BEC Flashcards
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of enterprise risk management addresses an entity’s assignment of authority and responsibility?
Internal environment.
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of enterprise risk management addresses an entity’s reporting deficiencies?
Monitoring.
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework addresses an entity’s timely reporting of identified internal control deficiencies?
Monitoring.
A company that retains a CPA with the appropriate knowledge, skills and abilities to prepare timely and effective financial reporting is applying the ideas from which principle of effective internal control over financial reporting?
Financial reporting competencies.
The Sarbanes-Oxley Act of 2002 requires that the members of the audit committee be independent with regard to the issuer. Within the meaning of the law, which of the following corporate officers would be considered independent?
Board Member
Independent Auditor
Board Member = Yes
Independent Auditor = No
According to the Sarbanes-Oxley Act of 2002, which of the following statements is correct regarding an issuer’s audit committee financial expert?
If an issuer does not have an audit committee financial expert, the issuer must disclose the reason why the role is not filled.
The Sarbanes-Oxley Act of 2002 was enacted in response to corporate scandals that largely centered on the quality of corporate financial disclosure and highlighted the inadequate oversight of management, auditors and the Board of Directors. The Sarbanes-Oxley Act addresses the problems related to inadequate board oversight by requiring public companies to have an:
Audit committee.
The Sarbanes-Oxley Act of 2002 requires that one or more members of the audit committee be a financial expert and that the financial reports disclose:
The existence of financial expert(s) on the audit committee or the reasons why the audit committee does not have a financial expert.
The primary benefit of having a financial expert on a company’s audit committee is:
The enhanced level of financial sophistication of the financial expert can serve as a resource for the audit committee.
Arnold Astor, CPA, is a local tax practitioner who has been asked to sit on the Board of BigLarge Corporation, a multinational issuer. Astor has never had any involvement either as an employee or as an auditor with publically traded companies but does teach an accounting principles class at the community college. Under the provisions of Sarbanes-Oxley Act of 2002:
The Board of Directors would likely evaluate Astor’s qualifications to serve on the audit committee and be designated as a financial expert based on mix of knowledge and experience.
The Sarbanes-Oxley Act of 2002 requires that the officers of a corporation be held accountable to a code of ethics. According to the Act, codifications of ethical standards should include provisions for all of the following, except:
Prompt internal reporting of code provisions and accountability for adherence to the code.
The Sarbanes-Oxley Act of 2002 requires that the management report on internal control include all of the following, except:
A statement that there are no disagreements between management and the auditor as to the effectiveness of internal controls.
The Sarbanes-Oxley Act of 2002 seeks to improve investor confidence by providing greater transparency for all of the following issues, except:
Means and methods for balancing risk and growth.
The Gotham Corporation regularly produces budget vs. actual data for its managers. The company is particularly sensitive to personnel costs, and division variances of greater than five percent for any period are promptly investigated to determine if budgeted postions have not been filled or if there has been extraordinary overtime. Timely exception resolution of this character illustrates the information and communication principles typically associated with:
Internal Control Information.
The external auditors for the Horace Company assess the achievement of internal control objectives each year and communicate the assessment to management and the Board. Communication by the external auditor illustrates which principle of the information and communication component of the Committee on Sponsoring Organization’s Integrated Framework?
External Communication.
The Instafab Corporation regularly assesses whether the financial statements of the company fairly state the financial position, results of operations and cash flows associated with the underlying transactions. Leases, for example are regularly evaluated for their status as a capital or operating lease and, if capital, the valuations of both the asset and liability are evaluated for fairness, the depreciation methods used and interest rates used are assessed for proper computation or application, and inclusion or exclusion of lease-related cash activity from the statement of cash flows is carefully evaluated. The regular evaluation of transactions as part of the risk assessment component of the Committee on Sponsoring Organization’s Framework reflects the principle of:
Financial Reporting Objectives.
Jasper International considers cash receipting and cash disbursement processes as part of their risk assessment. The consideration of processes relates to the:
Financial Reporting Risks.
The Treadway Commission was established to study factors that lead to fraudulent financial reporting. The Treadway Commission was established by:
Private sponsoring organizations.
The Committee on Sponsoring Organizations prepared the Internal Control Integrated Framework:
To help businesses assess internal control.
Able Corporation owns numerous businesses along the coast of Florida. The company’s management has identified business interruption events as a potential risk resulting from storm damages caused by hurricanes. Management is so fearful of the possibility of storm damage that they elect to divest the company of virtually all properties on the Florida coast. Able’s response to potential risks is known as:
Avoidance.
Able Corporation owns numerous businesses along the coast of Florida. The company’s management has identified business interruption events as a potential risk resulting from storm damages caused by hurricanes. The company elects to not only insure its properties but to “buy down” standard deductibles with additional premium. Able’s response to potential risks is known as:
Sharing.
Able Corporation owns numerous businesses along the coast of Florida. The company’s management has identified business interruption events as a potential risk resulting from storm damages caused by hurricanes. The company elects to balance its portfolio of risk with property investments on the coast of other states and in Florida’s interior. Able’s response to potential risks is known as:
Reduction.
Able Corporation owns numerous businesses along the coast of Florida. The company’s management has identified business interruption events as a potential risk resulting from storm damages caused by hurricanes. The company elects to treat the potential damages from hurricanes as part of their business model. Able’s response to potential risks is known as:
Acceptance.
Barker Healthcare Corporation’s management is developing their risk assessment as they review plans to expand their nursing home chain into various states in the southeast. The management team has consulted published industry sources to evaluate both population trends and affluence in the region as a means of evaluating both demand, the ability to pay and the risk that populations may either not seek healthcare or may not be able to afford it. Barker’s listing of risks from industry sources is a technique for risk assessment known as a(n):
Event Inventory.
Kamp Sporting Goods seeks to establish a code of conduct that will communicate the “tone at the top” to all employees. The contents of the code will likely include all of the following, except:
Definitions of common sense approaches to software piracy to ensure that the company is competitive.
Dollar Bus Company has set an objective to fully comply with published bus schedules to ensure consistent on-time service. The company knows that shorter routes per bus minimize delays caused by unforeseen issues. Shorter routes require a greater investment in the fleet. The company currently achieves an 83% compliance rate with the schedule and does not expect a significant increase or decrease in ridership or revenue as compliance improves to 100% but does see revenues fall off significantly when buses are late more that 20% of time. The company’s objective setting would logically develop as follows:
Compliance with the bus schedule would be reviewed in relation to the risk of lost ridership within tolerable compliance percentages above 80%.
Extra Edge Sporting Goods has set a strategic objective of being in the upper quartile of sporting goods retailers. The company identified a related objective of increasing its sales force by 50 new staff members while maintaining staff cost at .194 cents per sales dollar. Events identified by the management of Extra Edge that might interfere with achievement of their related objective would include all of the following, except:
Product demand may fall if sporting goods become less popular.
Management has carefully evaluated the likelihood and impact of events on its foreign operations. In the event of a 3% variation in exchange rate, the impact is estimated at $10 million without any action taken by management and $4 million if the company purchases a hedge instrument. The impact of the inherent risk of changes in foreign currency exchange on achieving company’s business objectives is:
$10 million.
Management has carefully evaluated the likelihood and impact of events on its foreign operations. In the event of a 3% variation in exchange rate, the impact is estimated at $10 million without any action taken by management and $4 million if the company purchases a hedge instrument. The impact of the residual risk of changes in foreign currency exchange on achieving company’s business objectives is:
$ 4 million.
Control activities are most closely related to:
Risk responses.
For the components of Enterprise Risk Management to be functioning effectively, there cannot be:
Material weaknesses in internal control.
The criteria for evaluating the effectiveness of enterprise risk management are:
The components of the enterprise risk management framework.
According to COSO, which of the following components of enterprise risk management addresses an entity’s integrity and ethical values?
Internal environment.
The Daphne Corporation evaluates employees with responsibilities for financial reporting for fulfillment of those responsibilities for compensation and promotion purposes. The company’s policies support the idea that:
Human resources practices should be designed to facilitate effective internal control over financial reporting.
In order to comply with a director’s duty of loyalty to a corporation, what action(s) should a director take when presented with a corporate opportunity?
Offer the opportunity to the corporation and accept it if the corporation rejects it.
Each of the following is a limitation of enterprise risk management (ERM), except:
ERM can provide absolute assurance with respect to objective categories.
A manufacturing firm identified that it would have difficulty sourcing raw materials locally, so it decided to relocate its production facilities. According to COSO, this decision represents which of the following responses to the risk?
Risk reduction.
According to COSO, the use of ongoing and separate evaluations to identify and address changes in internal control effectiveness can best be accomplished in which of the following stages of the monitoring-for-change continuum?
Change identification.
Which of the following is necessary to be an audit committee financial expert according to the criteria specified in the Sarbanes-Oxley Act of 2002?
Experience with internal accounting controls.
Which of the following positions best describes the nature of the Board of Directors of XYZ Co.’s relationship to the company?
Fiduciary.
The Committee on Sponsoring Organizations (COSO) recommends that the number of organizational layers between the Chief Financial Officer and those involved in financial reporting should not exceed:
Three.
As a matter of policy, all correspondence to or from regulatory auditors received by the management of the Barclay Corporation is provided to the Barclay Corporation audit committee and the corporation’s full board as needed. In assessing entity wide controls, management might conclude:
The Board of Directors understands and exercises oversight responsibility related to financial reporting and related internal control.
Auburndale Corporation has a corporate compliance program that allows employees the option of anonymously reporting violations of laws, rules, regulations, policies or other issues of abuse through a hotline. Reported issues are reviewed by the internal auditor and either immediately forwarded to the CEO or summarized and reported to the CEO each month. The program also provides opportunities to report through supervisory channels and includes a biannual training class that all employees must complete. The corporate compliance program demonstrates that:
Sound integrity and ethical values are developed and understood and set the standard of conduct for financial reporting.
The Carlton Corporation publishes an Employee Handbook that contains employee responsibilities for moral behavior including a code of conduct. Each year, employees must acknowledge their receipt of the handbook, their understanding of the code, and if they have any awareness of non-compliance within the company. The policies would indicate:
Sound integrity and ethical values are developed and understood and set the standard of conduct for financial reporting.
The Barstan Corporation has adopted the internal control integrated framework and regularly surveys local employers and uses national services to ensure that the accounting staff is appropriately compensated. The principle of the control environment most closely related to this practice is:
Human resources.
All of the following management activities of the Falco Insurance Group, Inc. are evidence of the ongoing monitoring of internal controls built into the company’s system, except:
The CFO updates the audit committee on status of internal control.
Corbin Corporation is evaluating the sample sizes associated with periodic tests of the existence of a fleet of taxis. Cash receipts associated with fares deposited daily are periodically reconciled to both the fares charged and the taxi’s odometer readings. With respect to monitoring controls over cash vs. vehicles, Corbin will likely:
Review cash on an ongoing basis and fixed assets on a less frequent periodic basis.
A not-for-profit organization periodically conducts focus groups of employees, service beneficiaries and governance board members to reevaluate its mission vision and values to determine the accuracy of the strategic statements to refine them where necessary. This activity relates to which component of internal control?
Monitoring.
Generally, an organization will not operate beyond the limits of their risk appetite. Risk appetite has generally been exceeded when:
The likelihood and impact of negative events significantly exceeds residual risks.
Strategic objectives for the mission and vision of the organization are generally linked to related objectives. All of the following objectives are typically regarded as related objectives, except:
Information technology objectives.
A significant component of risk assessment is the identification of events that might impede the achievement of objectives. The technique characterized by the development of a listing of potential events common to a specific industry or functional area is known as a(n):
Event inventory
Consensus Corporation routinely seeks to identify the events that are most likely to pose a risk to the company. The company generally hires an experienced facilitator to stimulate a discussion from a cross-functional group representing different areas throughout the company. This method of event identification is most like referred to as a(an):
Event workshop
The Glassman Company completed its annual retreat of board members and senior management and produced a document that links the organization’s mission and vision with strategic and related objectives. The document includes a commitment to establish an ethics hotline and assign a corporate officer to conduct ethics training and monitor reports through the hotline. That commitment would most likely be a:
Related compliance objective.
The Hartman Conglomerate completed its annual retreat of board members and senior management and produced a document that links the organization’s mission and vision with strategic and related objectives. The document includes a commitment to develop a uniform chart of accounts for all divisions of the conglomerate. That commitment would most likely be a:
Related reporting objective.
The Justco Corporation completed its annual retreat of board members and senior management and produced a document that links the organization’s mission and vision with strategic and related objectives. The document includes a commitment to conduct focus groups with customers and suppliers to determine the responsiveness of Justco to the needs of various parties. That commitment would most likely be a:
Related operations objective.
The Knight Corporation completed its annual retreat of board members and senior management and produced a document that links the organization’s mission and vision with strategic and related objectives. The document includes an objective that the Knight Corporation will rank in the top quartile of quality for its industry. That objective would most likely be a:
Strategic objective.
Establishing objectives that will support the mission and vision of an organization generally involve supporting the mission with:
Strategic objectives, supported by strategies and related objectives.
Davis, a director of Active Corp., is entitled to:
Rely on information provided by a corporate officer.
Knox, president of Quick Corp., contracted with Tine Office Supplies, Inc. to supply Quick’s stationery on customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick’s board of directors that Knox was a majority stockholder in Tine. Quick’s contract with Tine is:
Valid because the contract is fair to Quick.
The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as:
The business judgment rule.
The business judgment rule is a rule that immunizes corporate:
Management from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith and are within both the power of the corporation and the authority of management to make.
Which of the following is not a goal of an Enterprise Risk Management Framework (ERM)?
Avoid adverse publicity and damage to the entity’s reputation.
The Enterprise Risk Management Integrated Framework states that an organization must identify events, both positive and negative, as part of its risk management program. Which of the following is true with regard to events?
Event identification occurs after the development of objectives.
Conflict of interest provisions of the Sarbanes-Oxley Act of 2002 generally prohibit the directors or executive officers of an issuer from:
Receiving a personal loan from the issuer not in the ordinary course of business.
A company that maintains a strong internal audit function that reports directly to the Board of Directors is applying the ideas from which principle of effective internal control over financial reporting?
Organizational structure.
A company that routinely performs background checks on its employees to ensure that there is no criminal history is applying the ideas from which principle of effective internal control over financial reporting?
Human resources.
According to the Sarbanes-Oxley Act of 2002, a chief executive officer or chief financial officer who misrepresents the company’s finances may be penalized by being:
Fined and imprisoned.
Which of the following items is one of the eight components of COSO’s enterprise risk management framework?
Monitoring.
Management of a company has a lack of segregation of duties within the application environment, with programmers having access to development and production. The programmers have the ability to implement application code changes into production without monitoring or a quality assurance function. This is considered a deficiency in which of the following areas?
Change control.
Big Box Retailers is a cost leader that offers the lowest possible prices on consumer goods. The marketing practice that best describes Big Box Retailer’s approach would be:
Transaction marketing.
Quality programs normally include a number of techniques to find and analyze problems. The technique commonly used to determine zero defects and goalpost conformance is called a:
Control Chart.
Quality programs normally include a number of techniques to find and analyze problems. The technique commonly used to analyze the source of potential problems and their locations within a process is called a:
Fishbone Diagram
The management of a company would do which of the following to compare and contrast its financial information to published information reflecting optimal amounts?
Benchmark.
Which of the following is a true statement regarding nonfinancial measures of a process?
They are best viewed as attention directors
Which of the following incentive designs will most likely encourage the use of nonfinancial measures by a manager?
Tying incentives to the manager’s individual effort.
Which of the following is true regarding Productivity Ratios?
Total productivity ratios (TPRs) consider all inputs simultaneously as well as the prices of the inputs.
Which of the following is true regarding Pareto diagrams?
They display the individual and cumulative frequency of quality issues, defects, or problems.
Which of the following is not an element of the manufacturing process typically presented on a cause and effect (Fishbone) diagram?
Manufacturing Overhead.
Which of the following design choices for management incentive compensation would most likely emphasize future performance?
Restricted stock option programs.
Which of the following is not a characteristic of effective performance measures?
The measure emphasizes long-term over short-term issues.
Good Stuff Vitamin Corporation is trying to locate customers that will likely be interested in their range of health related products. The company is promoting their products to active adults and active seniors and has obtained a list of older adults from retirement associations and the names of individuals using other health related products such as athletic footwear. Future promotions are tailored to individual needs based on past orders. Good Stuff’s marketing practices could best be characterized as:
Database marketing.
Executive perks are often criticized since the compensation provided to the manager:
Can be excessive.
Nonfinancial performance measures are often preferable to financial performance measures as a means of constructively motivating operational managers since:
Nonfinancial measures are more easily associated with operational objectives.
Fabro, Inc. produced 1,500 units of Product RX-6 last week. The inputs to the production process for Product RX-6 were as follows.
450 pounds of Material A at a cost of $1.50 per pound.
300 pounds of Material Z at a cost of $2.75 per pound.
300 labor hours at a cost of $15.00 per hour.
What is the best productivity measure for the first-line supervisor in Fabro, Inc.’s production plant?
5.00 units per labor hour.
The quality control tool used to evaluate error rates and process improvement issues in a manner that combines both a histogram and a line graph is referred to as a:
Pareto diagram.
Quality programs normally include a number of techniques to find and analyze problems. The technique commonly used to rank and analyze the individual and cumulative causes of defects is called a:
Pareto Diagram.
Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Tape Duplicator Cleaning Unit Raw materials $ 44.00 $ 36.00 Machining @ $12/hr. 18.00 15.00 Assembly @ $10/hr. 30.00 10.00 Variable overhead @ $8/hr. 36.00 18.00 Fixed overhead @ $4/hr. 18.00 9.00 $ 146.00 $ 88.00
Suggested selling price $169.95 $99.98
Actual research and development costs $240,000 $175,000
Proposed advertising and promotion costs $500,000 $350,000
The total overhead cost of $27.00 for Huron’s laser disc cleaning unit is a:
Mixed cost.
Lankip Company produces two main products and a byproduct out of a joint process. The ratio of output quantities to input quantities of direct material used in the joint process remains consistent from month to month. Lankip has employed the physical-volume method to allocate joint production costs to the two main products. The net realizable value of the byproduct is used to reduce the joint production costs before the joint costs are allocated to the main products. Data regarding Lankip's operations for the current month are presented in the chart below. During the month, Lankip incurred joint production costs of $2,520,000. The main products are not marketable at the split-off point and, thus, have to be processed further. First Main Product Second Main Product Byproduct Monthly output in pounds 90,000 150,000 60,000 Selling price per pound $30 $14 $2 Process costs $540,000 $660,000 The amount of joint production cost that Lankip would allocate to the Second Main Product by using the physical-volume method to allocate joint production costs would be:
$1,500,000
Joint costs $ 2,520,000
Less net realizable value of byproduct (60,000 × $2) (120,000)
Net joint costs to be allocated $ 2,400,000
For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:
Net sales value at split-off.
Kode Co. manufactures a major product that gives rise to a by-product called May. May’s only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May’s sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode’s overall gross margin?
Gross margin increases by $1 for each unit of May sold.
For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:
Relative sales value at split-off.
Fab Co. manufactures textiles. Among Fab's Year 1 manufacturing costs were the following salaries and wages: Loom operators $ 120,000 Factory foremen 45,000 Machine mechanics 30,000 What was the amount of Fab's Year 1 direct labor?
$120,000
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
Assuming no further processing work is done after the split-off point, the amount of joint cost allocated to commercial building lumber (CBL) on a physical quantity allocation basis would be:
$180,000
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
If there are no further processing costs incurred after the split-off point, the amount of joint cost allocated to the mine support braces (MSB) on a relative sales value basis would be:
$75,000
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
Continuing with the previous data, assume the commercial building lumber is not marketable at split-off but must be further planed and sized at a cost of $200,000 per production run. During this process, 10,000 units are unavoidably lost; these spoiled units have no discernable value. The remaining units of commercial building lumber are saleable at $10.00 per unit. The mine support braces, although saleable immediately at the split-off point, are coated with a tar-like preservative that costs $100,000 per production run. The braces are then sold for $5 each.
Using the net realizable value (NRV) basis, the completed cost assigned to each unit of commercial building lumber would be:
$5.625
Sonimad Sawmill manufactures two lumber products from a joint milling process. The two products developed are mine support braces (MSB) and unseasoned commercial building lumber (CBL). A standard production run incurs joint costs of $300,000 and results in 60,000 units of MSB and 90,000 units of CBL. Each MSB sells for $2 per unit, each CBL sells for $4 per unit.
Assume the commercial building lumber is not marketable at split-off but must be further planed and sized at a cost of $200,000 per production run. During this process, 10,000 units are unavoidably lost; these spoiled units have no discernable value. The remaining units of commercial building lumber are saleable at $10.00 per unit. The mine support braces, although saleable immediately at the split-off point, are coated with a tar-like preservative that costs $100,000 per production run. The braces are then sold for $5 each.
If Sonimad Sawmill chose not to process the mine support braces beyond the split-off point, the contribution from the joint milling process would be:
$80,000 lower.
Mighty, Inc. processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a relative sales value basis?
$480,000
Which of the following types of costs are prime costs?
Direct materials and direct labor.
A company manufactures two products, X and Y, through a joint process. The joint (common) costs incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000 gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon. If there are no additional processing costs incurred after the split-off point, what is the amount of joint cost for each production run allocated to X on a physical-quantity basis?
$300,000
Which of the following is assigned to goods that were either purchased or manufactured for resale?
Product cost.
Which of the following costs would decrease if production levels were increased within the relevant range?
Fixed costs per unit.
Gram Co. develops computer programs to meet customers’ special requirements. How should Gram categorize payments to employees who develop these programs?
Direct costs
Value adding costs
Direct costs = yes
Value adding costs = yes
Which of the following topics is the focus of managerial accounting?
The needs of the organization’s internal parties.
Under Pick Co.'s job order costing system manufacturing overhead is applied to work in process using a predetermined annual overhead rate. During January Year 1, Pick's transactions included the following: Direct materials issued to production $ 90,000 Indirect materials issued to production 8,000 Manufacturing overhead incurred 125,000 Manufacturing overhead applied 113,000 Direct labor costs 107,000 Pick had neither beginning nor ending work-in-process inventory. What was the cost of jobs completed in January Year 1?
$310,000
COGM = $90,000 + $107,000 + $113,000 + $0 − $0 = $310,000
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31: Units Direct Labor Work-in-process inventory, January 1 100 $50,000 Started during the quarter 500 Completed during the quarter 400 Work-in-process inventory, March 31 200 Costs added during the quarter $720,000 Beginning work-in-process inventory was 50% complete for direct labor costs. Ending work-in-process inventory was 75% complete for direct labor costs. What is the total value of direct labor costs in ending work-in-process inventory using the weighted-average unit cost inventory valuation method?
$210,000
Compute equivalent units of production Compute the unit cost of production Apply unit costs to the equivalent units in ending inventory Compute equivalent units of production Total units to account for: Units accounted for as follows: Beginning WIP 100 Units completed 400 Units started 500 Ending WIP (75% complete) 200 Total 600 Total 600 Equivalent units of production for the quarter are 550 computed as follows: Units completed + completed portion of WIP (400 + (200 × 75%)) = 550 Compute the unit cost of production Total costs are computed as follows: Prior month cost 50,000 Current month cost 720,000 Total 770,000 Cost per unit is computed as follows: $770,000 ÷ 550 units = $1,400 per unit Apply unit costs to the equivalent units in ending inventory Total units in ending inventory 200 Percent complete × 75% Equivalent units 150 Equivalent units × cost per unit equals value of direct labor costs in ending inventory 150 units × $1,400 = $210,000 Proof: B Beginning inventory $50,000 A Add: Costs added during quarter 720,000 S Subtract: Costs of goods completed (400 × $1,400) (560,000) E Ending Inventory $210,000
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31: Units Direct Materials Work-in-process inventory, January 1 100 $50,000 Started during the quarter 500 Completed during the quarter 400 Work-in-process inventory, March 31 200 Costs added during the quarter $720,000 Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process inventory was 75% complete for direct materials. What is the total value of material costs in ending work-in-process inventory using the weighted-average unit cost inventory valuation method?
$210,000
Compute equivalent units of production Compute the unit cost of production Apply unit costs to the equivalent units in ending inventory Compute equivalent units of production Total units to account for: Units accounted for as follows: Beginning WIP 100 Units completed 400 Units started 500 Ending WIP (75% complete) 200 Total 600 Total 600 Equivalent units of production for the quarter are 550 computed as follows: Units completed + completed portion of WIP (400 + (200 × 75%)) = 550 Compute the unit cost of production Total costs are computed as follows: Prior month cost 50,000 Current month cost 720,000 Total 770,000 Cost per unit is computed as follows: $770,000 ÷ 550 units = $1,400 per unit Apply unit costs to the equivalent units in ending inventory Total units in ending inventory 200 Percent complete × 75% Equivalent units 150 Equivalent units × cost per unit equals value of direct material costs in ending inventory 150 units × $1,400 = $210,000 Proof: B Beginning inventory $50,000 A Add: Costs added during quarter 720,000 S Subtract: Costs of goods completed (400 × $1,400) (560,000) E Ending Inventory $210,000
Which of the following is true about activity-based costing?
It can be used with either process or job costing.
Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31: Units Direct Materials Work-in-process inventory, January 1 100 $50,000 Started during the quarter 500 Completed during the quarter 400 Work-in-process inventory, March 31 200 Costs added during the quarter $720,000 Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process inventory was 75% complete for direct materials. What is the total value of material costs in ending work-in-process inventory using the FIFO unit cost, inventory valuation method?
$216,000
Under the FIFO method, ending inventory is priced at the cost of manufacturing during the period. Equivalent units are composed of three parts: the completion of units on hand at the beginning of the period, units started and completed during the period, and units partially completed at the end of the period. Applying these principles to the given fact pattern, the total equivalent units of production for the quarter is detemined as follows: Equivalent units for the first quarter: Work in process, beginning (100 units × 50% to complete) 50 Units started and completed: Units completed and transferred out 400 Units in beginning inventory (100) 300 Work in process, ending (200 units × 75% complete) 150 Equivalent units of production 500 Costs associated with first quarter production January 1 Work-in-process −− First quarter costs added $720,000 Total costs $720,000 Cost per unit ($720,000/500) 1,440 Ending inventory (150 × $1,440) $216,000
A basic assumption of activity-based costing (ABC) is that:
Products or services require the performance of activities, and activities consume resources.
Madtack Company's beginning and ending inventories for the month of November Year 1 are: November 1 November 30 Direct materials $67,000 $62,000 Work-in-process 145,000 171,000 Finished goods 85,000 78,000 Production data for the month of November follows. Direct labor $200,000 Actual factory overhead 132,000 Direct materials purchased 163,000 Transportation in 4,000 Purchase returns and allowances 2,000 Madtack uses one factory overhead control account and charges factory overhead to production at 70 percent of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end. Madtack Company's prime cost for November is:
$370,000
Beginning balance direct materials $67,000 Plus purchases 163,000 Plus transportation in 4,000 Less purchase returns and allowances 2,000 Materials available 232,000 Less cost of materials used 170,000 ← SQUEEZE Ending balance direct materials $62,000 Direct materials $170,000 Direct labor (given) 200,000 Prime cost $370,000
Madtack Company's beginning and ending inventories for the month of November Year 1 are: November 1 November 30 Direct materials $67,000 $62,000 Work-in-process 145,000 171,000 Finished goods 85,000 78,000 Production data for the month of November follows. Direct labor $200,000 Actual factory overhead 132,000 Direct materials purchased 163,000 Transportation in 4,000 Purchase returns and allowances 2,000 Madtack uses one factory overhead control account and charges factory overhead to production at 70 percent of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end. Madtack Company's total manufacturing cost for November is:
$510,000
Direct material $170,000 [Note A] Direct labor 200,000 Overhead (70% of DL) 140,000 Total manufacturing cost $510,000 Note A: Beginning balance direct materials $67,000 Plus purchases 163,000 Plus transportation in 4,000 Less purchase returns and allowances 2,000 Materials available 232,000 Less cost of materials used (170,000) ← SQUEEZE Ending balance direct materials $62,000
Madtack Company's beginning and ending inventories for the month of November Year 1 are: November 1 November 30 Direct materials $67,000 $62,000 Work-in-process 145,000 171,000 Finished goods 85,000 78,000 Production data for the month of November follows. Direct labor $200,000 Actual factory overhead 132,000 Direct materials purchased 163,000 Transportation in 4,000 Purchase returns and allowances 2,000 Madtack uses one factory overhead control account and charges factory overhead to production at 70 percent of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end. Madtack Company's cost of goods transferred to finished goods inventory for November is:
$484,000
Beginning balance of WIP $145,000 Plus total manufacturing cost 510,000 [Note A] Goods available to transfer 655,000 Goods transferred to finished goods 484,000 ← SQUEEZE Ending balance of WIP $171,000 Note A: Direct material $170,000 [Note B] Direct labor 200,000 Overhead (70% of DL) 140,000 Total manufacturing cost $510,000 Note B: Beginning balance direct materials $67,000 Plus purchases 163,000 Plus transportation in 4,000 Less purchase returns and allowances 2,000 Materials available 232,000 Less cost of materials used (170,000) ← SQUEEZE Ending balance direct materials $62,000
Madtack Company's beginning and ending inventories for the month of November Year 1 are: November 1 November 30 Direct materials $67,000 $62,000 Work-in-process 145,000 171,000 Finished goods 85,000 78,000 Production data for the month of November follows. Direct labor $200,000 Actual factory overhead 132,000 Direct materials purchased 163,000 Transportation in 4,000 Purchase returns and allowances 2,000 Madtack uses one factory overhead control account and charges factory overhead to production at 70 percent of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end. Madtack Company's cost of goods sold for November is:
$491,000
Beginning balance of finished goods $85,000 Plus goods transferred to finished goods 484,000 [Note A] Finished goods available 569,000 Cost of goods sold 491,000 ← SQUEEZE Ending balance of finished goods $78,000 Note A: Beginning balance of WIP $145,000 Plus total manufacturing cost 510,000 [Note B] Goods available to transfer 655,000 Goods transferred to finished goods 484,000 ← SQUEEZE Ending balance of WIP $171,000 Note B: Direct material $170,000 [Note C] Direct labor 200,000 Overhead (70% of DL) 140,000 Total manufacturing cost $510,000 Note C: Beginning balance direct materials $67,000 Plus purchases 163,000 Plus transportation in 4,000 Less purchase returns and allowances 2,000 Materials available 232,000 Less cost of materials used (170,000) ← SQUEEZE Ending balance direct materials $62,000
Madtack Company's beginning and ending inventories for the month of November Year 1 are: November 1 November 30 Direct materials $67,000 $62,000 Work-in-process 145,000 171,000 Finished goods 85,000 78,000 Production data for the month of November follows. Direct labor $200,000 Actual factory overhead 132,000 Direct materials purchased 163,000 Transportation in 4,000 Purchase returns and allowances 2,000 Madtack uses one factory overhead control account and charges factory overhead to production at 70 percent of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end. Madtack Company's net charge to factory overhead control for the month of November is:
$8,000 credit, overapplied.
Factory overhead applied (70% of direct labor) $ 140,000
Actual overhead incurred 132,000
Amount of factory overhead overapplied $ 8,000
Because overhead was overapplied, there was a larger amount of cost that went to WIP. Therefore, applied overhead was credited by $8,000 too much in November.
In its April Year 1 production, Hern Corp., which does not use a standard cost system, incurred total production costs of $900,000, of which Hern attributed $60,000 to normal spoilage and $30,000 to abnormal spoilage. Hern should account for this spoilage as:
Inventoriable cost of $60,000 and period cost of $30,000.
In an activity-based costing system, what should be used to assign a department’s manufacturing overhead costs to products produced in varying lot sizes?
Multiple cause and effect relationships.
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the first-in, first-out (FIFO) method, the equivalent units of production for materials are:
104,000 units.
Equivalent units for the first quarter: Work in process, beginning (16,000 units × 40% to complete) 6,400 Units started and completed: Units completed and transferred out 92,000 Units in beginning inventory (16,000) 76,000 Work in process, ending (24,000 units × 90% complete) 21,600 Equivalent units of production 104,000
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the FIFO method, the equivalent units of production for conversion costs are:
98,400 units.
Equivalent units for the first quarter: Work in process, beginning (16,000 units × 80% to complete) 12,800 Units started and completed: Units completed and transferred out 92,000 Units in beginning inventory (16,000) 76,000 Work in process, ending (24,000 units × 40% complete) 9,600 Equivalent units of production 98,400
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the FIFO method, the equivalent unit cost of materials for May is:
$4.50
$4.50 equivalent unit cost of materials using the FIFO method. Cost of materials used $468,000 Equivalent units ÷ 104,000 [Note A] Equivalent unit cost of materials $4.50 Note A: Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of units on hand at the beginning of the period, the units started and completed during the period, and the units partially completed at the end of the period. Applying these principles to the given fact pattern, the total equivalent units of production for materials is determined as follows: Equivalent units for the first quarter: Work in process, beginning (16,000 units × 40% to complete) 6,400 Units started and completed: Units completed and transferred out 92,000 Units in beginning inventory (16,000) 76,000 Work in process, ending (24,000 units × 90% complete) 21,600 Equivalent units of production 104,000
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the FIFO method, the equivalent unit conversion cost for May is:
$5.83
$5.83 equivalent unit conversion cost using the FIFO method. Direct labor costs incurred $182,880 Factory overhead incurred 391,160 Conversion costs incurred $574,040 Equivalent units ÷ 98,400 [Note A] Equivalent unit cost of materials $5.83 Note A: Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of units on hand at the beginning of the period, the units started and completed during the period, and the units partially completed at the end of the period. Applying these principles to the given fact pattern, the total equivalent units of production for conversion costs is determined as follows: Equivalent units for the first quarter: Work in process, beginning (16,000 units × 80% to complete) 12,800 Units started and completed: Units completed and transferred out 92,000 Units in beginning inventory (16,000) 76,000 Work in process, ending (24,000 units × 40% complete) 9,600 Equivalent units of production 98,400
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the FIFO method, the total cost of units in the ending work-in-process inventory at May 31 is:
$153,168
$153,168 total cost of units in ending work-in-process inventory using the FIFO method. Ending Work-In-Process Inventory - FIFO Actual Units × % Compl. = Equiv. Units × Unit Cost = Total Cost Materials 24,000 90% 21,600 4.50 $97,200 Conversion Costs 24,000 40% 9,600 5.83 $55,968 Ending Inventory 24,000 $153,168 Note that the unit costs for materials ($4.50) and conversion costs ($5.83) are calculated below in Notes A and B. Note A: Cost of materials used $468,000 Equivalent units ÷ 104,000 [Note 1] Equivalent unit cost of materials $4.50 Note 1: Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of units on hand at the beginning of the period, the units started and completed during the period, and the units partially completed at the end of the period. Applying these principles to the given fact pattern, the total equivalent units of production for materials is determined as follows: Equivalent units for the first quarter: Work in process, beginning (16,000 units × 40% to complete) 6,400 Units started and completed: Units completed and transferred out 92,000 Units in beginning inventory (16,000) 76,000 Work in process, ending (24,000 units × 90% complete) 21,600 Equivalent units of production 104,000 Note B: Direct labor costs incurred $182,880 Factory overhead incurred 391,160 Conversion costs incurred $574,040 Equivalent units ÷ 98,400 [Note 2] Equivalent unit cost of materials $5.83 Note 2: Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of units on hand at the beginning of the period, the units started and completed during the period, and the units partially completed at the end of the period. Applying these principles to the given fact pattern, the total equivalent units of production for conversion costs is determined as follows: Equivalent units for the first quarter: Work in process, beginning (16,000 units × 80% to complete) 12,800 Units started and completed: Units completed and transferred out 92,000 Units in beginning inventory (16,000) 76,000 Work in process, ending (24,000 units × 40% complete) 9,600 Equivalent units of production 98,400
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the weighted-average method, the equivalent unit cost of materials for May is:
$4.60
$4.60 equivalent unit cost of materials using the weighted-average method ($54,560 beg. inv. + $468,000 additions = $522,560 ÷ 113,600 total avail. equivalent units). Materials Actual Units % Compl. Equiv. Units Total Cost Unit Cost Beginning Inventory 16,000 60% 9,600 $ 54,560 Add: Started 100,000 SQZ 104,000 468,000 $ 4.50 FIFO Total Available 116,000 113,600 522,560 $ 4.60 wtd-avg Less: Completed (92,000) 100% (92,000) Ending Inventory 24,000 90% 21,600 $ 97,200 $ 4.50 FIFO
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the weighted-average method, the equivalent unit conversion cost for May is:
$6.00
$6.00 equivalent unit conversion cost using the weighted-average method ($35,560 beg. inv. + $574,040 additions = $609,600 ÷ 101,600 total avail. equivalent units). Conversion Costs Actual Units % Compl. Equiv. Units Total Cost Unit Cost Beginning Inventory 16,000 20% 3,200 $ 35,560 Add: Started 100,000 SQZ 98,400 574,040 $ 5.83 FIFO Total Available 116,000 101,600 609,600 $ 6.00 wtd-avg Less: Completed (92,000) 100% (92,000) Ending Inventory 24,000 40% 9,600 $ 55,968 $ 5.83 FIFO
Kimbeth Manufacturing uses a process cost system to manufacture Dust Density Sensors for the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60 percent complete for materials and 20 percent complete for conversion costs. The ending inventory was 90 percent complete for materials and 40 percent complete for conversion costs.
Costs pertaining to the month of May are as follows:
Beginning inventory costs are: materials, $54,560; direct labor $20,320; and factory overhead, $15,240.
Costs incurred during May are: materials used, $468,000; direct labor, $182,880; and factory overhead, $391,160.
Using the weighted-average method, the total cost of the units in the ending work-in-process inventory at May 31, 1995, is:
$156,960
Ending Work-In-Process Inventory - Wtd. Avg. Actual Units % Compl. Equiv. Units Total Cost Unit Cost Materials 24,000 90% 21,600 $ 99,360 $ 4.60 wtd-avg. Conversion Costs 24,000 40% 9,600 57,600 $ 6.00 wtd-avg. 24,000 $ 156,960
The following information pertains to Lap Co.'s Palo Division for the month of April: Number of units Cost of materials Beginning work-in-process 15,000 $5,500 Started in April 40,000 18,000 Units completed 42,500 Ending work-in-process 12,500 All materials are added at the beginning of the process. Using the weighted-average method, the cost per equivalent unit for materials is:
$0.43
Units Cost
Beg inv.
15,000 $5,500
Started
40,000 18,000
Available
55,000 $23,500
In an activity-based costing system, cost reduction is accomplished by identifying and eliminating:
All cost drivers
Nonvalue adding activities
All cost drivers = No
Nonvalue adding activities = Yes
In a traditional job order cost system, the issue of indirect materials to a production department increases:
Factory overhead control.
Alex Company had the following inventories at the beginning and end of the month of January.
January 1 January 31
Finished Goods $ 125,000 $ 117,000
Work-in-process 235,000 251,000
Direct materials 134,000 124,000
The following additional manufacturing data was available for the month of January.
Direct materials purchased $ 189,000
Purchase returns and allowances 1,000
Transportation in 3,000
Direct labor 300,000
Actual factory overhead 175,000
Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31.
Alex Company’s balance in factory overhead control for January was:
$5,000 credit-overapplied.
$5,000 overapplied.
Actual factory overhead $ 175,000
Applied (300,000 × .6) (180,000)
Overapplied $ (5,000)
Black, Inc. employs a weighted average method in its process costing system. Black’s work in process inventory on June 30 consists of 40,000 units. These units are 100% complete with respect to materials and 60% complete with respect to conversion costs. The equivalent unit costs are $5.00 for materials and $7.00 for conversion costs. What is the total cost of the June 30 work in process inventory?
$368,000
Materials Conversion Total June 30 40,000 40,000 Percent Complete × 100% × 60% Equivalent Units 40,000 24,000 Equivalent Unit Costs × $ 5.00 × $ 7.00 Total $ 200,000 $ 168,000 $ 368,000
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, respectively. 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?
$5,625
Variable overhead rate = $50,000 / 20,000 hours = $2.50 per direct labor hour
Fixed overhead rate = $25,000 / 20,000 hours = $1.25 per direct labor hour
Total overhead rate = $2.50 + $1.25 = $3.75
Overhead applied to the job = $3.75 × 1,500 = $5,625
What is the cost of ending inventory given the following factors? Beginning inventory $ 5,000 Total production costs 60,000 Cost of goods sold 55,000 Direct labor 40,000
$10,000
Beginning inventory $ 5,000 Add: Production costs* 60,000 Total Manufacturing costs available 65,000 Subtract: Cost of good sold (55,000) Ending inventory $ 10,000
The following is selected information from the records of Ray, Inc.: Purchases of raw materials $ 6,000 Raw materials, beginning 500 Raw materials, ending 800 Work-in-process, beginning 0 Work-in-process, ending 0 Cost of goods sold 12,000 Finished goods, beginning 1,200 Finished goods, ending 1,400 What is the total amount of conversion costs?
$6,500
Beginning ($1,200) and ending ($1,400) finished goods inventory and cost of goods sold ($12,000) are used to squeeze costs of goods manufactured of $12,200
Cost of goods manufactured ($12,200) is then used in combination with beginning and ending WIP inventories of $0 to derive total costs incurred ($12,200) and then, in combination with materials ($5,700) the conversion costs of $6,500 as follows:
Which of the following nonvalue-added costs associated with manufactured work in process inventory is most significant?
The cost of moving, handling, and storing any individual product.
Merry Co. has two major categories of factory overhead: material handling and quality control. The costs expected for these categories for the coming year are as follows:
Material handling
$ 120,000
Quality inspection
200,000
The plant currently applies overhead based on direct labor hours. The estimated direct labor hours are 80,000 per year. The plant manager is asked to submit a bid and assembles the following data on a proposed job:
Direct materials
$ 4,000
Direct labor (2,000 hours)
6,000
What amount is the estimated product cost on the proposed job?
$18,000
Prime costs are the sum of direct labor and direct material: Direct labor $6,000 Direct material 4,000 Subtotal, prime costs $10,000 Applied overhead is equal to the overhead rate times the estimated hours: Computations of rate − total overhead: Material handling $120,000 Quality inspection 200,000 Total overhead $320,000 Total cost driver 80,000 Rate $4.00 Applied overhead: Estimated hours 2,000 Rate × $4.00 Applied overhead 8,000 Estimated costs $18,000
Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?
Flexible budget amounts.
Weighted-average and first in, first out (FIFO) equivalent units would be the same in a period when which of the following occurs?
No beginning inventory exists.
In the past, four direct labor hours were required to produce each unit of product Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was three times direct labor cost. In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units. What amount should management budget for cost of goods manufactured?
$5,060,000
Old Costs Revised Costs Units Input per Unit Cost per Input unit Old Costs Adjustment Factor Adjustment Total Prime Costs Direct Labor 10,000 4 $ 20 800,000 -25% (200,000) 600,000 Direct Materials 10,000 1 $ 200 2,000,000 30.00 300,000 2,300,000 Overhead Rate Per DL Costs Rate Per DL Costs Overhead 3 $ 800,000 2,400,000 3.60 2,160,000 5,200,000 5,060,000
During the current year, the following manufacturing activity took place for a company’s products:
Beginning work-in-process, 70% complete
10,000 units
Units started into production during the year
150,000 units
Units completed during the year
140,000 units
Ending work-in-process, 25% complete
20,000 units
What was the number of equivalent units produced using the first-in, first-out method?
138,000
Using the FIFO method of process costing, the equivalent units produced (EQU) are computed as follows:
EQU = EQU Beg WIP + EQU started and completed + EQU ending WIP
EQU = (10,000 × .30) + (130,000 × 1.00) + (20,000 × .25)
EQU = 3,000 + 130,000 + 5,000 = 138,000
Note that the .30 is the percentage of Beg WIP completed in the period. It is the complement of the percent complete.
Note that the 130,000 units started and completed is the 140,000 units started less the 10,000 units in the beginning inventory.
An alternate computation (different from the formula in the text) is as follows (some people may be more familiar with this alternate):
EQU = EQU End WIP + EQU completed − EQU ending WIP
EQU = (20,000 × .25) + (140,000 × 1.00) − (10,000 × .70)
EQU = 5,000 + 140,000 − 7,000 = 138,000
DJ Co. has a job-order cost system. The following debits (credits) appeared in the Work in Process account for the month of March: March 1, balance $12,000 March 31, direct materials 40,000 March 31, direct labor 30,000 March 31, manufacturing overhead applied 27,000 March 31, to finished goods (100,000) DJ Co. applies overhead at a predetermined rate of 90% of direct labor cost. Job No. 101, the only job still in process at the end of March, has been charged with manufacturing overhead of $2,250. What was the amount of direct materials charged to Job No. 101?
$4,250
Direct materials charged to job 101 is $4,250. Job 101 is the only incomplete job at the end of the month. First, compute the ending balance in WIP for DJ Co., and note that the ending balance is the same as the ending balance for Job 101. Other facts allow us to back into the direct materials for the job. Total Job 101 Beginning balance 12,000 0 Direct materials 40,000 4,250 (Squeeze) Direct labor 30,000 2,500 (2,250 ÷ 90%) Overhead applied 27,000 2,250 Issued (100,000) 0 Ending balance 9,000 9,000
A cost driver is defined as:
A causal factor that increases the total cost of a cost objective.
Which of the following is true regarding inventoriable costs?
Inventoriable costs are regarded as assets before the products are sold.
Cost drivers are:
Activities that cause costs to increase as the activity increases.
Conversion costs do not include:
Direct materials.
Which one of the following best describes direct labor?
Both a product cost and a prime cost.
A cost that is fixed per unit is an example of a:
Variable cost.
During May, Mercer Company completed 50,000 units costing $600,000, exclusive of spoilage allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000 units, costing $80,000, were 50 percent complete at May 31. All units are inspected between the completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the month was $20,000, and abnormal spoilage of $50,000 was also incurred during the month.
The portion of total spoilage that should be charged against revenue in May is:
$60,000
Normal spoilage is allocated to good production (Normal spoilage) × (Percent sold) $20,000 50% = $10,000 Abnormal spoilage is charged to the income statement Abnormal spoilage 50,000 $60,000
Conversion cost pricing:
Could be used when the customer furnishes the material used in manufacturing a product.
A cost that bears an observable and known relationship to a quantifiable activity base is a(n):
Engineered cost.
Smile Labs develops 35mm film using a four-step process that moves progressively through four departments. The company specializes in overnight service and has the largest drug store chain as its primary customer. Currently, direct labor, direct materials, and overhead are accumulated by department. The cost accumulation system that best describes the system Smile Labs is using is:
Process costing.
Because of changes that are occurring in the basic operations of many firms, all of the following represent trends in the way indirect costs are allocated, except:
Preferring plant-wide application rates that are applied to machine hours rather than incurring the cost of detailed allocations.
The distribution of overhead costs is known as:
Cost allocation.
Costs are allocated to cost objectives in many ways and for many reasons. Which one of the following is a purpose of cost allocation?
Measuring income and assets for external reporting.
Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when:
Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
Which of the following would cause overhead to be overapplied?
Actual overhead is less than overhead applied.
Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:
The manufactured products differ in the resources consumed from the individual departments in the plant.
In allocating factory service department costs to producing departments, which one of the following items would most likely be used as an activity base?
Units of electrical power consumed.
Alex Company had the following inventories at the beginning and end of the month of January. January 1 January 31 Finished Goods $125,000 $117,000 Work-in-process 235,000 251,000 Direct materials 134,000 124,000 The following additional manufacturing data was available for the month of January. Direct materials purchased $189,000 Purchase returns and allowances 1,000 Transportation in 3,000 Direct labor 300,000 Actual factory overhead 175,000 Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31. Alex Company's prime cost for January was:
$501,000
Beginning inventory, direct materials
$134,000
Purchases during January 189,000
Less: purchase returns and allowances (1,000)
Add: transportation in 3,000
Total direct materials available 325,000
Less: ending inventory, direct materials (124,000)
Direct materials used during January 201,000
Add: direct labor cost 300,000
Total prime cost $ 501,000
Alex Company had the following inventories at the beginning and end of the month of January. January 1 January 31 Finished Goods $125,000 $117,000 Work-in-process 235,000 251,000 Direct materials 134,000 124,000 The following additional manufacturing data was available for the month of January. Direct materials purchased $189,000 Purchase returns and allowances 1,000 Transportation in 3,000 Direct labor 300,000 Actual factory overhead 175,000 Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31. Alex Company's total manufacturing cost for January was:
$681,000
$681,000. Note that applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or underapplications are handled in December.
Direct materials used
$ 201,000
[Note A]
Direct labor
300,000
Factory overhead ($300,000 × .6)
180,000
Total manufacturing cost
$ 681,000
Note A:
Beginning inventory, direct materials $ 134,000
Purchases during January 189,000
Less: purchase returns and allowances (1,000)
Add: transportation in 3,000
Total direct materials available $ 325,000
Less: ending inventory, direct materials (124,000)
Direct materials used during January $ 201,000
Alex Company had the following inventories at the beginning and end of the month of January. January 1 January 31 Finished Goods $125,000 $117,000 Work-in-process 235,000 251,000 Direct materials 134,000 124,000 The following additional manufacturing data was available for the month of January. Direct materials purchased $189,000 Purchase returns and allowances 1,000 Transportation in 3,000 Direct labor 300,000 Actual factory overhead 175,000 Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31. Alex Company's cost of goods manufactured for January was:
$665,000
Total manufacturing cost $681,000 [Note A] Add: beginning WIP 235,000 Less: ending WIP (251,000) Cost of goods manufactured 665,000 Note A: Applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or underapplications are handled in December. Direct materials used $201,000 [Note 1] Direct labor 300,000 Factory overhead ($300,000 × .6) 180,000 Total manufacturing cost $681,000 Note 1: Beginning inventory, direct materials $ 134,000 Purchases during January 189,000 Less: purchase returns and allowances (1,000) Add: transportation in 3,000 Total direct materials available $ 325,000 Less: ending inventory, direct materials (124,000) Direct materials used during January $ 201,000
Alex Company had the following inventories at the beginning and end of the month of January. January 1 January 31 Finished Goods $125,000 $117,000 Work-in-process 235,000 251,000 Direct materials 134,000 124,000 The following additional manufacturing data was available for the month of January. Direct materials purchased $189,000 Purchase returns and allowances 1,000 Transportation in 3,000 Direct labor 300,000 Actual factory overhead 175,000 Alex Company applies factory overhead at a rate of 60 percent of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year, December 31. Alex Company's cost of goods sold for January was:
$673,000
Cost of goods manufactured $665,000 [Note A] Add: beginning finished goods inventory 125,000 Less: ending finished goods inventory (117,000) Cost of goods sold 673,000 Note A: Total manufacturing cost $681,000 [Note 1] Add: beginning WIP 235,000 Less: ending WIP (251,000) Cost of goods manufactured 665,000 Note 1: Applied overhead is determined as 60% of direct labor, and actual overhead is irrelevant until over- or underapplications are handled in December. Direct materials used $201,000 [Note a] Direct labor 300,000 Factory overhead ($300,000 × .6) 180,000 Total manufacturing cost $681,000 Note a: Beginning inventory, direct materials $ 134,000 Purchases during January 189,000 Less: purchase returns and allowances (1,000) Add: transportation in 3,000 Total direct materials available $ 325,000 Less: ending inventory, direct materials (124,000) Direct materials used during January $ 201,000
Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given below. Wall Mirrors Specialty Windows Units produced 25 25 Material moves per product line 5 15 Direct labor hours per unit 200 200 Budgeted materials handling costs $50,000 Under a costing system that allocates overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of wall mirrors would be:
$1,000
Wall mirrors − 25 units × 200 hours per unit 5,000 hours Specialty windows − 25 units × 200 hours per unit 5,000 hours Total hours 10,000 hours Budgeted materials handling costs $50,000 Divided by total hours ÷ 10,000 Materials handling cost per hour $5 Hours per unit × 200 Costs allocated to one unit $1,000
Zeta Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information given below. Wall Mirrors Specialty Windows Units produced 25 25 Material moves per product line 5 15 Direct labor hours per unit 200 200 Budgeted materials handling costs $50,000 Under activity-based costing (ABC), the materials handling costs allocated to one unit of wall mirrors would be:
$500
Activity-based costing allocates costs based on the activity driving those costs (material moves in this example). In comparing the activity required for wall mirrors and specialty windows, an allocation factor can be developed: Total material moves: 5 + 15 = 20 Percentage of moves related to wall mirrors: 5 ÷ 20 = 25% Percentage of moves related to specialty windows: 15 ÷ 20 = 75% Budgeted materials handling costs $50,000 Allocation factor × .25 Costs allocated to wall mirrors 12,500 Units produced ÷ 25 Costs allocated to one wall mirror $500
The benefit that management can expect from traditional costing includes which of the following:
Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.
Activity based costing refines product cost information because the cost system:
Emphasizes long-term product analysis (when fixed costs become variable costs).
The steps that a company, using a traditional cost system, would take to implement activity-based costing include:
I.
Evaluation of the existing system to assess how well the system supports the objective of an activity-based cost system.
II.
Identification of the activities for which cost information is needed with differentiation between value adding and non-value adding activities.
Both I and II.
The costing method that is properly classified for both external and internal reporting purposes is:
External reporting
Internal reporting
Activity based costing
External reporting = No
Internal reporting = yes
Under ABC, the allocation of costs to particular cost objectives allows a firm to analyze all of the following, except:
Why the sales of a particular product have increased.
An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is:
Activity-based costing.
New-Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5 percent of direct labor costs. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to more equitably distribute quality control costs, New-Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen makeup. Activity Cost Driver Cost Rates Quantity for Satin Sheen Incoming material Type of material inspection $11.50 per type 12 types In-process inspection Number of units $0.14 per unit 17,500 units Product certification Per order $77 per order 25 orders The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is:
$525.50 higher than the cost using the traditional system.
Activity-based costing of $4,513.00 is $525.50 higher than the $3,987.50 cost using the traditional system. Cost Rates Total Quantity Costs Incoming material inspection $11.50 × 12 = $138.00 In-process inspection $0.14 × 17,500 = 2,450.00 Product certification $77.00 × 25 = 1,925.00 Total activity-based cost (ABC) 4,513.00 Traditional cost 14.5% × $27,500 = 3,987.50 Excess of ABC over traditional $525.50
The use of activity-based costing normally results in:
Substantially greater unit costs for low-volume products than is reported by traditional product costing.
Lucy Sportswear manufactures a specialty line of T-shirts using a job order cost system. During March, the following costs were incurred in completing Job ICU2: direct materials $13,700; direct labor $4,800; administrative $1,400; and selling $5,600. Factory overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be:
$5.50
$5.50 cost of goods sold ($38,500 ÷ 7,000 units).
Which one of the following alternatives correctly classifies the business application to the appropriate costing system?
Job costing system
Process costing system
Job costing system - Print shop mgr
Process costing system - beverage drink
A print shop would use a job costing system, while a beverage drink manufacturer would use a process costing system. Job costing is used in the production of tailor-made or unique goods, including: Construction of buildings or ships Aircraft assembly Printing Special-purpose machinery (microcomputer manufacturer) Public accounting firm Management consulting firm Repair shops Industrial research projects Process costing is used where the product is composed of mass produced homogeneous units such as: Gasoline and oil Chemicals Steel Textiles (wallpaper) Plastics Paints Flour Meatpacking Canneries Rubber Lumber Food processing (beverage drink manufacturer) Glass Mining Cement Check clearing in banks Mail sorting in post offices Food preparation in fast-food outlets Premium handling in insurance companies
A processing department produces joint products Ajac and Bjac, each of which incurs separable production costs after split-off. Information concerning a batch produced at a $60,000 joint cost before split-off follows: Product Separable costs Sales value Ajac $ 8,000 $ 80,000 Bjac 22,000 40,000 $ 30,000 $ 120,000 What is the joint cost assigned to Ajac if costs are assigned using the relative net realizable value?
$48,000
Using the relative net realizable value method of allocating the joint costs, the net realizable value of both products needs to be calculated: Ajac Bjac Sales $ 80,000 $ 40,000 Separable costs (8,000) (22,000) Net realizable value $ 72,000 $ 18,000
Mason Company uses a job-order cost system and applies manufacturing overhead to jobs using a predetermined overhead rate based on direct-labor dollars. The rate for the current year is 200 percent of direct-labor dollars. This rate was calculated last December and will be used throughout the current year. Mason had one job, No. 150, in process on August 1 with raw materials costs of $2,000 and direct-labor costs of $3,000. During August, raw materials and direct labor added to jobs were as follows: No. 150 No. 151 No. 152 Raw materials $ − $ 4,000 $ 1,000 Direct labor 1,500 5,000 2,500 Actual manufacturing overhead for the month of August was $20,000. During the month, Mason completed Job Nos. 150 and 151. For August, manufacturing overhead was:
Underapplied by $2,000.
Since manufacturing overhead is applied on the basis of direct-labor dollars, the total of the direct-labor dollars for August must first be determined:
$1,500 + $5,000 + $2,500 = $9,000
Manufacturing overhead is applied at the rate of 200%, so $18,000 was applied for the month of August (200% × $9,000 = $18,000). Actual manufacturing overhead for August was $20,000, so manufacturing overhead was underapplied by $2,000 [$20,000 − $18,000].
Kerner Manufacturing uses a process costing system to manufacture laptop computers. The following information summarizes operations relating to laptop computer model #KJK20 during the quarter ending March 31: Units Direct Materials Work-in-process inventory, January 1 100 $ 70,000 Started during the quarter 500 Completed during the quarter 400 Work-in-process inventory, March 31 200 Costs added during the quarter $ 750,000 Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process inventory was 75% complete for direct materials. What were the equivalent units of production using the FIFO method, with regard to materials for March?
500
Under the FIFO method, the equivalent units of production is comprised of three parts: the completion of units on hand at the beginning of the period, the units started and completed during the period, and the units partially completed at the end of the period. Applying these principles to the given fact pattern, the total equivalent units of production for the quarter is determined as follows: Equivalent units for the first quarter: Work in process, beginning (100 units × 50% to complete) 50 Units started and completed: Units completed and transferred out 400 Units in beginning inventory (100) 300 Work in process, ending (200 units × 75% complete) 150 Equivalent units of production 500
The following information concerns Forming's equivalent units in May 20X1: Units Beginning work-in-process (50% complete) 2,000 Units started during May 8,000 Units completed & transferred 7,000 Ending work-in-process (80% complete) 2,500 Using the weighted average method, what were Forming's May 20X1 equivalent units?
9,000
Units completed 7,000 Ending WIP (2,500 × .80) 2,000 9,000
What is the normal effect on the numbers of cost pools and allocation bases when an activity-based cost (ABC) system replaces a traditional cost system?
Cost pools
Allocation basis
Cost pools - increase
Allocation basis - increase
A CPA would recommend implementing an activity-based costing system under which of the following circumstances?
The client produced products that heterogeneously consume resources.
Boyle, Inc. makes two products, X and Y that require allocation of indirect manufacturing costs. The following data was compiled by the accountant before making any allocations: Product X Product Y Quantity produced 10,000 20,000 Direct manufacturing labor hours 15,000 5,000 Setup hours 500 1,500 The total cost of setting up manufacturing processes and equipment is $400,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were $300,000 and $100,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?
Product x
Product y
Product x = $100,000
Product y = $300,000
The setup hours are used because neither quantity produced nor direct manufacturing hours are activities. The calculation is as follows: Setup Hours % of Setup Hours Allocation Product X 500 500 / 2,000 = 25% $100,000 Product Y 1,500 1,500 / 2,000 = 75% $300,000 Total 2,000 100% $400,000
The New Wave Co. is considering a new method for allocating overhead to its two products, regular and premium coffee beans. Currently New Wave is using the traditional method to allocate overhead, in which the cost driver is direct labor costs. However, it is interested in using two different drivers: machine hours (MH) for separating and roasting beans, and pounds of coffee for packing and shipping. Machine hours for the current month are 700 hours, direct labor cost per pound of coffee is $1.25, and direct materials cost per pound of coffee is $1.50. There are 1,000 pounds of coffee packed and shipped for the current month. The following data are also available: Regular Premium Overhead for the current month $5,000.00 Cost pool for separating and roasting beans 3,500.00 150 MH 550 MH Cost pool for packing and shipping 1,500.00 500 pounds 500 pounds What is the total cost per pound for the premium coffee using the new activity-based costing method?
$9.75
Activity based costing is a cost assignment concept that uses activity level as the fundamental cost object. Total cost per unit would be equal to the overhead allocated in accordance with the activity based cost object associated with each activity and the direct cost per unit. (Cost × Premium/Total) ÷ Pounds = Cost/Pound Separating and roasting1 ($3,500 × 550/700) ÷ 500 = $5.50 Packing and shipping2 ($1,500 × 500/1,000) ÷ 500 = 1.50 Direct Labor (given) 1.25 Direct Materials (given) 1.50 Total cost per pound for premium coffee $9.75
A company uses process costing to assign product costs. Available inventory information for a period is as follows: Inventory (in units) Material cost Conversion cost Beginning 0 Started during the period 15,000 $75,000 $55,500 Transferred out 13,500 End of period 1,500 The ending inventory was 25% complete as to the conversion cost. 100% of direct material was added at the beginning of the process. What was the total cost transferred out?
$121,500
Total cost transferred out is $121,500. The problem requires careful attention to the assumptions in the fact pattern.
1. Computation of cost of materials transferred out:
100% of direct material was added at the beginning of the process.
The cost per equivalent unit of material transferred out is computed as follows:
$75,000 materials cost ÷ 15,000 inventory
=
$5.00
per unit
Units transferred out
=
13,500
units
Materials cost transferred out
$67,500
2. Computation of conversion costs transferred out
Conversion costs of units started
$55,500
Equivalent Units transferred out 100% × 13,500
13,500
Equivalent Units in ending inventor 25% × 1,500
375
Total equivalent units
13,875
units
Conversion cost per equivalent units
$4.00
per unit
Units transferred out (13,500) × Conversion cost per EU ($4.00)
$54,000
3. Computation of total costs transferred out
Direct materials transferred out
$67,500
Conversion costs transferred out
54,000
Total costs transferred out
$121,500
The following information was extracted from the accounting records of Taft Manufacturing Company: Direct materials purchased $90,000 Direct materials used 86,000 Direct manufacturing labor costs 20,000 Indirect manufacturing labor costs 22,000 Sales salaries 14,000 Other factory expenses 32,000 Selling and administrative expenses 20,000 What was the cost of goods manufactured?
160,000
The cost of goods manufactured is calculated as indicated below:
Direct materials used $ 86,000
Direct manufacturing labor costs 20,000
Indirect manufacturing labor costs 22,000
Other factory expenses 32,000
$ 160,000
Arbor Corporation uses a water cooling system in its manufacturing operations. Gallons of water purchased for engine cooling increases with manufacturing production. Water and sewer utility costs recorded by the Arbor Corporation are billed to the company based on a minimum charge plus a rate for utilization beyond the minimum charge for 5,000 gallons of usage. Arbor would most likely classify its utility costs as:
Semivariable costs.
Limitations of an activity-based costing system include which of the following?
The expense of obtaining cost data is relatively high.
The Homogenized Milk Company uses process costing to value the cost of its individual gallons of milk and its ending inventory. On August 1, the company had 10,000 gallons of milk on hand that were 75% complete as to conversion costs. During the month of August, the company completed and transferred 30,000 gallons of milk to finished goods inventory and still had 5,000 gallons remaining in inventory at August 31 that was 60% complete as to conversion costs. What are the equivalent units of production relative to conversion costs that Homogenized would use assuming either the FIFO or weighted-average methods?
FIFO
Weighted Average
FIFO = 25,500
Weighted Average 33,000
The equivalent units of production under both methods are computed as follows: FIFO Equivalent Units Work-in-process, beginning 10,000 gallons × 25% (to complete) 2,500 Units started and completed this period Gallons completed and transferred out 30,000 Gallons in beginning inventory (10,000) 20,000 Work-in-process, ending 5,000 gallons × 60% 3,000 Equivalent gallons under FIFO 25,500 Weighted-average Equivalent Units Gallons completed and transferred out 30,000 Work-in-process, ending 5,000 gallons × 60% 3,000 Equivalent gallons under weighted-average 33,000 Note: Beginning units in process for the FIFO method represent the complement of the percentage-of-completion for the units on hand times the total units on hand (100% − 75%) × 10,000 = 2,500. As an alternate computation, FIFO units can be computed as the difference between weighted-average units of production net of the completed units in beginning inventory (33,000 − [10,000 × 75%]) = 25,500.
Feline Fabrications produces two products, Me and Ow, with joint production costs of $60,000. The company elects to use the net realizable value method of allocating costs between the 15,000 units of Me and 30,000 units of Ow produced during the year ended December 31, Year 1. Me has a selling price after split-off of $4.00 and separable costs of $30,000 while Ow has a selling price after split-off of $3.00 and separable costs after split-off of $20,000. What joint production costs will be allocated to each product?
ME
OW
ME = $18,000
OW = $42,000
The net realizable value method allocates joint costs based upon the ratio of each product's net realizable value as follows: Detail NRV Ratio of NRV Total Joint costs $60,000 Product Me Selling price $ 4.00 Times: # of Units 15,000 Total sales value $ 60,000 Separable costs (30,000) [Ratio of NRV to Total Joint costs] Net realizable value $ 30,000 30% $18,000 [30% × $60,000] Product Ow Selling price $ 3.00 Times: # of Units 30,000 Total sales value 90,000 Separable costs (20,000) [Ratio of NRV to Total Joint costs] Net realizable value 70,000 70% 42,000 [70% × $60,000] Total $100,000 100% $60,000
If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?
Conversion costs.
Based on the following data, what is the gross profit for the company? Sales $ 1,000,000 Net purchases of raw materials 600,000 Cost of goods manufactured 800,000 Marketing and administrative expenses 250,000 Indirect manufacturing costs 500,000 Beginning Inventory Ending Inventory Work in process $500,000 $400,000 Finished goods $100,000 $500,000
$600,000
The gross profit for the company is $600,000 computed as follows: Sales $ 1,000,000 Beginning inventory of finished goods $ 100,000 Cost of goods manufactured 800,000 Less: Ending finished goods inventory (500,000) Cost of goods sold 400,000 Gross profit $ 600,000 Note that significant irrelevant information was provided in the problem. Some of the information (e.g., the raw materials purchases, indirect costs and WIP) relate to data used to develop the relevant cost of goods manufactured. Other information (e.g., marketing and administrative expenses) relate to computation of operating income rather than gross profit.
One hundred pounds of raw material W is processed into 60 pounds of X and 40 pounds of Y. Joint costs are $135. X is sold for $2.50 per pound and Y can be sold for $3.00 per pound or processed further into 30 pounds of Z (10 pounds are lost in the second process) at an additional cost of $60. Each pound of Z can then be sold for $6. What is the effect on profits of processing product Y further into product Z?
No change.
Joint Costs
135
x 60 lbs at 2.50
y 40 lbs at 3.00
= 120.00
or
z 30 lbs at 6.00 = 180
less additional cost (60)
=120.00
No change
The relevance of a particular cost to a decision is determined by:
Potential effect on the decision.
In a decision analysis situation, which one of the following costs is generally not relevant to the decision?
Historical cost.
A company that produces 10,000 units has fixed costs of $300,000, variable costs of $50 per unit, and a sales price of $85 per unit. After learning that its variable costs will increase by 20%, the company is considering an increase in production to 12,000 units. Which of the following statements is correct regarding the company’s next steps?
If production remains at 10,000 units, profits will decrease by $100,000
Currently, the contribution margin per unit is $35 ($85 sales price minus $50 variable costs). If variable costs increase by 20%, the contribution margin per unit becomes $25 ($85 sales price minus $60 ($50 x 1.2) variable costs). The contribution margin will decrease by $10 per unit. If production remains at 10,000 units, profits will decrease by $100,000 (10,000 units times a $10 decrease in contribution margin per unit). Fixed costs are not relevant in this determination.
The following information is available on Crain Co.’s two product lines:
Chairs Tables
Sales $180,000 $48,000
Variable costs (96,000) (30,000)
CM 84,000 18,000
Fixed costs:
Avoidable (36,000) (12,000)
Unavoidable (18,000) (10,800)
Operating income (loss)
$30,000 ($4,800)
Assuming the tables line is discontinued, and the factory space previously used to make tables is rented for $24,000 per year, operating income will increase by what amount?
$18,000
The elimination of the tables line will eliminate unavoidable costs to the extent that they do not produce an operating loss. The rental income net of the reduced costs is the amount by which operating income will increase computed as follows: Rental income 24,000 Tables line unavoidable costs 10,800 Operating loss 4,800 Unabsorbed costs (6,000) Increase in net income $18,000 Viewed as a comparison, the change in operating income is as follows: Rental income 24,000 Unavoidable costs 10,800 Net operating income 13,200 Current operating loss (4,800) Overall change/Improvement in operating income $18,000
Comel, Inc. has two major product lines: stoves and dryers. Comel’s management wants to evaluate whether discontinuing dryers will increase profits. Which of the following is best for evaluating the discontinuance of the dryer product line?
Relevant cost.
The following information is taken from Wampler Co.’s Year 1 contribution income statement:
Sales $ 200,000
Contribution margin 120,000
Fixed costs 90,000
Income taxes 12,000
What was Wampler’s margin of safety?
$50,000
The margin of safety is the difference between current sales and breakeven sales. Breakeven sales is calculated by dividing fixed costs by the contribution margin ratio: Breakeven sales = $90,000 / ($120,000 ÷ $200,000) = $90,000 / 0.60 = $150,000 Margin of safety = $200,000 − $150,000 = $50,000
Kator Co. is a manufacturer of industrial components. One of their products that is used as a sub-component in auto manufacturing is KB-96. This product has the following financial structure per unit. Selling Price $ 150 Direct materials $ 20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs $ 90 During the next year, KB-96 sales are expected to be 10,000 units. All of the costs will remain the same except for fixed manufacturing overhead, which will increase by 20 percent and material, which will increase by 10 percent. The selling price per unit for next year will be $160. Based on these data, the contribution margin from KB-96 for next year will be:
.
$1,080,000
This Year Change Next Year Contribution Margin Selling price $ 150 \+ $ 10 = $ 160 $ 160 Direct materials 20 × 1.1 = 22 22 Direct labor 15 15 15 Variable mfg oh 12 12 12 Fixed mfg oh 30 × 1.2 = 36 −− Variable selling 3 3 3 Fixed sga 10 10 −− Total costs 90 98 52 Margin $ 60 $ 62 $ 108
Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott’s fixed cost?
$24,000
Breakeven sales $ 120,000
Contribution margin rate 20%
Contribution margin $ 24,000
Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?
$2,329
Since a 15% profit is desired, the cost of $990,000 would be 85% of sales. (Remember that profit + cost = sales.) Thus, sales are $1,164,700 ($990,000 ÷ 85%). $1,164,700 ÷ 500 units equals $2,329 per unit.
Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For Year 2, unit standard costs were unchanged from Year 1. In Year 2, the only beginning and ending inventories were finished goods of 5,000 units. How would Lynn’s ratios using absorption costing compare with those using variable costing?
Current Ratio
Return on Stockholders equity
Current Ratio = Greater
Return on Stockholders equity = Smaller
Jago Co. has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the:
Greater contribution margin per hour of manufacturing capacity.
Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs:
Fixed costs $ 21,000
Variable costs 33,000
The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?
$40,750
The minimum acceptable selling price should include only the incremental costs associated with the order: $33,000 variable costs + $7,750 external designers costs = $40,750. Note that this is a special order (won’t affect regular sales) and there is idle capacity.
The following information relates to Clyde Corporation, which produced and sold 50,000 units during a recent accounting period. Sales $ 850,000 Manufacturing costs: Fixed 210,000 Variable 140,000 Selling & administrative costs: Fixed 300,000 Variable 45,000 Income tax rate 40% For the next accounting period, if production and sales are expected to be 40,000 units, the company should anticipate a contribution margin per unit of:
$13.30
$13.30 contribution margin per unit. Sales $ 850,000 Variable manufacturing costs (140,000) Variable S&A costs (45,000) Contribution margin 665,000 Units ÷ 50,000 Contribution margin per unit $ 13.30 Note that contribution margin per unit does not change with volume.
Richardson Motors uses ten units of Part Number T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented below.
Direct materials $ 2,000
Material handling (20% of direct material cost) 400
Direct labor 16,000
Manufacturing overhead (150% of direct labor) 24,000
Total manufacturing cost $ 42,400
Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000.
If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit of T305 would:
Increase $9,600.
Increase $9,600. Build Buy Direct materials $ 2,000 $ 30,000 Material handling (20% of DM cost) 400 6,000 Direct labor 16,000 0 Manufacturing OH − variable 8,000 0 Manufacturing OH − fixed 16,000 16,000 Total costs $ 42,400 $ 52,000
Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device.
Direct labor $ 180
Direct materials 240
Factory overhead 105
Total variable production costs 525
Marketing costs 75
Total variable costs $ 600
Madengrad’s income tax rate is 40 percent, and annual fixed-costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last five years.
For Madengrad Company to achieve an after-tax net income of $540,000, annual sales revenue must be:
$22,500,000
Step 1 − Calculate before tax income Net income before tax − tax = Net income after tax NIBT − .40 NIBT = NIAT .60 NIBT = 540,000 NIBT = 900,000
Step 2 − Calculate number of units to achieve $900,000 net income before tax
Sales − variable cost - fixed cost = net income before tax = $900,000
($900 x units) - ($600 x units) - 6,600,000 = 900,000
$300 x units = 7,500,000
Number of units = 25,000
Step 3 - Calculate sales revenue based on number of units
25,000 units × $900 per unit = $22,500,000
Waldo Company, which produces only one product, provides its most current month's data as follows: Selling price per unit $80 Variable costs per unit: Direct materials 21 Direct labor 10 Variable manufacturing overhead 3 Variable selling and administrative 6 Fixed costs: Manufacturing overhead $76,000 Selling and administrative 58,000 Units: Beginning inventory 0 Month's production 5,000 Number sold 4,500 Ending inventory 500
Based upon the above information, what is the total contribution margin for the month under the variable costing approach?
$180,000
Under variable costing, all fixed factory overhead is treated as a period cost and is expensed in the period incurred. The cost of inventory includes only variable manufacturing costs, so the cost of goods sold includes only variable costs. Also, the variable selling, general, and administrative expenses are part of total variable costs. Unit Price Units Total Sales $80.00 4,500 $360,000 Direct Materials 21.00 4,500 $94,500 Direct Labor 10.00 4,500 45,000 Variable Mfg O/H 3.00 4,500 13,500 Variable S&A 6.00 4,500 27,000 Total Variable Costs 180,000 Contribution Margin 180,000 Fixed Mfg O/H 76,000 Fixed S&A 58,000 Total Fixed Costs 134,000 Net Income $46,000
At the end of a company’s first year of operations, 2,000 units of inventory are on hand. Variable costs are $100 per unit, and fixed manufacturing costs are $30 per unit. The use of absorption costing, rather than variable costing, would result in a higher net income of what amount?
$60,000
The difference between variable and absorption costing is the manner in which fixed manufacturing costs are treated. Under variable costing, only variable costs are included in inventory. Consequently, the difference in net income under variable costing rather than absorption costing is the amount of fixed manufacturing costs (accounted for in inventory under absorption costing) multiplied by the change in inventory. An increase in inventory indicates that a portion of the fixed costs associated with inventory under absorption costing are expensed under variable costing. Absorption costing, therefore, produces greater income than variable costing as inventory levels increase as follows:
Change in inventory (increase)
2,000
units
Fixed manufacturing cost per unit (absorbed into inventory,
excluded from cost of goods sold)
$ 30
Higher net income under absorption costing
$60,000
Pinecrest Co. had variable costs of 25% of sales, and fixed costs of $30,000. Pinecrest’s break-even point in sales dollars was:
$40,000
Break even analysis can be used to calculate the required sales dollars to produce breakeven using the following formula:
Sales = Fixed Cost ÷ Contribution Margin Ratio (contribution margin expressed as a percentage of revenue)
The fact pattern indicates that variable costs are 25% of sales. By extension, contribution must be 75% of sales (100%-25%). Break even in sales dollars is computed using the formula above based upon fixed costs given at $30,000:
Sales
= $30,000 ÷ 75%
= $40,000
Spring Co. had two divisions, A and B. Division A created Product X, which could be sold on the outside market for $25 and used variable costs of $15. Division B could take Product X and apply additional variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special order for a large amount of Product Y. If Division A were operating at full capacity, which of the following prices should Division A charge Division B for the Product X needed to fill the special order?
$25
This question is on transfer pricing. The best transfer pricing model is based on market price, which, in this question, is $25.
Which of the following costing methods provide(s) the added benefit of usefulness for external reporting purposes? I. Variable. II. Absorption.
II only.
A company’s target gross margin is 40% of the selling price of a product that costs $89 per unit. The product’s selling price should be:
$148.33
The selling price is computed at $148.33. The fact pattern provides the basic relationships and requires that you determine selling price either algebraically or in a tabular form. Putting the fact pattern in a table, the provided information is used to compute the solution as follows: Data Provided Computed Percent Amount Percent Amount Selling price 100% ??? 100% ↑ 148.33 Costs ??? (89) 60% (89) Gross margin 40% ??? 40% The problem provides that the company has a 40% gross margin. By extension, costs are 60% of sales. If costs are $89, then selling price must be $148.33, as calculated below: Selling price = Costs ÷ Ratio of costs to sales = $89 ÷ 60% = $148.33
Wren Co. manufactures and sells two products with selling prices and variable costs as follows: A B Selling price $18.00 $22.00 Variable costs 12.00 14.00 Wren's total annual fixed costs are $38,400. Wren sells four units of A for every unit of B. If operating income last year was $28,800, what was the number of units Wren sold?
10,500
Wren will have sold a total of 10,500 units to achieve a $28,800 operating profit assuming the fact pattern described above. The question requires the candidate to recall the basic contribution margin formula and apply some algebra.
The fact pattern describes that the operating income is $28,800 and the fixed costs are $38,400. The contribution margin is; therefore, the total of the two $67,200.
The basic formula to compute units sold is:
CM per unit x Units = $67,200
The fact pattern indicates that Wren has two products with unique selling and cost patterns.
First, compute the contribution margin:
Selling price - Variable cost =
Contribution margin per unit
Product A
$18 - $12 = $6
Product B
$22 - $14 = $8
Second, quantify the selling pattern and the relationship between the products. Wren sells 4 units of Product A for every unit of Product B, so expressing Product A in terms of Product B:
Product A = 4 x Product B
Third, determine the number of units of Product B that were sold:
$6 contribution margin x (4B) + $8 contribution margin x B = $67,200
24B + 8B = 67,200
32B = 67,200
B = 2,100
Fourth, determine the number of Product A and the total number of products sold:
A = 4 x B (4 x 2,100) or 8,400
Total units = 2,100 + 8,400 or 10,500
A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the price per cup to be $9.00; variable manufacturing costs to increase 33.3%; and fixed costs to increase 10%. How many cups (rounded) does the company need to sell this year to break even?
19,250
The ceramics manufacturer will need to sell 19,250 cups under new cost assumptions to break even. The fact pattern provides current breakeven information and requires computation of a revised breakeven subject to new assumptions. Current Costs Assumptions Revised Costs Selling price (given) $7.50 $9.00 Variable costs (given) 2.25 × 1.333 = 3.00 Contribution margin (computed) $5.25 $6.00 Breakeven in units (given) 20,000 Fixed costs (computed) $105,000 × 1.10 = $115,500 Current fixed costs are computed using the breakeven formula in units as follows: Fixed costs ÷ Contribution margin per unit = Breakeven in units Fixed costs ÷ $5.25 = 20,000 Fixed costs = $5.25 x 20,000 = $105,000 Revised breakeven point in units is computed using the same formula with revised data: Fixed costs ÷ Contribution margin per unit = Breakeven in units $115,500 ÷ $6.00 = Breakeven in units 19,250 = Breakeven in units
Which of the following statement(s) is(are) true regarding the relationship between absorption costing net income and variable costing income?
I.
When production exceeds sales, variable costing income exceeds absorption costing net income.
II.
When sales exceed production, absorption costing income exceeds variable costing net income.
Neither I nor II.
In its first year of operation, Magna Manufacturers had the following costs when it produced 100,000 and sold 80,000 units of its only product: Manufacturing costs: Fixed $180,000 Variable 160,000 Selling and admin costs: Fixed $90,000 Variable 40,000 How much lower would Magna's net income be if it used variable costing instead of full absorption costing?
$36,000
The difference between variable costing and full absorption costing lies in the treatment of fixed manufacturing costs. Full absorption costing treats fixed manufacturing costs as product costs, while variable costing expenses these as period costs.
Using full absorption costing:
$180,000 / 100,000 units = $1.80 per unit produced
$1.80 x 80,000 units sold = $144,000 fixed manufacturing costs expensed (through cost of goods sold) under full absorption costing. The remaining fixed manufacturing costs of $36,000 (= $180,000 - $144,000) remain in inventory as product costs.
Variable costing treats all fixed costs as period costs, expensing the costs regardless of sales. Thus, the difference in net income would be the amount of fixed manufacturing costs inventoried under absorption costing: $180,000 - $144,000 = $36,000.
In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would:
Be used in the computation of operating income but not in the computation of the contribution margin.
Rodder, Inc. manufactures a component in a router assembly. The selling price and unit cost data for the component are as follows:
Selling price $ 15
Direct materials cost 3
Direct labor cost 3
Variable overhead cost 3
Fixed manufacturing overhead cost 2
Fixed selling and administration cost 1
The company received a special one-time order for 1,000 component?
$14
The lowest unit price that Rodder should accept is the variable cost of producing the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of the alternative use for the production capacity. The total of these amounts is $14 [$3 + $3 + $3 + $5 = $14].
Selected information concerning the operations of a company for the year ended December 31 is as follows:
Units produced 20,000
Units sold 18,000
Direct materials used $80,000
Direct labor incurred $40,000
Fixed factory overhead $50,000
Variable factory overhead $24,000
Fixed selling and administrative expenses
$60,000
Variable selling and administrative expenses
$9,000
Work-in-process inventories at the beginning and end of the year were zero. What was the company’s finished goods inventory cost at December 31 under the variable (direct) costing method?
$14,400
The ending finished goods inventory computed using direct costing is calculated by allocating the total costs capitalized in inventory under direct costing (variable costs) to ending inventory as follows: Amount Units Ending Inventory Direct Material 80,000 Direct Labor 40,000 Variable Factory Overhead 24,000 Total Production 144,000 ÷ 20,000 = $7.20 Ending Inventory (20,000 - 18,000) × 2,000 Ending Inventory 14,400
Thompson Company is in the process of preparing its budget for the next fiscal year. The company has had problems controlling costs in prior years and has decided to adopt a flexible budgeting system this year. Many of its costs contain both fixed and variable cost components. A method that can be used to separate costs into fixed and variable components is:
Regression analysis.
A regression equation:
Estimates the dependent variables.
Seacraft Inc. received a request for a competitive bid for the sale of one of its unique boating products with a desired modification. Seacraft is now in the process of manufacturing this product but with a slightly different modification for another customer. These unique products are labor intensive and both will have long production runs. Which one of the following methods should Seacraft use to estimate the cost of the new competitive bid?
Learning curve analysis.
It is estimated that a particular manufacturing job is subject to an 80 percent learning curve. The first unit required fifty labor hours to complete. What is the cumulative average time per unit after completing four units?
32.0 hours.
Rule: The basic premise of the learning curve is that operating efficiency and/or production increases in repetitive tasks as experience is gained. The rate of improvement, measured by the learning curve, has a regular pattern that can be stated as follows:
As cumulative quantities double, average cost per unit decreases by a specified percent of the previous cost.
32.0 hours cumulative average time per unit after completing four units. Cumulative # of Units Average Time Per Unit 1 50 Hours 2 40 Hours (50 × 0.8) 4 32 Hours (40 × 0.8)
A management accountant performs a linear regression of maintenance cost vs. production using a computer spreadsheet. The regression output shows an “intercept” value of $322,897. How should the accountant interpret this information?
Y has a value of $322,897 when X equals zero
The regression analysis results for ABC Co. is shown as y = 90x + 45. The standard error (Sb) is 30 and coefficient of determination (r2) is 0.81. The budget calls for production of 100 units. What is ABC’s estimate of total costs?
$9,045
The total cost formula is the formula for a line where total cost, the dependent variable (y), is equal to volume times the independent variable, variable costs (x), plus a constant (fixed costs).
The formula for ABC Company is:
y = 90x + 45
The problem tells us that we plan to produce 100 units so total costs, y, is computed as follows:
y = (90 × 100) + 45
y = 9,045
The coefficient of determination measures the proportion of the total variation in “y” or total cost that is explained by the total variation in the independent variable, x, or variable costs. The coefficient of determination measures the reliability of the formula, but is not used for determining the value of “y”.
The standard error (also standard error of the mean) is a measurement used in conjunction with standard deviation computations and is not relevant to this projection.
Snyder Co. manufactures fans with direct material costs of $10 per unit and direct labor of $7 per unit. A local carrier charges Snyder $5 per unit to make deliveries. Sales commissions are paid at 10% of the selling price. Fans are sold for $100 each. Indirect factory costs and administrative costs are $6,800 and $37,200 per month, respectively. How many fans must Snyder produce to break even?
648
The break even point in units (fans) is computed as fixed costs divided by contribution margin per unit.
Contribution margin is computed as the difference between selling price and variable costs. Variable costs are comprised of the following:
Direct material $ 10.00
Direct labor 7.00
Delivery charges 5.00
Commission ($100 x 10%) 10.00
Total $ 32.00
Contribution margin = $100 - $32.00 = $68.00
Fixed costs are comprised of the following:
Indirect factory costs $ 6,800
Administrative costs 37,200
Total $ 44,000
Breakeven point units is computed as follows:
FC
$44,000
÷ CM per unit
68
Fans
647
Given that demand exceeds capacity, that there is no spoilage or waste, and that there is full utilization of a constant number of assembly hours, the number of components needed for an assembly operation with an 80 percent learning curve should I. Increase for successive periods. II. Decrease per unit of output.
I only.
Multiple regression differs from simple regression in that it:
Has more independent variables.
Using regression analysis, Fairfield Co. graphed the following relationship of its cheapest product line’s sales with its customers’ income levels:
If there is a strong statistical relationship between the sales and customers’ income levels, which of the following numbers best represents the correlation coefficient for this relationship?
- 0.93
The correlation coefficient measures the strength of the relationship between variables. It is a number between -1 and +1. If the relationship is strong, it will have a coefficient near +1 or -1 depending on the slope of the relationship. In this case, the descending relationship has a negative slope. The correlation coefficient will be close to -1, or -0.93 as given.
Which of the following costs are not included in inventoriable costs under a variable (or direct) costing system?
Fixed overhead.
Which of the following costs are included in product or inventoriable costs in an absorption costing system?
Direct material, direct labor and all overhead.
The method of inventory costing in which direct manufacturing costs and manufacturing overhead costs, both variable and fixed, are considered as inventoriable costs is best described as:
Absorption costing.
There are a variety of ways of classifying costs of an object as either fixed or variable. The most accurate method is considered to be:
The regression analysis method.
Many firms have made significant strides in reducing their inventories. Which of the following would be least likely to encourage managers to reduce inventory?
Using absorption costing.
The opportunity cost of making a component part where there is no alternative use for the factory is:
Zero.
Almo developed its business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were budgeted at $100,000. Almo’s after-tax profit objective was $240,000; the company’s effective tax rate is 40 percent. If no changes are made to the selling price or cost structure, determine the number of units that Almo Company must sell in order to break-even.
500 units.
500 units must be sold to breakeven.
Total fixed cost $100,000 ÷ contribution margin per unit of $200 = 500 units to breakeven.
Almo developed its business plan based on the assumption that canopies would sell at a price of $400 each. The variable costs for each canopy were projected at $200, and the annual fixed-costs were budgeted at $100,000. Almo’s after-tax profit objective was $240,000; the company’s effective tax rate is 40 percent. If no changes are made to the selling price or cost structure, determine the number of units that Almo Company must sell to achieve its after-tax profit objective.
2,500 units.
2,500 units must be sold to achieve a profit of $240,000.
Target after-tax profit of $240,000 ÷ (1 - tax rate) =
$240,000
.6
= $400,000
Total fixed cost + target after-tax profit ÷ contribution margin per unit =
$100,000 + 400,000
$200
= 2,500 units to achieve after-tax profit objective
Assumptions underlying cost-volume-profit analysis include all of the following, except:
Total costs are directly proportional to volume over the relevant range.
Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented below. Delphi is subject to a 40 percent income tax rate. Variable Costs Direct material $ 7.00 Direct labor 3.50 Manufacturing overhead 4.00 Total variable manufacturing cost 14.50 Selling expenses 1.50 Total variable cost $ 16.00 The number of units of the new product that Delphi Company must sell during the next fiscal year in order to break even is:
22,500
22,500 units. Selling price $ 36.00 Total variable cost 16.00 $ 20.00 Fixed costs ÷ contribution margin = breakeven units $450,000 ÷ $20.00 = 22,500 units
Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented below. Delphi is subject to a 40 percent income tax rate. Variable Costs Direct material $ 7.00 Direct labor 3.50 Manufacturing overhead 4.00 Total variable manufacturing cost 14.50 Selling expenses 1.50 Total variable cost $ 16.00 The maximum after-tax profit that can be earned by Delphi Company from sales of the new product during the next fiscal year is:
$30,000
Contribution margin per unit ($36 - $16) $ 20.00 Maximum capacity allocated × 25,000 Pretax contribution margin 500,000 Less fixed costs (450,000) Pretax profit 50,000 Less tax ($50,000 × 40%) (20,000) After-tax profit $ 30,000
Delphi Company has developed a new product that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at $36 per unit, Delphi's management has allocated only enough manufacturing capacity to produce a maximum of 25,000 units of the new product annually. The fixed-costs associated with the new product are budgeted at $450,000 for the year, which includes $60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented below. Delphi is subject to a 40 percent income tax rate. Variable Costs Direct material $ 7.00 Direct labor 3.50 Manufacturing overhead 4.00 Total variable manufacturing cost 14.50 Selling expenses 1.50 Total variable cost $ 16.00 Delphi Company's management has stipulated that it will not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profit is at least $75,000 the first year. The unit selling price to achieve this target profit must be at least:
$39.00
After-tax profit $ 75,000 Reciprocal of tax rate (100% - 40%) ÷ 60% Pretax profit 125,000 Fixed cost 450,000 575,000 Maximum volume ÷ 25,000 Required contribution margin per unit 23 Variable cost per unit 16 Required selling price $ 39
Marston Enterprises sells three chemicals: petrol, septine, and tridol. Petrol is the company’s most profitable product; tridol is the least profitable. Which one of the following events will definitely decrease the firm’s overall breakeven point for the upcoming accounting period?
An increase in anticipated sales of petrol relative to sales of septine and tridol.
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The following cost information relates to the product.
Unit Costs
Direct materials
$3.25
Direct labor
4.00
Distribution
.75
The company will also be absorbing $120,000 of additional fixed-costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product.
If the selling price is $14 per unit, the breakeven point in units (rounded to the nearest hundred) for surge protectors is:
20,000 units
$20,000 units. Price $14.00 Direct materials (3.25) Direct labor (4.00) Distribution ( .75) Contribution margin $6.00 Additional "fixed" costs $120,000 Contribution margin ÷ 6 Units to breakeven 20,000 Note: The $20,000 of allocated fixed costs are irrelevant.
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The following cost information relates to the product.
Unit Costs
Direct materials
$3.25
Direct labor
4.00
Distribution
.75
The company will also be absorbing $120,000 of additional fixed-costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product.
How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to gain $30,000 additional income before taxes?
25,000 units.
Price $14.00 Direct materials (3.25) Direct labor (4.00) Distribution (.75) Contribution margin $6.00 Additional "fixed" costs $120,000 Additional income before taxes 30,000 150,000 Contribution margin ÷ 6 Units to achieve + $30,000 25,000
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows. The following cost information relates to the product.
Unit Costs
Direct materials
$3.25
Direct labor
4.00
Distribution
.75
The company will also be absorbing $120,000 of additional fixed-costs associated with this new product. A corporate fixed charge of $20,000 currently absorbed by other products will be allocated to this new product.
How many surge protectors (rounded to the nearest hundred) must Bruell Electronics sell at a selling price of $14 per unit to increase after-tax income by $30,000? Bruell Electronics’ effective income tax rate is 40 percent.
28,300 units.
Price $14.00 Direct materials (3.25) Direct labor (4.00) Distribution (.75) Contribution margin $6.00 Additional "fixed" costs $120,000 Pretax profit ($30,000 ÷ 60%) 50,000 170,000 Contribution margin ÷ 6 Units to achieve $30,000 additional after tax income 28,300
When a multi-product plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the:
Highest contribution margin per unit of the constraining resource.
Kator Co. is a manufacturer of industrial components. One of their products that is used as a sub-component in auto manufacturing is KB-96. This product has the following financial structure per unit. Selling Price $150 Direct materials $20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs $90 Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assuming Kator has excess capacity, the minimum price that is acceptable for this one-time, special order is in excess of:
$50
$50 (variable cost) is the minimum price that is acceptable for this one-time, special order, assuming excess capacity is available. Variable Cost Selling price $150 Direct materials $20 20 Direct labor 15 15 Variable manufacturing overhead 12 12 Fixed manufacturing overhead 30 − Shipping and handling 3 3 Fixed selling and administrative 10 − Total costs $90 50
Kator Co. has received a special, one-time, order for 1,000 KB-96 parts. Assume that Kator is operating at full capacity, and the next best alternative use of their capacity on existing equipment is LB-64 that would produce a contribution of $10,000. This product has the following financial structure per unit. Selling Price $150 Direct materials $20 Direct labor 15 Variable manufacturing overhead 12 Fixed manufacturing overhead 30 Shipping and handling 3 Fixed selling and administrative 10 Total costs $90 The minimum price that is acceptable for this one-time, special order is in excess of:
$60
$60 is the minimum price that is acceptable, using the original data, for this one-time, special order. $60 opportunity cost equals variable cost of $50 plus alternative use contribution of $10 ($10,000 profit + 1,000 units). Direct materials $ 20 Direct labor 15 Variable Mfg OH 12 Variable selling 3 Variable cost 50 Alternative use contribution 10 Opportunity cost $ 60
In joint-product costing and analysis, which one of the following costs is relevant when deciding the point at which a product should be sold in order to maximize profits?
Separable costs after the split-off point.
Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?
Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
Whitehall should process further and sell to flank if the total selling price per unit after further processing is greater than $5.00. Per Unit Totals AM-12 AM-12 BM-36 Combined Units 1 60,000 40,000 100,000 Joint costs $3.00 $180,000 ÷ $120,000 = $300,000 Further costs 1.50 90,000 Total costs 4.50 $270,000 Add gross margin at split-off: ($3.50 - 3.00) = .50 Minimum $5.00
Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation after further processing for $5.50 per unit. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. Joint costs attributable to AM-12 were $180,000, and costs of processing AM-12 further were $90,000. With respect to AM-12, which one of the following statements is correct?
The operating profit last month was $50,000 and the inventory value is $45,000
The operating profit last month was $50,000, and the inventory value is $45,000. Per Unit × Units = Income Inventory Sales $5.50 × 50,000 = $275,000 Cost of goods sold 4.50 × 50,000 = 225,000 Inventory 4.50 × 10,000 = − 45,000 Operating profit 50,000 Inventory 45,000 50,000 unit sales + 10,000 inventory = 60,000 unit production $180,000 in joint costs divided by 60,000 units = 3.00 unit costs $90,000 further processing divided by 60,000 units = 1.50 unit costs Total costs per unit 4.50
Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first 4 months of Year 1. What was the variable order filling cost component per order? Month Orders Cost January 1,200 $3,120 February 1,300 3,185 March 1,800 4,320 April 1,700 3,895
$2.00
The high-low method uses the high and the low activity levels (orders) in order to determine the equation of a straight line [Y = (VC * X) + FC], thus separating the total costs into variable and fixed costs.
$4,320 - $3,120
1,800 - 1,200
= $2.00 per order
Trijonis Company estimated its material handling costs at two activity levels, as follows: Kilos Handled Cost 80,000 $160,000 60,000 $132,000 What is Trijonis’ estimated cost for handling 75,000 kilos?
$153,000
Using the high-low method, the variable cost per kilo can be determined by dividing the change in cost ($160,000 - $132,000) by the change in volume (80,000 - 60,000): $160,000 - $132,000 80,000 - 60,000 = $1.40 per kilo The fixed portion of the cost can be determined by substituting the volume and variable in the equation Y = a + bx, or Y = a + bx $160,000 = a + $1.40(80,000) a = $48,000 At 75,000 kilos, the total cost would be: Y = $48,000 + $1.40x Y = $48,000 + $1,40(75,000) Y = $153,000
Which of the following forecasting methods relies mostly on judgment?
Delphi.
An increase in production levels within a relevant range most likely would result in:
Increasing the total cost.
A delivery company is implementing a system to compare the costs of purchasing and operating different vehicles in its fleet. Truck 415 is driven 125,000 miles per year at a variable cost of $0.13 per mile. Truck 415 has a capacity of 28,000 pounds and delivers 250 full loads per year. What amount is the truck’s delivery cost per pound?
$0.00232 per pound.
Delivery cost per pound is $0.00232 and is determined by dividing total variable costs by total delivered pounds. The computations are as follows:
Total variable costs for Truck 415 is $16,250 (125,000 miles times $0.13 per mile).
Total pounds delivered are 7,000,000 (28,000 pounds times 250 loads).
Cost per delivered pound is $16,250 divided by 7,000,000, or $0.00232.
A company is offered a one-time special order for its product and has the capacity to take this order without losing current business. Variable costs per unit and fixed costs in total will be the same. The gross profit for the special order will be 10%, which is 15% less than the usual gross profit. What impact will this order have on total fixed costs and operating income?
Total fixed costs do not change, and operating income increases.
Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production.
Huron’s fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products.
Tape
Duplicator Cleaning
Unit
Raw materials $ 44.00 $ 36.00
Machining @ $12/hr. 18.00 15.00
Assembly @ $10/hr. 30.00 10.00
Variable overhead @ $8/hr. 36.00 18.00
Fixed overhead @ $4/hr. 18.00 9.00
Total cost $ 146.00 $ 88.00
Suggested selling price $169.95 $99.98
Actual research and development costs $240,000 $175,000
Proposed advertising and promotion costs $500,000 $350,000
Research and development costs for Huron’s two new products are:
Sunk costs
The CPA reviewed the minutes of a board of director’s meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR couldn’t fill the order. By having SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was completed. Which of the following statements is correct regarding LQR’s action?
The use of resource markets outside of LQR involves opportunity cost.
Which of the following statements is true regarding opportunity cost?
Idle space that has no alternative use has an opportunity cost of zero.
In managerial accounting, the term “relevant range” is often used to describe:
The range over which cost relationships are valid.
At annual sales of $900,000, the Ebo product has the following unit sales price and costs: Sales price $ 20 Prime cost 6 Manufacturing overhead: Variable 1 Fixed 7 Selling & administrative costs: Variable 1 Fixed 3 18 Profit $ 2 What is Ebo's breakeven point in units?
37,500 units
.Step 1:
Determine how many units were sold to generate the $900,000 in sales shown in the fact pattern:
$900,000/$20 per unit = 45,000 units sold
Step 2:
Determine the total fixed costs: Unit costs: Fixed manufacturing costs $ 7 Fixed selling and administrative costs 3 Total fixed cost per unit $ 10 Total fixed costs = $10 per unit x 45,000 units = $450,000
Step 3:
Determine the contribution margin per unit: Selling price per unit $ 20 Prime costs (6) Variable overhead costs (1) Variable selling & administrative costs (1) Contribution margin per unit $ 12
Step 4:
Determine the breakeven in units:
Break-even analysis assumes that over the relevant range:
Unit variable costs are unchanged
The Danforth corporation circuit production plant has a 12,000 unit capacity and currently produces 10,000 circuits per year. The company incurs $50,000 in variable costs for its current production and carries a $40,000 fixed cost burden. If Danforth has an opportunity to fill a special order for 1,000 circuits, the price per unit for the order should exceed:
$5.00
Assuming available capacity, the minimum cost per unit of a special order is equal to the variable cost per unit. Fixed costs are irrelevant.
The Danforth corporation circuit production plant has a 10,000 unit capacity and currently produces 10,000 circuits per year. The company incurs $50,000 in variable costs for its current production and carries a $40,000 fixed cost burden. Danforth has explored other alternatives and knows that the next best alternative would produce a $2,000 contribution margin for a 1,000 unit run. If Danforth has an opportunity to fill a special order for 1,000 circuits, the price per unit of the order should exceed:
$7.
At capacity, the minimum price for a special order is the sum of the variable costs of current utilization plus the contribution margin from the next best alternative.
Variable costs ($50,000 ÷ 10,000) $ 5
Contribution margin, next best ($2,000 ÷ 1,000) 2
Total $ 7
A company produces and sells two products. The first product accounts for 75% of sales and the second product accounts for the remaining 25% of sales. The first product has a selling price of $10 per unit, variable costs of $6 per unit, and allocated fixed costs of $100,000. The second product has a selling price of $25 per unit, variable costs of $13 per unit, and allocated fixed costs of $212,000. At the break-even point, what number of units of the first product will have been sold?
39,000
Product one unit sales of 39,000 will result in an overall breakeven for the company. The call of the question asks for the level of sales for an overall breakeven (not breakeven per product) so the company must generate a contribution margin equal to combined fixed costs of $312,000 ($100,000 for the first product + $212,000 for the second product) assuming the relative sales volumes given in the problem.
Contribution margins (CM) are computed as follows:
First product:
$10 selling price - $6 variable cost = $4 contribution margin
Second product:
$25 selling price - $13 variable cost = $12 contribution margin
Since the relative sales volume of product is 75% for the first product and 25% of the second product, total breakeven units can be algebraically expressed as follows:
(First product CM X 75% of total units) + (Second product CM X 25% of total units) = Fixed costs
($4 x 75%x) + ($12 x 25%x) = 312,000
$3x +$3x = $312,000
$6x = $312,000
x = $312,000/$6
x = 52,000
The call of the question is for the number of units of the first product. The first product represents 75% of the total units.
First product sales at breakeven = 52,000 x 75% = 39,000
Black Co.’s breakeven point was $780,000. Variable expenses averaged 60% of sales, and the margin of safety was $130,000. What was Black’s contribution margin?
$364,000
The contribution margin at the time the company achieves a $130,000 margin of safety is $364,000. The margin of safety is the excess of sales over break even sales. Assuming variable costs are 60% of selling price, contribution margin may be computed at 40% of selling price as follows: Cost component Breakeven Margin of safety Total Sales 100% $780,000 $130,000 $910,000 Variable costs 60% 468,000 78,000 546,000 Contribution margin 40% $312,000 $ 52,000 $364,000
The following information data pertains to a manufacturing company:
Total sales $ 80,000
Total variable costs 20,000
Total fixed costs 30,000
What is the breakeven level in sales dollars?
$40,000
Breakeven point in sales dollars may be computed as the ratio of total fixed costs to the contribution margin ratio.
The contribution margin ratio is the contribution margin expressed as a percentage of revenue. In this instance, the contribution margin ratio is equal to the sales price of $80,000 less the variable costs of $20,000 divided by the sales price of $80,000.
The contribution margin ratio is therefore:
$60,000/$80,000 or 75%
Breakeven point in dollars is computed using the following formula:
Total fixed costs
Contribution margin ratio
= Breakeven point in dollars
Therefore in this instance, the breakeven point in dollars is:
$30,000
75%
= $40,000
Jackson Co. is considering a project that will use 2,000 square feet of storage space at one of its facilities to store used equipment. What will determine Jackson’s opportunity cost?
The value of the next best use of the space.
Jones Corp. had an opportunity to use its capacity to produce an extra 5,000 units with a contribution margin of $5 per unit, or to rent out the space for $10,000. What was the opportunity cost of using the capacity?
$10,000
The opportunity cost is $10,000, the value of the next best use of the space. The alternative selected carries a contribution margin of $25,000 and the next best use is renting the space for $10,000.
Which of the following costing methods will yield the lowest inventory value?
Variable.
In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient idle capacity, which one of the following is not relevant to the decision?
Absorption costs.
Arbor Corporation uses the coefficient of correlation to measure the strength of the cost volume relationships used in planning. When reviewing variable costs and volume, Arbor would be most likely to find a coefficient of correlation equal to:
1.0
.
Arbor would expect a coefficient of correlation equal to 1.0. The positive measure would reflect the strong direct relationship assumed in CVP analysis, where total variable costs increase proportionally with volume.
The Waller Walleye Plant is operating at capacity and currently generates revenue of $1,600,000 per year by processing stewed walleye for cat food. The plant currently has a 15% contribution margin. The company has been offered the opportunity to prepare stewed sturgeon for upscale cat food using one-quarter of the plant’s capacity. The sturgeon job would take one year and pay $600,000 with a 25% contribution margin. The opportunity cost of not accepting the sturgeon project is:
$150,000
The opportunity cost is the opportunity foregone, the $150,000 in lost contribution from not taking the new job:
Sales $ 600,000
Variable costs (75%) (450,000)
Contribution (25%) $ 150,000
Norville Creations wants to achieve an after-tax profit of $45,000 for the year ended December 31, Year 1. The company sells its product for $35 per unit and has a contribution margin ratio of 15%. The company’s fixed costs are currently $150,000 and its tax rate is 25%. How many units must Norville sell to achieve its after-tax profit objective?
40,000
Norville must sell 40,000 units to achieve an after-tax profit of $45,000. Units are computed by dividing the fixed cost plus the desired pre-tax profit by the contribution margin per unit. Pre-tax profit is computed as the after-tax profit times the complement of the tax rate. Contribution margin per unit is computed as the selling price times the contribution margin ratio. The computation of the units required for break-even is as follows: Computation of Pre-tax income After-tax income $45,000 Complement of tax rate [100% - 25%] ÷ 75% Pre-tax income $60,000 Computation of Breakeven Numerator Pre-tax income $60,000 Fixed costs 150,000 Breakeven numerator $210,000 Computation of Contribution Margin Per Unit Selling price $35.00 Contribution margin ratio (CM/SP, given) × 15% Contribution margin per unit $5.25 Computation of Required Sales Volume Breakeven numerator $210,000 Contribution margin per unit ÷ 5.25 Sales in units to achieve target after-tax profit 40,000 units
The coefficient of determination, r squared, in a multiple regression equation is the:
Percentage of variation in the dependent variable explained by the variation in the independent variables
State College is using cost-volume-profit analysis to determine tuition rates for the upcoming school year. Projected costs for the year are as follows: Contribution margin per student $ 1,800 Variable expenses per student 1,000 Total fixed expenses 360,000 Based on these estimates, what is the approximate breakeven point in number of students?
200
correct. The breakeven point in units is 200. The breakeven point in units is computed by dividing fixed costs by contribution margin per unit. Both figures are given in the problem and are used to compute breakeven point in units (students) as follows: Fixed costs 360,000 Contribution margin per student ÷ 1,800 Breakeven point in students 200
Brewster Co. has the following financial information: Fixed costs $ 20,000 Variable costs 60% Sales price $ 50 What amount of sales is required for Brewster to achieve a 15% return on sales?
$80,000
Sales of $80,000 provide a 15% return on sales. The required sales volume may be computed algebraically as follows assuming sales = "S" as follows: S − 0.6S − $20,000 = 0.15S S − 0.6S − 0.15S = $20,000 0.25S = $20,000 S = $20,000 ÷ 0.25 S = $80,000
A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the following changes: sales price per cup to be $9.00; variable manufacturing costs to increase 33.3%; fixed costs to increase 10%; and the income tax rate to remain at 40%. Sales in the coming year are expected to exceed last year’s sales by 1,000 units. How many units does the company expect to sell this year?
22,600
Current year sales (in units) are expected to be 22,600, 1,000 more than the 21,600 units sold in the current year. The 21,600 units sold last year is derived from computations of last year sales in units based on last year cost structure data as follows (note that current year increases are irrelevant):
Step 1: Calculate last year’s contribution margin per unit (CM/unit)
CM/unit = Sales price per unit − Variable cost per unit = $7.50 − $2.25 = $5.25
Step 2: Determine last year’s fixed costs using the breakeven formula
Breakeven units = Fixed costs / Contribution margin per unit
20,000 = Fixed costs / $5.25
Fixed costs = 20,000 × $5.25 = $105,000
Step 3: Calculate last year’s before-tax profit
Before-tax profit = After-tax profit / (1 − tax rate)
Before-tax profit = $5,040 / 60% = $8,400
Step 4: Calculate units sold last year
Units sold to achieve profit = (Fixed costs + Profit) / Contribution margin per unit
Units sold last year = ($105,000 + $8,400) / $5.25 = 21,600
Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?
When production is greater than sales, absorption costing income is greater than variable costing income.
Companies in what type of industry may use a standard cost system for cost control?
Mass Production Industry
Service Industry
Mass Production Industry = yes
Service Industry = yes
What is the required unit production level given the following factors? Units Projected sales 1,000 Beginning inventory 85 Desired ending inventory 100 Prior-year beginning inventory 200
1,015
Required production can be calculated from a normal Account Analysis Format, where production takes the place of purchases, sales takes the place of cost of goods sold, and everything is expressed in units (not dollars). Beginning and ending inventory are given in the question. The calculation is as follows: Beginning inventory 85 Add: Production "plug" Subtract: Sales (1,000) Ending inventory 100 The plug for production is thus 1,015 units.
Card Bicycle Co. has prepared production and raw materials budgets for next year. At the end of this year, the finished product inventory is expected to include 2,000 bicycles, and raw material inventory is expected to include 3,000 bicycle tires. Each finished bicycle requires two tires. The marketing department provided the following data from the sales budget for the first quarter: January February March Expected bicycle sales (units) 12,000 16,000 18,000 The company inventory policy is to have finished product inventory equal to 20% of the following month's sales requirements, and raw material equal to 10% of the following month's production requirements. In the January budget for raw materials, how many tires are expected to be purchased?
26,680
January tire requirements are 26,680 tires. NOTE that this question is very detailed and quite confusing in parts. We suspect that it will be rare for something of this nature to appear frequently on the CPA Exam (which is likely a reason they released the question).
There are multiple steps in computing the raw materials requirements.
Determine the amount of raw materials transferred out by computing the amount of finished goods transferred in:
Compute the ending balance of January Finished Product at 3,200 (February sales x 20%) per company policy.
Use the beginning balance (given) and January sales (given) to squeeze out 13,200 bicycles transferred in.
Multiply 13,200 by 2 tires per bicycle to arrive at the number of tires transferred out of Work in Process in January.
Use January ending finished product data and March sales data to arrive at February production requirements and, by extension, the required ending balance for January’s raw materials inventory:
January finished goods ending balance is February finished goods beginning balance.
Compute the ending balance of February Finished Product at 3,600 (March sales x 20%) per company policy.
Use the beginning balance (computed) and February sales (given) to squeeze out 16,400 bicycles transferred in (production requirements).
Multiply 16,400 by 2 tires per bicycle to arrive at the number of tires needed for production requirements in February and multiply by 10% to compute the raw materials ending balance for January at 3,280 in accordance with company policy.
Compute tire requirements (purchases) for January based on computed ending balance and computed transfers to finished goods in January and beginning inventory (given):
Ending balance, 3,280 + Raw materials transferred to finished goods, 26,400 - beginning inventory, 3,000 = 26,680 tires purchased.
Crisper, Inc. plans to sell 80,000 bags of potato chips in June, and each of these bags requires five potatoes. Pertinent data includes: Bags of potato chips Potatoes Actual June 1 inventory 15,000 bags 27,000 potatoes Desired June 30 inventory 18,000 bags 23,000 potatoes What number of units of raw material should Crisper plan to purchase?
411,000
The fact pattern provides beginning and ending finished goods and raw material data as well as finished goods sales data.
Begin by computing the amount of finished product (chips) completed during the period by squeezing $83,000 in additions from the beginning and ending inventory and sales of chips data.
Assume that the additions to finished goods were transferred out of raw materials (potatoes) at the rate defined in the fact pattern, 5 potatoes per bag of chips (5 potatoes x 83,000 = 415,000).
Squeeze the 411,000 planned potatoes purchases of raw materials from the beginning and ending raw materials inventory provided and the 415,000 potatoes transfer amount derived from finished good data as follows:
acKue Co. plans to produce 200,000 pairs of roller skates during January of next year. Planned production for February is 250,000 pairs. Sales are forecasted at 180,000 pairs for January and 240,000 pairs for February. Each pair of roller skates has eight wheels. JacKue’s policy is to maintain 10% of the next month’s production in inventory at the end of a month. How many wheels should JacKue purchase during January?
1,640,000
JacKue should anticipate purchasing 1,640,000 wheels in January. JacKue would purchase enough wheels for 200,000 skates planned for production as adjusted for 20,000 already on hand in anticipation of January production plus 25,000 purchased in anticipation of February production as follows: January production (skates) 200,000 Less beginning inventory (10% x 200,000) (20,000) Plus ending inventory (10% x 250,000) 25,000 January purchases 205,000 Wheels per skate x 8 Total January purchases 1,640,000
The goals and objectives upon which an annual profit plan is most effectively based are:
A combination of financial, quantitative, and qualitative measures
Which of the following Performance Management Measures integrates both financial and non-financial measures of performance?
Balanced Scorecard.
In analyzing company operations, the controller of the Jason Corporation found a $250,000 favorable flexible-budget revenue variance. The variance was calculated by comparing the actual results with the flexible budget. This variance can be wholly explained by:
Changes in unit selling prices.
For a company that produces more than one product, the sales volume variance can be divided into which two of the following additional variances?
Sales quantity variance and sales mix variance.
The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is:
Sales volume variance
Strategic Business Units (SBUs) are classified into different types based on the responsibility levels assigned to their managers. Which SBU has the least amount of responsibility?
Cost SBU.
Controllable revenue would be included in a performance report for a:
Profit Center
Cost Center
Profit Center = Yes
Cost Center = No
The performance measurement tool generally associated with the display of information evaluating multiple dimensions of business outcomes is referred to as the:
Balanced scorecard.
Although there is no single format for the balanced scorecard, the report generally includes a variety of measurements associated with objectives classified by critical success factors. Critical success factors often include:
Financial, internal business process, customer, and human resource considerations.
Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n):
Profit center.
Decentralized firms can delegate authority and yet retain control and monitor managers’ performance by structuring the organization into responsibility centers. Which one of the following organizational segments is most like an independent business?
Investment center.
A successful responsibility accounting reporting system is dependent upon:
The proper delegation of responsibility and authority.
Which of the following balanced scorecard perspectives examines a company’s success in targeted market segments?
Customer.
Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and retention are measures used under which of the following perspectives?
Learning and growth.
Organizations focus on both financial and non-financial features of their operations to evaluate the degree to which they will be successful in their strategies. These financial and non-financial dimensions of their operations are sometimes referred to as:
Critical success factors
Strategic Business Units (SBUs) are classified into different types based on the responsibility levels assigned to their managers. Each of the following items are reasons for classifying Strategic Business Units as cost, revenue, profit, or investment, except to:
Highlight different responsibility levels among managers in highly centralized organizations
Which is not an example of responsibility accounting?
Product center.
Fairmount, Inc. uses an accounting system that charges costs to the manager who has been delegated the authority to make the decisions incurring the costs. For example, if the sales manager accepts a rush order that will result in higher than normal manufacturing costs, these additional costs are charged to the sales manager because the authority to accept or decline the rush order was given to the sales manager. This type of accounting system is known as:
Responsibility accounting
The purpose of identifying manufacturing variances and assigning their responsibility to a person/department should be to:
Use the knowledge about the variances to promote learning and continuous improvement in the manufacturing operations.
Organic Enterprises cultivates potted plants and hybrids. Management conducted a careful engineering study of product requirements and has developed standards to control production. Standards of this type are also referred to as:
Authoritative standards.
Which of the following is a disadvantage of participative budgeting?
It is more time consuming.
Central Winery manufactured two products, A and B. Estimated demand for product A was 10,000 bottles and for product B was 30,000 bottles. The estimated sales price per bottle for A was $6.00 and for B was $8.00. Actual demand for product A was 8,000 bottles and for product B was 33,000 bottles. The actual price per bottle for A was $6.20 and for B was $7.70. What amount would be the total selling price variance for Central Winery?
$8,300 unfavorable.
The selling price variance (SPV) is computed as follows:
SPV = (Actual selling price per unit - Budgeted selling price per unit) x Actual sold units
SPV for product A = ($6.20 - $6.00) x 8,000 = $1,600
SPV for product B = ($7.70 - $8.00) x 33,300 = ($9,900)
Total SPV = ($8,300) or $8,300 unfavorable
Rolling Wheels purchases bicycle components in the month prior to assembling them into bicycles. Assembly is scheduled one month prior to budgeted sales. Rolling pays 75% of component costs in the month of purchase and 25% of the costs in the following month. Component costs included in budgeted cost of sales are: April May June July August $5,000 $6,000 $7,000 $8,000 $8,000 What is Rolling's budgeted cash payments for components in May?
$7,750
This problem requires the candidate to derive budgeted cash payments for the month of May from a schedule of budgeted cost of sales. The question indicates that components are purchased one month prior to assembly and two months prior to sale. The question also indicates that components are paid for over two months, with 75% being paid in the month of purchase and the remaining 25% paid in the following month. Therefore, cash payments in May will relate to units to be sold in June and July. The payments will include the 25% balance of components purchased for June sales, and the 75% payment for components purchased for July sales. ($8,000 × 75% + $7,000 × 25% = $7,750)
Mien Co. is budgeting sales of 53,000 units of product Nous for October. The manufacture of one unit of Nous requires 4 kilos of chemical Loire. During October, Mien plans to reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units. There is no Nous work-in-process inventory. How many kilos of Loire is Mien budgeting to purchase in October?
186,000
Mien plans to sell 53,000 units of product Nous, plus increase inventory of Nous by 6,000 units. This implies that 59,000 units must be manufactured, which will require 236,000 (= 59,000 x 4) kilos of Loire. Since there is already inventory of 50,000 kilos of Loire, only 186,000 kilos will need to be purchased. Budgeted sales of Nous 53,000 units Desired increase in Nous inventory 6,000 units Units of Nous to be manufactured 59,000 units Kilos of Loire required for each unit of Nous x 4 Total units of Loire required 236,000 kilos Amount of Loire be used from current inventory (50,000) kilos Amount of Loire to be purchased 186,000 kilos
A Year 1 cash budget is being prepared for the purchase of Toyi, a merchandise item. Budgeted data are:
Cost of goods sold for Year 1 $ 300,000
Accounts payable 1/1/Year 1 20,000
Inventory - 1/1/Year 1 30,000
Inventory - 12/31/Year 1 42,000
Purchases will be made in 12 equal monthly amounts and paid for in the following month. What is the Year 1 budgeted cash payment for purchases of Toyi?
306,000
Purchases in Year 1 should be budgeted to cover both the planned sales (cost = $300,000) and the desired increase in inventory ($12,000), for a total of $312,000. Accounts payable at 1/1/Year 1 (relating to December 1994 purchases) will be paid in Year 1. Accounts payable at 12/31/Year 1 of $26,000 (= $312,000 ÷ 12) will not be paid until Year 2. Purchases $ 312,000 A/P paid in Year 1 20,000 December purchase (26,000) Paid in Year 2 $ 306,000
Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box. Projected sales in units for the next five months are as follows.
Month Projected Sales in Units
January 30,000
February 36,000
March 33,000
April 40,000
May 29,000
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy’s policy is to manufacture 1.5 times the coming month’s projected sales every other month starting with January (i.e., odd-numbered months) for February sales, and to manufacture 0.5 times the coming month’s projected sales in alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to other products as needed during the even-numbered months.
The unit production budget for animated rabbits for January is:
54,000 units
54,000 units is the production budget for January:
February sales projection $ 36,000
1.5 × in odd months × 1.5
January production budget $ 54,000
Daffy Tunes manufactures an animated rabbit with moving parts and a built-in voice box. Projected sales in units for the next five months are as follows.
Month Projected Sales in Units
January 30,000
February 36,000
March 33,000
April 40,000
May 29,000
Each rabbit requires basic materials that Daffy purchases from a single supplier at $3.50 per rabbit. Voice boxes are purchased from another supplier at $1.00 each. Assembly labor cost is $2.00 per rabbit and variable overhead cost is $.50 per rabbit. Fixed manufacturing overhead applicable to rabbit production is $12,000 per month. Daffy’s policy is to manufacture 1.5 times the coming month’s projected sales every other month starting with January (i.e., odd-numbered months) for February sales, and to manufacture 0.5 times the coming month’s projected sales in alternate months (i.e., even-numbered months). This allows Daffy to allocate limited manufacturing resources to other products as needed during the even-numbered months.
The dollar production budget for animated rabbits for February is:
127,500
$127,500 dollar production budget for February: March projected sales in units 33,000 .5 x in even months × 5 February production budget in units 16,500 Variable cost per unit (3.50 + 1.00 + 2.00 + .50) × 7.0 Variable production costs 115,500 Fixed mfg overhead costs 12,000 Dollar production budget 127,500
Simpson, Inc. is in the process of preparing its annual budget. The following beginning and ending inventory levels (in units) are planned for the year ending December 31, Year 1.
Beg Inv End Inventory
Raw material* 40,000 50,000
Work-in-process 10,000 10,000
Finished goods 80,000 50,000
*Two units of raw material are needed to produce each unit of finished product.
If Simpson, Inc. plans to sell 480,000 units during Year 1, the number of units it would have to manufacture during the year would be:
450,000 units
450,000 units would need to be manufactured during Year 1 to support sales of 480,000 units: Units Projected sales 480,000 Desired ending inventory 50,000 Required units 530,000 Less: beginning inventory (80,000) Required units to manufacture 450,000
Superior Industries, sales budget shows quarterly sales for the next year as follows.
Quarter Units
1 10,000
2 8,000
3 12,000
4 14,000
Company policy is to have a finished goods inventory at the end of each quarter equal to 20 percent of the next quarter’s sales. Budgeted production for the second quarter of the next year would be:
8,800 units
8,800 units budgeted production for the second quarter: Production needs to cover the current budgeted sales for the current quarter while also taking into account desired inventory levels. Second quarter sales 8,000 Desired ending inventory (20% × 12,000) 2,400 Total units required 10,400 Less: beginning inventory (20% x 8,000) (1,600) Budgeted production 8,800
A flexible budget is appropriate for a:
Marketing budget
Direct material usage budget
Marketing budget = Yes
Direct material usage budget = Yes
Orion Corporation is preparing a cash budget for the six months beginning January 1, Year 1. Shown below are the company’s historical collection pattern and the budgeted credit sales for the period.
65 percent collected in month of sale
20 percent collected in the first month after sale
10 percent collected in the second month after sale
4 percent collected in the third month after sale
1 percent uncollectible
January $ 160,000
February 185,000
March 190,000
April 170,000
May 200,000
June 180,000
The estimated total cash collections during April from accounts receivable would be:
$173,400
April 170,000 x 65% = $110,500
March 190,000 x 20% = 38,000
February 185,000 x 10% = 18,500
January 160,000 x 4% = 6,400
$173,400
Johnson Co. is preparing its master budget for the first quarter of next year. Budgeted sales and production for one of the company’s products are as follows:
Month Sales Production
January 10,000 12,000
February 12,000 11,000
March 15,000 16,000
Each unit of this product requires 4 pounds of raw materials. Johnson’s policy is to have sufficient raw materials on hand at the end of each month for 40 percent of the following month’s production requirements. The January 1 raw materials inventory is expected to conform with this policy.
How many pounds of raw materials should Johnson budget to purchase for January?
46,400
The computation derives purchases using the BASE mnemonic where B is the beginning inventory computed at 40% of January’s production requirements and E is the ending inventory at 40% of February’s production requirements. Both are multiplied by the 4 pounds of raw material needed. Amounts subtracted from inventory, the “S”, are the items produced in January, multiplied by the 4 pounds of raw materials needed. We then squeeze the purchases from the formula: ending inventory of 17,600 + 48,000 units produced - beginning inventory of 19,200, which equals 46,400.
Which of the following budgets provides information for preparation of the owner’s equity section of a budgeted balance sheet?
Budgeted income statement
Ryan Co. projects the following monthly revenues for next year: January $100,000 July $250,000 February 500,000 August 275,000 March 425,000 September 300,000 April 450,000 October 350,000 May 575,000 November 400,000 June 300,000 December 525,000 Ryan's terms are net 30 days. The company typically receives payment on 80% of sales the month following the sale and 17% is collected two months after the sale. Approximately 3% of sales are deemed bad debt. What amount represents the expected cash collection in the second calendar quarter of next year?
$1,393,750
On June 30, Year 1, a company is preparing the cash budget for the third quarter. The collection pattern for credit sales has been 60% in the month of sale, 30% in the first month after sale, and the rest in the second month after sales. Uncollectible accounts are negligible. There are cash sales each month equal to 25% of total sales. The total sales for the quarter are estimated as follows: July, $30,000; August, $15,000; September, $35,000. Accounts receivable on June 30, Year 1, were $10,000. What amount would be the projected cash collections for September?
$30,125
Fargo, Mfg., a small business, is developing a budget for next year. Which of the following steps should Fargo perform first?
Forecast Fargo’s sales volume.
Clear Plus, Inc. manufactures and sells boxes of pocket protectors. The static master budget and the actual results for May are as follows:
Actual Static Budget
Unit sales 12,000 10,000
Sales $132,000 $100,000
Variable costs of sales
70,800 60,000
Contribution margin
61,200 40,000
Fixed costs 32,000 30,000
Operating income
$29,200 $10,000
The operating income for Clear Plus, Inc. using a flexible budget for May is:
$18,000
$18,000 operating income using a flexible budget for May.
12,000 units × $4/unit contribution margin = $ 48,000
Fixed costs (30,000)
Net income per flexible budget $ 18,000
Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes?
Accounts payable
Which of the following listings correctly describes the order in which the four types of budgets must be prepared?
Sales, production, direct materials purchases, cash disbursements.
Baby Frames, Inc. evaluates manufacturing overhead by using variance analysis. The following information applies to the month of May:
Actual Budgeted
Number of frames manufactured
19,000 20,000
Variable overhead costs
$4,100 $2 per DL hr
Fixed overhead costs
$22,000 $20,000
$1 per unit
Direct labor hours
2,100 hours 0.1 hour per frame
What is the variable overhead efficiency variance?
$400 unfavorable
Rule: The formula for the variable overhead efficiency variance is computed as budgeted variable overhead based on standard hours minus budgeted variable overhead based on actual hours. The sole difference between these two calculated amounts is the use of actual compared to standard hours for variable overhead.
Baby Frames, Inc. evaluates manufacturing overhead by using variance analysis. The following information applies to the month of May:
Actual Budgeted
Number of frames manufactured
19,000 20,000
Variable overhead costs
$4,100 $2 per DL hr
Fixed overhead costs
$22,000 $20,000 DL hr
2,100 hours 0.1 hour per frame
What is the fixed overhead spending variance?
$2,000 unfavorable.
The fixed overhead spending variance is purely the difference between the amount spent and the amount budgeted for fixed overhead. We planned to spend $20,000 and we actually spent $22,000. These results represent a $2,000 unfavorable variance. Fixed overhead spent $22,000 Fixed overhead budgeted 20,000 Fixed overhead variance $ 2,000 Unfavorable
Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are shown below:
Variable overhead (4 hours at $8/hour) $ 32
Fixed overhead (4 hours at $5*/hour) 20
Total overhead cost per unit $ 52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
22,000 pumps were produced although 25,000 had been scheduled for production.
94,000 direct labor hours were worked at a total cost of $940,000.
The standard direct labor rate is $9 per hour.
The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
The fixed overhead spending variance for November was:
$40,000 unfavorable
$40,000 unfavorable overhead spending variance:
Actual fixed overhead $ 540,000
Budgeted fixed overhead (100,000 DL hrs. × $5/hr.) 500,000
Unfavorable variance $ 40,000
Water Control, Inc. manufactures water pumps and uses a standard cost system. The standard factory overhead costs per water pump are based on direct labor hours and are shown below:
Variable overhead (4 hours at $8/hour) $ 32
Fixed overhead (4 hours at $5*/hour) 20
Total overhead cost per unit $ 52
*Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
22,000 pumps were produced although 25,000 had been scheduled for production.
94,000 direct labor hours were worked at a total cost of $940,000.
The standard direct labor rate is $9 per hour.
The standard direct labor time per unit is four hours.
Variable overhead costs were $740,000.
Fixed overhead costs were $540,000.
The variable overhead spending variance for November was:
$12,000 favorable.
$12,000 favorable variable overhead spending variance:
Budgeted variable overhead (94,000 DL hrs. × $8/hr.) $ 752,000
Actual variable overhead 740,000
Favorable variance $ 12,000
Folsom Fashions sells a line of women’s dresses. Folsom’s performance report for November Year 1 follows.
Actual Budget
Dresses sold 5,000 6,000
Sales $235,000 $300,000
Variable costs 145,000 180,000
Contribution margin90,000 20,000
Fixed costs 84,000 80,000
Operating income $6,000 $40,000
The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income.
The variable cost flexible budget variance for November is:
$5,000 favorable.
Variable costs $ 145,000
Budgeted variable costs (5,000 × $30, where $180,000 ÷ 6,000 = $30/unit) 150,000
Variance $ 5,000
Folsom Fashions sells a line of women’s dresses. Folsom’s performance report for November Year 1 follows.
Actual Budget
Dresses sold 5,000 6,000
Sales $235,000 $300,000
Variable costs 145,000 180,000
Contribution margin 90,000 120,000
Fixed costs 84,000 80,000
Operating income $6,000 $40,000
The company uses a flexible budget to analyze its performance and to measure the effect on operating income of the various factors affecting the difference between budgeted and actual operating income.
The fixed cost variance for November is:
$4,000 unfavorable.
Actual fixed costs $ 84,000
Budgeted fixed costs 80,000
Variance $ 4,000
Virgil Corp. uses a standard cost system. In May, Virgil purchased and used 17,500 pounds of materials at a cost of $70,000. The materials usage variance was $2,500 unfavorable and the standard materials allowed for May production was 17,000 pounds. What was the materials’ price variance for May?
$17,500 favorable
Set up the PURE DADS mnemonic as shown below where PU is the materials variance and RE is the Labor variance. Remember that the Difference is ALWAYS Standard minus Actual.
Plug in the amounts that are known: Enter amount of the Usage variance at $2,500U, compute the amount of the difference associated with the usage variance (17,000 standard units minus 17,500 actual units) and then in item (A) algebraically determine the amount of standard costs at $5.00.
Calculate the amount of actual costs per unit based on the information given: $70,000 in total costs divided by 17,500 pounds purchased is $4.00 actual cost per unit. Compute the difference (B) between Standard cost per unit of $5.00 and actual cost per unit of $4.00 to arrive at a difference of $1.00.
Compute the price variance (C) as the product of the difference in standard and actual costs per unit and the actual pounds used as given in the problem.
A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor usage variance?
$30,000 favorable.
The direct labor usage (efficiency) variance is computed as follows:
Direct labor usage variance = Difference in standard and actual hours x standard rate
Direct labor usage variance = ((10,000 units x .50 hour) - 3,000 hours) x $15 per hour
Direct labor usage variance = $30,000 favorable
The usage variance is favorable because the actual hours were less than the standard hours
To meet its monthly budgeted production goals, Acme Mfg. Co. planned a need for 10,000 widgets at a price of $20 per widget. Acme’s actual units were 11,200 at a price of $18.50 per widget. What amount reflected Acme’s price variance?
$16,800 favorable.
Price variance is computed as follows:
Price variance = (Standard price - Actual price) x Actual units
Price variance = ($20 - $18.50) x 11,200
Price variance = $1.50 x 11,200 = $16,800 favorable
The price variance is favorable because the actual price is less than the standard price.
Quick Co. was analyzing variances for one of its operations. The initial budget forecast production of 20,000 units during the year with a variable manufacturing overhead rate of $10 per unit. Quick produced 19,000 units during the year. Actual variable manufacturing costs were $210,000. What amount would be Quick’s flexible budget variance for the year?
$20,000 unfavorable.
The flexible budget variance is $20,000 unfavorable and represents the difference between actual performance and the budget at the achieved volume. Actual expenses are greater than the computed budget. The variance is unfavorable and is computed as follows:
For the current period production levels, Woodwork Co. budgeted 11,000 board feet of production and purchased 15,000 board feet. The material cost was budgeted at $7 per foot. The actual cost for the period was $8.50 per foot. What was Woodwork’s material price variance for the period?
$22,500 unfavorable.
Woodwork Co. experienced a $22,500 unfavorable direct materials price variance for the current period. The materials price variance formula calculates out as follows:
Materials price variance = Actual Quantity x (Actual - Standard Price)
Materials price variance = 15,000 x (8.50 - 7.00)
Materials price variance = (22,500)
The materials price variance is unfavorable since we spent more than standard.
The trough method is computed as follows:
Actual Quantity x
Actual Price
Actual Quantity x
Standard Price
15,000 × $8.50 =
$127,500
←Price Variance→
(22,500)
15,000 × $7.00 =
$105,000
he difference between standard hours at standard wage rates and actual hours at standard wage rates is referred to as which of the following types of variances?
Labor usage
Rule: The two-way direct labor variances are computed as follows: Actual Hours Actual Rate ←Rate Variance→ Actual Hours Standard Rate ←Usage/Efficiency→ Standard Hours Standard Rate
Which of the following is a characteristic of a flexible budget?
Provides budgeted numbers for various activity levels.
A company’s controller is adjusting next year’s budget to reflect the impact of an expected 5% inflation rate. Listed below are selected items from next year’s budget before the adjustment:
Total salaries expense $ 250,000
Health costs 100,000
Depreciation expense 65,000
Interest expense on 10-year fixed-rate notes 37,750
After adjusting for the 5% inflation rate, what is the company’s total budget for the selected items before taxes for next year?
$470,250
A 5% inflation rate would impact salary and health care costs but would not impact depreciation expense (based on historical cost) and would not impact interest expense (fixed based on amortization schedule). The budget would be computed as follows: Salaries expense $250,000 x 1.05 = $262,500 Health costs 100,000 x 1.05 = 105,000 Depreciation expense 65,000 x 1.00 = 65,000 Interest expense on 10-year fixed-rate notes 37,750 x 1.00 = 37,750 Total budget $470,250
A company uses a standard costing system. At the end of the current year, the company provides the following overhead information:
Actual overhead incurred:
Variable
$ 90,000
Fixed
$ 62,000
Budgeted fixed overhead
$ 65,000
Variable overhead rate (per direct labor hour)
$ 8
Standard hours allowed for actual production
12,000
Actual labor hours used
11,000
What amount is the variable overhead efficiency variance?
$8,000 favorable
The efficiency variance compares the amount of the variable overhead applied (at standard) to the amount of variable overhead that would have been applied at actual. If more was applied than would have been incurred, the results are favorable. Standard hours allowed 12,000 Application rate $ 8 Total $ 96,000 Actual hours 11,000 Application rate $ 8 Total $ (88,000) Variable efficiency variance $ 8,000
