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MAS Lauderbach 1 PDF
MAS Lauderbach 1 PDF
1 Introduction ..................................................................................................1
2 Profit Planning .............................................................................................9
3 Cost Analysis .............................................................................................23
4 Activity-Based Costing and Management .................................................34
5 Short-Term Decisions and Accounting Information..................................54
6 Operational and Financial Budgeting ........................................................74
7 Capital Budgeting Decisions–Part I ...........................................................90
8 Capital Budgeting Decisions–Part II .......................................................103
9 Responsibility Accounting .......................................................................117
10 Divisional Performance Measurement.....................................................133
11 Control and Evaluation of Cost Centers ..................................................148
12 Introduction to Product Costing ...............................................................163
13 Standard Costing, Variable Costing, and Throughput Costing................179
14 Process Costing and the Cost Accounting Cycle .....................................195
CHAPTER 1: INTRODUCTION
Multiple Choice
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.
True-False
T 3. Economic events are the raw data for both financial and managerial
accounting.
Problems
SOLUTION:
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Multiple Choice
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
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.
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 $15 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%.
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.
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 24. If a company is earning a profit, its fixed costs
a. are less than total contribution margin.
b. are equal to total contribution margin.
c. are greater than total variable costs.
d. can be greater than or less than total contribution margin.
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.
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.
a 33. In the following graph, revenue is represented by
A
| * D
| * *
| * *
| * *
| * *
| *
| * *
| * *
| * *
B|*__________*___________________________________ C
| *
| *
| *
| *
|*______________________________________________
O E
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.
d 35. In the following graph, total variable costs are represented by
A
| * D
| * *
| * *
| * *
| * *
| *
| * *
| * *
| * *
B|*__________* __________________________________ C
| *
| *
| *
| *
|*______________________________________________
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.
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
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
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
T 6. As unit sales increase, both average total cost and fixed cost per unit
decrease.
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 $8 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.
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
--- --- ---
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 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.
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
SOLUTION:
b. 64%
$728,000 - $600,000
-------------------- = 64%
$800,000 - $600,000
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:
Multiple Choice
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.
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.
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.
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.
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.
True-False
T 10. A multiple regression equation uses more than one driver to predict
costs.
Problems
SOLUTION:
c. About 68% of the time, maintenance cost should be within what amount of
the predicted value?
SOLUTION:
SOLUTION:
SOLUTION:
SOLUTION:
c. About 68% of the time, repair cost should be within what amount of the
predicted value?
SOLUTION:
SOLUTION:
SOLUTION:
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.
c 9. The segment for which you are estimating the cost is called the
a. activity driver
b. consumption ratio
c. cost object
d. sustaining activity
d 11. A tool that compares how tasks are performed internally with the best
practices of industry leaders is
a. process value analysis
b. re-engineering
c. caveat analysis
d. benchmarking
d 20. ____________ are those performed each time a unit is produced or sold.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
a 21. ____________ are those that a company performs when it makes a group of
units.
a. Batch-level activities
b. Facility-sustaining activities
c. Sustaining activities
d. Unit-level activities
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.
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.
Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2
Model A Model B
Units produced 200 400
Material moves (total) 20 80
Direct labor hours per unit 1 2
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 40. 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:
c 43. Waupaca Company produces three products with the following production
and cost information:
a 45. Waupaca Company produces three products with the following production
and cost information:
a 46. Waupaca Company produces three products with the following production
and cost information:
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
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
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
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
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
Amount Amount of
Cost driver In Pool Activity
----------- -------- ---------
Direct labor hours $100,000 15,000
Number of batches 150,000 200
Design changes 50,000 125
--------
Total overhead costs $300,000
========
Product X Product Y
--------- ---------
Direct labor hours 1,000 400
Number of batches 10 20
Design changes 1 15
SOLUTION:
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:
3. Johnson & Mathey 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.
a. Determine the profits for each segment, assuming costs are allocated
based on annual revenues.
b. Determine the profits for each segment, assuming costs are allocated
based on the number of jobs.
c. Determine the profits for each segment, assuming costs are allocated
based on chargeable hours.
SOLUTION:
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
SOLUTION:
Total salaries for the year were $900,000; overhead was $600,000.
a. Determine the profits for each segment, assuming costs are allocated
based on annual revenues.
b. 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:
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
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
Labor costs 250,000 150,000 $400,000
Number of receipts 8,000 2,000
Number of batches 425 75
SOLUTION:
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:
SOLUTION:
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
External Internal
Failure Failure Appraisal Prevention
1. In-process inspection
2. Warranty expenses
3. Worker training
4. Downtime on machinery due
to rework
5. Product returns
6. Product design
7. Preventive maintenance
8. Wages for field repair
workers
9. Quality laboratory
10. Customer complaints
SOLUTION:
External Internal
Failure Failure Appraisal Prevention
1. In-process inspection X
2. Warranty expenses X
3. Worker training X
4. Downtime on machinery due
to rework X
5. Product returns X
6. Product design X
7. Preventive maintenance X
8. Wages for field repair
Workers X
9. Quality laboratory X
10. 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.
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.
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.
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.
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.
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
a. 100 80 150
b. 50 80 150
c. 90 0 150
d. 100 80 100
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.
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. 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:
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
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
d. 100 80 100
True-False
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 8. The only revenues or costs that are relevant in decision making are the
differential revenues or costs.
The unavoidable costs are allocated based on unit sales of 1,000 A and
2,000 B. CONSIDER EACH QUESTION INDEPENDENTLY UNLESS TOLD OTHERWISE.
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:
SOLUTION:
SOLUTION:
There are 2,400 minutes available on each machine during the week. All
materials needed are readily available on a just-in-time basis.
a. 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
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.
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:
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
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.
a. Scottso currently has 60,000 hours available for production each month.
How many units should be produced and sold for each product?
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.
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:
b. $420 ($420,000/1,000)
Multiple Choice
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.
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.
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.
c. 52,000 units.
d. 28,000 units.
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.
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 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
a. $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.
True-False
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 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.
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:
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:
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.
b. Find the amount and direction of the budget variance for 20X2 for
production overhead. (favorable unfavorable) Circle one answer.
SOLUTION:
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 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.
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.
March $300,000
April $312,000
May $320,000
June $348,000
10. Hicks Company has the following sales projections for 20X4:
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
20X3.
a. Prepare a schedule of cash receipts for the first three months of 20X4.
Multiple Choice
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.
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.
a 7. If an investment has a positive NPV,
a. its IRR is greater than the company's cost of capital.
b. cost of capital exceeds the cutoff rate of return.
c. its IRR is less than the company's cutoff rate of return.
d. the cutoff rate of return exceeds cost of capital.
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.
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.
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 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.
True-False
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
SOLUTION:
Cost $100,000
Useful life 10 years
Annual straight-line depreciation $ 10,000
Expected annual savings in cash
operation costs $ 18,000
SOLUTION:
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:
a. Find the increase in annual after-tax cash flows for this opportunity.
SOLUTION:
SOLUTION:
SOLUTION:
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:
SOLUTION:
a. Payback period: 3.0 years (30,000 + 60,000 + 90,000)
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
======
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:
a. Find the increase in annual after-tax cash flows for this opportunity.
SOLUTION:
Multiple Choice
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.
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 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.
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
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.
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
True-False
F 7. Both the IRR and the book rate of return methods of analyzing
investments should yield the same decision.
Problems
If the company sells the machine its cash operating expenses will increase
by $30,000 per year due to an operating lease. The tax rate is 40%.
SOLUTION:
a. Cash flow from sale: $90,000 ($70,000 + 40% tax savings on the $50,000
tax loss)
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:
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:
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%.
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:
{[($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:
If the company sells the machine its cash operating expenses will increase
by $20,000 per year. The tax rate is 40%.
SOLUTION:
a. Cash flow from sale: $116,000 ($120,000 - 40% tax on the $10,000 tax
gain)
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:
a. Compute the expected increase in annual net cash flow for this project.
SOLUTION:
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-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
Seiler's cutoff rate is 12% and its tax rate is 40%.
SOLUTION:
Multiple Choice
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.
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.
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 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.
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.
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.
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
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:
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.
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:
True-False
F 2. The sales volume variance is the difference between actual and planned
unit sales multiplied by the actual contribution margin per unit.
T 8. The sales price variance is the difference between the actual selling
price and the planned selling price multiplied by actual units sold.
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%
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%
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:
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% -
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%
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%
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%
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.
SOLUTION:
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%
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:
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
----
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
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.
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.
b 24. If two divisions earn the same ROI and RI, which of the following is
true?
a. Their managers must be about equally skillful.
b. Their incomes and investments must be the same.
c. Both divisions are doing as well as they should be.
d. All of the above.
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.
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.
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
c 39. Scottso Division has the following results for the year:
Revenues $1,080,000
Variable expenses 440,000
Fixed expenses 400,000
c 41. Scottso Division has the following results for the year:
Revenues $1,080,000
Variable expenses 440,000
Fixed expenses 400,000
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 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
c 49. Durand Division has the following results for the year:
Revenues $470,000
Net income 130,000
d 50. Durand Division has the following results for the year:
Revenues $470,000
Net income 130,000
True-False
T 8. Transfer prices equal to market prices are least appropriate when the
selling division has excess productive capacity.
Problems
SOLUTION:
Division B has the opportunity to buy its needs for 40,000 units from an
outside supplier at $8 each.
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:
SOLUTION:
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:
5. Crosby Division has the following information for the most recent period:
SOLUTION:
Division Division
A B
-------- ----------
Divisional investment $400,000 $1,250,000
Divisional profit $120,000 $ 580,000
Divisional sales $800,000 $2,600,000
SOLUTION:
Division B has the opportunity to buy its needs for 5,000 units from an
outside supplier at $45 each.
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)]
SOLUTION:
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)
c. Find the effect of the deal on the income of Lachene Inc. and circle
the correct direction. (increase decrease none)
SOLUTION:
10. Young Division has the following information for the most recent period:
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.
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.
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.
c 15. Which set of terms describes the same type of variance?
a. Price variance, rate variance, use variance.
b. Price variance, rate variance, efficiency variance.
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 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 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
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
c 49. Barron Company has standard variable costs as follows:
Materials, 3 pounds at $4.00 per pound $12.00
Labor, 2 hours at $10.00 per hour 20.00
Variable overhead, $7.50 per labor hour 15.00
$47.00
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 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 $12 per unit
Labor, 3 hours at $15 per hour $45 per unit
Variable overhead at $8 per labor hour $24 per 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 $12 per unit
Labor, 5 hours at $12 per hour $60 per unit
Variable overhead at $7 per labor hour $35 per 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:
Budget Actual
------ ------
Unit production 9,000 9,600
Direct labor hours 11,250 11,550
Materials used, feet 15,750 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
SOLUTION:
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, feet 16,000 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 $15 per unit
Labor, 3 hours at $14 per hour $42 per unit
Variable overhead at $10 per labor hour $30 per 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
SOLUTION:
6. Toimi Inc. had the following variances for the most recent month:
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:
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.
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)
Multiple Choice
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.
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.
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.
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
c. 23,000
d. 22,000
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.
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
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 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.
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
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.
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.
SOLUTION:
SOLUTION:
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
=======
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.
SOLUTION:
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.
SOLUTION:
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
SOLUTION:
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:
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.
a. What is cost of goods sold using normal costing?
SOLUTION:
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.
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
=======
Multiple Choice
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.
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.
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 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.
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 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
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.
True-False
Problems
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:
SOLUTION:
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:
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:
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:
SOLUTION:
SOLUTION:
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.
c. Compute the absorption costing income if fixed costs per unit are
determined using budgeted production.
SOLUTION:
Multiple Choice
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.
d 16. A company that uses standard costing
a. must make only one product.
b. always has a volume variance unless normal capacity and practical
capacity are the same.
c. shows higher incomes than it would if it used actual costing.
d. shows the same per-unit cost of inventory each month.
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.
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.
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.
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.
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
F. 10. Although weighted average and FIFO may give different values for
inventory, the resulting income will always be the same.
Problems
SOLUTION:
The cost of the beginning inventory was $2,900 and current period
production costs were $166,880.
SOLUTION:
b. $1.60 ($166,880/104,300)
c. $10,080, (9,000 x 70% x $1.60)
d. $159,700
3. The following data are available for 20X4 for Scottso, which uses
weighted-average process costing.
SOLUTION:
$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:
SOLUTION:
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.
SOLUTION:
b. $1.10 ($222,970/202,700)
8. The following data are available for 20X2 for Hunter, Inc., which uses
weighted-average process costing.
SOLUTION:
SOLUTION:
SOLUTION:
c. $1,582,940