that all information that could
reasonably influence users be fully disclosed.

[457] Source: CMA 3

Answer (A) is correct. One of the responsibilities of

the financial manager/management accountant
under