BEC 3 - Operations Management

Question 1

Weighted Average and FIFO equivalent units would be the same in a period when..

Answer 1

no beg inv exists

Question 2

What costs is included in the product costs?

Answer 2

Direct material and conversion costs.

Question 3

What are the four cost associated with product quality costs?

Answer 3

Internal failure, external failure, prevention, and appraisal

Question 4

What is a Pareto Diagram?

Answer 4

it is called a histogram (frequency diagram); used to determine the quality control issues that are most frequent and often demand the greatest attention

Question 5

What is the fishbone diagram?

Answer 5

It is also called the cause and effect diagram; it is used to analyze the source of potential problems and their locations within a process

Question 6

What is a balanced scorecard?

Answer 6

a balanced scorecard provides information on several aspects of an organization’s performance, capturing success factors such as financial performance, internal business processes, innovation/HR advancements and customer satisfaction

Question 7

what is the economic value-added method?

Answer 7

it is a measure that uses net operating profit after taxes (NOPAT) and compares it to required return for the capital.

Evaluates the performance of firm’s capital in any given year

represents the residual income that remains after the cost of capital, including equity has been deducted

Question 8

What is the formula for the asset turnover ratio?

Answer 8

total sales divided by total assets

Question 9

At the end of its fiscal year, C.G. Manufacturing recorded the data below:

Prime cost $800,000
Variable manufacturing overhead $100,000
Fixed manufacturing overhead $160,000
Variable selling and other expenses $80,000
Fixed selling and other expenses $40,000

If C.G. uses variable costing, the inventoriable costs for the fiscal year are

Answer 9

Prime cost $800K + Variable Mfg OH $100K = $900K

Question 10

What are conversion costs?

Answer 10

Direct labor and MFG OH

Question 11

When traditional costing is used, application of overhead is accomplished in two steps:

Answer 11

Step 1: Overhead rate = Budgeted overhead costs divided by estimated cost driver

Step 2: Applied Overhead = Actual cost driver x overhead rate (from step 1)

Question 12

What is job order costing?

Answer 12

used for unique lower volume & easily identifiable inventory

cost is allocated to a specific job as it moves through the manufacturing process

Question 13

Jonathon MFG adopted a job costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were 20,000 and $100,000. In addition, budgeted variable and fixed factory overhead were $50,000 and $25,000, respectively?

Actual costs and hours for the year were as follows:

Direct labor hours - 21,000
Direct labor costs - $110,000
Machine hours - 35,000

For a particular job, 1,500 direct labor hours were used. Using direct labor hours as the cost driver, what amount of overhead should be applied to this job?

Answer 13

Step 1: O/H Rate = total MFG O/H est. divided by total est. DL hours

$75,000 divided by 20,000 = $3.75 per hour

Step 2: 1,500 hours x $3.75 = $5,635

Question 14

What is process costing?

Answer 14

a method of product costing that averages costs and applies them to a large number of homogenous items

Question 15

What are equivalent units?

Answer 15

attaching costs to partially completed units at the end of each period.

Finished units = 1,000
Partially finished units = 600 units
percent complete 30%

Total Equivalent Units is 1,180 EU (1000 + 600*30%)

Question 16

WIP beg - 100 units, 25% complete
Units completed and transferred out - 600 units
WIP, end - 200 units, 40% complete

Compute the equivalent units of production using the FIFO method and the weighted cost method.

Answer 16

Weighted average equivalent units of production
1. Units completed and transferred out (always 100%) - 600 units
2. WIP, end - 200 units x 40% = 80 units
3. Equivalent units of production = 680 units

FIFO equivalent units of production

1. WIP, Beg - 100 units x 75% (to complete) = 75 units
2. Units Started and Completed this period
   Units completed and transferred out - 600
   Units in beg inventory - (100)
   Total is 500 units
3. WIP, ending - 200 units x 40% = 80 units

75 units + 500 units + 80 units = 655

Question 17

How to determine the cost per equivalent unit for Weighted Average and FIFO methods?

Answer 17

1. Weighted Average = (Beg Cost + Current Costs) / Equivalent units
2. FIFO = Current Cost ONLY / Equivalent Units

Question 18

What is the basic operation of Activity Based Costing?

Answer 18

1. Identify the Cost Drivers - identify the activity centers and the activities that drive the costs in each activity center
2. Accumulate the Costs in Cost Pools - many small cost pools are accumulated
3. Trace Indirect Costs to Activity Centers - trace any indirect costs to the activity centers that can be assigned without allocation
4. Allocate Remaining Indirect Cost Pools - Costs of each activity are applied to cost objects based on the most appropriate cost drivers
5. Divide assigned costs by level of activity for the cost center - divide the costs assigned to the activity center by the estimated level of activity for the center to device an application rate for that center
6. Cost the product - cost the product by multiplying its demand for the resources of an activity center by the rate for that activity center.

Question 19

What is a Pareto Diagram?

Answer 19

are used to determine the quality control issues that are most frequent and often demand the greatest attention.

this diagram demonstrates the frequency of defects from highest to lowest frequency

Question 20

What is a fishbone diagram?

Answer 20

also called a cause and effect diagram

after the the most frequently recurring issues are identified by the Pareto diagram, a cause and effect diagram may be used to further analyze the defect

this diagram provides a framework for managers to analyze the problems that contribute to the occurrence of defects.

Question 21

What is a balanced scorecard?

Answer 21

gathers information on multiple dimensions of an organization’s performance defined by critical success factors necessary to accomplish the firms strategy. Critical success factors are classified as:

1. Financial
2. Internal business processes
3. Customer satisfaction
4. Advancement of innovation and human resource development (learning and growth)

Question 22

What is the formulas of ROI?

Answer 22

= Income / investment capital

or

= profit margin x investment turnover

**it is the ideal performance measure for investment strategic business units (SBUs)

Question 23

Assume that sales are $1M, net income is $40K, and invested capital is $250K. The organization’s required rate of return (hurdle rate) is 12%.

Determine whether the organization is meeting performance expectations using ROI?

Answer 23

= (net income / sales) x (sales / invested capital)
= ($40K / $1M) x ($1M / $250K)
= $40K / $250K
= 16%

ROI of 16% is greater than hurdle rate so org is meeting performance expectations

Question 24

What is the formulate for Return on Equity?

Answer 24

Net Income / Equity

Question 25

What is the dupont analysis?

Answer 25

breaks down ROE into three distinct components:

1. net profit margin (net income / sales)
2. asset turnover (sales / avg assets)
3. financial leverage (assets / equity)

= Net profit margin x asset turnover x financial leverage

= ROA x Financial leverage

Question 26

What is the extended DuPont Model?

Answer 26

it’s when you break down the net profit margin into three components.

1. tax burden (net income / pretax income)
2. Interest burden (pretax income / EBIT)
3. EBIT Margin (EBIT / Sales)

Extended DuPont ROE = Tax Burden x Interest Burden x EBIT Margin x Asset Turnover x Financial Leverage

Question 27

What are residual income methods?

Answer 27

they measure the excess of actual income earned by an investment over the return required by the company

this is a performance measure for investment SBUs

Question 28

What is the formula for residual income?

Answer 28

= Net Income - required return

required return = NBV (equity) x hurdle rate

Question 29

Greg Manufacturing has an investment in its SouthEast regional plan with a NBV of $200K. Greg expected hurdle rate is 10%, and the division produces net income of $30K

Calculate residual income.

Answer 29

Net Income = $30K

Required return = NBV x hurdle rate
Required return = $200K x 10% = $20K

Residual income = $30K - $20K = $10K

Question 30

What is Economic Value Added method?

Answer 30

similar to residual income method.

computes required return based on hurdle rate determined by management, and the EVA measures the excess of income after taxes (not counting interest expense) earned by an investment over the return rate defined by the company’s overall cost of capital (WACC)

EVA ensures that performance is measured in comparison to changes associated with all capital, debt, and equity

Question 31

What is the EVA formula?

Answer 31

= Net operating profit after taxes (NOPAT) - Required return

required return = investment x WACC

Question 32

Greg Manufacturing has an investment in its Southeast regional plant with an investment of $300K after adjustments for capitalization of R&D costs and revaluation of certain assets. The company’s cost of capital is 12%, and its division produces a net operating profit after taxes of $50K after adjustments for current year R&D, asset revaluations, and other accounting considerations.

Calculate the economic value added.

Answer 32

NOPAT = $50K

Required return = Investment x WACC
= $300K x 12%
=$36K

EVA = $50K - $36K
EVA = $14K

since EVA is positive, Greg MFG has added to shareholder value

Question 33

An increase in which of the following should cause management to reduce the average inventory?

A. The annual demand for the product.
B. The cost of carrying inventory.
C. The cost of placing an order.
D. The lead time needed to acquire inventory.

Answer 33

B. The cost of carrying inventory.

Carrying costs are all costs associated with holding inventory, such as storage and spoilage. If carrying costs increase, holding larger amounts of inventory increases the total of ordering costs and holding costs. The economic order quantity model determines the order quantity that minimizes the sum of ordering costs and carrying costs. If demand and cost per order are constant, an increase in unit holding cost decreases the economic order quantity. Thus, management should make smaller and more frequent orders. This decreases average inventory.

Question 34

what are the four categories of cost associated with product quality cost?

Answer 34

1. Prevention
2. Appraisal
3. Internal failure
4. External failure

Question 35

What are examples of appraisal costs?

Answer 35

statistical quality checks, testing, and inspections, maintenance of labs

Question 36

What are critical success factors normally classified as?

Answer 36

1. Financial Solvency and return
2. Customer satisfaction
3. Internal business processes
4. human resource innovation

Question 37

Echo Company uses a normalized job costing system and applies factory overhead on the basis of machine hours. Echo’s yearly profit plan disclosed anticipated factory overhead of $4,800,000 if 200,000 machine hours are worked. By year end, actual factory overhead charges and machine hours worked amounted to $4,730,000 and 215,000, respectively. What amount correctly states the factory overhead applied to Echo’s actual year-end overhead?

A. $360,000 overapplied.
B. $430,000 overapplied.
C. $70,000 overapplied.
D. $430,000 underapplied.

Answer 37

B. $430,000 overapplied.

The standard overhead rate is $24 per machine hour ($4,800,000 ÷ 200,000). Total overhead applied is the product of the standard overhead rate and the actual hours, which is $5,160,000 ($24 × 215,000). With an actual overhead of $4,730,000 and an applied overhead of $5,160,000, the company has overapplied its overhead by $430,000 ($5,160,000 – $4,730,000).

Question 38

What costs are treated as product costs under variable costing?

A. Only variable production costs.
B. All variable and fixed manufacturing costs.
C. All variable costs.
D. Only direct costs.

Answer 38

A. Only variable production costs.

Product costs under variable costing include direct materials, direct labor, and variable factory overhead. Each is a variable production cost.

Question 39

When a firm prepares financial reports by using absorption costing,

A. Profits will always increase with increases in sales.
B. Profits will always decrease with decreases in sales.
C. Profits may decrease with increased sales even if there is no change in selling prices and costs.
D. Decreased output and constant sales result in increased profits.

Answer 39

C. Profits may decrease with increased sales even if there is no change in selling prices and costs.

In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed production, more overhead is expensed under absorption costing because fixed overhead is carried over from the prior inventory. If sales exceed production, more than one period’s fixed overhead is recognized as expense. Accordingly, if the increase in fixed overhead expensed is greater than the contribution margin of the increased units sold, less profit may result from an increased level of sales.

Question 40

A company has significant fixed overhead costs in the manufacturing of its sole product, auto mufflers. For internal reporting purposes, in which one of the following situations would ending finished goods inventory be higher under direct (variable) costing rather than under absorption costing?

A. If more units were sold than were produced during a given year.
B. In all cases when ending finished goods inventory exists.
C. None of these situations.
D. If more units were produced than were sold during a given year.

Answer 40

C. None of these situations.

The monetary value of ending inventory is never higher under direct costing than under absorption costing because fewer costs are capitalized under direct costing.

Question 41

In an income statement prepared as an internal report using the variable costing method, variable selling and administrative expenses are

A. Used in the computation of the contribution margin.
B. Used in the computation of operating income but not in the computation of the contribution margin.
C. Not used.
D. Treated the same as fixed selling and administrative expenses.

Answer 41

A. Used in the computation of the contribution margin.

In a variable costing income statement, the contribution margin equals sales minus all variable costs, which include the variable selling and administrative expenses as well as variable manufacturing costs (direct materials, direct labor, and variable factory overhead). Operating income equals the contribution margin minus all fixed costs.

Question 42

A decrease in direct materials costs often results in a(n)

A. Favorable sales volume variance.
B. Unfavorable sales price variance.
C. None of the answers are correct.
D. Unfavorable sales volume variance.

Answer 42

C. None of the answers are correct.

The sales volume variance is the change in contribution margin attributable solely to the difference between the actual and budgeted unit sales (if contribution margin is constant). A decrease in direct materials costs will not change standard price, actual unit sales, or budgeted unit sales unless the materials are defective, unsuitable, or otherwise of poor quality. Thus, a decrease in direct materials costs will not result in a sales volume variance. The sales price variance is the change in contribution margin attributable solely to the change in selling price (if quantity is constant). A simple decrease in direct materials costs will not change actual unit sales, actual price, or standard price. Thus, a decrease in direct materials costs usually will not result in a sales price variance. However, a favorable materials cost decrease due to poor quality materials may affect sales.

Question 43

In a job-order cost system, the application of factory overhead is usually reflected in the general ledger as an increase in
A. Finished goods control.
B. Work-in-process control.
C. Manufacturing overhead control.
D. Cost of goods sold.

Answer 43

B. Work-in-process control.

The entry to record the application of manufacturing overhead to specific jobs is to charge WIP control and credit manufacturing overhead applied using a predetermined overhead rate. The effect is to increase the WIP control account.

Question 44

Under the three-variance method for analyzing manufacturing overhead, the difference between the actual manufacturing overhead and the manufacturing overhead applied to production is the

A. Controllable variance.
B. Net manufacturing overhead variance.
C. Spending variance.
D. Efficiency variance.

Answer 44

B. Net manufacturing overhead variance.

Three-way analysis calculates spending, efficiency, and volume variances. However, regardless of whether two-, three-, or four-way analysis is used, the net manufacturing overhead variance is the difference between actual overhead and the amount applied to production.

Question 45

A company has the following financial information:
Sales 200,000
Net income 100,000
Depreciation 20,000
Interest 10,000
Taxes 5,000

What is the company’s operating profit margin?
A. 50.0%
B. 67.5%
C. 57.5%
D. 32.5%

Answer 45

C. 57.5%

The operating profit margin equals operating income divided by net sales. The operating profit margin therefore equals 57.5% [($100,000 net income + $10,000 interest + $5,000 taxes) ÷ $200,000 sales].

Question 46

In a traditional job-order cost system, the issuance of indirect materials to a production department increases

A. Stores control.
B. Factory overhead applied.
C. Work-in-process control.
D. Factory overhead control.

Answer 46

D. Factory overhead control.

As overhead is incurred, factory overhead control is debited and accounts payable, supplies, etc., are credited. When overhead is applied, work-in-process is debited and factory overhead applied is credited. The difference between the debited and credited amounts is over- or underapplied overhead.

Question 47

The following information pertains to a by-product called Moy:

Sales for the month 5,000 units
Selling price per unit $6
Selling costs per unit $2
Processing costs $0

Inventory of Moy was recorded at net realizable value (NRV) when produced in the previous month. No units of Moy were produced in the month just ended. What amount should be recognized as profit on Moy’s sales?
A. $10,000
B. $30,000
C. $0

Answer 47

Net realizable value is selling price minus selling and disposal costs, which means there is no (zero) profit when sold. The product’s NRV and recorded inventory cost is equal to $4 per unit ($6 selling price per unit – $2 selling cost per unit). Therefore, when the units are sold, the company will record revenue of $30,000 ($6 × 5,000 units), cost of goods sold of $20,000 ($4 × 5,000 units), and selling costs of $10,000 ($2 × 5,000 units). This leads to the company breaking even on the transaction and not recognizing any profits on Moy’s sales ($30,000 – $20,000 – $10,000).

Question 48

If the value of a byproduct is inventoried, how is it treated with respect to the joint costs?

Answer 48

If the value of the byproduct is inventoried it is treated as a reduction in joint cost

Question 49

Which of the following is a disadvantage of using a process costing system versus job-order costing?

A. It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.
B. It is expensive to use as a good deal of clerical work is required.
C. It is difficult to determine cost of goods sold when partial shipments are made before completion.
D. It is difficult to ensure that materials and labor are accurately charged to each specific job.

Answer 49

A. It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.

Process costing is used to assign costs to similar products that are mass produced on a continuous basis. Costs are accumulated for a cost object consisting of a large number of similar units of goods or services, work-in-process is stated in terms of equivalent units, and unit costs are established based on the average cost of all units. Process costing, therefore, involves the calculation of the stage of completion of goods-in-process, a necessary step in determining the number of equivalent units.

Question 50

In a traditional job-order cost system, the issuance of indirect materials to a production department increases

A. Factory overhead applied.
B. Work-in-process control.
C. Factory overhead control.
D. Stores control.

Answer 50

C. Factory overhead control.

As overhead is incurred, factory overhead control is debited and accounts payable, supplies, etc., are credited. When overhead is applied, work-in-process is debited and factory overhead applied is credited. The difference between the debited and credited amounts is over- or underapplied overhead.