Professional Documents
Culture Documents
Multiple Choice
b 6. One of the ways managerial accounting differs from financial accounting is that managerial
accounting
a. is bound by generally accepted accounting principles.
b. classifies information in different ways.
c. does not use financial statements.
d. deals only with economic events.
a 11. Which classification of costs is most relevant for income statements to be used internally?
a. Behavior.
b. Function.
c. Method of payment.
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d. Object.
d 12. The set of processes that transform raw materials into finished products is known as a
a. differentiation strategy.
b. flexible manufacturing system.
c. lowest cost strategy.
d. value chain.
a 14. The period that begins with the arrival of materials and ends with the shipment of a completed
good is the
a. cycle time.
b. manufacturing cell.
c. computer-integrated manufacturing.
d. performance period.
a 19. The professional certification most relevant for managerial accountants is the
a. CMA.
b. CPA.
c. CSA.
d. MAS.
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d. has two columns, while a balance sheet has more than two.
d 25. Conventional and just-in-time manufacturers differ in that the conventional manufacturer is
likely to
a. be a new entrant into its industry.
b. need less storage space than its JIT competitors.
c. give less credibility to management accounting reports.
d. have a longer production cycle than its JIT competitors.
True-False
T 2. Generally accepted accounting principles govern financial accounting but not managerial
accounting.
T 3. Economic events are the raw data for both financial and managerial accounting.
F 4. Internal financial statements must be prepared using generally accepted accounting principles.
T 5. The form and content of reports can influence decisions made by managers.
F 6. Management-by-objectives and management-by-exception are two names for the same general
management principle.
F 7. "Pro forma" is the name given to an income statement that classifies costs by function.
T 8. Some managerial accounting reports contain costs not incorporated in the basic accounting
system.
F 9. A professional examination exists to test the competence of financial accountants, but not of
managerial accountants.
F 10. Managerial accountants should, but have no obligation to, maintain their professional skills.
Problems
SOLUTION:
3
SOLUTION:
3. Based on the information provided, compute accrued wages payable at the end of 20X4.
SOLUTION:
SOLUTION:
SOLUTION:
$52,000 (126,000 Total assets - $56,000 current liabilities - $18,000 total noncurrent liabilities)
SOLUTION:
7. Based on the information provided, compute accrued taxes payable at the end of 20X9.
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Cash paid in 20X9 for taxes $750,000
SOLUTION:
8. Based on the information provided, compute prepaid supplies at the end of 20X9.
SOLUTION:
SOLUTION:
SOLUTION:
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a. Total assets, $780 ($440 + $340)
b. Total owners' equity, $460 ($950 - $490)
c. Beginning RE, $100 ($340 beginning owners' equity - $240)
d. Ending RE, $130 [$460 - ($240 + $90)]
e. Net income, $104 ($130 of ending RE + $74 - $100 beginning RE)
Multiple Choice
c 1. Which formula gives unit sales required to earn a target profit? (P = selling price, V = variable
cost per unit, F = total fixed costs, T = target profit)
a. F/(P - V)
b. (F + T)/P
c. (F + T)/(P - V)
d. (F + T)/V
c 2. Which formula gives the sales dollars required to earn a target profit? (P = selling price, V =
variable cost per unit, F = total fixed costs, T = target profit)
a. F/[(P - V)/P]
b. (F + T)/(P)
c. (F + T)/[(P - V)/P]
d. F + T/V
c 8. If all goes according to plan except that unit variable cost falls,
a. total contribution margin will be lower than expected.
b. the contribution margin percentage will be lower than expected.
c. profit will be higher than expected.
d. per-unit contribution margin will be lower than expected.
a 9. If all goes according to plan except that total fixed costs rise,
a. income will be lower than expected.
b. total contribution margin will be lower than expected.
c. total sales will be lower than expected.
d. income will be higher than expected.
a 10. Which of the following decreases per-unit contribution margin the most for a company currently
earning a profit?
a. A 10% decrease in selling price.
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b. A 10% increase in variable cost per unit.
c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.
a 15. If selling price, per-unit variable cost, and total fixed costs are constant,
a. the break-even point in units remains constant.
b. profit per unit remains constant for all levels of volume within the relevant range.
c. total variable costs equal total fixed costs.
d. total contribution margin equals total fixed costs.
b 16. XYZ Company desires a profit of $120,000 and expects to sell 20,000 units. Variable cost per
unit is $16 and total fixed costs are $160,000. The selling price must be
a. $40.
b. $30.
c. $26.
d. $20.
a 17. Contribution margin percentage is 30% and contribution margin per unit is $12. Which of the
following is true?
a. Variable cost per unit is $28.
b. Return on sales is 12%.
c. Selling price is $48.
d. Variable cost percentage is 12%.
b 18. Contribution margin is 30% of sales. Profit is $80,000. Sales are $600,000. Fixed costs are
a. $ 90,000.
b. $100,000.
c. $160,000.
d. $180,000.
a 19. TRS Company changed production methods, increasing fixed costs and decreasing its per-unit
variable costs. The change
a. increases risk and increases potential profit.
b. increases risk and decreases potential profit.
c. decreases risk and decreases potential profit.
d. decreases risk and increases potential profit.
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d 21. Selling price is $100, unit variable cost is $68, and fixed costs are $400,000. Unit sales required
to earn a $120,000 profit are
a. 5,200
b. 7,647
c. 13,700
d. 16,250
c 22. The tax rate is 40%. A company that wants a profit of $120,000 after taxes must earn how
much before taxes?
a. $ 48,000.
b. $ 72,000.
c. $200,000.
d. $300,000.
a 23. Genco Company has a 30% contribution margin percentage and fixed costs of $30,000. To earn
a 10% return on sales, Genco must have sales of
a. $150,000.
b. $100,000.
c. $40,000.
d. an amount that cannot be determined without more information.
a 30. A fixed cost is the same percentage of sales in three different months. Which of the following is
true?
a. The company had the same sales in each of those months.
b. The cost is both fixed and variable.
c. The company is operating at its break-even point.
d. The company is achieving its target level of profit.
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d. selling price rises.
a 32. If the sales mix shifts toward higher contribution margin products, the break-even point
a. decreases.
b. increases.
c. remains constant.
d. it is impossible to tell without more information.
c 34. In the following graph, the vertical distance between the lines OA and BD represents
| A D
| * *
| * *
| * *
| * *
| *
| * *
| * *
| * *
B|*__________* __________________________________ C
| *
| *
| *
| *
|*______________________________________________
O E
a. revenue.
b. total variable cost.
c. profit or loss.
d. total contribution margin.
A
| * D
| * *
| * *
| * *
| * *
| *
| * *
| * *
| * *
B|*__________* __________________________________ C
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| *
| *
| *
| *
|*______________________________________________
O E
c 37. The break-even point in units equals total fixed costs divided by
a. selling price per unit.
b. variable cost per unit.
c. contribution margin per unit.
d. contribution margin percentage.
d 38. The break-even point in dollars equals total fixed costs divided by
a. selling price per unit.
b. variable cost as a percentage of selling price.
c. contribution margin per unit.
d. contribution margin percentage.
c 39. Company A has a lower variable cost per unit and higher total fixed costs than Company B. The
selling prices of their products are the same. Sales fluctuate considerably for both companies.
Therefore,
a. Company A has a lower break-even point than Company B.
b. Company A earns more profit than Company B.
c. Company A is more risky than Company B.
d. Company A has a lower contribution margin percentage than Company B.
b 40. The margin of safety is
a. the profit currently earned in excess of the target profit.
b. the difference between current sales and sales at break-even.
c. the ratio of contribution margin to variable cost.
d. the difference between contribution margin currently earned and contribution margin at break
even.
d 42. Selling price is $40, unit variable cost is $24, and fixed costs are $400,000. Unit sales required
to break even are
a. 10,000.
b. 12,500.
c. 16,667.
d. 25,000.
d 43. ABC's variable costs are 60% of total revenue. If fixed costs are $300,000, what is the break-
even sales volume?
a. $120,000
b. $180,000
c. $500,00
d. $750,000
b 44. Acme has sales of $200,000, fixed costs of $100,000, and a profit of $20,000. What is Acme's
margin of safety?
a. $ 20,000
b. $ 33,333
c. $100,000
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d. An amount that cannot be determined without more information.
b 45. Machine A has fixed costs of $450,000 and a variable cost of $20. Machine B has fixed costs of
$600,000 and a variable cost of $14. What is the indifference point, in units?
a. 22,500
b. 25,000
c. 42,858
d. An amount that cannot be determined without more information.
d 46. DJH Company has sales of $360,000, variable costs of $216,000, and fixed costs of $150,000.
To earn a 10% return on sales, DJH must have sales of
a. $375,000.
b. $440,000.
c. $470,000.
d. $500,000.
b 47. DJH Company has sales of $400,000, variable costs of $240,000, and fixed costs of $150,000.
What is the break-even sales volume?
a. $150,000
b. $375,000
c. $390,000
d. $550,000
a 48. Alvarez Inc. sells three products with the following results:
X Y Z
------ ------ ------
Sales $10,000 $20,000 $30,000
Variable costs 4,000 12,000 15,000
c 49. Scottso Enterprises has fixed costs of $120,000. At a sales volume of $400,000, return on sales
is 10%; at a $600,000 volume, return on sales is 20%. What is the break-even volume?
a. $160,000
b. $210,000
c. $300,000
d. An amount that cannot be determined without more information.
d 50. Samson Inc. has a contribution margin percentage of 35%. If fixed costs are $630,000, what is
the break-even point?
a. $ 220,500
b. $ 409,500
c. $ 969,231
d. $1,800,000
True-False
F 5. If a company's income statement shows a positive contribution margin but a net loss, its fixed
costs are too high.
T 6. As unit sales increase, both average total cost and fixed cost per unit decrease.
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F 8. Return on sales is another name for contribution margin percentage.
T 10. The weighted-average contribution margin percentage changes with changes in sales mix.
Problems
1. Foris Company's product sells for $16 and has a variable cost per unit of $12. Fixed costs are
$120,000.
b. Compute the number of units Foris must sell to earn a $30,000 profit.
c. Foris has a target profit of $36,000 and expects to sell 30,000 units. Compute the selling price
Foris must charge to earn the target profit.
d. Foris wants to keep its selling price at $16 per unit and earn a 10% return on sales. Calculate the
number of units Foris must sell to meet the target.
SOLUTION:
2. Dennis Company sells a product for $20, variable costs are $8 per unit, and fixed costs are
$32,000.
b. Find the selling price that Dennis must charge to earn an $8,000 profit selling 1,600 units.
c. Dennis is considering new equipment that would increase fixed costs by $2,000 while reducing
unit variable costs by $1.60 per unit. Find the sales level where Dennis is indifferent between the two
cost structures.
SOLUTION:
a. 2,667 ($32,000/$12)
b. $33.00
Profit = Sales - Variable Costs - Fixed Costs
$8,000 = 1,600X - $8 x 1,600 - $32,000
1,600X = $52,800
X = $33.00
c. 1,250 units
Current Costs = Proposed Costs
$32,000 + $8Q = $34,000 + $6.40Q
Q = 1,250
3. Stout Company sells three products. Planned results for next year follow.
Product
A B C
---- ---- ----
Selling price $10 $8 $4
Variable cost 4 6 1
12
--- --- ---
Contribution margin $6 $2 $3
=== === ===
Sales mix in dollars 25% 25% 50%
c. Suppose now that the sales mix, in UNITS, is 25%, 25%, 50%. Determine the weighted-average
contribution-margin per unit.
SOLUTION:
a. 58.75%
A B C Total
--- --- --- -----
Contribution margin percentage 60% 25% 75%
Sales mix in dollars 25% 25% 50%
--- --- ---
Weighted-average 15% + 6.25% + 37.5% = 58.75%
c. $3.50
A B C Total
--- --- --- -----
Contribution margin per unit $6.00 $2.00 $3.00
Sales mix in units 25% 25% 50%
----- ----- -----
Weighted-average $1.50 + $0.50 + $1.50 = $3.50
4. Maple Company has sales of $550,000 and has variable costs of $330,000. Fixed costs are
$180,000.
c. Compute the sales Maple would need to earn a 10% return on sales.
SOLUTION:
5. Acme Company's product sells for $80 and has a variable cost per unit of $60. Fixed costs are
$400,000.
b. Compute the number of units must Acme sell to earn a $100,000 profit.
c. Acme has a target profit of $152,000 and expects to sell 30,000 units. Compute the selling price
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Acme must charge to earn the target profit.
d. Acme wants to keep its selling price at $40 per unit and earn a 10% return on sales. Calculate
the number of units Acme must sell to meet the target.
SOLUTION:
6. Craik Company sells a product for $25, variable costs are 12 per unit, and fixed costs are $180,000.
b. Find the selling price that Craik must charge to earn a $40,000 profit selling 16,000 units.
c. Craik is considering new equipment that would increase fixed costs by $20,000 while reducing
unit variable costs by $2.00 per unit. Find the sales level where Craik is indifferent between the two
cost structures.
SOLUTION:
a. 13,846 ($180,000/$13)
b. $25.75
Profit = Sales - Variable Costs - Fixed Costs
$40,000 = 16,000X - $12 x 16,000 - $180,000
16,000X = $412,000
X = $25.75
c. 10,000 units
Current Costs = Proposed Costs
$180,000 + $12Q = $200,000 + $10Q
Q = 10,000
7. Mound Company has a before-tax return on sales of 9% and a 25% margin of safety. Current sales
are $800,000.
SOLUTION:
a. $600,000 ($800,000 x 75%)
b. 64%
$728,000 - $600,000
-------------------- = 64%
$800,000 - $600,000
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Product
P Q R
--- --- ---
Selling price $20 $8 $6
Variable cost 8 6 3
--- --- ---
Contribution margin $12 $2 $3
=== === ===
Units sold 10,000 20,000 70,000
SOLUTION:
a. $3.70
A B C Total
--- --- --- -----
Units sold 10,000 + 20,000 + 70,000 = 100,000
Mix in units 10% 20% 70%
b. 54,054 ($200,000/$3.70)
9. Oak Grove Inc's product sells for $32 and has a variable cost per unit of $20. Fixed costs are
$120,000. The effective tax rate is 40%.
b. Compute the number of units Oak Grove must sell to earn a $30,000 after-tax profit.
c. Oak Grove has an after-tax target profit of $36,000 and expects to sell 20,000 units. Compute
the selling price Oak Grove must charge to earn the target profit.
SOLUTION:
a. 10,000 ($120,000/12)
10. Eleva Company has sales of $350,000, variable costs of $200,000, and fixed costs of $125,000.
Eleva has an effective tax rate of 40%.
c. Compute the sales Eleva would need to earn a 15% after-tax return on sales.
SOLUTION:
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a. $291,647 ($125,000/42.86% = $291,647)
CM% = ($350,000 - $200,000)/$350,000 = 42.86%
Multiple Choices
b 1. The principal advantage of the scatter-diagram method over the high-low method of cost
estimation is that the scatter-diagram method
a. includes costs outside the relevant range.
b. considers more than two points.
c. can be used with more types of costs than the high-low method.
d. gives a precise mathematical fit of the points to the line.
d 3. The cost estimation method that gives the most mathematically precise cost prediction equation
is
a. the high-low method.
b. the scatter-diagram method.
c. the contribution margin method.
d. regression analysis.
d 7. A non-value-adding cost is
a. usually direct to a product.
b. the same as a discretionary cost.
c. unavoidable.
d. not essential to manufacturing a product.
a 8. Fixed costs that cannot be reduced within a short period of time are
a. committed.
b. variable.
c. avoidable.
d. unnecessary.
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c. Fee for a consultant on the company's long-range planning.
d. Advertising.
a 10. RST's average cost per unit is the same at all levels of volume. Which of the following is true?
a. RST must have only variable costs.
b. RST must have only fixed costs.
c. RST must have some fixed costs and some variable costs.
d. RST's cost structure cannot be determined from this information.
d 15. ABC Company breaks even at $600,000 sales and earns $60,000 at $700,000 sales. Which of
the following is true?
a. Fixed costs are $40,000.
b. Profit at sales of $800,000 would be $160,000.
c. The selling price per unit is $6.
d. Contribution margin is 60% of sales.
b 16. A seasonal business that sets selling prices at 20% above average cost for the preceding month
will
a. be better off if it closed down during the off-season.
b. charge higher prices in the off-season than in the busy season.
c. always charge higher prices than its competitors.
d. make a consistent return on sales of 20%.
d 19. Fixed costs that managers can change on short notice are
a. value-adding costs.
b. variable costs.
c. unavoidable costs.
d. discretionary costs.
c 20. A(n) __________ relationship is one that appears to exist even though there is no causal
relationship.
a. Correlation.
b. Outlier.
c. Spurious.
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d. Value-added.
a 29. Ogden Company had $300,000 overhead cost at 20,000 machine hours, $320,000 overhead
cost at 25,000 hours. Variable overhead cost per machine hour is
a. $ 4.00.
b. $12.80.
c. $15.00.
d. some other number.
b 30. Sacramento Company had $400,000 overhead cost at 50,000 machine hours and $460,000
overhead cost at 60,000 hours. Total fixed overhead is
a. $ 60,000
b. $100,000
c. $120,000.
d. $320,000.
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d. Insurance.
c 33. Which cost is most likely to be avoidable in deciding whether to shut down one of the four
assembly lines in a factory?
a. Depreciation on the factory building.
b. Salaries of maintenance workers who service all assembly lines.
c. Power used to operate equipment on the assembly line.
d. Heat and light for the building.
c 34. DSP Company earned $100,000 on sales of $1,000,000. It earned 130,000 on sales of
$1,100,000. Variable costs as a percentage of sales are
a. 30%.
b. 40%.
c. 70%.
d. 90%.
b 35. DSP Company earned $100,000 on sales of $1,000,000. It earned $130,000 on sales of
$1,100,000. Total fixed costs are
a. $0.
b. $200,000.
c. $420,000.
d. $900,000.
c 36. Predicting costs at activity levels that are outside the relevant range is called
a. association.
b. correlation.
c. extrapolation.
d. none of the above.
b 39. MNO has a break-even point of 200,000 units and earns a $100,000 profit at sales of 250,000
units. Which of the following is true?
a. Fixed costs are $100,000.
b. Total contribution margin at 200,000 units is $400,000.
c. Profit at sales of 300,000 units is $120,000.
d. Selling price per unit is $2.
a 40. The closeness of the relationship between the cost and the activity is called
a. correlation.
b. spurious.
c. regression analysis.
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d. manufacturing overhead.
c 42. DJH has an average unit cost of $20 at 20,000 units and $13.75 at 40,000 units. What is the
variable cost per unit?
a. $5.00
b. $6.25
c. $7.50
d. An amount that cannot be determined without more information.
b 43. DJH has an average unit cost of $20 at 20,000 units and $13.75 at 40,000 units. What is the
total fixed cost?
a. $125,000
b. $250,000
c. $400,000
d. An amount that cannot be determined without more information.
a 44. GMH Company had $200,000 overhead cost at 25,000 machine hours and $240,000 overhead
cost at 60,000 hours. Variable overhead per machine hour is
a. $4.00.
b. $1.00.
c. $0.83.
d. some other number.
d 45. Elmwood Company had $300,000 overhead cost at 40,000 machine hours, and $360,000
overhead cost at 60,000 hours. Total fixed overhead is
a. $ 36,000
b. $ 40,000
c. $ 60,000.
d. $180,000.
b 46. Crookston Company breaks even at $300,000 sales and earns $40,000 at $400,000 sales.
Which of the following is true?
a. Fixed costs are $120,000.
b. Profit at sales of $500,000 would be $50,000.
c. The selling price per unit is $4.
d. Contribution margin is 10% of sales.
a 47. Glenwood has an average unit cost of $45 at 20,000 units and $25 at 60,000 units. What is the
variable cost per unit?
a. $15
b. $20
c. $35
d. An amount that cannot be determined without more information.
b 48. Glenwood has an average unit cost of $45 at 20,000 units and $25 at 60,000 units. What is the
total fixed cost?
a. $400,000
b. $600,000
c. $900,000
d. An amount that cannot be determined without more information.
b 49. Osceola Company earned $50,000 on sales of $400,000. It earned $70,000 on sales of
$450,000. Contribution margin as a percentage of sales is
a. 30%.
b. 40%.
c. 60%.
d. 70%.
c 50. Osceola Company earned $50,000 on sales of $400,000. It earned $70,000 on sales of
$450,000. Total fixed costs are
a. $ 0.
b. $ 50,000.
c. $110,000.
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d. $180,000.
True-False
T 2. In interpreting regression results, the higher the correlation, the better cost predictions are likely
to be.
F 4. Discretionary fixed costs are not necessary to successful operation of the business.
T 5. High-low, scatter diagram, and regression analysis are methods of developing formulas to
predict mixed costs.
T 7. In developing a cost-prediction equation using regression analysis, you might not select the one
with the highest correlation.
F 8. A company using activity-based costing need not do regression analysis or scatter diagrams.
F 9. An r-squared of .91 with a regression equation means that predictions will be accurate 91% of
the time.
T 10. A multiple regression equation uses more than one driver to predict costs.
Problems
1. Carlson Company incurred $170,000 in overhead costs making 12,000 units in March. It made
15,000 units and incurred $188,000 in overhead costs in April.
SOLUTION:
2. The statistician of RST, Inc. has developed the following cost-prediction equation, using
observations from 12,000 to 30,000 machine hours.
b. Will maintenance cost at zero machine hours be $236,837? yes no Circle the correct
answer.
c. About 68% of the time, maintenance cost should be within what amount of the predicted value?
SOLUTION:
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3. Genner Company earned $125,000 on sales of $750,000. It earned $225,000 on sales of
$1,000,000.
SOLUTION:
4. Danner has an average unit cost of $22.50 at a volume of 400,000 units. At 500,000 units the
average unit cost is $20.50.
SOLUTION:
5. Tri-County Company incurred $175,000 in overhead costs making 40,000 units in April. It made
24,000 units and incurred $147,000 in overhead costs in May.
SOLUTION:
6. Bilbo Company incurred $374,000 in overhead costs making 11,000 units in November. It made
7,500 units and incurred $325,000 in overhead costs in December.
SOLUTION:
7. The statistician of Comstock, Inc. has developed the following prediction equation for costs, using
observations from 25,000 to 60,000 machine hours.
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b. Will repair cost at zero machine hours be $146,374? yes no Circle the correct answer.
c. About 68% of the time, repair cost should be within what amount of the predicted value?
SOLUTION:
SOLUTION:
9. Bennco has an average unit cost of $18.50 at a volume of 100,000 units. At 200,000 units the
average unit cost is $14.25.
SOLUTION:
10. Parsons Company incurred $475,000 in overhead costs making 40,000 units in August. It made
30,000 units and incurred $447,000 in overhead costs in September.
SOLUTION:
Multiple Choice
a 1. Activity-based costing
a. requires the identification of cost drivers.
b. is used only in JIT operations.
c. applies only to discretionary fixed costs.
d. does not help to identify activities as value-adding or non-value-adding.
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a 2. A company using activity-based costing
a. tries to identify cost drivers.
b. allocates all costs to individual products.
c. looks for the activity with which total costs are most closely associated.
d. is probably using the JIT philosophy.
b 8. The resource utilized by a given product divided by the total amount of the resource available is
called the
activity driver
consumption ratio
cost object
sustaining activity
c 9. The segment for which you are estimating the cost is called the
activity driver
consumption ratio
cost object
sustaining activity
a 10. A tool that focuses on manufacturing processes and seeks to reduce or optimize the activities
performed within the process is
process value analysis
re-engineering
caveat analysis
benchmarking
d 11. A tool that compares how tasks are performed internally with the best practices of industry
leaders is
process value analysis
re-engineering
caveat analysis
benchmarking
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c 13. Which of the following statements is true?
The traditional approach to costing uses many different cost drivers.
Costs that are indirect to products are by definition traceable to directly to products.
Costs that are indirect to products are traceable to some activity.
All of the above statements are true.
d 20. ____________ are those performed each time a unit is produced or sold.
Batch-level activities
Facility-sustaining activities
Sustaining activities
Unit-level activities
a 21. ____________ are those that a company performs when it makes a group of units.
Batch-level activities
Facility-sustaining activities
Sustaining activities
Unit-level activities
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Distribution-channel sustaining
Unit-sustaining
a 26. The quality costs that are incurred to determine whether particular units of product meet
quality standards are
a. appraisal costs.
b. external failure costs.
c. internal failure costs.
d. prevention costs.
c 27. The cost of downtime on machines while rework is being performed is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
b 30. The cost to repair a unit of product that fails after it is sold is a(n)
a. appraisal cost.
b. external failure cost.
c. internal failure cost.
d. prevention cost.
b 31. Genco manufactures two versions of a product. Production and cost information show the
following:
Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2
Material handling costs total $200,000. Under ABC, the material handling costs allocated to each
unit of Model A would be:
a. $10
b. $200
c. $333
d. Some other number
c 32. Genco manufactures two versions of a product. Production and cost information show the
following:
Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2
Material handling costs total $200,000. Under ABC, the material handling costs allocated to each
unit of Model B would be:
a. $200
b. $333
c. $400
d. Some other number
26
a 33. Genco manufactures two versions of a product. Production and cost information show the
following:
Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 3
Material handling costs total $200,000. Direct labor hours are used to allocate overhead costs.
The material handling costs allocated to each unit of Model A would be:
a. $143
b. $200
c. $333
d. Some other number
b 34. Cadott Manufacturing produces three products. Production and cost information show the
following:
Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model X
would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number
b 35. Cadott Manufacturing produces three products. Production and cost information show the
following:
Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model Y
would be
a. $ 6.67
b. $10.00
c. $20.00
d. Some other number
b 36. Cadott Manufacturing produces three products. Production and cost information show the
following:
Inspection costs totaled $100,000. Using ABC, inspections costs allocated to each unit of Model Z
would be
a. $ 6.67
b. $ 8.33
c. $10.00
d. Some other number
c 37. Cadott Manufacturing produces three products. Production and cost information show the
following:
27
Inspection costs totaled $100,000. Using direct labor hours as the allocation base, inspections
costs allocated to each unit of Model X would be
a. $10.00
b. $20.00
c. $40.00
d. Some other number
a 38. Cadott Manufacturing produces three products. Production and cost information show the
following:
Inspection costs totaled $100,000. . Using direct labor hours as the allocation base, inspections
costs allocated to each unit of Model Y would be
a. $6.67
b. $10.00
c. $20.00
d. Some other number
a 39. Cadott Manufacturing produces three products. Production and cost information show the
following:
Inspection costs totaled $100,000. Using direct labor hours as the allocation base, inspections
costs allocated to each unit of Model Z would be
a. $6.67
b. $8.33
c. $10.00
d. Some other number
b 40. Superior Inc. produces three products. Production and cost information is as follows:
c 41. Superior Inc. produces three products. Production and cost information is as follows:
a 42. Superior Inc. produces three products. Production and cost information is as follows:
28
Direct labor hours 4,000 2,000 4,000
Number of setups 100 150 250
c 43. Waupaca Company produces three products with the following production and cost information:
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs
$180,000. What would be the per unit overhead cost for Model A if direct labor hours were the
allocation base?
a. $20.50
b. $41.00
c. $82.00
d. Some other number
b 44. Waupaca Company produces three products with the following production and cost information:
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs
$180,000. What would be the per unit overhead cost for Model A if activity-based costing were used?
a. $20.50
b. $74.00
c. $82.00
d. Some other number
a 45. Waupaca Company produces three products with the following production and cost information:
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs
$180,000. What would be the per unit overhead cost for Model B if activity-based costing were used?
a. $22.00
b. $66.00
c. $123.00
d. Some other number
a 46. Waupaca Company produces three products with the following production and cost information:
Overhead costs include setups $90,000; shipping costs $140,000; and engineering costs
29
$180,000. What would be the per unit overhead cost for Model C if activity-based costing were used?
a. $10.83
b. $32.50
c. $245.28
d. Some other number
c 47. Kimball Company produces two products in a single factory. The following production and cost
information has been determined:
Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5
The controller has determined total overhead to be $480,000. $120,000 relates to material
moves; $150,000 relates to testing; the remainder is related to labor time.
If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per
unit be for Model 1?
a. $10.00
b. $120.00
c. $240.00
d. $400.00
b 48. Kimball Company produces two products in a single factory. The following production and cost
information has been determined:
Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5
The controller has determined total overhead to be $480,000. $140,000 relates to material
moves; $150,000 relates to testing; the remainder is related to labor time.
If Kimball uses activity-based costing to allocate overhead to each model, what would overhead
per unit be for Model 1?
a. $400.00
b. $295.00
c. $240.00
d. $120.00
d 49. Kimball Company produces two products in a single factory. The following production and cost
information has been determined:
Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5
The controller has determined total overhead to be $480,000. $140,000 relates to material
moves; $150,000 relates to testing; the remainder is related to labor time.
If Kimball uses direct labor hours to allocate overhead to each model, what would overhead per
unit be for Model 2?
a. $158.33
b. $400.00
c. $950.00
d. $1,200.00
c 50. Kimball Company produces two products in a single factory. The following production and cost
information has been determined:
Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
30
Testing time (total) 250 125
Direct labor hours per unit 1 5
The controller has determined total overhead to be $480,000. $140,000 relates to material
moves; $150,000 relates to testing; the remainder is related to labor time.
If Kimball uses activity-based costing to allocate overhead to each model, what would overhead
per unit be for Model 2?
a. $158.33
b. $415.93
c. $925.00
d. Some other number
True-False
F 2. A company that uses only volume-based measures will overcost its low-volume products.
F 10. The acceptable quality level is the point where internal failure costs are minimized.
Problems
1. Scottso Enterprises incurs $300,000 in manufacturing overhead costs each month. The company
has been allocating overhead to individual product lines based on direct labor hours.
Amount Amount of
Cost driver In Pool Activity
----------- -------- ---------
Direct labor hours $100,000 25,000
Number of batches 150,000 200
Design changes 50,000 125
--------
Total overhead costs $300,000
========
Two products have the following characteristics:
Product X Product Y
--------- ---------
Direct labor hours 1,000 400
Number of batches 10 20
Design changes 1 15
a. Determine the overhead to be allocated to each product using direct labor hours as the only cost
driver.
b. Determine the overhead to be allocated to each product using the three drivers identified.
SOLUTION:
31
Product X: $11,900; Product Y: $22,600
Amount Amount of
Cost driver In Pool Activity Rate
----------- -------- --------- --------
Direct labor hours $100,000 25,000 $ 4.00
Number of batches 150,000 200 750.00
Design changes 50,000 125 400.00
Product X Product Y
--------- ---------
Direct labor hours, $4,000 $1,600
Number of batches 7,500 15,000
Design changes 400 6,000
------ ------
$11,900 $22,600
2. Lewis Company has two major segments with the following information:
SOLUTION:
c. & d.
Upstate Downstate Total_
Annual revenue $200,000 $600,000 $800,000
Annual salesperson salaries 30,000 45,000 75,000
Travel 24,000 12,000 36,000
Entertainment 57,600 86,400 144,000
Administrative 60,000 90,000 150,000
------- ------- -------
Income $ 28,400 $366,600 $395,000
3. Johnson & Mathew is an architectural and landscape services firm. The firm operates in three major
segments. The following information has been obtained,
Salaries for the year were $800,000; overhead for the year was $1,000,000.
32
Determine the profits for each segment, assuming costs are allocated based on annual revenues.
Determine the profits for each segment, assuming costs are allocated based on the number of jobs.
Determine the profits for each segment, assuming costs are allocated based on chargeable hours.
SOLUTION:
4. Coleman Company produces three products, X, Y, & Z. The income statement for the firm as a
whole is:
Sales $1,850,000
Less variable costs 1,310,000
----------
Contribution margin $ 540,000
Less fixed costs
Selling 330,000
Administrative 180,000
-------
510,000
----------
Net income $ 30,000
The sales, variable costs, and line-sustaining fixed costs for the four products are:
Q___ R___ S_ __
Sales $250,000 $400,000 $1,200,000
Variable costs 60% 65% 75%
Line-sustaining costs $90,000 $130,000 $ 230,000
Prepare an income statement segmented by product line, including a column for the entire firm. Be
sure to show segment income as well as total enterprise income.
SOLUTION:
5. Ellington & Hodges is a public relations firm. The firm operates in three major segments. The
following information has been obtained,
Determine the profits for each segment, assuming costs are allocated based on annual revenues.
33
Determine the profits for each segment, assuming overhead costs are allocated based on the number
of clients and salaries are allocated based on chargeable hours.
SOLUTION:
6. Danner Company incurs $1,600,000 in manufacturing overhead costs each month. The company
has been allocating overhead to individual product lines based on direct labor hours.
Amount Amount of
Cost driver In Pool Activity
----------- -------- ---------
Direct labor hours $500,000 40,000
Number of setups 700,000 1,000
Number of tests 400,000 500
----------
Total overhead costs $1,600,000
==========
Product S Product T
--------- ---------
Direct labor hours 2,000 1,000
Number of setups 20 100
Number of tests 2 150
a. Determine the overhead to be allocated to each product using direct labor hours as the only cost
driver.
b. Determine the overhead to be allocated to each product using the three drivers identified.
SOLUTION:
Amount Amount of
Cost driver In Pool Activity Rate
----------- -------- --------- --------
Direct labor hours $500,000 40,000 $ 12.50
Number of setups 700,000 1,000 700.00
Number of tests 400,000 500 800.00
Product S Product T
--------- ---------
Direct labor hours, $25,000 $12,500
Number of setups 14,000 70,000
Number of tests 1,600 120,000
------ -------
$40,600 $202,500
Engine Race
Rebuilds Cars Total__
Annual revenue $1,200,000 $1,400,000 $2,600,000
Material costs 400,000 $600,000 $1,000,000
34
Labor costs 250,000 150,000 $400,000
Number of receipts 8,000 2,000
Number of batches 425 75
SOLUTION:
c. & d.
Engine Race
Rebuilds Cars Total__
Annual revenue $1,200,000 $1,400,000 $2,600,000
Material costs 400,000 600,000 1,000,000
Labor costs 250,000 150,000 400,000
Receiving 240,000 60,000 300,000
Material moves 233,750 41,250 275,000
Administrative 140,625 84,375 225,000
------- ------- --------
Income $(64,375) $464,375 $ 400,000
8. Ventura Company produces four products, Q, R, S & T. The income statement for the firm as a
whole is:
Sales $3,000,000
Less variable costs 1,870,000
---------
Contribution margin $1,130,000
Less fixed costs
Manufacturing $320,000
Selling 290,000
Administrative 168,000
-------
778,000
---------
Net income $ 352,000
The sales, contribution margin ratios, and line-sustaining fixed costs for the four products are:
Prepare an income statement segmented by product line, including a column for the entire firm. Be
sure to show segment income as well as total enterprise income.
SOLUTION:
35
Variable costs 130,000 240,000 800,000 700,000 1,870,000
------- ------- --------- --------- ---------
Contribution margin $ 70,000 $160,000 $ 200,000 $ 700,000 $1,130,000
Line-sustaining costs 60,000 80,000 168,000 270,000 578,000
------- ------- --------- --------- ---------
Segment income $ 10,000 $ 80,000 $ 32,000 $ 430,000 $ 552,000
Company-sustaining 200,000
---------
Enterprise income $ 352,000
Categorize each of the costs into the appropriate quality cost category and prepare a total for
each.
SOLUTION:
Prevention costs:
Costs to improve the production process $175,000
Design engineer salaries 325,000
Total prevention costs $500,000
Appraisal costs:
Incoming inspection costs $110,000
Finished goods inspection 165,000
Total appraisal costs 275,000
10. Following is a list of activities that pertains to quality. Classify each as either external failure,
internal failure, appraisal, or prevention.
External Internal
Failure Failure Appraisal Prevention
In-process inspection
Warranty expenses
Worker training
Downtime on machinery due
to rework
Product returns
Product design
Preventive maintenance
Wages for field repair
workers
Quality laboratory
Customer complaints
SOLUTION:
36
External Internal
Failure Failure Appraisal Prevention
In-process inspection X
Warranty expenses X
Worker training X
Downtime on machinery due
to rework X
Product returns X
Product design X
Preventive maintenance X
Wages for field repair
Workers X
Quality laboratory X
Customer complaints X
Multiple Choice
a 1. The salary or wage that you could be earning while you are taking this test is
a. an opportunity cost.
b. a sunk cost.
c. an incremental cost.
d. a joint cost.
b 3. The role of sunk costs in decision making can be summed up in which of the following sayings?
a. Nothing ventured, nothing gained.
b. Bygones are bygones.
c. A penny saved is a penny earned.
d. The love of money is the root of all evil.
a 5. The Robinson-Patman Act forbids charging different prices to different customers unless
a. the price differences are justified by differences in distribution costs.
b. prices offered competitors are fully disclosed to all customers.
c. such prices produce profits no greater than normal profits.
d. the customers are located within the seller's state.
a 7. From its refining process an oil company obtains three products, one of which can be processed
further into a different product, the other two of which can be sold after further refining. The refining
process is
a. a joint process.
b. a mixed cost process.
c. an unavoidable process.
d. a process whose costs should be allocated to the resulting products.
b 8. The Accessories Department shows sales of $35,000. Variable costs are $30,000 and allocated
unavoidable fixed costs are $9,000, leaving a $4,000 loss. Based on this information and all other
things equal,
a. the department contributes $35,000 to total profits.
37
b. dropping the department will reduce total company profits by $5,000.
c. the department should be closed.
d. the department should be kept only if unit volume can be increased enough to increase sales
by $4,000.
b 11. Which of the following costs is relevant in deciding whether to sell joint products at split-off or
process them further?
a. The unavoidable costs of further processing.
b. The avoidable costs of further processing.
c. The variable cost of operating the joint process.
d. The cost of materials used to make the joint products.
b 12. A manufacturing process that invariably produces two or more products
a. is a complementary process.
b. is a joint process.
c. normally has only fixed costs.
d. usually has primarily variable costs.
d 13. Which of the following is a short-term decision in which opportunity costs are not relevant?
a. Make-or-buy decision.
b. Special-order decision.
c. Drop-a-segment decision.
d. None of the above.
b 15. A company has space that it uses to make a component. It could rent the space to another
company. The rent is
a. a sunk cost. \
b. an opportunity cost.
c. a joint cost.
d. an avoidable cost.
a 16. Escanaba Company has 200 units of an obsolete component. The variable cost to produce them
was $10 per unit. They could now be sold for $1.75 each and it would cost $7.60 to make them now. If
the units could be used to make a product for a special order, their relevant cost is
a. $ 1.75.
b. $ 7.60.
c. $10.00.
d. some other number.
38
c. relevant to decision making and is usually reflected in accounting records.
d. not relevant to decision making and is usually reflected in accounting records.
b 23. Which of the following statements pertaining to the Theory of Constraints is true?
Inventory is evil and should never be kept.
Inventory is important to keep immediately before a bottleneck process.
Inventory should be kept before every machining process to prevent any downtime.
None of the above are true.
c 24. Which of the following cost-classification schemes is most relevant to decision making?
a. Fixed--variable.
b. Joint--common
c. Avoidable--unavoidable.
d. Direct--common.
d 25. Which of the following is NOT relevant in deciding whether to process a joint product beyond its
split-off point?
a. The split-off value.
b. The price after additional processing.
c. The cost of further processing.
d. The cost of operating the joint process.
c 26. Benson Company has 200 units of an obsolete part. The variable cost to produce them was $4
per unit. They could now be sold for $3 each and it would cost $6 to make them now. The parts could
be reworked for $8 each and sold for $17. What is the monetary advantage of reworking the parts
over the next-best action?
a. $ 600.
b. $1,000.
c. $1,200.
d. $2,000.
b 27. Pueblo Company sells a product for $60. Variable cost is $32. Pueblo could accept a special
order for 1,000 units at $46. If Pueblo accepted the order, how many units could it lose at the regular
price before the decision became unwise?
a. 1,000.
b. 500.
c. 200.
d. 0.
39
d 29. The variable cost of a unit of product made yesterday is
a. an incremental cost.
b. an opportunity cost.
c. a differential cost.
d. a sunk cost.
d 30. The most profitable use of a resource that has limited capacity and is needed in the production
of more than one product is a function of which of the following?
a. The number of units of each product the company can sell.
b. The contribution margin of each product.
c. The amount of resource-use required for each unit of each product.
d. All of the above.
c 31. Which of the following is NOT relevant in a make-or-buy decision about a part the entity uses in
some of its products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier's per-unit variable cost to make the part.
d. The number of units of the part needed each period.
d 32. Which of the following is NOT relevant to a decision about whether to drop a segment?
a. The contribution margin expected to be produced by the segment.
b. The avoidable fixed costs direct to that segment.
c. The complementary effects of dropping the segment.
d. "None of the above" is the best answer because all of the above are relevant.
a 33. Just-in-time manufacturers are less likely than conventional manufacturing companies to
a. operate a joint process that results in joint products.
b. be able to accommodate special orders.
c. have constraints on their productive capacity.
d. fit any of the above characterizations.
c 35. Buchanan Company currently sells 4,000 units of product Q for $1 each. Capacity is 5,000 units.
Variable costs are $0.40 and avoidable fixed costs are $400. A chain store has offered $0.80 per unit
for 400 units of Q. If Buchanan accepts the order, the change in income will be a
a. $60 decrease.
b. $80 decrease.
c. $160 increase.
d. $480 increase.
a 36. Tyler Company currently sells 1,000 units of product M for $1 each. Variable costs are $0.40 and
avoidable fixed costs are $400. A discount store has offered $0.80 per unit for 400 units of product M.
The managers believe that if they accept the special order, they will lose some sales at the regular
price. Determine the number of units they could lose before the order became unprofitable.
a. 267 units
b. 500 units
c. 600 units
d. Some other number.
b 37. Bear Valley produces three products: A, B, and C. One machine is used to produce the products.
The contribution margins, sales demands, and time on the machine (in minutes) are as follows:
time on
Demand CM machine
------ ---- --------
A 100 $25 10
B 80 18 5
C 150 30 10
There are 2400 minutes available on the machine during the week. How many units should be
produced and sold to maximize the weekly contribution?
A B C
40
a. 100 80 150
b. 50 80 150
c. 90 0 150
d. 100 80 100
d 38. Elk Grove produces three products: A, B, and C. A machine is used to produce the products.
The contribution margins, sales demands, and time on the machine (in minutes) are as follows:
time on
Demand CM machine
------ ---- --------
A 120 $20 5
B 80 36 10
C 100 50 15
There are 2400 minutes available on the machine during the week. How many units should be
produced and sold to maximize the weekly contribution?
A B C
a. 120 80 100
b. 20 80 100
c. 120 30 100
d. 120 80 66
a 39. Black Oak Company makes and sells oak boxes for a price of $60 each. Unit costs based on
anticipated monthly sales of 1,000 boxes are as follows:
A chain store has offered to buy 100 boxes per month at $58 each. To accept this special order,
Black Oak will have to restrict its sales to regular customers to only 900 boxes per monthly because
its production capacity cannot be expanded in the short run. However, no variable selling expenses
will be incurred for this special order. If Black Oak accepts the chain store's offer, its profit will
a. increase by $300.
b. increase by $500.
c. decrease by $200.
d. decrease by $500.
a 40. Medford Corporation operates a plant with a productive capacity to manufacture 20,000 units of
its product a year. The follow information pertains to the production costs at capacity:
A supplier has offered to sell 4,000 units to Medford annually. Assume no change in the fixed
costs. What is the price per unit that makes Medford indifferent between the "make" and "buy"
options?
a. $8
b. $12
c. $20
d. $0
b 41. DJH Company produces 1,000 units of Part X per month. The total manufacturing costs of the
part are as follows:
An outside supplier has offered to supply the part at $40 per unit. It is estimated that 20% of the
41
fixed overhead assigned to Part X will no longer be incurred if the company purchases the part from
the outside supplier. If DJH Company purchases 1,000 units of Part X from the outside supplier per
month, then its monthly operating income will
a. decrease by $20,000.
b. decrease by $4,000.
c. not change.
d. increase by $20,000.
c 42. DJH Company produces 1,000 units of Part X per month. The total manufacturing costs of the
part are as follows:
An outside supplier has offered to supply the part at $40 per unit. It is estimated that 20% of the
fixed overhead assigned to Part X will no longer be incurred if the company purchases the part from
the outside supplier. What is the maximum price that DJH Company should be willing to pay the
outside supplier?
a. $60
b. $40
c. $36
d. $25
c 43. Scooter Company produces three products from a joint process costing $100,000. The following
information is available:
b 44. Genco Company produces three products from a joint process costing $100,000. The following
information is available:
c 45. Colfax Company expects to incur the following costs at the planned production level of 10,000
units:
42
The selling price is $50 per unit. The company currently operates at full capacity of 10,000 units.
Capacity can be increased to 13,000 units by operating overtime. Variable costs increase by $14 per
unit for overtime production. Fixed overhead costs remain unchanged when overtime operations
occur. Colfax Company has received a special order from a wholesaler who has offered to buy 1,000
units at $45 each. What is the incremental cost associated with this special order?
a. $14,000
b. $28,000
c. $42,000
d. $45,000
b 46. Colfax Company expects to incur the following costs at the planned production level of 10,000
units:
The selling price is $50 per unit. The company currently operates at full capacity of 10,000 units.
Capacity can be increased to 13,000 units by operating overtime. Variable costs increase by $14 per
unit for overtime production. Fixed overhead costs remain unchanged when overtime operations
occur. Colfax Company has received a special order from a wholesaler who has offered to buy 1,000
units at $45 each. What is the impact on Colfax's operating income if this special order is accepted?
a. $17,000 increase
b. $3,000 increase
c. no change
d. $5,000 decrease
c 47. GMH Company manufactures 100,000 units of Part X annually for use in one of its main
products. The total manufacturing cost for 100,000 units of Part X is as follows:
Selin Company has offered to sell GMH 100,000 units of Part X per year. If GMH accepts this offer, the
facilities used to produce Part X can be used in the production of other components. This change
would save GMH $10,000 in rent for the leased production facility used at present to support the
production of other components. What is the amount of relevant costs for this make-or-buy decision?
a. $200,000
b. $240,000
c. $250,000
d. $400,000
d 48. GMH Company manufactures 100,000 units of Part X annually for use in one of its main
products. The total manufacturing cost for 100,000 units of Part X is as follows:
Sutton Company has offered to sell GMH 100,000 units of Part X per year. If GMH accepts this
offer, the facilities used to produce Part X can be used in the production of other components. This
change would save GMH $10,000 in rent for the leased production facility used at present to support
the production of other components. What is the maximum price that GMH should be willing to pay
Sutton for part X?
a. $1.20
b. $2.00
c. $2.40
d. $2.50
43
d 49. Barrie, Inc., produces three products: A, B, and C. Two machines are used to produce the
products. The contribution margins, sales demands, and time on each machine (in minutes) is as
follows:
time time
Demand CM on M1 on M2
A 100 $12 5 10
B 80 18 10 5
C 100 25 15 5
There are 2,400 minutes available on each machine during the week. How many units should be
produced and sold to maximize the weekly contribution?
A B C
a. 100 80 100
b. 20 80 100
c. 100 40 100
d. 100 80 73
b 50. Barrie, Inc., produces three products: A, B, and C. Two machines are used to produce the
products. The contribution margins, sales demands, and time on each machine (in minutes) is as
follows:
time time
Demand CM on M1 on M2
A 100 $12 5 10
B 80 18 10 5
C 150 25 5 10
There are 2,400 minutes available on each machine during the week. How many units should be
produced and sold to maximize the weekly contribution?
A B C
a. 100 80 150
b. 50 80 150
c. 90 0 150
100 80 100
True-False
F 1. If the results of a decision are not as good as expected, there has been an error in the decision-
making process.
T 4. In general, the smaller the segment being considered in a decision, the fewer the avoidable
costs.
T 5. A given fixed cost might be separable and relevant for the purpose of one decision and common
and irrelevant for the purpose of another decision in the same company.
T 7. Fixed costs that are allocated to several segments are normally irrelevant to decisions for one of
those segments.
T 8. The only revenues or costs that are relevant in decision making are the differential revenues or
costs.
T 10. Management's objective should be to exploit a constraint rather than to eliminate it.
Problems
1. Wilson Company expects the following results, without considering any of the changes described
below.
Product A Product B Total
--------- --------- -----
44
Sales $100 $300 $400
Variable costs 40 100 140
---- ---- ----
Contribution margin $ 60 $200 $260
Fixed costs - avoidable (20) (30) (50)
- unavoidable (50) (100) (150)
---- ---- ----
Profit (loss) $(10) $ 70 $ 60
===== ==== ====
The unavoidable costs are allocated based on unit sales of 1,000 A and 2,000 B. CONSIDER EACH
QUESTION INDEPENDENTLY UNLESS TOLD OTHERWISE.
b. If product A were dropped and the unit sales of product B increased by 30%, what would the
company's income be?
c. Product A can be dropped and replaced with a new product, C, which would have avoidable fixed
costs of $50. Product C would sell for $0.60, have variable costs of $0.20, and expected volume of
400 units. Compute Wilson's income if A were replaced by C.
d. Suppose now that products A and B are joint products that are being sold at split-off. All of the
costs shown on the income statement are the materials, labor, and overhead of the joint process.
Find income if product B were processed further at additional costs of $90 and sold for $350.
SOLUTION:
2. Arapahoe Corp. can make three products from a joint process. The monthly cost of the joint
process is $10,000. Following are data about the three products.
b. Arapahoe is currently processing all three products rather than selling any of them at the split-off
point. Find its current income.
SOLUTION:
3. Madison Co. operates a joint process. Three products, B, C, and D emerge from that process, each
of which can be sold immediately or processed further. Monthly output is 50,000 gallons; 50% is B,
30% is C, and 20% is D. You have the following information.
B C D
------- ------- -------
Per-gallon split-off price $8 $9 $6
45
Per-gallon price after further
processing $13 $15 $12
Per-gallon variable cost of
further processing $4 $2 $4
Avoidable direct fixed costs of
further processing, per month $35,000 $45,000 $18,000
Unavoidable direct fixed costs
of further processing, per month $18,000 $40,000 $ 7,000
SOLUTION:
B should be sold at split-off.
B: [50,000 x 50%] x [$13 - $8 - $4] - $35,000 = -$10,000
C: [50,000 x 30%] x [$15 - $9 - $2] - $45,000 = $15,000
D: [50,000 x 20%] x [$12 - $6 - $4] - $18,000 = $2,000
4. Milton Company has three products: A, B, and C. Three machines are used to produce the products.
The contribution margins, sales demands, and time on each machine (in minutes) is as follows:
There are 2,400 minutes available on each machine during the week. All materials needed are
readily available on a just-in-time basis.
What are the load factors for each of the three machines?
SOLUTION:
c. A: 93, B: 80, C: 60
A: $45/15 = $3
B: $30/5 = $6
C: $40/10 = $4
5. LaCrosse Company expects the following results, without considering any of the changes described
below.
Product A Product B Total
--------- --------- ------
Sales $1,000 $3,000 $4,000
Variable costs 400 1,000 1,400
----- ----- -----
Contribution margin $ 600 $2,000 $2,600
Fixed costs - avoidable (200) (300) (500)
46
- unavoidable (500) (1,000) (1,500)
----- ------ -----
Profit (loss) $ (100) $ 700 $ 600
===== ====== ======
The unavoidable costs are allocated based on unit sales of 1,000 A and 2,000 B. An exporter has
offered $0.80 per unit for 200 units of A.
a. Find the change in income if LaCrosse accepts the o rder, assuming no loss of regular sales.
b. The managers believe that if they accept the special order, they will lose some sales at the
regular price. Determine the number of units they could lose before the order became unprofitable.
c. The managers believe that they will lose 80 units at the regular price if they accept the order.
Calculate the price they must charge for the special order to increase income by $50.
SOLUTION:
a. Change in income: $80 increase [200 x ($0.80 - $0.40 variable cost per unit)]
c. Price: $0.89
Lost contribution margin (80 x $0.60) $48.0
Desired profit 50.0
-----
Contribution margin required from special order $98.0
Divided by 20. units 200
-----
Equals contribution margin per unit $0.49
Plus variable cost 0.40
-----
Equals required price $0.89
=====
6. Mays Company manufactures 200,000 units of part XYZ annually. The following information has
been collected:
Materials $200,000
Direct labor 110,000
Variable overhead 50,000
Fixed overhead 100,000
--------
Total costs $460,000
========
Clemens Company has offered to provide part XYZ for $2 per unit. Assume no other productive use
of the space exists.
b. What is the maximum price Mays is willing to pay for the part?
SOLUTION:
b. $1.80 ($360,000/200,000)
7. Gonzalez can produce any of three products with its current production line. The heat treating
equipment has 400 hours available during any given month. Per unit production, sales, and cost
statistics are as follows:
47
A B C
--- --- ---
Selling price $15 $20 $10
Variable cost $9 $12 $7
Required time in heat treat 1.5 hrs 2.5 hrs. 1.0 hrs
Maximum demand per month 100 100 100
b. Suppose the selling price of C increases to $12. How many of each product should Gonzalez
produce and sell?
SOLUTION:
a. 100 A, 100 B, 0 C
A: ($15 - 9)/1.5 = $4.00/hr 100 x 1.5 hrs = 150.0 hrs
B: ($20 - 12)/2.5 = $3.20/hr 100 x 2.5 hrs = 250.0
C: ($10 - 7)/1.0 = $3.00/hr 0 (no hours remaining)
b. 100 A, 60 B, 100 C
C: ($12 - 7)/1.0 = $5.00/hr 100 x 1.0 hrs = 100.0 hrs
A: ($15 - 9)/1.5 = $4.00/hr 100 x 1.5 hrs = 150.0
B: ($20 - 12)/2.5 = $3.20/hr (400 - 100 - 150)/2.5 hrs = 60 units
8. Scottso Enterprises has the following products and costs:
A B C
Unit demand per month 2,000 3,000 4,000
Labor and overhead are applied to each product at a rate of $30 per machine hour. Management
considers both labor and overhead to be fixed costs.
Scottso currently has 60,000 hours available for production each month. How many units should be
produced and sold for each product?
An exporter has approached Scottso with an offer to purchase 500 units of product C for a discounted
price. This is a one-time order and will not affect normal sales. No commission will be paid. What is
the minimum price Scottso should accept?
SOLUTION:
b. $575
Lost throughput of B: $32.14 x 7 hours = $225
Materials 350
Minimum price $575
9. Miami Company currently sells 3,000 units of product A for $1.25 each. Variable costs are $0.60,
avoidable fixed costs are $750, and unavoidable allocated fixed costs are $1,500. An exporter has
offered $0.90 per unit for 800 units of product A.
48
a. Find the change in income if Miami can accept the order without affecting current sales.
b. The managers believe that if they accept the special order, they will lose some sales at the
regular price. Determine the number of units they could lose before the order became unprofitable.
c. The managers believe that they will lose 270 units at the regular price if they accept the order.
Calculate the price they must charge for the special order to increase income by $200.
SOLUTION:
c. Price: $1.07
Lost contribution margin (270 x $0.65) $175.5
Desired profit 200.0
-----
Contribution margin required from special order $375.5
Divided by 800 units 800
-----
Equals contribution margin per unit $0.47 rounded
Plus variable cost 0.60
-----
Equals required price $1.07
=====
10. Arpeggio Company manufactures 1,000 units of part XYZ annually. The following information has
been collected:
Materials $200,000
Direct labor 110,000
Variable overhead 50,000
Fixed overhead 100,000
--------
Total costs $460,000
========
Mobile Company has offered to provide part XYZ for $400 per unit. If Arpeggio accepts the offer
another product will be moved into the space vacated, saving $60,000 a year in rent.
b. What is the maximum price Arpeggio is willing to pay for the part?
SOLUTION:
Cost to make the part: $200,000 + 110,000 + 50,000 = $360,000 + 60,000 rent = $420,000
b. $420 ($420,000/1,000)
Multiple Choice
49
c. Performance evaluation.
d. All of the above.
d 5. Which of the following equations can be used to budget purchases? (BI = beginning inventory,
EI = ending inventory desired, CGS = budgeted cost of goods sold)
a. Budgeted purchases = CGS + BI - EI
b. Budgeted purchases = CGS + BI
c. Budgeted purchases = CGS + EI + BI
d. Budgeted purchases = CGS + EI - BI
b 6. A flexible budget is
a. one that can be changed whenever a manager so desires.
b. adjusted to reflect expected costs at the actual level of activity.
c. one that uses the formula total cost = cost per unit x units produced.
d. the same as a continuous budget.
b 7. The use of flexible (as opposed to static) budget allowances is LEAST important for which of the
following?
a. Costs of the production department.
b. Costs of the general accounting department.
c. Costs of the product shipping department.
d. Costs of the material receiving department.
d 8. Budgets set at very high levels of performance (i.e., very low costs)
a. assist in planning the operations of the company.
b. stimulate people to perform better than they ordinarily would.
c. are helpful in evaluating the performance of managers.
d. can lead to low levels of performance.
c 11. Which of the following is a difference between a static budget and a flexible budget?
a. A flexible budget includes only variable costs, a static budget includes only fixed costs.
b. A flexible budget includes all costs, a static budget includes only fixed costs.
c. A flexible budget gives different allowances for different levels of activity; a static budget does
not.
d. None of the above.
50
c. It facilitates performance evaluation by permitting comparisons of budgeted and actual results.
d. It provides a check-up device that allows managers to keep close tabs on their subordinates.
b 16. Which of the following will occur if X Co.'s actual sales in May are lower than its budgeted sales
for that month?
a. X won't have enough cash to cover bills requiring payment in May.
b. X's actual inventory at the end of May will be higher than budgeted.
c. X's actual purchases in June will be higher than budgeted.
d. All of the above.
a 18. If cash receipts from customers are greater than sales, which of the following is most likely to be
true?
a. The balance of accounts receivable will decrease.
b. The company's outstanding debt will decrease.
c. The company's cash balance will increase.
d. The company will show a profit.
a 20. Which of the following is LEAST likely to be affected if unit sales for this month are lower than
budgeted?
a. Production for this month.
b. Production for next month.
c. Cash receipts for next month.
d. Inventory at the end of this month.
c 24. The type of company most likely to run short of cash during the year is one with
a. little seasonality.
b. high contribution margin percentage.
51
c. high seasonality and rapid sales growth.
d. relatively low fixed costs.
a 26. One difference between budgeting in for-profit and not-for-profit entities is that not-for-profit
entities usually
a. budget expenses before revenues.
b. don't need a cash budget.
c. are less likely to use incremental budgeting.
d. use computer software-packages to facilitate the budgeting process.
d 27. To prepare its cash disbursements budget, a company uses information from
a. its balance sheet at the end of the prior period.
b. its purchases budget.
c. its capital budget.
d. all of the above sources.
c 29. Quorum Company desires an ending inventory of $120,000. It expects sales of $240,000 and
has a beginning inventory of $80,000. Cost of sales is 60% of sales. Budgeted purchases are
a. $120,000.
b. $144,000.
c. $184,000.
d. $264,000.
d 30. Garamond Company budgeted purchases of $200,000. Cost of sales was $240,000 and the
desired ending inventory was $84,000. The beginning inventory was
a. $40,000.
b. $64,000.
c. $84,000.
d. $124,000.
a 31. Wildwood Company budgeted purchases of 20,000 units. The budgeted beginning inventory was
4,800 units and the budgeted ending inventory was 6,000 units. Budgeted sales were
a. 18,800 units.
b. 21,200 units.
c. 24,800 units.
d. 26,000 units.
c 32. Menomonie Company budgeted sales of 18,000 units. The budgeted beginning inventory was
3,000 units and the budgeted ending inventory was 5,000 units. Budgeted production is
a. 23,000 units.
b. 21,000 units.
c. 20,000 units.
d. 16,000 units.
d 33. Baker Company budgets supplies as $20,000 + ($1.20 x direct labor hours). Baker has
budgeted 18,000 direct labor hours, $130,000 direct labor cost. The flexible budget allowance for
supplies is
a. $18,000.
b. $20,000.
c. $150,000.
d. some other number.
b 34. Equinox Company budgeted sales of 44,000 units for January, 60,000 for February. The
budgeted beginning inventory for January 1 was 14,000 units. Equinox desires an ending inventory
equal to one-half of the following month's sales needs. Budgeted production for January is
a. 74,000 units.
b. 60,000 units.
52
c. 52,000 units.
d. 28,000 units.
c 35. Sams Company manufactures a single product. It keeps its inventory of finished goods at 75%
the coming month's budgeted sales, inventory of raw materials at 50% of the coming month's
budgeted production needs. Each unit of product requires two pounds of materials. The production
budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in
June would be
a. 1,525 pounds.
b. 2,550 pounds.
c. 2,800 pounds.
d. 3,050 pounds.
a 36. Hayward Company desires an ending inventory of $70,000. It expects sales of $400,000 and has
a beginning inventory of $65,000. Cost of sales is 65% of sales. Budgeted purchases are
a. $265,000.
b. $395,000.
c. $405,000.
d. $535,000.
c 37. Bryce Company budgeted sales of 50,000 units for January, 60,000 for February. Bryce Company
desires an ending inventory equal to one-half of the following month's sales needs. Inventory on
January 1 was as desired. Budgeted production for January is
a. 22,000 units.
b. 52,000 units.
c. 55,000 units.
d. 74,000 units.
c 38. Chetek Company budgeted purchases of 19,000 units. The budgeted beginning inventory was
12,400 units and the budgeted ending inventory was 13,000 units. Budgeted sales were
a. 32,000 units.
b. 31,400 units.
c. 18,400 units.
d. 19,600 units.
d 39. Barron Company manufactures a single product. Barron keeps inventory of raw materials at
50% of the coming month's budgeted production needs. Each unit of product requires three pounds
of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600.
Raw material purchases in July would be
a. 1,450 pounds.
b. 2,400 pounds.
c. 3,900 pounds.
d. some other number.
c 40. Acker Company has prepared the following flexible budget for production costs: total production
costs = $260,000 + $5X, where X is the number of machine hours. Acker produced 20,000 units,
using 34,000 machine hours at a total cost of $425,000. The flexible budget allowance for production
costs is
a. $260,000.
b. $425,000.
c. $430,000.
d. $525,000.
c 41. Scooter Inc. has projected sales to be $130,000 in June, $135,000 in July and $150,000 in
August. Scooter collects 30% of a month's sales in the month of sale, 50% in the month following the
sale, and 16% in the second month following the sale. Cash collections in August would be
a. $ 45,000.
b. $127,300.
c. $133,300.
d. $138,500.
d 42. Rundall Co. makes payments for purchases 30% during the month of purchase and the
remainder the following month. April purchases are projected to be $160,000; May purchases will be
$240,000. Cash payments in May will be
a. $ 72,000.
b. $108,000.
c. $168,000.
d. $184,000.
c 43. Randall Co. makes payments for purchases 30% during the month of purchase and the
53
remainder the following month. April purchases are projected to be $80,000; May purchases will be
$120,000. The accounts payable balance on May 31 will be
a. $36,000.
b. $54,000.
c. $84,000.
d. $92,000.
c 44. Alfuth Co. makes payments for purchases 10% during the month of purchase, 60% in the
following month, and the remainder in the second month following the purchase. Purchases are
projected to be $260,000 in January, $280,000 in February, and $320,000 in March. March payments
will be
a. $ 32,000.
b. $168,000.
c. $278,000.
d. some other number.
d 45. Reid Co. makes payments for purchases 10% during the month of purchase, 60% in the
following month, and the remainder in the second month following the purchase. Purchases are
projected to be $130,000 in January, $140,000 in February, and $160,000 in March. The March 31
accounts payable balance will be
$48,000.
b. $96,000.
c. $144,000.
d. $186,000.
c 46. Andover Inc. has projected sales to be: February, $10,000; March, $9,000; April, $8,000; May,
$10,000; and June, $11,000. Andover has 30% cash sales and 70% sales on account. Accounts are
collected 40% in the month following the sale and 55% collected the second month. Total cash
receipts in May would be
a. $3,000.
b. $8,150.
c. $8,705.
d. some other number.
d 47. Conde Inc. has projected sales to be: February, $20,000; March, $18,000; April, $16,000; May,
$20,000; and June, $22,000. Conde has 30% cash sales and 70% sales on account. Accounts are
collected 40% in the month following the sale and 60% collected the second month. Accounts
receivable for May 31 would be
a. $ 6,160.
b. $13,300.
c. $14,000.
d. $20,720.
d 48. Holmgren estimates its supplies purchases to be $21,000 in August and $28,000 in September.
Holmgren pays 70% of its accounts in the month of purchase with the remainder paid the following
month. September payments would be
a. $14,700.
b. $19,600.
c. $23,100.
d. $55,900.
c 49. Danner Inc. has projected sales to be $100,000 in June, $90,000 in July, and $70,000 in August.
Danner collects 50% of a month's sales in the month of sale, 30% in the month following the sale, and
16% in the second month following the sale. Cash collections in August would be
a. $35,000.
b. $62,000.
c. $78,000.
d. $86,000.
a 50. Clearwater Inc. has projected sales to be $160,000 in April, $200,000 in May, and $240,000 in
June. Clearwater collects 40% of a month's sales in the month of sale, 40% in the month following the
sale, and 20% in the second month following the sale. The accounts receivable balance on June 30
would be
a. $184,000.
b. $144,000.
c. $ 40,000.
d. some other number.
True-False
54
F 1. A just-in-time manufacturer does NOT need a sales budget.
T 2. A flexible budget allowance is NOT especially useful for budgeting discretionary costs.
F 3. The purchases budget is prepared before the sales budget because the company cannot
estimate what it will sell until it has some idea of what will be on hand.
F 4. The longer the time period covered by a budget, the more useful the budget will be for
controlling operations.
F 5. A purchases budget is normally prepared after the company has forecast how much cash it will
have available to pay for purchases.
F 6. Imposed budgets are exceptionally ambitious goals not likely to be achieved without making
fundamental changes in the way a job is done.
F 7. A JIT manufacturer that maintains no inventory doesn't need a cash disbursements budget.
F 8. The budget for a retailer is likely to be more complex than that for a manufacturer because a
retailer has a wider variety of customers.
F 9. The increasing public demand for accountability from governmental and other not-for-profit
organizations has resulted in an increased use of incremental budgeting.
Problems
1. Ballan Inc. estimates its units sales for the coming months to be as follows:
March 280,000
April 260,000
May 250,000
June 230,000
July 240,000
August 225,000
Ballan maintains inventory at budgeted sales needs for the next month. March 1 inventory will be
248,000 units.
SOLUTION:
2. Superior Company manufactures a single product. It keeps its inventory of finished goods at twice
the coming month's budgeted sales and inventory of raw materials at 150% of the coming month's
budgeted production. Each unit of product requires five pounds of materials, which cost $3 per
pound. The sales budget is, in units: May, 10,000; June, 12,400; July, 12,600; August, 13,200.
55
SOLUTION:
3. Ironwood sells a single product for $10. The purchase cost is $4 per unit and Ironwood pays a 20%
sales commission. Fixed costs are $45,000 per month including $12,000 depreciation, and the
company maintains inventory equal to budgeted sales needs for the following month. The following
budgeted data are available.
SOLUTION:
4. Westrum estimates production overhead costs equal to $300,000 + $2X, where X is the number of
machine hours used. Westrum budgeted 40,000 machine hours for 20X4. Westrum produced 23,000
56
units in 20X4, each requiring 3 machine hours. Actual production costs were $420,000.
a. Calculate the flexible budget allowance for production overhead costs for 20X4.
b. Find the amount and direction of the budget variance for 20X4 for production overhead.
(favorable unfavorable) Circle one answer.
SOLUTION:
5. Acme Inc. estimates its dollar sales for the coming months to be as follows.
June $340,000
July 360,000
August 300,000
September 260,000
October 240,000
November 200,000
Acme has an average gross margin of 40% of sales and maintains inventory at 75% of budgeted
sales needs for the next month. Acme began June with $150,000 in inventory.
SOLUTION:
6. Bay City estimates production overhead costs equal to $200,000 + $4X + $7Y, where X is the
number of direct labor hours used and Y is the number of machine hours used. Bay City budgeted
20,000 direct labor hours and 50,000 machine hours for 20X9. Bay City produced 30,000 units in
20X9, each requiring 1 direct labor hour and 2.5 machine hours. Actual production costs were
$890,000.
a. Calculate the flexible budget allowance for production overhead costs for 20X9.
b. Find the amount and direction of the budget variance for 20X2 for production overhead.
(favorable unfavorable) Circle one answer.
SOLUTION:
a. Flexible budget allowance, $845,000 [$200,000 + (30,000 x 1 x $4) + (30,000 x 2.5 x 7)]
January $200,000
February $240,000
March $300,000
April $360,000
Cost of sales is 70% of sales. Sales are collected 40% in the month of sale and 60% in the
following month. Webster keeps inventory equal to double the coming month's budgeted sales
57
requirements. It pays for purchases 80% in the month of purchase and 20% in the month after
purchase. Inventory at the beginning of January is $190,000. Webster has monthly fixed costs of
$30,000 including $6,000 depreciation. Fixed costs requiring cash are paid as incurred.
e. March purchases are $290,000. Compute budgeted cash payments in March to suppliers of
goods.
g. Cash at the end of February is $45,000. Cash disbursements are not required for anything other
than payments to suppliers and fixed costs. Compute the budgeted cash balance at the end of March.
SOLUTION:
January $200,000
February 210,000
March 225,000
April 230,000
May 245,000
June 240,000
Weasel collects 40% of its sales in the month of sale, 45% in the month following the sale and
13% in the second month following the sale. Records show that sales were $225,000 in November
and $208,000 in December 20X2.
a. Prepare a schedule of cash receipts for the first three months of 20X3.
b.What would be the accounts receivable (net of bad debts) balance on March 31, 20X3?
SOLUTION:
58
$201,040
========
March $300,000
April $312,000
May $320,000
June $348,000
Cost of sales is 55% of sales. Bismarck keeps an inventory equal to one-fourth the coming
month's budgeted sales requirements. It pays for purchases 40% in the month of purchase and 60%
in the month after purchase. Accounts Payable is $94,800 on March 1.
SOLUTION:
59
10. Hicks Company has the following sales projections for 20X9:
Hicks collects 30% of its sales in the month of sale, 45% in the month following the sale, and 24%
in the second month following the sale. Records show that sales were $160,000 in November and
$168,000 in December 20X8.
a. Prepare a schedule of cash receipts for the first three months of 20X9.
b.What would be the accounts receivable balance (net of bad debts) on March 31, 20X9?
SOLUTION:
Multiple Choice
d 1. Calculating the payback period for a capital project requires knowing which of the following?
a. Useful life of the project.
b. The company's minimum required rate of return.
c. The project's NPV.
d. The project's annual cash flow.
a 3. Which of the following is NOT relevant in calculating annual net cash flows for an investment?
a. Interest payments on funds borrowed to finance the project.
b. Depreciation on fixed assets purchased for the project.
c. The income tax rate.
d. Lost contribution margin if sales of the product invested in will reduce sales of other products.
a 4. If the present value of the future cash flows for an investment equals the required investment,
the IRR is
a. equal to the cutoff rate.
60
b. equal to the cost of borrowed capital.
c. equal to zero.
d. lower than the company's cutoff rate of return.
c 6. Which of the following events is most likely to reduce the expected NPV of an investment?
a. The major competitor for the product to be manufactured with the machinery being considered
for purchase has been rated "unsatisfactory" by a consumer group.
b. The interest rate on long-term debt declines.
c. The income tax rate is raised by the Congress.
d. Congress approves the use of faster depreciation than was previously available.
c 8. Which of the following describes the annual returns that are discounted in determining the NPV
of an investment?
a. Net incomes expected to be earned by the project.
b. Pre-tax cash flows expected from the project.
c. After-tax cash flows expected from the project.
d. After-tax cash flows adjusted for the time value of money.
b 9. Which of the following capital budgeting methods does NOT consider the time value of money?
a. IRR.
b. Book rate of return.
c. Time-adjusted rate of return.
d. NPV.
d 11. Which of the following is a basic difference between the IRR and the book rate of return (BRR)
criteria for evaluating investments?
a. IRR emphasizes expenses and BRR emphasizes expenditures.
b. IRR emphasizes revenues and BRR emphasizes receipts.
c. IRR is used for internal investments and BRR is used for external investments.
d. IRR concentrates on receipts and expenditures and BRR concentrates on revenues and
expenses.
61
c. cannot be used if the company plans to finance the project with funds already available
internally.
d. require forecasts of cash flows expected from the project.
b 16. A company with cost of capital of 15% plans to finance an investment with debt that bears 10%
interest. The rate it should use to discount the cash flows is
a. 10%.
b. 15%.
c. 25%.
d. some other rate.
c 17. Which of the following events will increase the NPV of an investment involving a new product?
a. An increase in the income tax rate.
b. An increase in the expected per-unit variable cost of the product.
c. An increase in the expected annual unit volume of the product.
d. A decrease in the expected salvage value of equipment.
b 18. An investment has a positive NPV discounting the cash flows at a 14% cost of capital. Which
statement is true?
a. The IRR is lower than 14%.
b. The IRR is higher than 14%.
c. The payback period is less than 14 years.
d. The book rate of return is 14%.
a 22. Two new products, X and Y, are alike in every way except that the sales of X will start low and
rise throughout its life, while those of Y will be the same each year. Total volumes over their five-year
lives will be the same, as will selling prices, unit variable costs, cash fixed costs, and investment. The
NPV of product X
a. will be less than that of product Y.
b. will be the same as that of product Y.
c. will be greater than that of product Y.
d. none of the above.
d 23. Which of the following events is most likely to increase the number of investments that meet a
company's acceptance criteria?
a. Top management raises the target rate of return.
b. The interest rate on long-term debt rises.
c. The income tax rate rises.
d. The IRS allows companies to expense purchases of fixed assets, instead of depreciating them
over their lives.
d 24. Investment A has a payback period of 5.4 years, investment B one of 6.7 years. From this
information we can conclude
a. that investment A has a higher NPV than B.
b. that investment A has a higher IRR than B.
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c. that investment A's book rate of return is higher than B's.
d. none of the above.
d 25. Investment A has a book rate of return of 26%, investment B one of 18%. From this information
we can conclude
a. that investment A has a higher NPV than B.
b. that investment A has a higher IRR than B.
c. that investment A has a shorter payback period than B.
d. none of the above.
c 26. A dollar now is worth more than a dollar to be received in the future because of
a. inflation.
b. uncertainty.
c. the opportunity cost of waiting.
d. none of the above.
a 27. In contrast to the payback and book rate of return methods, the NPV and IRR methods
a. consider the time value of money.
b. ignore depreciation.
c. use after-tax cash flows.
d. all of the above.
a 29. Which statement describes the relevance of depreciation in calculating cash flows?
a. Depreciation is relevant only when income taxes exist.
b. Depreciation is always relevant.
c. Depreciation is never relevant.
d. Depreciation is relevant only with discounted cash flow methods.
a 32. The only future costs that are relevant to deciding whether to accept an investment are those
that will
a. be different if the project is accepted rather than rejected.
b. be saved if the project is accepted rather than rejected.
c. be deductible for tax purposes.
d. affect net income in the period that they are incurred.
c 34. Which of the following methods FAILS to distinguish between return of investment and return on
investment?
a. NPV.
b. IRR.
c. Payback.
d. Book rate of return.
c 35. If a company is NOT subject to income tax, which of the following is true of a proposed
investment?
a. The project's IRR equals the entity's cost of capital.
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b. The project's NPV is zero.
c. Depreciation on assets required for the project is irrelevant to the evaluation.
d. The expected annual increase in future cash flows equals the investment required to undertake
the project.
d 37. Qualitative issues could increase the acceptability of a project under which of the following
conditions?
a. The IRR is less than the company's cutoff rate.
b. The project has a negative NPV.
c. The payback period is longer than the company's cutoff period.
d. All of the above.
a 38. If Co. X wants to use IRR to evaluate long-term decisions and to establish a cutoff rate of return,
X must be sure the cutoff rate is
a. at least equal to its cost of capital.
b. at least equal to the rate used by similar companies.
c. greater than the IRR on projects accepted in the past.
d. greater than the current book rate of return.
a 39. Which of the following is NOT relevant in calculating net cash flows for Project N?
a. Interest payments on funds that would be borrowed to finance Project N.
b. Depreciation on assets purchased for Project N.
c. The contribution margin the company would lose if sales of the product introduced by Project N
will reduce sales of other products.
d. The income tax rate applicable to the entity.
d 41. If depreciation on a new asset exceeds its savings in cash operating costs, which of the
following is true?
a. The project is usually unacceptable.
b. The annual after-tax cash flow on the new asset will be greater than the savings in cash
operating costs.
c. The project has a negative NPV.
d. All of the above.
b 43. An investment opportunity costing $75,000 is expected to yield net cash flows of $23,000
annually for five years. The NPV of the investment at a cutoff rate of 14% would be
a. $(3,959).
b. $3,959.
c. $75,000.
d. $78,959.
b 44. An investment opportunity costing $55,000 is expected to yield net cash flows of $22,000
annually for five years. The payback period of the investment is
a. 0.4 years.
b. 2.5 years.
c. $33,000.
d. some other number.
c 45. An investment opportunity costing $180,000 is expected to yield net cash flows of $53,000
annually for five years. The IRR of the investment is between
a. 10 and 12%.
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b. 12 and 14%.
c. 14 and 16%.
d. 16 and 18%.
b 46. An investment opportunity costing $150,000 is expected to yield net cash flows of $45,000
annually for five years. The cost of capital is 10%. The book rate of return would be
a. 10%.
b. 20%.
c. 30%.
d. 33.3%.
a 47. An investment opportunity costing $150,000 is expected to yield net cash flows of $36,000
annually for six years. The NPV of the investment at a cutoff rate of 12% would be
a. $(2,004).
b. $2,004.
c. $150,000.
d. $147,996.
c 48. An investment opportunity costing $100,000 is expected to yield net cash flows of $22,000
annually for seven years. The payback period of the investment is
a. 0.22 years.
b. 3.08 years.
c. 4.55 years.
d. some other number.
a 49. An investment opportunity costing $200,000 is expected to yield net cash flows of $39,000
annually for eight years. The IRR of the investment is between
a. 10 and 12%.
b. 12 and 14%.
c. 14 and 16%.
d. 16 and 18%.
b 50. An investment opportunity costing $80,000 is expected to yield net cash flows of $25,000
annually for four years. The cost of capital is 10%. The book rate of return would be
a. 10.0%.
b. 12.5%.
c. 21.3%.
d. 32.0%.
True-False
T 1. Payback period is the length of time it will take a company to recoup its outlay for an
investment.
T 2. Discounted cash flow techniques apply to investments that involve either costs only, or both
costs and revenues.
F 3. Cost of capital is the interest rate that a company expects to pay to finance a particular capital
investment project.
F 4. The higher the cost of capital, the higher the present value of future cash inflows.
F 7. IRR can be computed for even cash flows, but not for uneven cash flows.
T 8. If IRR is less than the cost of capital, the NPV will be negative.
T 10. Payback emphasizes the return of the investment and ignores the return on the investment.
Problems
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1. An investment opportunity costing $180,000 is expected to yield net cash flows of $60,000
annually for five years.
SOLUTION:
Cost $100,000
Useful life 10 years
Annual straight-line depreciation $ 10,000
Expected annual savings in cash
operation costs $ 18,000
SOLUTION:
a. Annual net cash flows: $14,800 [$18,000 pretax - 40% x ($18,000 - $10,000 depreciation)]
3. Willow Company is considering the purchase of a machine with the following characteristics.
Cost $150,000
Estimated useful life 10 years
Expected annual cash cost savings $35,000
Marquette's tax rate is 40%, its cost of capital is 12%, and it will use straight-line depreciation for
the new machine.
SOLUTION:
4. Bilt-Rite Co. has the opportunity to introduce a new product. Bilt-Rite expects the product to sell
for $60 and to have per-unit variable costs of $40 and annual cash fixed costs of $3,000,000.
Expected annual sales volume is 250,000 units. The equipment needed to bring out the new product
costs $5,000,000, has a four-year life and no salvage value, and would be depreciated on a straight-
line basis. Bilt-Rite's cost of capital is 10% and its income tax rate is 40%.
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a. Find the increase in annual after-tax cash flows for this opportunity.
SOLUTION:
SOLUTION:
6. Scottso has an investment opportunity costing $300,000 that is expected to yield the following
cash flows over the next six years:
SOLUTION:
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Average investment: $300,000 / 2 = $150,000
c. NPV: $130,530
Cash Factor PV
------ ------ ------
1 75,000 .909 68,175
2 90,000 .826 74,340
3 115,000 .751 86,365
4 130,000 .683 88,790
5 100,000 .621 62,100
6 90,000 .564 50,760
-------
430,530
Investment 300,000
-------
NPV 130,530
======
Cost $160,000
Useful life 10 years
Annual straight-line depreciation $ ???
Expected annual savings in cash
operation costs $ 33,000
SOLUTION:
a. Annual net cash flows: $26,200 [$33,000 pretax - 40% x ($33,000 - $16,000 depreciation)]
c. IRR: between 10% and 12% [factor of 6.107 (160,000/26,200) is between 6.145 and 5.650]
8. Scottso has an investment opportunity costing $180,000 that is expected to yield the following
cash flows over the next five years:
SOLUTION:
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Average return: $54,000 ($270,000 total / 5 years)
Depreciation: 36,000 ($180,000 / 5 years)
------
Average income $18,000
c. NPV: $6,930
Cash Factor PV
------ ------ ------
1 30,000 .893 26,790
2 60,000 .797 47,820
3 90,000 .712 64,080
4 60,000 .636 38,160
5 30,000 .567 17,010
-------
193,860
Investment 180,000
-------
NPV 13,860
======
9. Reno Company is considering the purchase of a machine with the following characteristics.
Cost $160,000
Estimated useful life 5 years
Expected annual cash cost savings $56,000
Expected salvage value none
Reno's tax rate is 40%, its cost of capital is 12%, and it will use straight-line depreciation for the
new machine.
SOLUTION:
10. Whitehall Co. has the opportunity to introduce a new product. Whitehall expects the project to
sell for $40 and to have per-unit variable costs of $27 and annual cash fixed costs of $1,500,000.
Expected annual sales volume is 200,000 units. The equipment needed to bring out the new product
costs $3,500,000, has a four-year life and no salvage value, and would be depreciated on a straight-
line basis. Whitehall's cutoff rate is 10% and its income tax rate is 40%.
a. Find the increase in annual after-tax cash flows for this opportunity.
SOLUTION:
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- $1,500,000 - $3,500,000/4] $ 225,000
Income tax ( 90,000)
----------
Net income $ 135,000
Plus depreciation 875,000
----------
Net cash flow $1,010,000
==========
Multiple Choice
c 1. Which of the following groups of capital budgeting techniques uses the time value of money?
a. Book rate of return, payback, and profitability index.
b. IRR, payback, and NPV.
c. IRR, NPV, and profitability index.
d. IRR, book rate of return, and profitability index.
b 2. Discounted cash flow techniques for analyzing capital budgeting decisions are NOT normally
applied to projects
a. requiring no investment after the first year of life.
b. having useful lives shorter than one year.
c. that are essential to the business.
d. involving replacement of existing assets.
a 4. Companies using MACRS for tax purposes and straight-line depreciation for financial reporting
purposes usually find that the relationship between the tax basis and book value of their assets is
a. the tax basis is lower than book value.
b. the tax basis is higher than book value.
c. the tax basis is the same as book value.
d. none of the above.
a 7. In choosing from among mutually exclusive investments the manager should normally select the
one with the highest
a. NPV.
b. IRR.
c. profitability index.
d. book rate of return.
a 8. In deciding whether to replace a machine, which of the following is NOT a sunk cost?
a. The expected resale price of the existing machine.
b. The book value of the existing machine.
c. The original cost of the existing machine.
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d. The depreciated cost of the existing machine.
a 9. A company is considering replacing a machine with one that will save $50,000 per year in cash
operating costs and have $20,000 more depreciation expense per year than the existing machine.
The tax rate is 40%. Buying the new machine will increase annual net cash flows of the company by
a. $38,000.
b. $30,000.
c. $20,000.
d. $12,000.
c 11. A major difference between an investment in working capital and one in depreciable assets is
that
an investment in working capital is never returned, while most depreciable assets have some residual
value.
b. an investment in working capital is returned in full at the end of a project's life, while an investment
in depreciable assets has no residual value.
c. an investment in working capital is not tax-deductible when made, nor taxable when returned,
while an investment in depreciable assets does allow tax deductions.
d. because an investment in working capital is usually returned in full at the end of the project's
life, it is ignored in computing the amount of the investment required for the project.
a 13. If a company uses a five-year MACRS period to depreciate assets instead of a 10-year life with
straight-line depreciation,
a. the NPV of the investment is higher.
b. the IRR of the investment is lower.
c. there is no difference in either NPV or IRR.
d. total cash flows over the useful life would be lower.
d 17. Which of the following makes investments more desirable than they had been?
a. An increase in the income tax rate.
b. An increase in interest rates.
c. An increase in the number of years over which assets must be depreciated.
d. None of the above.
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c. Some revenues and expenses have no tax effects.
d. Income taxes are based solely on revenues and expenses.
c 20. With respect to income taxes, the principal advantage of MACRS over straight-line depreciation
is that
a. total taxes will be lower under MACRS.
b. taxes will be constant from year to year under MACRS.
c. taxes will be lower in the earlier years under MACRS.
d. taxes will decline in future years under MACRS.
a 26. Because of idle capacity, a company is considering two assets for sale. They are identical in all
respects except that asset A has a higher tax basis than asset B. Only one need be sold now and the
market price is the same for both assets. Which of the following is true?
a. The cash flow is greater from selling asset A.
b. The cash flow is greater from selling asset B.
c. The cash flow is the same no matter which one is sold.
d. It is not possible to determine how the cash flows from sales of the assets will differ.
a 27. If the tax law were changed so that owners of apartment buildings had to depreciate them over
50 years instead of the current 31.5 years,
a. rents would rise.
b. rents would fall because annual depreciation charges would fall.
c. rents would stay about the same.
d. more people would invest in apartment buildings.
b 28. Which statement could express the results of a sensitivity analysis of an investment decision?
a. The NPV of the project is $50,000.
b. A 5% decline in volume will make the project unprofitable.
c. This project ranks third out of the five available.
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d. This project does not meet the cutoff rate of return.
c 29. XYZ Co. is adopting just-in-time principles. When evaluating an investment project that would
reduce inventory, how should XYZ treat the reduction?
a. Ignore it.
b. Decrease the cost of the investment and decrease cash flows at the end of the project's life.
c. Decrease the cost of the investment.
d. Decrease the cost of the investment and increase the cash flow at the end of the project's life.
b 30. Which of the following combinations of capital budgeting techniques includes only discounted
cash flow techniques?
a. Book rate of return, payback, and profitability index.
b. NPV, IRR, and profitability index.
c. IRR, payback, and NPV.
d. Profitability index, NPV, and payback.
a 32. In connection with a capital budgeting project, an investment in working capital is normally
recovered
a. at the end of the project's life.
b. in the first year of the project's life.
c. evenly through the project's life.
d. when the company goes out of business.
b 33. For investments that have only costs (no revenues or cost savings), an appropriate decision rule
is to accept the project that has the
a. longest payback period.
b. lowest present value of cash outflows.
c. higher present value of future cash outflows.
d. lowest internal rate of return.
b 34. The cash inflow from the return of an investment in working capital is
a. adjusted for taxes due.
b. discounted to present value.
c. ignored if any depreciable assets also involved in the project have no expected residual value.
d. not real.
d 35. NPV is appropriate to use to analyze which decision relating to a joint-products company?
a. Whether or not to sell facilities now used for additional processing of one of the joint products.
b. Whether or not to acquire facilities needed for additional processing of one of the joint
products.
c. Whether or not to sell facilities now used to operate the joint process.
d. All of the above.
d 36. If X Co. expects to get a one-year bank loan to help cover the initial financing of capital project
Q, the analysis of Q should
a. offset the loan against any investment in inventory or receivables required by the project.
b. show the loan as an increase in the investment.
c. show the loan as a cash outflow in the second year of the project's life.
d. ignore the loan.
c 38. A company evaluates a project using straight-line depreciation over its 10-year estimated useful
life and then reevaluates it using a 7-year MACRS class life. The second analysis will show
a. a lower IRR for the project.
b. the same NPV and IRR for the project.
c. a higher NPV for the project.
d. lower total cash flows over the 10 years.
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a 39. Assuming that a project has already been evaluated using the following techniques, the
evaluation under which technique is least likely to be affected by an increase in the estimated
residual value of the project?
a. Payback period.
b. IRR.
c. NPV.
d. PI.
c 42. Acme is considering the sale of a machine with a book value of $160,000 and 3 years remaining
in its useful life. Straight-line depreciation of $50,000 annually is available. The machine has a current
market value of $200,000. What is the cash flow from selling the machine if the tax rate is 40%?
a. $50,000
b. $160,000
c. $184,000
d. $200,000
c 43. Hoff is considering the sale of a machine with a book value of $160,000 and 3 years remaining
in its useful life. Straight-line depreciation of $50,000 annually is available. The machine has a current
market value of $100,000. What is the cash flow from selling the machine if the tax rate is 40%?
a. $50,000
b. $100,000
c. $124,000
d. $160,000
a 44. Altoona Company is considering replacing a machine with a book value of $200,000, a
remaining useful life of 4 years, and annual straight-line depreciation of $50,000. The existing
machine has a current market value of $175,000. The replacement machine would cost $320,000,
have a 4 year life, and save $100,000 per year in cash operating costs. If the replacement machine
would be depreciated using the straight-line method and the tax rate is 40%, what would be the
increase in annual income taxes if the company replaces the machine?
a. $28,000
b. $40,000
c. $42,000
d. $64,000
b 45. An investment opportunity costing $300,000 is expected to yield net cash flows of $100,000
annually for five years. The profitability index of the investment at a cutoff rate of 14% would be
a. 3.0.
b. 1.14.
c. 0.33.
d. 14%.
d 46. A project has a NPV of $30,000 when the cutoff rate is 10%. The annual cash flows are $41,010
on an investment of $100,000. The profitability index for this project is
a. 1.367.
b. 3.333.
c. 2.438.
d. 1.300.
c 47. A project has an IRR in excess of the cost of capital. The profitability index for this project would
be
a. less than zero.
b. between zero and one.
c. greater than one.
d. cannot be determined without more information.
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b 48. A project has an IRR less than the cost of capital. The profitability index for this project would be
a. less than zero.
b. between zero and one.
c. greater than one.
d. cannot be determined without more information.
b 49. Portage Press Company is considering replacing a machine with a book value of $200,000, a
remaining useful life of 5 years, and annual straight-line depreciation of $40,000. The existing
machine has a current market value of $200,000. The replacement machine would cost $300,000,
have a 5-year life, and save $100,000 per year in cash operating costs. If the replacement machine
would be depreciated using the straight-line method and the tax rate is 40%, what would be the
increase in annual net cash flow if the company replaces the machine?
a. $60,000
b. $68,000
c. $76,000
d. $84,000
b 50. Winneconne Company is considering replacing a machine with a book value of $400,000, a
remaining useful life of 5 years, and annual straight-line depreciation of $80,000. The existing
machine has a current market value of $400,000. The replacement machine would cost $550,000,
have a 5-year life, and save $75,000 per year in cash operating costs. If the replacement machine
would be depreciated using the straight-line method and the tax rate is 40%, what would be the net
investment required to replace the existing machine?
a. $90,000
b. $150,000
c. $330,000
d. $550,000
True-False
T 1. The higher the IRR on an investment project, the higher its profitability index.
F 2. If the payback period of an investment project is shorter than its life, the project's profitability
index is greater than 1.
F 3. If a company has decided that a certain task must be performed and three machines accomplish
that task, the machine with the lowest initial cash outlay should be selected.
T 4. An investment with an IRR greater than cost of capital has a profitability index greater than 1.
T 5. The only costs and revenues relevant to a replacement decision are those that will change if a
replacement is made.
T 6. Both the incremental and the total-project approaches to analyzing a replacement decision
should yield the same decision.
F 7. Both the IRR and the book rate of return methods of analyzing investments should yield the
same decision.
F 8. If the payback period of an investment is shorter than its life, its profitability index is greater
than l.
T 9. When compared with straight-line depreciation, using MACRS will result in a larger NPV.
F 10. IRR and book rate of return will usually yield the same value for an investment.
Problems
1. Stockholm Company is considering the sale of a machine with the following characteristics.
If the company sells the machine its cash operating expenses will increase by $30,000 per year due
75
to an operating lease. The tax rate is 40%.
b. Calculate the increase in annual net cash outflows as a result of selling the machine.
SOLUTION:
a. Cash flow from sale: $90,000 ($70,000 + 40% tax savings on the $50,000 tax loss)
b. Increase in annual cash outflows: $27,600 ($30,000 pretax cost increase - $2,400 decrease in
income taxes; the $30,000 increase in cash costs is partially offset by losing a $24,000 depreciation
deduction)
2. Pepin Company is considering replacing a machine that has the following characteristics.
The replacement machine would cost $150,000, have a five-year life, and save $50,000 per year
in cash operating costs. It would be depreciated using the straight-line method. The tax rate is 40%.
b. Compute the increase in annual income taxes if the company replaces the machine.
c. Compute the increase in annual net cash flows if the company replaces the machine.
SOLUTION:
b. Increase in income taxes: $16,000 [40% x ($50,000 pretax flow - $30,000 depreciation + $20,000
lost depreciation)]
3. Cable Company is considering the purchase of a machine with the following characteristics.
Cost $100,000
Useful life 10 years
Expected annual cash cost savings $30,000
Cable's income tax rate is 40% and its cost of capital is 12%. Cable expects to use straight-line
depreciation for tax purposes.
a. Compute the expected increase in annual net cash flow for this project.
c. How would the profitability index for this project be affected if Cable were to use MACRS
depreciation for tax purposes and the machine fell into the 7-year MACRS class? (increase decrease
not affected) Circle the appropriate answer.
SOLUTION:
a. Increase in annual net cash flow: $22,000 [$30,000 - (40% x ($30,000 - $10,000)]
c. Effect on profitability index: Increase (PI would increase because the tax shield of depreciation
would occur earlier and so be more valuable when considering the time value of money.)
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4. Frank Co. has the opportunity to introduce a new product. Frank expects the product to sell for $60
and to have per-unit variable costs of $35 and annual cash fixed costs of $4,000,000. Expected
annual sales volume is 275,000 units. The equipment needed to bring out the new product costs
$6,000,000, has a four-year life and no salvage value, and would be depreciated on a straight-line
basis. Frank's cost of capital is 14% and its income tax rate is 40%.
c. Suppose that some of the 275,000 units expected to be sold would be to customers who currently
buy another of Frank's products, the X-10, which has a $12 per-unit contribution margin. Find the
sales of X-10 that can Frank lose per year and still have the investment in the new product return at
least the 14% cost of capital.
d. Suppose that selling the new product has no complementary effects but that Frank's production
engineers anticipate some production problems in making the new product and are not confident of
the $35 estimate of per-unit variable costs for the new product. Find the amount by which Frank's
estimate of per-unit variable cost could be in error and the investment still have a return at least
equal to the 14% cost of capital.
SOLUTION:
a. Annual net cash flows: $2,325,000 [$2,875,000 pretax - 40% x ($2,875,000 - $1,500,000
depreciation)]
{[($775,050/2.914)/60%]/275,000 units}
Cost $240,000
Useful life 10 years
Annual straight-line depreciation $ ???
Expected annual savings in cash
operation costs $ 80,000
Additional working capital needed $100,000
SOLUTION:
a. Annual net cash flows: $57,600 [$80,000 pretax - 40% x ($80,000 - $24,000 depreciation)]
6. Darwin Company is considering the sale of a machine with the following characteristics.
77
Book value $110,000
Remaining useful life 5 years
Annual straight-line depreciation $ ???
Current market value $120,000
If the company sells the machine its cash operating expenses will increase by $20,000 per year.
The tax rate is 40%.
b. Calculate the increase in annual net cash outflows as a result of selling the machine.
SOLUTION:
a. Cash flow from sale: $116,000 ($120,000 - 40% tax on the $10,000 tax gain)
b. Increase in annual cash outflows: $20,800 ($20,000 pretax cost increase + $800 increase in
income taxes; the $20,000 increase in cash costs is more than offset by losing a $22,000 depreciation
deduction)
7. Rusk Company is considering replacing a machine that has the following characteristics.
The replacement machine would cost $300,000, have a four-year life, and save $37,500 per year
in cash operating costs. It would be depreciated using the straight-line method. The tax rate is 40%.
b. Compute the increase in annual income taxes if the company replaces the machine.
c. Compute the increase in annual net cash flows if the company replaces the machine.
SOLUTION:
b. Increase in income taxes: $5,000 [40% x ($37,500 pretax flow - $75,000 depreciation + $50,000
lost depreciation)]
8. Zmolek Company is considering the purchase of a machine costing $700,000 with a useful life of
10 years. Annual cash cost savings are expected to be $200,000. Zmolek's income tax rate is 40%
and its cost of capital is 12%. Zmolek expects to use straight-line depreciation for tax purposes.
a. Compute the expected increase in annual net cash flow for this project.
SOLUTION:
a. Increase in annual net cash flow: $148,000 [$200,000 - 40% x ($200,000 - $70,000)]
9. Racine Co. has the opportunity to introduce a new product. Racine expects the project to sell for
$200 and to have per-unit variable costs of $130 and annual cash fixed costs of $6,000,000.
Expected annual sales volume is 125,000 units. The equipment needed to bring out the new product
costs $7,200,000, has a four-year life and no salvage value, and would be depreciated on a straight-
78
line basis. Working capital of $500,000 would be necessary to support the increased sales. Racine's
cost of capital is 12% and its income tax rate is 40%.
SOLUTION:
Cost $2,000,000
Useful life 8 years
Annual straight-line depreciation $ ???
Expected annual savings in cash
operation costs $ 750,000
Additional working capital needed $ 500,000
SOLUTION:
a. Annual net cash flows: $550,000 [$750,000 - 40% x ($750,000 - $250,000 depreciation)]
Multiple Choice
79
c 4. Which of the following is critically important for a responsibility accounting system to be
effective?
a. Each employee should receive a separate performance report.
b. Service department costs should be allocated to the operating departments that use the
service.
c. Each manager should know the criteria used for evaluating his or her performance.
d. The details on the performance reports for individual managers should add up to the totals on
the report to their supervisor.
c 5. Which of the following items is LEAST likely to appear on the performance report of the manager
of a product line?
a. Variable manufacturing costs for products in the line.
b. Selling expenses for the line.
c. A share of company-wide advertising.
d. Revenues from the line.
c 12. The cost allocation policy most likely to encourage use of a service is based on
a. budgeted total costs of the service department.
b. actual total costs of the service department.
c. budgeted variable costs for the service department.
d. actual variable costs for the service department.
80
b. use the method that best reflects the relative sizes of the departments.
c. turn the service department into an investment center.
d. allocate only the fixed costs of the service department.
a 15. If a computer department does work for other departments, charging a flat price per hour, the
computer department is
a. an artificial profit center.
b. a cost center.
c. an investment center.
d. none of the above.
b 17. As a general rule, the best transfer price to use to transfer the costs of a service center to an
operating department is
a. the price charged by an outside company for the same service.
b. the price that encourages goal congruence.
c. one that is based on budgeted variable cost.
d. one that is based on budgeted total cost.
b 18. Which of the following costs is LEAST likely to appear on the performance report for the foreman
of a production department?
a. Wages of direct laborers.
b. Rent on machinery used in department.
c. Repairs to machinery used in department.
d. Cost of materials used.
d 19. ABC Company operates a factory that makes components for other ABC factories to assemble.
The factory could be treated as
a. a cost center.
b. an artificial profit center.
c. an investment center.
d. any of the above.
d 20. For reports to follow the principles of responsibility accounting, which of the following must be
true?
a. Each segment of the entity is an artificial profit center.
b. The company is decentralized.
c. The company uses transfer prices.
d. The reports show controllable costs separately from noncontrollable costs.
c 21. The effective use of responsibility accounting requires that performance reports for cost centers
a. show only variable costs.
b. show a fair share of allocated costs.
c. distinguish between controllable and noncontrollable costs.
d. show a fair share of revenues attributable to the center.
d 23. Which of the following is NOT a good reason for allocating indirect costs to operating
departments?
a. To remind managers of the need to cover indirect costs.
b. So that operating managers will encourage service department managers to keep costs down.
c. To encourage managers to use services wisely.
d. To determine the true costs of operating departments.
b 24. An artificial profit center
a. has no investment.
b. does not provide its goods or services outside the entity.
c. cannot control its costs.
d. could not be operated as a cost center.
81
c 25. A responsibility center is
a. any department.
b. any manager.
c. any area of activity for which a manager is responsible.
d. only large departments.
a 26. ABC's actual selling price was less than planned and actual unit volume more than planned.
Therefore,
a. ABC had a favorable sales volume variance.
b. ABC's total contribution margin was more than planned.
c. ABC had a favorable sales price variance.
d. ABC's actual total sales equaled planned total sales.
a 28. Which of the following methods of allocating the costs of service departments provides the
broadest recognition of departments served?
a. Reciprocal allocation.
b. Step-down allocation.
c. Direct allocation.
d. Arbitrary allocation.
d 29. Which of the following is a good reason for allocating indirect costs to operating departments?
a. The company could lose money if the operating departments do not pay for the services they
use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
d. To determine the true costs of operating departments.
b 30. When a manager takes an action that benefits his or her responsibility center, but not the
company as a whole,
a. it is a non-controllable action.
b. there is a lack of goal congruence.
c. the center must be an artificial profit center.
d. the manager should be fired.
d 31. Which of the following is a good reason for NOT allocating indirect costs to operating
departments?
a. The company saves money if the operating departments do not pay for the services they use.
b. To remind managers of the need to cover indirect costs.
c. To encourage managers to use more services.
d. The costs are not controllable by the operating departments.
d 32. Which of the following is a good reason for NOT allocating indirect costs to operating
departments?
a. To remind managers that revenues must cover indirect costs.
b. To recognize that operating departments benefit from the services.
c. To encourage managers to use services wisely.
d. Because allocating them might prompt operating managers to use nonincremental costs in
making decisions.
82
b. depends on whether the cost is fixed or variable.
c. depends on whether the cost is direct or indirect.
d. is irrelevant to the preparation of performance reports.
d 37. Comparing budgeted and actual amounts is important in evaluating the performance of
a. the manager of a cost center.
b. the manager of a profit center.
c. the manager of an investment center.
d. any manager.
Planned Actual
------- -------
Sales $80,000 $78,900
Variable costs 50,000 48,500
------- -------
Contribution margin $30,000 $30,400
======= =======
Planned sales were 10,000 units; actual sales were 9,700 units. The sales price variance is
a. $1,100 U.
b. $1,000 F.
c. $900 U.
d. $400 F.
Planned Actual
------- -------
Sales $80,000 $78,900
Variable costs 50,000 48,500
------- -------
Contribution margin $30,000 $30,400
======= =======
Planned sales were 10,000 units, actual sales were 9,700 units. The sales volume variance is
a. $1,100 U.
b. $1,000 F.
c. $900 U.
d. $400 F.
b 41. Certainty Stores has three stores and one service center. The percentage of services used in
the current year are Store X, 35%; Store Y, 40%; and Store Z, 25%. The service center costs were
budgeted at $160,000 fixed and $240,000 variable. Actual fixed costs were $140,000 and actual
variable costs were $270,000. Actual service center costs are allocated to the stores based on actual
usage of the service center. Service center costs allocated to Store Y are
a. $64,000.
b. $164,000.
c. $410,000.
d. some other number.
c 42. Certainty Stores has three stores and one service center. The percentage of services used in
the current year are Store X, 35%; Store Y, 40%; and Store Z, 25%. The service center costs were
budgeted at $350,000 fixed and $250,000 variable. Actual fixed costs were $370,000 and actual
variable costs were $280,000. Budgeted service center costs are allocated to the stores based on
actual usage of the service center. Service center costs allocated to Store Y are
83
a. $140,000.
b. $148,000.
c. $240,000.
d. $260,000.
c 43. Wabasha Co. has two service departments (A and B) and two producing departments (X and
Y). Data provided are as follows:
Wabasha uses the direct method to allocate service department costs. The service department
cost allocated to Department Y is
a. $88.
b. $96.
c. $130.
d. $240.
c 44. Wabasha Co. has two service departments (A and B) and two producing departments (X and
Y). Data provided are as follows:
Wabasha uses the step-down method to allocate service department costs. Department A costs
are allocated first. The service department cost allocated to Department Y is
a. $90.
b. $97.50.
c. $112.50.
d. $130.
c 45. Wabasha Co. has two service departments (A and B) and two producing departments (X and
Y). Data provided are as follows:
d 46. Olson Stores has three stores and one service center. The percentage of services used in the
current year are Store A, 40%; Store B, 25%; and Store C, 45%. The expected long-term budgeted
usages are Store A, 30%; Store B, 30%; and Store C, 40%. The service center costs were budgeted at
$450,000 fixed and $550,000 variable. Actual fixed costs were $430,000 and actual variable costs
were $570,000. Olson allocates the budgeted variable costs of the central purchasing unit based on
actual use of the unit's services, and allocates budgeted fixed costs based on expected long-term use
of the unit's services. Service center costs allocated to Store A are
a. $135,000.
b. $220,000.
c. $300,000.
d. $355,000.
84
b 47. Olson Stores has three stores and one service center. The percentage of services used in the
current year are Store A, 45%; Store B, 35%; and Store C, 20%. The expected long-term budgeted
usages are Store A, 30%; Store B, 40%; and Store C, 30%. The service center costs were budgeted at
$450,000 fixed and $550,000 variable. Actual fixed costs were $430,000 and actual variable costs
were $570,000. Olson allocates the budgeted variable costs of the central purchasing unit based on
actual use of the unit's services, and allocates budgeted fixed costs based on expected long-term use
of the unit's services. Service center costs allocated to Store B are
a. $350,000.
b. $372,500.
c. $400,000.
d. $550,000.
d 48. Basin Co. has two service departments (A and B) and two producing departments (X and Y).
Data provided are as follows:
Basin uses the direct method to allocate service department costs. The service department cost
allocated to Department X is
a. $280.
b. $300.
c. $320.
d. $443.
a 49. Basin Co. has two service departments (A and B) and two producing departments (X and Y).
Data provided are as follows:
Basin uses the step-down method to allocate service department costs. Department A costs are
allocated first. The service department cost allocated to Department X is
a. $457.
b. $443.
c. $320.
d. $300.
c 50. Basin Co. has two service departments (A and B) and two producing departments (X and Y).
Data provided are as follows:
Basin uses the reciprocal method to allocate service department costs. The service department
cost allocated to Department X is
a. $300.
b. $340.
c. $417.
d. $468.
True-False
F 2. The sales volume variance is the difference between actual and planned unit sales multiplied by
85
the actual contribution margin per unit.
F 3. The principle of controllability is less important to the internal reporting for a centralized
company than for a decentralized one.
F 4. Allocated costs are less important to the internal reporting for a centralized company than for a
decentralized company.
T 6. It is not always possible to separate the variable and fixed components of actual costs.
T 8. The sales price variance is the difference between the actual selling price and the planned
selling price multiplied by actual units sold.
T 9. The direct method of allocating service department costs ignores all of the interactions between
service departments.
F 10. The reciprocal method of allocating service department costs considers only the usage by the
producing departments in determining the allocations.
Problems
1. The following data are for Billings Stores, which has two stores and one service center.
Helena Butte
------- -----
Percentage of services used in current year 20% 80%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $225,000 fixed and $125,000 variable. Actual fixed costs
were $240,000 and actual variable costs were $115,000. The managers wish to allocate the actual
central purchasing costs to the stores based on actual use of the central purchasing service.
SOLUTION:
2. The following data are for Billings Stores, which has two stores and one service center.
Helena Butte
------- -----
Percentage of services used in current year 20% 80%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $225,000 fixed and $125,000 variable. Actual fixed costs
were $240,000 and actual variable costs were $115,000. The company wishes to allocate the
budgeted variable costs of the central purchasing unit based on actual use of the unit's services and
to allocate budgeted fixed costs based on expected long-term use of the unit's services.
a. Compute the total cost allocated to the Helena store for the services of the central purchasing
unit.
b.Compute the total cost allocated to the Butte store for the services of the central purchasing unit.
SOLUTION:
3. Following are data about Alphabet Co.'s two service departments and two operating departments.
86
Service Depts. Operating Depts.
-------------- ---------------
A B X Y
------- ------ ------ ------
Direct costs $200 $500 $1,500 $2,000
Services performed by Dept. A 20% 40% 40%
Services performed by Dept. B. 10% 90% -
a. Alphabet allocates costs of its service departments using the direct method of allocation. Find the
total cost that will be allocated to Dept. X.
b.Alphabet allocates the costs of its service departments using the step-down method, beginning
with Dept. A. Find the total amount of cost that will be allocated to Dept. X.
SOLUTION:
b. Allocated to X: $620
A B X Y
---- ---- ---- ----
A's direct cost $200
A's cost allocated (200) $ 40 $80 $80
B's direct cost 500
-----
Total for allocating $540
B's costs allocated (540) 540 0
---- ---
Allocated to X $620
Allocated to Y $80
4. Following are data about Alphabet Co.'s two service departments and two operating departments.
Service Depts. Operating Depts.
-------------- ---------------
A B X Y
------- ------ ------ ------
Direct costs $400 $1,000 $3,000 $4,000
Services performed by Dept. A 20% 40% 40%
Services performed by Dept. B. 10% 90% -
Alphabet allocates costs of its service departments using the reciprocal method of allocation. Find
the total cost that will be allocated to Dept. X.
SOLUTION:
Allocated to X: $1,195.92
A = $400 + .1B A = 510.20
B = $1,000 + .2A B = 1,102.04
A B X Y
------- ------- ------- -------
Direct costs $400.00 $1,000.00
A's cost allocated (510.20) 102.04 $204.08 $204.08
B's costs allocated 110.20 (1,102.04) 991.84 0
------- -------
Allocated to X $1,195.92
Allocated to Y $204.08
5. The following data are for Lexington Stores, which has two stores and one service center.
Concord Graham
------- ------
Percentage of services used in current year 40% 60%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $100,000 fixed and $75,000 variable. Actual fixed costs
were $140,000 and actual variable costs were $105,000. The managers wish to allocate the actual
central purchasing costs to the stores based on actual use of the central purchasing service.
87
b.Compute the allocation to the Graham store.
SOLUTION:
6. The following data are for Lexington Stores, which has two stores and one service center.
Concord Graham
------- ------
Percentage of services used in current year 40% 60%
Expected long-term use of services 30% 70%
Budgeted central purchasing costs were $100,000 fixed and $75,000 variable. Actual fixed costs
were $140,000 and actual variable costs were $105,000. The company wishes to allocate the
budgeted variable costs of the central purchasing unit based on actual use of the unit's services and
to allocate budgeted fixed costs based on expected long-term use of the unit's services.
a. Compute the total cost allocated to the Concord store for the services of the central purchasing
unit.
b.Compute the total cost allocated to the Graham store for the services of the central purchasing
unit.
SOLUTION:
7. Following are data about Hamilton Co.'s two service departments and two operating departments.
Service Depts. Operating Depts.
-------------- ---------------
A B X Y
------- ------ ------ ------
Direct costs $400 $600 $2,000 $3,000
Services performed by Dept. A 30% 30% 40%
Services performed by Dept. B. 20% 70% 10%
a. Hamilton allocates costs of its service departments using the direct method of allocation. Find the
total cost that will be allocated to each of the operating departments.
b.Hamilton allocates the costs of its service departments using the step-down method, beginning
with Dept. A. Find the total amount of cost that will be allocated to each of the operating
departments.
c. Hamilton allocates costs of its service departments using the reciprocal method of allocation. Find
the total cost that will be allocated to each of the operating departments.
SOLUTION:
88
c. Allocated to X: $702.13, Allocated to Y: $297.87
A = $400 + .2B A = 553.19
B = $600 + .3A B = 765.96
A B X Y
------- ------- ------- -------
Direct costs $400.00 $600.00
A's cost allocated (553.19) 165.96 $165.96 $221.27
B's costs allocated 153.19 (765.96) 536.17 76.60
------- -------
Allocated to X $702.13
Allocated to Y $297.87
8. Following are data about Hawley Co.'s two service departments and three operating departments.
Service Depts. Operating Depts.
-------------- ----------------------
A B X Y Z
------- ------ ------ ------ ------
Direct costs $400 $600
Services performed by Dept. A 30% 40% 20% 10%
Services performed by Dept. B. 40% 20% 20% 20%
Hawley allocates costs of its service departments using the reciprocal method of allocation. Find
the total costs that will be allocated to each of the operating departments.
SOLUTION:
A B X Y Z
------- ------- ------- ------- -------
Direct costs $400.00 $600.00
A's cost allocated (727.27) 218.18 $290.91 $145.45 $ 72.72
B's costs allocated 327.27 (818.18) 163.64 163.64 163.64
------- ------- -------
Allocated to X $454.55
Allocated to Y $309.09
Allocated to Z $236.36
9. Following are data about Augusta Co.'s three service departments and two operating
departments.
Service Depts. Operating Depts.
--------------------- ----------------
A B C X Y
------- ------ ------ ------ ------
Direct costs $150 $300 $350
Services performed by Dept. A 20% 30% 40% 10%
Services performed by Dept. B. 10% 20% 50% 20%
Services performed by Dept. C 30% 40% 15% 15%
a. Augusta allocates costs of its service departments using the direct method of allocation. Find the
total cost that will be allocated to Dept. X.
b.Augusta allocates the costs of its service departments using the step-down method, beginning
with Dept. A followed by Dept. B. Find the total amount of cost that will be allocated to Dept. X.
SOLUTION:
a. Allocated to X: $509.29 {$150 x [40/(40 + 10)] + $300 x [50/(50 + 20)] + $350 x [15/(15 +
15)]}
b. Allocated to X: $477.50
A B C X Y
---- ---- ------- ------- -------
A's direct cost $150
A's cost allocated (150) $ 30 $ 45.00 $ 60.00 $ 15.00
B's direct cost 300
89
----
Total for allocating $330
B's costs allocated (330) 73.33 183.34 73.33
C's direct cost 350.00
-------
Total for allocating $468.33
C's costs allocated (468.33) 234.16 234.16
------ ------
Allocated to X $477.50
Allocated to Y $322.50
Planned Actual
-------- --------
Sales $160,000 $162,500
Variable costs at $5 per unit 100,000 102,500
-------- --------
Contribution margin $ 60,000 $ 60,000
======== ========
Planned sales were 20,000 units, actual sales were 20,500 units.
SOLUTION:
Multiple Choice
d 3. This year Division A made sales to Division B at a higher transfer price than was used last year.
All other things equal, which of the following is true?
a. A's profit this year should be about the same as last year.
b. B's profit this year should be about the same as last year.
c. The company's total profit should be higher this year than last year.
d. The company's total profit should be about the same this year as last year.
90
a. higher than that for the company as a whole.
b. lower than that for an outside company operating in the same industry.
c. lower than return on sales for the division.
d. lower than that for the enterprise as a whole.
c 8. Divisional profit
a. is computed in essentially the same way as is income for the company as a whole.
b. should include a deduction for an appropriate share of the company's common costs.
c. normally includes the results of intracompany sales.
d. is not affected by depreciation methods.
c 11. Which item is usually NOT relevant to a decision by a divisional manager to reduce a transfer
price to meet a price offered to another division by an outside supplier?
a. Opportunity cost.
b. Variable manufacturing costs.
c. Fixed divisional overhead.
d. The price offered by the outside supplier.
a 14. Which equation describes residual income? (I = investment, N = income, and K = minimum
required ROI)
a. N - (K x I)
b. (K x I) - N
c. N/I - K
d. (K x I) - (N/I)
c 15. If Division C has a 10% return on sales, income of $10,000, and an investment turnover of 4
times, its sales are
a. $10,000.
b. $40,000.
c. $100,000.
d. $400,000.
b 16. If Division C has a 10% return on sales, income of $10,000, and an investment turnover of 4
times, divisional investment is
a. $10,000.
91
b. $25,000.
c. $40,000.
d. $100,000.
c 17. If Division C has a 10% return on sales, income of $10,000, and an investment turnover of 4
times, its ROI is
a. 5000%.
b. 100%.
c. 40%.
d. 10%.
b 18. If a division's ROI and the minimum required ROI are the same, the division's residual income is
a. positive.
b. zero.
c. negative.
d. none of the above.
a 19. If residual income for Division Q of Company Z is negative, which of the following is true?
a. Q's ROI is less than Z's minimum required ROI.
b. Q's ROI equals Z's minimum required ROI.
c. Q's ROI is higher than Z's minimum required ROI.
d. None of the above.
d 22. All other things remaining constant, if a division doubles its investment turnover, its ROI will
a. decrease.
b. remain constant.
c. increase.
d. double.
c 25. Which of the following is most likely to be included in calculating divisional profit?
a. Interest on corporate debt.
b. Income taxes.
c. Sales to other divisions within the company.
d. A share of corporate administration expenses.
b 26. If sales increase, while income and investment remain constant, which of the following is true?
a. Investment turnover decreases.
b. ROS decreases.
c. ROI increases.
d. ROI could increase or decrease.
92
c 28. If income increases while sales and investment remain constant, which of the following is true?
a. Investment turnover increases.
b. ROS decreases.
c. ROI increases.
d. ROI could increase or decrease.
a 29. Which transfer price is ideal for the company when the selling division is at capacity?
a. Market price.
b. Incremental cost.
c. Budgeted full cost.
d. Actual variable cost plus a percentage profit.
c 30. From the standpoint of the company, the important question in transfer pricing is
a. what is fair to the divisions.
b. how to determine the profit of the divisions.
c. whether or not the transfer should take place.
d. when the transfer should be made.
a 34. Which of the following is true about transfer prices for sales between divisions located in
different countries?
a. They should consider the tax structures in the two countries.
b. They are usually set by the governments of the two countries.
c. They cannot affect the total income of the company.
d. All of the above.
d 35. Multinational companies face special problems in which of the following areas of managerial
practice?
a. Performance evaluation.
b. Transfer prices.
c. Allocating common costs.
d. All of the above.
b 37. If the investment turnover increased by 20% and ROS decreased by 30%, the ROI would
a. increase by 20%.
b. decrease by 16%.
c. increase by 4%.
d. none of the above.
b 38. Scottso Division has the following results for the year:
Revenues $1,080,000
Variable expenses 440,000
Fixed expenses 400,000
93
Total divisional assets are $1,600,000. The company's minimum required rate of return is 14
percent. Residual income for Scottso is
a. $(64,000).
b. $16,000.
c. $151,200.
d. $224,000.
c 39. Scottso Division has the following results for the year:
Revenues $1,080,000
Variable expenses 440,000
Fixed expenses 400,000
Total divisional assets are $1,600,000. The company's minimum required rate of return is 14
percent. Return on investment for Scottso is
a. 54%.
b. 18%.
c. 15%.
d. 10%.
b 40. Monrovia Division has net income of $240,000 on sales of $3,200,000. If the investment is
$1,600,000 what is ROS?
a. 15.0%
b. 7.5%
c. 10.0
d. 2.0
c 41. Scottso Division has the following results for the year:
Revenues $1,080,000
Variable expenses 440,000
Fixed expenses 400,000
Total divisional assets are $1,600,000. The company's minimum required rate of return is 14
percent. Return on sales for Scottso is
a. 1.5%.
b. 15.0%.
c. 22.2%.
d. 67.5%.
d 42. Monrovia Division has net income of $240,000 on sales of $3,200,000. If the investment is
$1,600,000 what is asset turnover?
a. 15.0%
b. 7.5%
c. 10.0
d. 2.0
a 43. Monrovia Division has net income of $240,000 on sales of $3,200,000. If the investment is
$1,600,000 what is ROI?
a. 15.0%
b. 7.5%
c. 10.0
d. 2.0
b 44. Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part X sells for
$40, has a variable cost of $22, and a fixed cost per unit of $10. Alcatraz has a capacity to produce
100,000 units per period. Capone Division currently purchases 10,000 units of part X from Alcatraz for
$40. Capone has been approached by an outside supplier willing to supply the parts for $36. What is
the effect on XYZ's overall profit if Alcatraz REFUSES the outside price and Capone decides to buy
outside?
a. no change
b. $140,000 decrease in XYZ profits
c. $80,000 decrease in XYZ profits
d. $40,000 increase in XYZ profits
a 45. Alcatraz Division of XYZ Corp. sells 80,000 units of part X to the outside market. Part X sells for
$40, has a variable cost of $22, and a fixed cost per unit of $10. Alcatraz has a capacity to produce
100,000 units per period. Capone Division currently purchases 10,000 units of part X from Alcatraz for
$40. Capone has been approached by an outside supplier willing to supply the parts for $36. What is
94
the effect on XYZ's overall profit if Alcatraz ACCEPTS the outside price and Capone continues to buy
inside?
a. no change
b. $140,000 decrease in XYZ profits
c. $80,000 decrease in XYZ profits
d. $40,000 increase in XYZ profits
c 46. If the investment turnover decreased by 20% and ROS decreased by 30%, the ROI would
a. increase by 30%.
b. decrease by 20%.
c. decrease by 44%.
d. none of the above.
c 47. If the investment turnover increased by 10% and ROS increased by 20%, the ROI would
a. increase by 10%.
b. increase by 20%.
c. increase by 30%.
d. increase by 32%.
b 48. Durand Division has the following results for the year:
Revenues $470,000
Net income 130,000
Total divisional assets are $625,000. The company's minimum required rate of return is 12
percent. Residual income for Durand is
a. $3,760.
b. $55,000.
c. $73,600.
d. cannot be determined without further information.
c 49. Durand Division has the following results for the year:
Revenues $470,000
Net income 130,000
Total divisional assets are $625,000. The company's minimum required rate of return is 12
percent. Return on investment for Durand is
a. 9.0%.
b. 18.3%.
c. 20.8%.
d. 27.7%.
d 50. Durand Division has the following results for the year:
Revenues $470,000
Net income 130,000
Total divisional assets are $625,000. The company's minimum required rate of return is 12
percent. Return on sales for Durand is
a. 9.0%.
b. 18.3%.
c. 20.8%.
d. 27.7%.
True-False
F 3. The measure most commonly used for evaluating divisional performance is investment turnover.
T 4. Allocating all common assets, liabilities, and costs to divisions does not affect the ROI of the
company as a whole.
T 5. Using residual income as a criterion for evaluating divisional performance requires that the
company establish a minimum desired rate of return on investment.
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F 6. Return on investment is the product of return on sales and inventory turnover.
F 7. Return on investment for a multidivision company will be lower than the ROI for the division with
the lowest ROI.
T 8. Transfer prices equal to market prices are least appropriate when the selling division has excess
productive capacity.
Problems
1. The following information is available about the status and operations of A-Klop Company, which
has a minimum required ROI of 15%. ANSWER EACH ITEM INDEPENDENTLY OF THE OTHERS.
Division Division
A B
---------- ----------
Divisional investment $ 500,000 $1,500,000
Divisional profit $ 150,000 $ 540,000
Divisional sales $1,000,000 $3,600,000
c. Division A could increase its profit by $40,000 by increasing its investment by $150,000.
Compute its total residual income.
d. Division A could increase its return on sales by one percentage point, while keeping the same
total sales and investment. Compute its ROI.
e. Division B could reduce its investment so that its asset turnover increased by one time, while
holding total sales constant. Compute its ROI.
SOLUTION:
e. ROI for B: 51% [$3,600,000/1,500,000 = 2.4 times + 1 = 3.4 times x ROS of 15%
($540,000/$3,600,000) = 51%]
2. Division A of Getz Company expects the following results. ANSWER EACH QUESTION
INDEPENDENTLY.
To Division B To Outsiders
------------- ------------
Sales (40,000 x $10) $400,000
(40,000 x $12) $480,000
Variable costs at $6 240,000 240,000
-------- --------
Contribution margin $160,000 $240,000
Fixed costs, all common, allocated
on the basis of relative units 120,000 120,000
-------- --------
Profit $ 40,000 $120,000
======== =======
Division B has the opportunity to buy its needs for 40,000 units from an outside supplier at $8
each.
a. Division A refuses to meet the $8 price, sales to outsiders cannot be increased, and Division B
buys from the outside supplier. Compute the effect on the income of Getz.
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b. Division A cannot increase its sales to outsiders, does meet the $8 price, and Division B continues
to buy from A. Compute the effect on the income of Getz.
c. Suppose that Division A could sell the 40,000 units now taken by Division B to outsiders at $9
each without disturbing sales at the regular $12 price. Division B buys outside at $8 and Division A
increases its outside sales. Find the effect on the income of Getz.
SOLUTION:
a. Getz's income: Decreases $80,000 [40,000 units x ($8 outside price - $6 variable cost)]
c. Getz's income: $40,000 increase ($360,000 added revenue from outsiders - $320,000 paid to the
outsider by B)
3. The following information relates to Zimmer Division of Purdy Inc. Purdy's desired ROI for its
segments is 20%.
SOLUTION:
4. Bayfield Division of Ashland Inc. has a capacity of 200,000 units and expects the following results.
Washburn Division of Ashland Inc. currently purchases 50,000 units of a part for one of its
products from an outside supplier for $4 per unit. Washburn's manager believes he could use a minor
variation of Bayfield's product instead, and offers to buy the units from Bayfield at $3.50. Making the
variation desired by Washburn would cost Bayfield an additional $0.50 per unit and would increase
Bayfield's annual cash fixed costs by $20,000. BAYFIELD'S MANAGER AGREES TO THE DEAL OFFERED
BY WASHBURN'S MANAGER.
a. Find the effect of the deal on Washburn's income and circle the correct direction. (increase
decrease none)
b. Find the effect of the deal on Bayfield's income and circle the correct direction. (increase
decrease none)
c. Find the effect of the deal on the income of Ashland Inc. and circle the correct direction.
(increase decrease none)
SOLUTION:
b. Bayfield's income, + $10,000 {50,000 x ($3.50 - $2 - $0.50) - [lost contribution margin of 10,000
x ($4 - $2)] - $20,000 new fixed costs}
5. Crosby Division has the following information for the most recent period:
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Divisional investment $ 6,500,000
Divisional sales $12,000,000
6. The following information is available about the status and operations of Stills Company, which
has a minimum required ROI of 20%. ANSWER EACH ITEM INDEPENDENTLY OF THE OTHERS.
Division Division
A B
-------- ----------
Divisional investment $400,000 $1,250,000
Divisional profit $120,000 $ 580,000
Divisional sales $800,000 $2,600,000
c. Division B could increase its profit by $80,000 by increasing its investment by $300,000.
Compute its total residual income.
d. Division A could increase its return on sales by one percentage point, while keeping the same
total sales. Compute its ROI.
e. Division A could increase its sales so that its asset turnover increased by one time, while holding
total assets constant. Compute its ROI.
SOLUTION:
7. Division A of Nash Company expects the following results. ANSWER EACH QUESTION
INDEPENDENTLY.
To Division B To Outsiders
------------- ------------
Sales (5,000 x $60) $300,000
(25,000 x $72) $1,800,000
Variable costs at $36 180,000 900,000
-------- ---------
Contribution margin $120,000 $ 900,000
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Fixed costs, all common, allocated
on the basis of relative units 60,000 300,000
-------- ---------
Profit $ 60,000 $ 600,000
======== ==========
Division B has the opportunity to buy its needs for 5,000 units from an outside supplier at $45
each.
a. Division A refuses to meet the $45 price, sales to outsiders cannot be increased, and Division B
buys from the outside supplier. Compute the effect on the income of Nash.
b. Division A cannot increase its sales to outsiders, does meet the $45 price, and Division B
continues to buy from A. Compute the effect on the income of Nash.
c. Suppose that Division A could sell the 5,000 units now taken by Division B to outsiders at $57
each without disturbing sales at the regular $72 price. Division B buys outside at $45 and Division A
increases its outside sales. Find the effect on the income of Nash.
SOLUTION:
a. Nash's income: Decreases $45,000 [5,000 units x ($45 outside price - $36 variable cost)]
c. Nash's income: $60,000 increase ($285,000 added revenue from outsiders - $225,000 paid to the
outsider by B)
8. The following information relates to Bradley Division of Allen Company. Allen's minimum cost of
capital for its segments is 15%.
SOLUTION:
9. Rosalie Division of Lachene Inc. has a capacity of 100,000 units and expects the following results
for.
Katarina Division of Lachene Inc. currently purchases 20,000 units of a part for one of its products
from an outside supplier at $32 per unit. Katarina's manager believes he could use a minor variation
of Rosalie's product instead, and offers to buy the units from Rosalie at $26. Making the variation
desired by Katarina would cost Rosalie an additional $5 per unit and would increase Rosalie's annual
cash fixed costs by $80,000. ROSALIE'S MANAGER AGREES TO THE DEAL OFFERED BY KATARINA'S
MANAGER.
a. Find the effect of the deal on Katarina's income and circle the correct direction. (increase
decrease none)
b. Find the effect of the deal on Rosalie's income and circle the correct direction. (increase
decrease none)
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c. Find the effect of the deal on the income of Lachene Inc. and circle the correct direction.
(increase decrease none)
SOLUTION:
b. Rosalie's income, - $160,000 {20,000 x ($26 - $20 - $5) - [lost contribution margin of 10,000 x
($30 - $20)] - $80,000 new fixed costs)}
10. Young Division has the following information for the most recent period:
SOLUTION:
a. ROI: 12.9% ($11,000,000/$85,000,000)
Multiple Choice
a 3. Setting standards
a. has important behavioral implications.
b. is largely a matter of calculating rates and quantities.
c. should be done to make them as tight as possible.
d. is done only for manufacturing activities.
a 5. A major drawback to setting standards based on historical results is that such standards
a. can perpetuate inefficiencies.
b. are harder to compute than are engineered standards.
c. are usually too hard to meet because of inflation.
d. are usually not well received by workers.
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b 6. Cascade Company, which has a $3 standard cost per unit and budgeted production at 1,000
units, actually produced 1,200 units. Total standard cost for the period is
a. $3,000.
b. $3,600.
c. an amount that cannot be determined without knowing the variances for the period.
d. none of the above.
c 7. Which variance is LEAST likely to be affected by hiring workers with less skill than those already
working?
a. Material use variance.
b. Labor rate variance.
c. Material price variance.
d. Variable overhead efficiency variance.
c 8. Which variance is MOST likely to be affected by buying a more expensive material that produces
less waste and is easier to handle?
a. Labor rate variance.
b. Variable overhead spending variance.
c. Direct labor efficiency variance.
d. Fixed overhead budget variance.
Standard direct labor time is 1.5 hours per unit of product. The standard wage rate is $6 per
hour. Standard variable overhead cost for a unit of product is
a. $4.00.
b. $6.00.
c. $9.00.
d. $10.00.
d 11. If the variable overhead standard is based on direct labor hours and actual hours worked exceed
standard hours allowed, the result is
a. a favorable labor efficiency variance.
b. an unfavorable variable overhead spending variance.
c. a favorable variable overhead spending variance.
d. an unfavorable variable overhead efficiency variance.
d 14. The sum of the material price variance and material use variance always equals the difference
between
a. actual and standard material purchases.
b. actual material purchases and standard material use.
c. standard material purchases and standard material use.
d. none of the above pairs of amounts.
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c. Use variance, efficiency variance, quantity variance.
d. Use variance, efficiency variance, spending variance.
d 16. A product requires 0.60 standard labor hours, the standard labor rate is $10 per hour, and
production was 300 units. Actual labor cost was $1,862 at $9.80 per hour. Which of the following is
true?
a. The labor rate variance was $98 favorable.
b. The labor rate variance was $62 unfavorable.
c. The labor efficiency variance was $62 unfavorable.
d. The labor efficiency variance was $100 unfavorable.
d 17. Cascade Company bought 10,000 pounds of material and used 9,500. The material price
variance was $300 unfavorable and the standard price per pound is $3. The cost of materials
purchased was
a. $28,200
b. $28,800
c. $29,700
d. $30,300
c 18. The standard price of a material is $2 per pound. The company bought 2,000 pounds at $1.90
per pound and used 1,700 pounds. Standard use was 1,800 pounds. The material price variance was
a. $170 favorable.
b. $180 favorable.
c. $200 favorable.
d. $400 favorable.
c 19. A company made 1,200 units with a $550 favorable labor use variance. There was no labor rate
variance and actual labor cost was $19,250. The actual wage rate was $11. Standard labor time per
unit is
a. 0.5 hours
b. 1.0 hour
c. 1.5 hours
d. 2.0 hours
a 20. Which formula calculates a price or rate variance? (AQ = actual quantity of the factor, AP =
actual price of the factor, SQ = standard price of the factor, SQ = standard quantity of the factor)
a. (AQ x AP) - (AQ x SP).
b. (AQ x AP) - (SQ x AP).
c. (AQ x SP) - (SQ x SP)
d. (AQ x SP) - (SQ x AP).
b 21. Which formula calculates a use or efficiency variance? (AQ = actual quantity of the factor, AP =
actual price of the factor, SQ = standard price of the factor, SQ = standard quantity of the factor)
a. (AQ x AP) - (SQ x SP).
b. (AQ x SP) - (SQ x SP).
c. (AQ x AP) - (AQ x SP)
d. (SQ x SP) - (SQ x AP).
c 24. A purchasing manager bought cheaper-than-normal materials that are difficult to handle. Which
combination of variances is LEAST likely to be affected by this decision?
a. Material use and direct labor use.
b. Material use, direct labor use, and variable overhead efficiency.
c. Direct labor rate and variable overhead budget.
d. Direct labor use and variable overhead efficiency.
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b. control.
c. performance evaluation.
d. all of the above.
a 32. Which of the following is NOT a reason why some JIT operations do not use standards?
a. Standards are often set too tight for JIT operations.
b. Using standards can stifle continuous improvement.
c. Standards focus on cost centers, not on the entire manufacturing operation.
d. All of the above are reasons.
b 36. For a company whose variable overhead relates to direct labor, the variable overhead efficiency
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variance
a. results from efficient or inefficient use of variable overhead elements.
b. results from efficient or inefficient use of direct labor.
c. is always the same as the direct labor efficiency variance.
d. is more like a budget variance than a use variance.
b 37. Acme Company produced 500 units with a $50 unfavorable labor rate variance. The labor use
variance was $180 favorable. Actual labor cost was $17,870. The standard wage rate was $9. Actual
hours were
a. 1,520
b. 1,980
c. 2,000
d. 2,020
a 38. Crunch Company expects a 90% learning curve. The first batch of a new product required 1,000
hours. The total time for the first four batches should be
a. 3,240 hours.
b. 3,600 hours.
c. 4,000 hours.
d. some other number of hours.
c 39. Crunch Company expects a 90% learning curve. The first batch of a new product required 10
hours. The first four batches should take an average of
a. 10 hours.
b. 9 hours.
c. 8.1 hours.
d. some other number of hours.
c 40. Acme has a standard of 15 parts of component X costing $1.50 each. Acme purchased 14,910
units of X for $21,950. Acme generated a $415 favorable price variance and a $3,735 favorable
quantity variance. If there were no changes in the component inventory, how many units of finished
product were produced?
a. 994 units
b. 1,000 units
c. 1,160 units
d. some other number
b 41. Acme has a standard price of $6 per pound for materials. July's results showed an unfavorable
material price variance of $44 and a favorable quantity variance of $228. If 1,066 pounds were used
in production, what was the standard quantity allowed for materials?
a. 1,066
b. 1,104
c. 1,294
d. some other number
c 42. Genco paid $78,800 to direct labor for the production of 1,500 units. Standards allow 2 labor
hours per unit at a rate of $25.00 per hour. Actual hours totaled 2,900. The direct labor rate variance
was
a. $2,050 favorable
b. $3,800 favorable
c. $6,300 unfavorable
d. some other number
a 43. Genco paid $78,800 to direct labor for the production of 1,500 units. Standards allow 2 labor
hours per unit at a rate of $25.00 per hour. Actual hours totaled 2,900. The direct labor efficiency
variance was
a. $2,500 favorable
b. $3,800 favorable
c. $6,300 unfavorable
d. some other number
c 44. Danner had a $550 favorable direct labor rate variance and a $720 unfavorable efficiency
variance. Danner paid $6,650 for 800 hours of labor. What was the standard direct labor wage rate?
a. $8.10
b. $8.31
c. $9.00
d. some other number
104
c 45. Jeter's Company had a $510 unfavorable direct labor rate variance and a $1,000 favorable
efficiency variance. Jeter's standard payroll was $11,200 at a standard wage of $10 per hour. What
was the actual direct labor wage rate?
a. $9.56
b. $10.00
c. $10.50
d. some other number
a 46. Chippewa paid $32,225 to direct labor for the production of 1,700 units. Standards allow 3 labor
hours per unit at a rate of $6.50 per hour. Actual hours totaled 5,150. The direct labor rate variance
was
a. $1,250 favorable
b. $925 favorable
c. $325 favorable
d. $325 unfavorable
d 47. Chippewa paid $32,225 to direct labor for the production of 1,700 units. Standards allow 3 labor
hours per unit at a rate of $6.50 per hour. Actual hours totaled 5,150. The direct labor efficiency
variance was
a. $1,250 favorable
b. $925 favorable
c. $325 favorable
d. $325 unfavorable
During September, Chetek produced 5,000 units, using 9,640 labor hours at a total wage of
$94,670 and incurring $78,600 in variable overhead. The variable overhead budget variance is
a. $6,300 unfavorable
b. $3,600 unfavorable
c. $2,700 favorable
d. some other number
During September, Barron produced 5,000 units, using 9,640 labor hours at a total wage of
$94,670 and incurring $78,600 in variable overhead. The variable overhead efficiency variance is
a. $6,300 unfavorable
b. $3,600 unfavorable
c. $2,700 favorable
d. $3,300 favorable
c 50. Silver Bow manufactured the first batch of product in 100 hours. The second batch took an
additional 60 hours. What percent learning occurred?
a. 100%
b. 90%
c. 80%
d. Cannot be determined with the information given.
True-False
T 1. Standard costs are per-unit expressions of flexible budget allowances based on output.
F 2. The value of b, the exponent in the learning curve formula, is the learning rate.
F 4. Learning curves can only be used for a one-of-a-kind special order product.
F 5. So long as total actual costs approximate total budgeted costs there is no need for managerial
concern or action.
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T 6. It is not always possible to separate the variable and fixed components of actual overhead cost.
F 7. When an unfavorable variance occurs, there is some action that some manager can take to
correct the event or circumstance that gave rise to the variance.
F 8. Standard costs are devices for measuring effectiveness but not efficiency.
F 9. "Ideal standards" are those most likely to be met under most conditions.
T 10. The labor efficiency variance excludes the effects of laborers being paid more or than the
standard labor rate.
Problem
Standard costs:
Materials, 2 pounds at $6 per pound $12per unit
Labor, 3 hours at $15 per hour $45per unit
Variable overhead at $8 per labor hour $24per unit
Budgeted fixed production costs $140,000 per year
Budgeted production for the year 4,000 units
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
SOLUTION:
Standard costs:
Materials, 3 pounds at $4 per pound $12per unit
106
Labor, 5 hours at $12 per hour $60per unit
Variable overhead at $7 per labor hour $35per unit
Budgeted fixed production costs $150,000 per year
Budgeted production for the year 5,000 units
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
SOLUTION:
3. Anne's Arbors has the following budget and actual results for May:
Budget Actual
------ ------
Unit production 9,000 9,600
Direct labor hours 11,250 11,550
Materials used, feet15,750 16,100
Standard labor rate is $12 per hour; standard material price is $4.50 per foot. Actual wages were
$140,250; actual material purchases were 17,500 pounds for $77,160.
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
107
SOLUTION:
a. MPV: $1,590 F $77,160 - ($4.50 x 17,500)
4. North Company has the following budget and actual results for July:
Budget Actual
------ ------
Unit production 10,000 8,400
Direct labor hours 12,000 11,860
Materials used, feet16,000 16,750
Standard labor rate is $14 per hour; standard material price is $7.50 per foot. Actual wages were
$168,750; actual material purchases were 18,800 pounds for $149,825.
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
SOLUTION:
Standard costs:
Materials, 5 yards at $3 per pound $15per unit
Labor, 3 hours at $14 per hour $42per unit
Variable overhead at $10 per labor hour $30per unit
Budgeted fixed production costs $175,000 per year
Budgeted production for the year 7,700 units
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
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d. Direct labor efficiency variance.F U
SOLUTION:
6. Toimi Inc. had the following variances for the most recent month:
Other information included: actual wages paid $72,310; materials purchased $130,760; standards
per unit were 2 labor hours at $5 per hour, 3 pounds at $6 per pound. There were no changes in
materials inventories.
SOLUTION:
b. 14,220 SH $71,100 / $5
c. 15,616 AH $78,080 / $5
7. Ralph Inc. had the following variances for the most recent month:
Other information included: actual wages paid $105,560; materials purchased $124,860;
standards per unit were 2 labor hours at $5 per hour and variable overhead at $6 per hour.
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d. Find the variable overhead efficiency variance.
SOLUTION:
b. 17,468 SH 8,734 x 2
8. Gros Ventre Company expects a learning rate of 80%. The first batch of a new product is
expected to take 500 direct labor hours.
a. Compute the cumulative average time for the first four batches.
SOLUTION:
b. 1,280
Output (X) Average time (Y) Total time (XY)
1 500 500
2 400 (500 x 80%) 800 (2 x 400)
4 320 (400 x 80%) 1,280 (4 x 320)
9. Benco Inc. has the following results for December when production was 8,000 units:
Per unit standards are 2.5 pounds of materials at $12.00 per pound and 3.5 hours at $16 per
hour.
For each variance, determine the amount and circle the correct direction,
F = favorable, U = unfavorable
SOLUTION:
10. Cascade Company expects a learning rate of 90%. The first batch of a new product is expected to
take 200 direct labor hours.
110
a. Compute the cumulative average time for the first eight batches.
SOLUTION:
b. 1,166.4
Output (X) Average time (Y) Total time (XY)
1 200 200
2 180 (200 x 90%) 360 (2 x 180)
4 162 (180 x 90%) 648 (4 x 162)
8 145.8 (162 x 90%) 1,166.4 (8 x 145.8)
111
b 9. The principal reason for using more than one rate to apply overhead is
a. to keep the individual rates low.
b. that overhead costs are driven by more than one activity.
c. that such rates recognize the seasonal nature of some costs.
d. to simplify recordkeeping.
a 10. Activity-based overhead rates are more useful than a single plant-wide rate if
a. overhead costs are driven by several activities.
b. direct labor cost varies significantly from department to department.
c. all products require about the same amounts of all activities.
d. manufacturing overhead costs are nearly all fixed.
a 16. XYZ had an $8,000 unfavorable volume variance, a $11,500 unfavorable variable overhead
spending variance, and $1,500 total underapplied overhead. The fixed overhead budget variance was
a. $18,000 favorable.
b. $21,000 favorable.
c. $17,500 unfavorable.
d. $21,000 unfavorable.
d 17. Machine hours used to set the predetermined overhead rate were 25,000, actual hours were
24,000, and overhead applied was $60,000. Budgeted overhead for the year was
a. $57,600.
b. $59,000.
c. $60,000.
d. $62,500.
112
a. lower than under actual costing.
b. higher than under actual costing.
c. the same as under actual costing.
d. any of the above.
c 23. In a factory operated largely by robots, the best basis for applying overhead is probably
a. direct labor hours.
b. direct labor cost.
c. machine hours.
d. raw material use.
a 24. Spooner applies overhead based on direct labor cost. It had budgeted manufacturing overhead
of $50,000 and budgeted direct labor of $25,000. Actual overhead was $52,500, actual labor cost
was $27,000. Overhead was
a. overapplied by $1,500.
b. overapplied by $2,000.
c. overapplied by $2,500.
d. underapplied by $2,000.
c 25. Hayward applies overhead at $5 per machine hour. During March it worked 10,000 hours and
overapplied overhead by $3,000. Actual overhead was
a. $53,000.
b. $50,000.
c. $47,000.
d. none of the above.
b 26. Aurora applies overhead at $9 per direct labor hour of which $4 is variable overhead. Budgeted
direct labor hours were 80,000. Budgeted fixed overhead was
a. $320,000
b. $400,000.
c. $720,000.
d. none of the above.
c 28. In contrast to a company that uses a single overhead rate, one that uses activity-based costing
a. will have higher product costs than one using a single overhead rate.
b. cannot compute budget variances.
c. will incur additional costs for recordkeeping.
d. must have a preponderance of fixed overhead costs.
c 30. Hoyt Company applies overhead at $4 per direct labor hour. In March Hoyt incurred overhead of
$96,000. Underapplied overhead was $4,000. How many direct labor hours did Hoyt work?
a. 25,000
b. 24,000
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c. 23,000
d. 22,000
a 32. Daly had a $9,000 favorable volume variance, a $7,500 unfavorable variable overhead spending
variance, and $6,000 total overapplied overhead. The fixed overhead budget variance was
a. $4,500 favorable.
b. $8,000 favorable.
c. $4,500 unfavorable.
d. $8,000 unfavorable.
d 33. Acme had a $6,000 favorable fixed overhead budget variance, a $2,500 unfavorable variable
overhead spending variance, and $1,000 total overapplied overhead. The volume variance was
a. $4,500 overapplied.
b. $4,500 underapplied.
c. $2,500 overapplied.
d. $2,500 underapplied.
b 34. Waldorf had a $10,000 unfavorable fixed overhead budget variance, a $6,000 unfavorable
variable overhead spending variance, and a $2,000 favorable volume variance. The total overhead
was
a. $14,000 overapplied.
b. $14,000 underapplied.
c. $18,000 overapplied.
d. $18,000 underapplied.
a 35. Bacon had a $18,000 unfavorable volume variance, a $5,000 unfavorable fixed overhead
budget variance, and $12,000 total underapplied overhead. The variable overhead spending variance
was
a. $11,000 favorable.
b. $1,000 favorable.
c. $11,000 unfavorable.
d. $23,000 unfavorable.
d 36. Gonzalez Company uses the equation $520,000 + $2 per direct labor hour to budget
manufacturing overhead. Gonzalez has budgeted 150,000 direct labor hours for the year. Actual
results were 150,000 direct labor hours and $817,500 total manufacturing overhead. The total
overhead applied for the year is
a. $300,000.
b. $520,000.
c. $817,500.
d. $820,000.
a 37. Gonzalez Company uses the equation $520,000 + $2 per direct labor hour to budget
manufacturing overhead. Gonzalez has budgeted 150,000 direct labor hours for the year. Actual
results were 150,000 direct labor hours and $817,500 total manufacturing overhead. The total
overhead variance for the year is
a. $2,500 favorable.
b. $12,500 favorable.
c. $2,500 unfavorable.
d. some other number.
c 38. Bonds Company uses the equation $300,000 + $1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted 125,000 direct labor hours for the year. Actual results
were 110,000 direct labor hours, $297,000 fixed overhead, and $194,500 variable overhead. The total
overhead variance for the year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
a 39. Bonds Company uses the equation $300,000 + $1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted 125,000 direct labor hours for the year. Actual results
were 110,000 direct labor hours, $297,000 fixed overhead, and $194,500 variable overhead. The
114
variable overhead spending variance for the year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
b 40. Bonds Company uses the equation $300,000 + $1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted 125,000 direct labor hours for the year. Actual results
were 110,000 direct labor hours, $297,000 fixed overhead, and $194,500 variable overhead. The
fixed overhead budget variance for the year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
d 41. Bonds Company uses the equation $300,000 + $1.75 per direct labor hour to budget
manufacturing overhead. Bonds has budgeted 125,000 direct labor hours for the year. Actual results
were 110,000 direct labor hours, $297,000 fixed overhead, and $194,500 variable overhead. The
fixed overhead volume variance for the year is
a. $2,000.
b. $3,000.
c. $47,000.
d. $48,000.
a 42. Machine hours used to set the predetermined overhead rate were 80,000, actual hours were
90,000, and overhead applied was $117,000. Budgeted overhead for the year was
a. $104,000.
b. $117,000.
c. $131,625.
d. some other number.
a 43. Cooke Company uses the equation $450,000 + $1.50 per direct labor hour to budget
manufacturing overhead. Cooke has budgeted 150,000 direct labor hours for the year. Actual results
were 156,000 direct labor hours and $697,500 total manufacturing overhead. The total overhead
variance for the year is
a. $4,500 favorable.
b. $18,000 favorable.
c. $4,500 unfavorable.
d. $18,000 unfavorable.
b 44. Antaya Company uses the equation $375,000 + $1.20 per direct labor hour to budget
manufacturing overhead. Antaya has budgeted 75,000 direct labor hours for the year. Actual results
were 81,000 direct labor hours, $388,000 fixed overhead, and $98,600 variable overhead. The total
overhead variance for the year is
a. $2,700.
b. $10,700.
c. $22,000.
d. $30,000.
a 45. Antaya Company uses the equation $375,000 + $1.20 per direct labor hour to budget
manufacturing overhead. Antaya has budgeted 75,000 direct labor hours for the year. Actual results
were 81,000 direct labor hours, $388,000 fixed overhead, and $98,600 variable overhead. The
variable overhead spending variance for the year is
a. $2,700.
b. $10,700.
c. $22,000.
d. $30,000.
c 46. Antaya Company uses the equation $375,000 + $1.20 per direct labor hour to budget
manufacturing overhead. Antaya has budgeted 75,000 direct labor hours for the year. Actual results
were 81,000 direct labor hours, $388,000 fixed overhead, and $98,600 variable overhead. The fixed
overhead budget variance for the year is
a. $2,700.
b. $10,700.
c. $22,000.
d. $30,000.
d 47. Antaya Company uses the equation $375,000 + $1.20 per direct labor hour to budget
manufacturing overhead. Antaya has budgeted 75,000 direct labor hours for the year. Actual results
115
were 81,000 direct labor hours, $388,000 fixed overhead, and $98,600 variable overhead. The fixed
overhead volume variance for the year is
a. $1,400.
b. $13,000.
c. $15,600.
d. $30,000.
a 48. Machine hours used to set the predetermined overhead rate were 68,000, actual hours were
64,000, and budgeted overhead was $142,800. Overhead applied for the year was
a. $134,400.
b. $136,500.
c. $142,800.
d. $151,725.
a 49. Rhoda had a $2,000 favorable volume variance, a $7,000 unfavorable variable overhead
spending variance, and $3,000 total underapplied overhead. The fixed overhead budget variance was
a. $1,000 favorable.
b. $8,000 favorable.
c. $2,000 unfavorable.
d. $8,000 unfavorable.
b 50. Katrina Inc. had a $30,000 favorable fixed overhead budget variance, a $44,000 unfavorable
variable overhead spending variance, and $44,000 total underapplied overhead. The volume variance
was
a. $30,000 overapplied.
b. $30,000 underapplied.
c. $58,000 overapplied.
d. $58,000 underapplied.
True-False
T 1. A major advantage of normal costing over actual costing is that it smoothes out fluctuations in
unit costs.
T 4. A seasonal business using normal costing expects high overapplied and underapplied overhead
during individual months of the year.
F 6. Activity-based overhead rates give higher costs than does a single, plant-wide rate.
Problems
Gagne has budgeted 300,000 direct labor hours for the year. Actual results were 320,000 direct
labor hours and $1,249,000 total manufacturing overhead.
d.Find the overhead budget variance and state whether favorable or unfavorable.
116
e. Compute the volume variance and state whether favorable or unfavorable
SOLUTION:
a. $4 ($600,000/300,000 + $2 variable)
Gomez applies overhead to jobs at $0.80 per direct labor dollar. Total overhead cost incurred was
$950,000. There were no beginning inventories.
c. Find the amount of overhead (overapplied underapplied) and circle the correct direction.
SOLUTION:
3. Antigo Company uses job-order costing. Data related to March are as follows:
Antigo applies overhead to jobs at $8 per machine hour. Total overhead cost incurred in March
was $8,400. There were no beginning inventories. Job A was incomplete at the end of March, Job B
was sold for $28,000, and Job C was in finished goods inventory. Selling and administrative expenses
were $2,100.
SOLUTION:
117
a. $10,300 (Cost of job A, below)
c. $400 overapplied
e.
Sales $28,000
Normal cost of sales $14,700
Less overapplied overhead 400 14,300
------- -------
Gross margin $13,700
Selling and administrative expenses 2,100
-------
Income $11,600
=======
4. Bruno Company uses the following equation to budget manufacturing overhead.
Bruno has budgeted 100,000 direct labor hours for the year. Actual results were 90,000 direct
labor hours and $457,000 total manufacturing overhead.
d.Find the overhead budget variance and state whether favorable or unfavorable.
a. $5 ($200,000/100,000 + $3 variable)
Hurley applies overhead to jobs at $0.60 per direct labor dollar. Total overhead cost incurred was
$1,460,000. There were no beginning inventories.
118
a. What is cost of goods sold using normal costing?
c. Find the amount of overhead (overapplied underapplied) and circle the correct direction.
SOLUTION:
6. Acme Company uses job-order costing. Data related to August are as follows:
Acme applies overhead to jobs at $10.00 per machine hour. Total overhead cost incurred in
August was $16,700. There were no beginning inventories. Job A was incomplete at the end of
August, Job B was sold for $34,000, and Job C was in finished goods inventory. Selling and
administrative expenses were $3,500.
SOLUTION:
c. $700 underapplied
e.
119
Sales $34,000
Normal cost of sales $18,700
Plus underapplied overhead 700 19,400
------- -------
Gross margin $14,600
Selling and administrative expenses 3,500
-------
Income $11,100
=======
Darlington uses actual costing to assign overhead based on direct labor. Total overhead cost
incurred was $2,700,000. There were no beginning inventories.
SOLUTION:
8. Beloit Company uses job-order costing. Data related to September are as follows:
Beloit uses actual costing to apply overhead to jobs based on direct labor cost. Total overhead
cost incurred in September was $14,300. There were no beginning inventories. Job A was incomplete
at the end of September, Job B was sold for $22,000, and Job C was in finished goods inventory.
Selling and administrative expenses were $3,800.
SOLUTION:
120
------- ------- ------
Total costs $11,300 $17,200 $8,800
======= ======= ======
e.
Sales $22,000
Cost of sales 17,200
-------
Gross margin $ 4,800
Selling and administrative expenses 3,800
-------
Income $ 1,000
=======
Ashland applies overhead to jobs at $0.70 per direct labor dollar. Total overhead cost incurred was
$1,070,000. There were no beginning inventories.
c. Find the amount of overhead (overapplied underapplied) and circle the correct direction.
10. Hayes Company uses job-order costing. Data related to May are as follows:
Job A Job B Job C
------ ------ ------
Material cost $3,900 $5,700 $4,400
Direct labor cost $2,000 $4,000 $3,000
Machine hours 1,000 700 1,400
Hayes applies overhead to jobs at $8 per machine hour. Total overhead cost incurred in May was
$24,650. There were no beginning inventories. Job A was incomplete at the end of May, Job B was
sold for $30,000, and Job C was in finished goods inventory. Selling and administrative expenses were
$3,900.
121
c. Overhead was (overapplied underapplied) by? Circle the correct direction.
SOLUTION:
c. $150 overapplied
e.
Sales $30,000
Normal cost of sales $15,300
Less overapplied overhead 150 15,150
------- -------
Gross margin $14,850
Selling and administrative expenses 3,900
-------
Income $10,950
=======
CHAPTER 13: STANDARD COSTING, VARIABLE COSTING, AND THROUGHPUT
COSTING
Multiple Choice
122
d. normal costing is less appropriate for multiproduct firms.
d 5. Variable costing and absorption costing will show the same incomes when there are no
a. beginning inventories.
b. ending inventories.
c. variable costs.
d. beginning and ending inventories.
c 6. ABC had the same activity in 20X3 as in 20X2 except that production was higher in 20X3 than in
20X2. ABC will show
a. higher income in 20X3 than in 20X2.
b. the same income in both years.
c. the same income in both years under variable costing.
d. the same income in both years under absorption costing.
d 8. Which measure of activity is likely to give the LOWEST standard fixed cost per unit?
a. Actual activity.
b. Normal capacity.
c. Budgeted activity.
d. Practical capacity.
c 9. Which item is NOT used to compute the fixed overhead volume variance?
a. Standard fixed cost per unit.
b. Budgeted fixed overhead.
c. Actual fixed overhead.
d. Actual quantity produced.
a 11. A company that sets a standard fixed cost based on practical capacity
a. should expect unfavorable volume variances.
b. will set its selling prices too low.
c. has a higher cost per unit than a company using normal activity to set the standard.
d. usually overapplies its fixed costs.
a 12. A predetermined overhead rate for fixed costs is unlike a standard fixed cost per unit in that a
predetermined overhead rate is
a. based on an input factor like direct labor hours and a standard cost per unit is based on a unit
of output.
b. based on practical capacity and a standard fixed cost can be based on any level of activity.
c. used with variable costing while a standard fixed cost is used with absorption costing.
d. likely to be higher than a standard fixed cost per unit.
b 13. ABC had $400,000 budgeted fixed overhead costs and based its standard on normal activity of
40,000 units. Actual fixed overhead costs were $430,000, actual production was 36,000 units, and
sales were 30,000 units. The volume variance was
a. $30,000.
b. $40,000.
c. $70,000.
d. $77,777.
a 14. Advocates of variable costing for internal reporting purposes do NOT rely on which of the
following points?
a. The matching concept.
b. Price-volume relationships.
c. Absorption costing does not include selling and administrative expenses as part of
inventoriable cost.
d. Production influences income under absorption costing.
123
d 15. Calculating income under variable costing does NOT require knowing
a. unit sales.
b. unit variable manufacturing costs.
c. selling price.
d. unit production.
a 20. Which method gives the lowest inventory cost per unit?
a. Variable costing.
b. Absorption costing using normal activity to set the standard fixed cost.
c. Absorption costing using practical capacity to set the standard fixed cost.
d. Actual absorption costing.
b 21. Which costs are treated differently under absorption costing and variable costing?
a. Variable manufacturing costs.
b. Fixed manufacturing costs.
c. Variable selling and administrative expenses.
d. Fixed selling and administrative expenses.
a 22. ABC Company had 15,000 units in ending inventory. The total cost of those units under variable
costing is
a. less than it is under absorption costing.
b. the same as it is under absorption costing.
c. more than it is under absorption costing.
d. any of the above.
b 23. York Company had $200,000 income using absorption costing. York has no variable
manufacturing costs. Beginning inventory was $15,000 and ending inventory was $22,000. Income
under variable costing would have been
a. $178,000.
b. $193,000.
c. $200,000.
d. $207,000.
124
a 26. Standard costing differs from normal costing in the treatment of
a. materials, direct labor, and overhead.
b. materials and direct labor.
c. direct labor and overhead.
d. overhead.
c 30. ABC had the same activity in 20X4 as in 20X3 except that production was lower in 20X4 than in
20X3. ABC will show
a. lower income in 20X4 than in 20X3.
b. the same income in both years.
c. the same income in both years under variable costing.
d. the same income in both years under absorption costing.
a 31. Rounder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units.
Ending inventory under variable costing would be
a. $20,000.
b. $30,000.
c. $35,000.
d. cannot be determined without further information.
c 32. Rounder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units.
Ending inventory under absorption costing would be
a. $20,000.
b. $30,000.
c. $35,000.
d. cannot be determined without further information.
a 33. Rounder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
volume variance under variable costing would be
a. $0.
b. $20,000.
c. $30,000.
d. some other number.
c 34. Rounder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
volume variance under absorption costing would be
a. $0.
b. $20,000.
c. $30,000.
d. some other number.
b 35. Rounder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $300,000. Rounder uses a normal activity of 20,000 units to set its standard
125
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
standard cost of goods sold under variable costing would be
a. $400,000.
b. $420,000.
c. $735,000.
d. some other number.
c 36. Rounder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
standard cost of goods sold under absorption costing would be
a. $400,000.
b. $420,000.
c. $735,000.
d. some other number.
c 37. Alpha Company has a standard fixed cost of $10 per unit. At an actual production of 16,000
units an unfavorable volume variance of $20,000 resulted. What were total budgeted fixed costs?
a. $140,000
b. $160,000
c. $180,000
d. Cannot be determined without further information.
a 38. Beta Company has a standard fixed cost of $10 per unit using a normal capacity of 11,000
units. An unfavorable volume variance of $12,000 resulted. What was the volume produced?
a. 9,800
b. 11,000
c. 12,200
d. Cannot be determined without further information.
a 39. Gamma Corporation has total budgeted fixed costs of $150,000. Actual production was 8,000
units; normal capacity is 7,500 units. What was the volume variance?
a. $10,000 favorable
b. $15,000 favorable
c. $15,000 unfavorable
d. $10,000 unfavorable
b 40. Eastern Co. has total budgeted fixed costs of $150,000. Actual production of 39,000 units
resulted in a $6,000 favorable volume variance. What normal capacity was used to determine the
fixed overhead rate?
a. 33,000
b. 37,500
c. 40,560
d. Cannot be determined without further information.
a 41. Western Company has a standard fixed cost of $8 per unit. At an actual production of 8,000
units a favorable volume variance of $12,000 resulted. What were total budgeted fixed costs?
a. $52,000
b. $64,000
c. $76,000
d. Cannot be determined without further information.
d 42. Monona Corporation has total budgeted fixed costs of $64,000. Actual production was 15,000
units; normal capacity is 16,000 units. What was the volume variance?
a. $4,000 favorable
b. $4,267 favorable
c. $4,267 unfavorable
d. $4,000 unfavorable
b 43. Madison Industries manufactures a single product using standard costing. Variable production
costs are $26 and fixed production costs are $250,000. Madison uses a normal activity of 12,500 units
to set its standard costs. Madison began the year with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. Ending inventory under variable costing would be
a. $10,000.
b. $13,000.
c. $23,000.
d. cannot be determined without further information.
c 44. Madison Industries manufactures a single product using standard costing. Variable production
126
costs are $26 and fixed production costs are $250,000. Madison uses a normal activity of 12,500 units
to set its standard costs. Madison began the year with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. Ending inventory under absorption costing would be
a. $10,000.
b. $13,000.
c. $23,000.
d. cannot be determined without further information.
d 45. Madison Industries manufactures a single product using standard costing. Variable production
costs are $26 and fixed production costs are $250,000. Madison uses a normal activity of 12,500 units
to set its standard costs. Madison began the year with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The volume variance under variable costing would be
a. $10,000.
b. $20,000.
c. $30,000.
d. some other number.
c 46. Madison Industries manufactures a single product using standard costing. Variable production
costs are $26 and fixed production costs are $250,000. Madison uses a normal activity of 12,500 units
to set its standard costs. Madison began the year with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The volume variance under absorption costing would be
a. $10,000.
b. $20,000.
c. $30,000.
d. some other number.
b 47. Madison Industries manufactures a single product using standard costing. Variable production
costs are $26 and fixed production costs are $250,000. Madison uses a normal activity of 12,500 units
to set its standard costs. Madison began the year with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The standard cost of goods sold under variable costing would be
a. $230,000.
b. $299,000.
c. $506,000.
d. $529,000.
c 48. Sigma Company has a standard fixed cost of $18 per unit using a normal capacity of 9,000
units. A favorable volume variance of $18,000 resulted. What was the volume produced?
a. 8,000
b. 9,000
c. 10,000
d. Cannot be determined without further information.
c 49. Western Co. has total budgeted fixed costs of $72,000. Actual production of 5,500 units
resulted in a $6,000 unfavorable volume variance. What normal capacity was used to determine the
fixed overhead rate?
a. 5,000
b. 5,500
c. 6,000
d. Cannot be determined without further information.
d 50. Madison Industries manufactures a single product using standard costing. Variable production
costs are $26 and fixed production costs are $250,000. Madison uses a normal activity of 12,500 units
to set its standard costs. Madison began the year with 1,000 units in inventory, produced 11,000
units, and sold 11,500 units. The standard cost of goods sold under absorption costing would be
a. $230,000.
b. $299,000.
c. $506,000.
d. $529,000.
True-False
F 1. Absorption costing incomes are always higher than variable costing incomes.
F 2. Income under standard variable costing is not influenced by the total amount of fixed
manufacturing costs.
T 3. A multiproduct company using standard absorption costing calculates standard fixed costs for
each product using a standard fixed overhead rate based on an input factor such as direct labor
hours.
127
T 4. A major difference between standard costing and normal costing is that one uses actual hours to
apply overhead and the other uses standard hours.
T 5. Proponents of variable costing for external reporting argue that while fixed production costs
benefit production as a whole, they do not benefit any particular unit of product.
T 6. A company using absorption costing can increase its income by increasing production without
increasing sales.
F 7. A company using variable costing can increase its income by increasing production without
increasing sales.
T 10. According to GAAP, absorption costing must be used for external financial reporting.
Problems
1. Whitehall Company sells a single product for $25. It had no beginning inventories. Operating data
follow.
Assume standard absorption costing using normal capacity as the basis for computing the
standard fixed cost per unit. Compute
e. Ending inventory.
f. Volume variance.
g.Income.
SOLUTION:
2. Lund Company sells a single product for $25. It had no beginning inventories. Operating data
128
follow.
SOLUTION:
3. Maiden Rock Company sells a single product for $25. It had no beginning inventories. Operating
data follow.
SOLUTION:
4. Genco Inc. makes a single product that sells for $50. The standard variable manufacturing cost is
$32.50 and the standard fixed manufacturing cost is $7.50, based on producing 20,000 units. During
the year Genco produced 22,000 units and sold 21,000 units. Actual fixed manufacturing costs were
$157,000; actual variable manufacturing costs were $735,000. Selling and administrative expenses,
all fixed, were $75,000. There were no beginning inventories.
SOLUTION:
129
Volume (15,000) F 12,000
Adjusted Cost of Goods Sold 852,000
Gross Profit $198,000
Selling & Administrative 75,000
Net Income $123,000
b. Sales $1,050,000
Variable Costs (21,000 x $32.50) $682,500
Variable Spending Variance 20,000 Un
Adjusted Variable Cost of Goods Sold 702,500
Contribution Margin $347,500
Fixed Costs:
Manufacturing $157,000
Selling & Administrative 75,000 232,000
Net Income $115,500
There were no variable cost variances for the year. Fixed costs incurred were equal to the
budgeted amount. There were no beginning inventories and no selling or administrative expenses.
a. Compute the absorption costing income if fixed costs per unit are determined using normal
capacity.
b.Compute the absorption costing income if fixed costs per unit are determined using practical
capacity.
c. Compute the absorption costing income if fixed costs per unit are determined using budgeted
production.
SOLUTION:
6. Cumberland Company sells a single product for $30. It had no beginning inventories. Operating
data follow.
130
Assume the actual costs were as budgeted.
Assume standard absorption costing using normal capacity as the basis for computing the standard
fixed cost per unit. Compute
e. Ending inventory.
f. Volume variance.
g.Income.
SOLUTION:
7. Acme Company sells a single product for $30. It had no beginning inventories. Operating data
follow.
SOLUTION:
8. Carlson Company sells a single product for $30. It had no beginning inventories. Operating data
follow.
131
Selling and administrative expenses:
Variable per unit sold $5
Fixed selling $25,000
Number of units produced 13,000 units
SOLUTION:
9. Bach Inc. makes a single product that sells for $40. The standard variable manufacturing cost is
$22 and the standard fixed manufacturing cost is $8, based on producing 30,000 units. During the
year Bach produced 28,000 units and sold 26,000 units. Actual fixed manufacturing costs were
$235,000; actual variable manufacturing costs were $595,000. Selling and administrative expenses
were $95,000. There were no beginning inventories.
SOLUTION:
b. Sales $1,040,000
Variable Costs (26,000 x $22) $572,000
Variable Spending Variance (21,000) F
Adjusted Variable Cost of Goods Sold 551,000
Contribution Margin $489,000
Fixed Costs:
Manufacturing 235,000
Selling & Administrative 95,000 330,000
Net Income $159,000
There were no variable cost variances for the year. Fixed costs incurred were equal to the
budgeted amount. There were no beginning inventories and no selling or administrative expenses.
a. Compute the absorption costing income if fixed costs per unit are determined using normal
capacity.
b.Compute the absorption costing income if fixed costs per unit are determined using practical
capacity.
132
c. Compute the absorption costing income if fixed costs per unit are determined using budgeted
production.
SOLUTION:
Multiple Choice
b 3. Which of the following is NOT relevant in determining weighted-average unit cost in process
costing?
a. Cost of beginning inventory.
b. Equivalent unit production in beginning inventory.
c. Equivalent unit production in ending inventory.
d. Units completed.
133
c 7. Which company is most likely to use process costing?
a. A manufacturer of nuclear reactors.
b. A construction contractor.
c. A cannery.
d. A textbook publisher.
a 11. Which of the following is the same whether the company uses standard process costing or
actual process costing?
a. Equivalent production.
b. Cost of goods transferred from work in process to finished goods.
c. Net income for the period.
d. Cost per unit of ending inventory of work in process.
b 13. If a company uses actual process costing, the amount transferred from Work in Process
Inventory to Finished Goods Inventory is the cost of
a. equivalent unit production for the period.
b. units completed during the period.
c. units completed and sold during the period.
d. all units worked on during the period.
b 14. If a company uses standard process costing, the amount transferred from Work in Process
Inventory to Finished Goods Inventory is the
a. standard cost of equivalent unit production for the period.
b. standard cost of units completed during the period.
c. actual cost of units completed and sold during the period.
d. actual cost of all units worked on during the period.
a 15. Under standard costing, the amount of direct labor cost charged (debited) to Work in Process
Inventory is
a. standard labor hours at standard rates.
b. standard labor hours at actual rates.
c. actual labor hours at actual rates.
d. actual direct labor cost incurred.
134
d. cost of goods sold.
a 18. The numerator of the FIFO unit cost calculation is
a. current period cost.
b. cost of beginning inventory.
c. current period cost plus cost of beginning inventory.
d. cost of goods sold.
b 19. FIFO equivalent unit production (EUP) is 6,200 units. EUP in ending inventory is 300, in
beginning inventory it is 125. Weighted-average EUP is
a. 6,500.
b. 6,325.
c. 6,025.
d. 5,900.
a 20. Weighted-average EUP is 4,100 units. Cost incurred during the period are $11,250, and the
beginning inventory was $2,150. Unit cost is
a. $3.268.
b. $2.744.
c. $2.220
d. $0.524.
a 21. Weighted-average EUP is 11,400 units. Beginning inventory was 1,000 units 60% complete,
ending inventory is 2,000 units 20% complete. The number of units completed is
a. 11,000.
b. 10,800.
c. 10,400.
d. 9,400.
c 22. Algoma completed 10,000 units, had beginning inventory of 2,500 units 40% complete, and
ending inventory of 1,000 units 20% complete. Weighted-average EUP was
a. 9,200.
b. 10,000.
c. 10,200.
d. 11,000.
d 23. Which formula gives weighted-average equivalent unit production? (UC = units completed, BI =
equivalent units in beginning inventory, EI = equivalent units in ending inventory)
a. UC + BI + EI.
b. UC + BI - EI.
c. UC + EI - BI.
d. UC + EI.
c 24. Which formula gives FIFO equivalent unit production? (UC = units completed, BI = equivalent
units in beginning inventory, EI = equivalent units in ending inventory)
a. UC + BI + EI.
b. UC + BI - EI.
c. UC + EI - BI.
d. UC + EI.
135
c. equal to or greater than the number of units completed.
d. any of the above.
a 30. Which item is NOT relevant in determining FIFO equivalent unit production?
a. Cost of beginning inventory.
b. Equivalent unit production in beginning inventory.
c. Equivalent unit production in ending inventory.
d. Units completed.
b 31. The FIFO method of calculating equivalent production and unit costs
a. is less likely to be accurate than the weighted-average method.
b. is more useful for control purposes than the weighted-average method.
c. cannot be used unless a company also uses standard costing.
d. eliminates the need to calculate separate equivalent-production numbers for each element of
manufacturing cost.
c 33. Scooter Corp had no beginning inventories, finished 40,000 units, and sold 36,000 units. There
were no ending inventories of materials or work in process. Materials purchased and used were
$225,000; direct labor and overhead were $170,000. Ending inventory would be valued at
a. $17,000.
b. $22,500.
c. $39,500.
d. some other number.
b 34. Scooter Corp had no beginning inventories, finished 40,000 units, and sold 36,000 units. There
were no ending inventories of materials or work in process. Materials purchased and used were
$225,000; direct labor and overhead were $170,000. Cost of goods sold would be valued at
a. $39,500.
b. $355,500.
c. $395,000.
d. some other number.
b 35. Dewey Company had a beginning inventory of 3,000 units 35% complete, and an ending
inventory of 2,500 units 20% complete. If 17,500 units were completed, weighted-average EUP is
a. 17,500.
b. 18,000.
c. 18,550.
d. 20,000.
b 36. Dewey Company had a beginning inventory of 3,000 units 35% complete, and an ending
inventory of 2,500 units 20% complete. If 17,500 units were completed, FIFO EUP is
a. 17,500.
b. 16,950.
c. 16,050.
d. 15,050.
a 37. Cheatem has a weighted-average EUP of 30,000 units. Beginning inventory was 4,000 units
40% complete; ending inventory was 5,000 units 60% complete. The number of units completed is
a. 27,000.
b. 29,000.
c. 30,000.
d. 31,000.
b 38. Cheatem has a weighted-average EUP of 30,000 units. Beginning inventory was 4,000 units
40% complete; ending inventory was 5,000 units 60% complete. FIFO EUP is
a. 25,400.
b. 28,400.
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c. 30,000.
d. 31,000.
d 39. Howe has a FIFO EUP of 46,580 units. Beginning inventory of 6,500 units was 80% complete;
the ending inventory of 2,800 units was 60% complete. How many units were completed during the
period?
a. 39,700
b. 44,900
c. 46,200
d. 50,100
c 40. Howe has a FIFO EUP of 46,580 units. Beginning inventory of 6,500 units was 80% complete; the
ending inventory of 2,800 units was 60% complete. Weighted-average EUP is
a. 46,580.
b. 47,880.
c. 51,780.
d. some other number.
b 41. Sosa Inc. had $3,000 in beginning work in process and incurred an additional $28,500 during
the period. If weighted-average EUP was 10,000 units, unit cost would be
a. $2.85.
b. $3.15.
c. $9.50.
d. some other number.
a 42. Granger Co. had $3,000 in beginning work in process and incurred an additional $28,500 during
the period. If FIFO EUP was 10,000 units, unit cost would be
a. $2.85.
b. $3.15.
c. $9.50.
d. some other number.
b 43. Field Company had a beginning inventory of 2,000 units 40% complete, ending inventory of
1,500 units 70% complete, and transferred out 23,500 units. Weighted-average unit costs were $1.15
for materials, $0.75 for conversion costs. All materials are added at the start of the process. The cost
of finished units transferred to finished goods is
a. $28,750.
b. $44,650.
c. $47,500.
d. $52,250.
b 44. Field Company had a beginning inventory of 4,000 units 40% complete, ending inventory of
3,000 units 70% complete, and transferred out 47,000 units. Weighted-average unit costs were $1.15
for materials, $0.75 for conversion costs. All materials are added at the start of the process. The cost
of ending inventory is
a. $5,700.
b. $5,025
c. $3,990.
d. some other number.
b 45. Garden Co. had a beginning inventory of 3,000 units 60% complete, ending inventory of 3,000
units 80% complete, and transferred out 27,500 units. FIFO unit costs were $2.15 for materials, $1.25
for conversion costs. All materials are added at the start of the process. Beginning inventory cost
$9,400. The cost of finished units transferred out is
a. $69,875.
b. $92,900.
c. $93,500.
d. $103,700.
b 46. Garden Co. had a beginning inventory of 3,000 units 60% complete, ending inventory of 3,000
units 80% complete, and transferred out 27,500 units. FIFO unit costs were $2.15 for materials, $1.25
for conversion costs. All materials are added at the start of the process. Beginning inventory cost
$9,400. The cost of ending inventory is
a. $8,160.
b. $9,450.
c. $10,200.
d. $17,000.
d 47. Woods Run has a weighted-average EUP of 49,750 units. Beginning inventory of 4,500 units was
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60% complete; the ending inventory of 4,800 units was 60% complete. The units completed during
the period is
a. 49,750.
b. 44,950.
c. 47,050.
d. 46,870.
b 48. Woods Run has a weighted-average EUP of 49,750 units. Beginning inventory of 4,500 units was
60% complete; the ending inventory of 4,800 units was 60% complete. Conversion costs in beginning
inventory were $1,960; conversion costs added during the period were $40,825. Conversion costs per
unit are
a. $0.82.
b. $0.86.
c. $0.70.
d. cannot be determined with the information given.
a 49. Grover Co. had a beginning inventory of 1,750 units 70% complete, ending inventory of 3,000
units 20% complete, and transferred out 24,500 units. Weighted-average unit costs were $2.15 for
materials, $1.75 for conversion costs. All materials are added at the start of the process. The cost of
finished units transferred to finished goods is
a. $95,550.
b. $102,375.
c. $107,250.
d. $114,075.
c 50. Grover Co. had a beginning inventory of 1,750 units 70% complete, ending inventory of 3,000
units 20% complete, and transferred out 24,500 units. Weighted-average unit costs were $2.15 for
materials, $1.75 for conversion costs. All materials are added at the start of the process. The cost of
ending inventory is
a. $2,340.
b. $6,450.
c. $7,500.
d. $11,700.
True-False
T 1. To calculate weighted-average equivalent production you do not need to know the number of
units in the beginning inventory.
F 2. Equivalent production calculated using FIFO is higher than equivalent production calculated
using weighted average.
T 3. Departmental overhead rates can be used by both job-order and process costing firms.
F 8. Backflush costing uses two inventory accounts: raw materials and a combined work in
process/finished goods.
T 9. If a company has no inventories, the weighted-average approach and the FIFO approach will
result in the same income.
F. 10. Although weighted average and FIFO may give different values for inventory, the resulting
income will always be the same.
Problems
1. Clater uses weighted-average process costing. It had the following results in July.
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Current period production costs $166,200
SOLUTION:
The cost of the beginning inventory was $2,900 and current period production costs were
$166,880.
d.Compute the cost of goods completed and transferred to finished goods inventory.
SOLUTION:
b. $1.60 ($166,880/104,300)
d. $159,700
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e. Scottso now uses FIFO. Compute ending inventory of work in process.
SOLUTION
a. 53,500 [50,000 + (5,000 x 70%)]
$83,920
-------------------------------------- = $1.6046
50,000 + (5,000 x 70%) - (3,000 x 40%)
4. Debra's Pottery Studios uses weighted-average process costing. It had the following results in
June.
SOLUTION:
5. Dubois Corp. has a just-in-time manufacturing system and maintains no ending materials or work
in process inventory balances. Dubois uses backflush costing and had the following data for March.
SOLUTION:
140
Conversion Costs $525,000
6. Wheeler Inc. sold 125,000 units of product during the year. Variable cost per unit was $5,
standard fixed manufacturing cost per unit was $8, and selling and administrative costs were
$425,000. All costs were incurred as budgeted. Income was $175,000 after a favorable volume
variance of $100,000. There were no changes in inventory during the year.
b.Determine the volume used to set the standard fixed manufacturing cost per unit.
SOLUTION:
The cost of the beginning inventory was $3,180 and current period production costs were
$222,970.
d.Compute the cost of goods completed and transferred to finished goods inventory.
SOLUTION:
d. $219,880
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c. Compute the cost of the ending inventory of work in process.
SOLUTION:
a. Compute the equivalent units of production for materials and for conversion costs for the month
of July.
SOLUTION:
142
Yount uses the FIFO method of costing.
a. Compute the equivalent units of production for materials and for conversion costs for the month
of September.
b.Compute the unit costs for each cost factor.
SOLUTION:
c. $1,582,940
Beginning inventory ($109,730 + 38,950) $148,680
Finish beginning inventory (8,000 x 40% x $8.80) 28,160
Units started and completed (64,500 x $21.80) 1,406,100
---------
Total $1,582,940
==========
d. $196,000 Materials: 10,000 x 100% x $13.00 = $130,000
Conversion: 10,000 x 75% x $8.80 = 66,000
--------
$196,000
========
143