Accounting Exam #4

Question 1

Select the false statement.

Answer 1

General, selling, and administrative costs can’t be assigned to a cost object.
Other options: -The same cost may be assigned to more than one cost object
-Indirect costs can’t be easily traced to a cost object
-A given cost can be driven by more than one cost driver.

Question 2

Which of the following is NOT an example of a cost object and its related cost driver?

Answer 2

Cost Object Cost Driver
Direct Labor Hours Indirect Labor

Rent Square Feet
Transportation Miles Driven
Utilities Machine Hours

Question 3

A chair manufacturer makes custom chairs using hand tools, wood, glue and varnish. Which of the following statements is true?

Answer 3

Wood would be accounted for as a direct cost, and glue and varnish as indirect costs.

Question 4

Preston Company has three divisions. The company should consider a cost to be a direct cost of a division if:

Answer 4

It can be traced to a division in a cost-effective manner.

Question 5

Marsden Company has three departments occupying the following amount of floor space:

Department 1 15,000 sq. ft.
Department 2 10,000 sq. ft.
Department 3 25,000 sq. ft.

How much store rent should be allocated to Department 3 if total rent is equal to $200,000? (Do not round intermediate calculations.)

Answer 5

100,000

Allocation rate = Total cost to be allocated ÷ Cost driver (allocation base)

Allocation rate = $200,000 ÷ (15,000 sq. ft. + 10,000 sq. ft. + 25,000 sq. ft.) = $200,000 ÷ 50,000 sq. ft. = $4 per sq. ft.

Allocation per cost object = Allocation rate × Weight of the cost driver for that cost object

Allocation to Department 3 = $4 per sq. ft. × 25,000 sq. ft. = $100,000

Question 6

At the beginning of the year, Rangle Company expected to incur $54,000 of overhead costs in producing 6,000 units of product. The direct material cost is $20 per unit of product. Direct labor cost is $30 per unit. During January, 600 units were produced. The total cost of the units made in January was:

Answer 6

35,400
Direct material cost of $12,000 (= 600 units × $20 per unit) + Direct labor cost of $18,000 (= 600 units × $30 per unit) + Overhead cost of $5,400 (= $54,000 ÷ 6,000 units × 600 units) = $35,400

Question 7

State University’s College of Business is divided into three departments, accounting, marketing, and management. Relevant information for each department is provided below:

Cost Driver-Accounting-Marketing-Management
Number of students 700 400 200
Number of classes per semester 32 18 14
Number of faculty 10 12 5

The Dean of the College of Business is trying to assign funds from the operating budget to the three departments. Assuming that the chair of each department is trying to attain the highest funding possible for his/her department, which of the following most accurately describes the allocation base that each chair will favor?

Answer 7

The chair of the Management department will want to use the number of classes while the chair of the Marketing department will prefer the number of faculty.

Recall that the allocation rate equals the total cost to be allocated divided by the cost driver (allocation base). Here, the funds to be assigned from the operating budget represent the total cost to be allocated. Each department chair will favor the rate that provides the highest allocation of budget funds as shown below:
Cost Driver Allocation Base Accounting Marketing Management
Number of students 700 + 400 + 200 = 1,300 700 ÷ 1,300 = 53.8 % 400 ÷ 1,300 = 30.8 % 200 ÷ 1,300 = 15.4 %
Number of classes per semester 32 + 18 + 14 = 64 32 ÷ 64 = 50 % 18 ÷ 64 = 28.1 % 14 ÷ 64 = 21.9 %
Number of faculty 10 + 12 + 5 = 27 10 ÷ 27 = 37.0 % 12 ÷ 27 = 44.4 % 5 ÷ 27 = 18.5 %

Question 8

Danforth Manufacturing Company uses a cost-plus pricing strategy. At the beginning of the year, Danforth estimated that total annual fixed overhead costs would amount to $60,000. Further, Danforth estimated that the annual volume of production would be 1,000 units of product. Based on these estimates, Danforth computed a predetermined overhead rate that was used to allocate overhead cost to the products made throughout the year. As predicted, the actual volume of production amounted to 1,000 units of product. However, actual fixed overhead costs amounted to $56,000. Based on this information alone:

Answer 8

a higher than appropriate selling price was assigned to products during the year

Question 9

Custom Quilters makes decorative comforters, quilted garments, and other products in a small sewing factory. The company expects to make 2,000 comforters during the current year. With respect to the comforters, how would the supervisory salaries be classified?

Answer 9

Indirect and fixed

Question 10

Which of the following is NOT an important factor in determining the appropriate cost driver to use in allocating a cost?

Answer 10

-All of the answers are important factors in determining the appropriate cost driver to use in allocating a cost.
-A cause-and-effect relationship between the cost and the cost driver.
-The availability of information about the cost and cost driver.
-The ability of the cost driver to allocate indirect costs to cost objects.

Question 11

Ch 13.

Question 12

Select the correct statement regarding relevant costs and revenues.

Answer 12

Relevant revenues must differ among the alternatives.

Question 13

Ann is trying to decide which one of two job offers she will accept. Several items are presented below:

1) Base salary - same for both
2) Overtime Compensation - different
3)Moving Allowance - same for both
4) Signing Bonus - different
5) Job search costs incurred - different

Select the items that are irrelevant to Ann’s decision.

Answer 13

1, 3, 5

Question 14

Scholastic Tours is trying to decide which one of two tours it will introduce. The costs and revenues associated with each alternative are listed below:
Eastern Tour Western Tour
Projected revenue $14,000 $18,000
Variable costs 2,000 10,000
Fixed costs 6,000 6,000
Profit $6,000 $2,000

What are the incremental (differential) costs of the Western Tour?

Answer 14

$8000
Differential costs of Western Tour = $10,000 − $2,000 = $8,000.

Question 15

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department. If the fishing department is closed, the store manager’s position will not be affected, but if the entire store is closed, the manager will be terminated. Which of the following lessons should be learned from this example?

Answer 15

Relevance of costs is context sensitive.

Question 16

Rachel is deciding whether to remain in the home she has lived in for the past ten years, which is located very near her work, or to move into a newer home that is located in the suburbs farther from her job. The old house was purchased for $160,000 and has a market value of $220,000. The new home can be purchased for $285,000. Which of the following is not relevant to Rachel’s decision?

Answer 16

Cost of the old house

Question 17

Which of the following items is qualitative?

Answer 17

Degree to which the new machine can be integrated with existing machinery

Question 18

Which of the following costs is an example of a product-level cost?

Answer 18

Patent filing costs

Question 19

Suck costs:

Answer 19

are not considered when evaluating new proposals.

Question 20

Ch. 14

Question 21

Select the INCORRECT statement about budgeting committees.

Answer 21

Membership on the budget committee is restricted most often to accountants because the budget involves numbers.

Question 22

Which of the following is NOT an advantage of budgeting?

Answer 22

Provides assurance that accounting records are in accordance with generally accepted accounting principles

Question 23

Select the CORRECT statement about budgeting and human behavior.

Answer 23

The attitudes of upper managers significantly impact budget effectiveness.

Question 24

Benton Company’s sales budget shows the following expected total sales:

Month Sales
January $ 25,000
February $ 30,000
March $ 35,000
April $ 40,000

The company expects 80% of its sales to be on account (credit sales). Credit sales are collected as follows: 25% in the month of sale and 72% in the month following the sale, with the remainder being uncollectible and written off. The total cash receipts during April would be:

Answer 24

$36.160
Cash receipts during April from sales in April = (March sales × Percent credit sales + Percent collected in month following month of sale) + (April sales × Percent credit sales + Percent collected in month of sale) + (April sales × Percent cash sales)

Cash receipts during April from sales in April = ($35,000 × 80% × 72%) + ($40,000 × 80% × 25%) + [$40,000 × (100% – 80%)] = $20,160 + $8,000 + $8,000 = $36,160

Question 25

Which of the following would NOT be included in the cash budget?

Answer 25

Depreciation expense
-Interest expense
-Ending cash balance
-Receipts from customers

Question 26

Ch. 15

Question 27

Packrall Company makes computer chips. Curtis is manager of the company’s maintenance department. Because his maintenance technicians are so well trained in maintaining expensive and sensitive circuit board stamping equipment, Curtis has been authorized to contract to perform maintenance for outside customers. In this company, the maintenance department is likely organized as:

Answer 27

A profit center

Question 28

Select the INCORRECT statement concerning the application of the controllability concept to responsibility accounting.

Answer 28

Each manager should be evaluated on the costs but not the revenues that are under his or her control.

Question 29

Spark Company’s static budget is based on a planned activity level of 52,000 units. At the same time the static budget was prepared, the management accountant prepared two additional budgets, one based on 47,000 units and one based on 57,000. The company actually produced and sold 56,000 units. In evaluating its performance, management should compare the company’s actual revenues and costs to which of the following budgets?

Answer 29

A budget based on 56,000 units

For performance evaluation, management compares actual results to a flexible budget based on the actual volume of activity, which, in this situation, is 56,000 units.

Question 30

Jones Company developed the following static budget at the beginning of the company’s accounting period:

Revenue (8,000 units) $ 16,000
Variable costs 4,000
Contribution margin $ 12,000
Fixed costs 4,000
Net income $ 8,000

If actual production totals 8,200 units, the flexible budget would show total costs of:

Answer 30

8,100

Based on 8,200 units:
Total budgeted costs = Variable costs + Fixed costs
Total budgeted costs = [($4,000 ÷ 8,000 units) × 8,200 units] + $4,000 = $8,100

Question 31

The Ferguson Company estimated that October sales would be 100,000 units with an average selling price of $6.00. Actual sales for October were 105,000 units and average selling price was $5.95.

The sales price variance was:

Answer 31

$5,250 unfavorable.

Question 32

When would a sales price variance be listed as unfavorable?

Answer 32

When the actual sales price is less than the standard sales price.

Question 33

Which of the following statements about return on investment (ROI) is FALSE?

Answer 33

ROI equals margin divided by investment turnover.

Question 34

Joseph Company has an investment in assets of $1,197,000, operating income that is 10% of sales, and an ROI of 19%. From this information the amount of operating income would be:

Answer 34

$227,430

ROI = Margin × Turnover
ROI = Operating income ÷ Operating assets
19% = Operating income ÷ $1,197,000
19% × $1,197,000 = Operating income
Operating income = $227,430