BEC Flashcards
1
Q
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?
A
Internal environment.
2
Q
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?
A
Monitoring.
3
Q
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?
A
Monitoring.
4
Q
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?
A
Financial reporting competencies.
5
Q
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
A
Board Member = Yes
Independent Auditor = No
6
Q
According to the Sarbanes-Oxley Act of 2002, which of the following statements is correct regarding an issuer’s audit committee financial expert?
A
If an issuer does not have an audit committee financial expert, the issuer must disclose the reason why the role is not filled.
7
Q
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:
A
Audit committee.
8
Q
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:
A
The existence of financial expert(s) on the audit committee or the reasons why the audit committee does not have a financial expert.
9
Q
The primary benefit of having a financial expert on a company’s audit committee is:
A
The enhanced level of financial sophistication of the financial expert can serve as a resource for the audit committee.
10
Q
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:
A
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.
11
Q
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:
A
Prompt internal reporting of code provisions and accountability for adherence to the code.
12
Q
The Sarbanes-Oxley Act of 2002 requires that the management report on internal control include all of the following, except:
A
A statement that there are no disagreements between management and the auditor as to the effectiveness of internal controls.
13
Q
The Sarbanes-Oxley Act of 2002 seeks to improve investor confidence by providing greater transparency for all of the following issues, except:
A
Means and methods for balancing risk and growth.
14
Q
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:
A
Internal Control Information.
15
Q
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?
A
External Communication.
16
Q
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:
A
Financial Reporting Objectives.
17
Q
Jasper International considers cash receipting and cash disbursement processes as part of their risk assessment. The consideration of processes relates to the:
A
Financial Reporting Risks.
18
Q
The Treadway Commission was established to study factors that lead to fraudulent financial reporting. The Treadway Commission was established by:
A
Private sponsoring organizations.
19
Q
The Committee on Sponsoring Organizations prepared the Internal Control Integrated Framework:
A
To help businesses assess internal control.
20
Q
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:
A
Avoidance.
21
Q
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:
A
Sharing.
22
Q
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:
A
Reduction.
23
Q
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:
A
Acceptance.
24
Q
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):
A
Event Inventory.
25
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.
26
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%.
27
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.
28
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.
29
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.
30
Control activities are most closely related to:
Risk responses.
31
For the components of Enterprise Risk Management to be functioning effectively, there cannot be:
Material weaknesses in internal control.
32
The criteria for evaluating the effectiveness of enterprise risk management are:
The components of the enterprise risk management framework.
33
According to COSO, which of the following components of enterprise risk management addresses an entity's integrity and ethical values?
Internal environment.
34
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.
35
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.
36
Each of the following is a limitation of enterprise risk management (ERM), except:
ERM can provide absolute assurance with respect to objective categories.
37
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.
38
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.
39
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.
40
Which of the following positions best describes the nature of the Board of Directors of XYZ Co.'s relationship to the company?
Fiduciary.
41
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.
42
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.
43
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.
44
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.
45
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.
46
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.
47
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.
48
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.
49
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.
50
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.
51
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
52
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
53
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.
54
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.
55
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.
56
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.
57
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.
58
Davis, a director of Active Corp., is entitled to:
Rely on information provided by a corporate officer.
59
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.
60
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.
61
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.
62
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.
63
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.
64
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.
65
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.
66
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.
67
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.
68
Which of the following items is one of the eight components of COSO's enterprise risk management framework?
Monitoring.
69
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.
70
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.
71
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.
72
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
73
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.
74
Which of the following is a true statement regarding nonfinancial measures of a process?
They are best viewed as attention directors
75
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.
76
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.
77
Which of the following is true regarding Pareto diagrams?
They display the individual and cumulative frequency of quality issues, defects, or problems.
78
Which of the following is not an element of the manufacturing process typically presented on a cause and effect (Fishbone) diagram?
Manufacturing Overhead.
79
Which of the following design choices for management incentive compensation would most likely emphasize future performance?
Restricted stock option programs.
80
Which of the following is not a characteristic of effective performance measures?
The measure emphasizes long-term over short-term issues.
81
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.
82
Executive perks are often criticized since the compensation provided to the manager:
Can be excessive.
83
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.
84
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.
85
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.
86
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.
87
```
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.
88
```
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
89
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.
90
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.
91
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.
92
```
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
93
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
94
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
95
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
96
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.
97
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
98
Which of the following types of costs are prime costs?
Direct materials and direct labor.
99
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
100
Which of the following is assigned to goods that were either purchased or manufactured for resale?
Product cost.
101
Which of the following costs would decrease if production levels were increased within the relevant range?
Fixed costs per unit.
102
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
103
Which of the following topics is the focus of managerial accounting?
The needs of the organization's internal parties.
104
```
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
```
105
```
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
```
106
```
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
```
107
Which of the following is true about activity-based costing?
It can be used with either process or job costing.
108
```
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
```
109
A basic assumption of activity-based costing (ABC) is that:
Products or services require the performance of activities, and activities consume resources.
110
```
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
```
111
```
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
```
112
```
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
```
113
```
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
```
114
```
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.
115
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.
116
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.
117
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
```
118
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
```
119
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
```
120
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
```
121
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
```
122
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
```
123
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
```
124
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
```
125
```
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
```
126
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
127
In a traditional job order cost system, the issue of indirect materials to a production department increases:
Factory overhead control.
128
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)
129
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
```
130
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
131
```
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
```
132
```
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:
133
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.
134
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
```
135
Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?
Flexible budget amounts.
136
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.
137
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
```
138
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
139
```
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
```
140
A cost driver is defined as:
A causal factor that increases the total cost of a cost objective.
141
Which of the following is true regarding inventoriable costs?
Inventoriable costs are regarded as assets before the products are sold.
142
Cost drivers are:
Activities that cause costs to increase as the activity increases.
143
Conversion costs do not include:
Direct materials.
144
Which one of the following best describes direct labor?
Both a product cost and a prime cost.
145
A cost that is fixed per unit is an example of a:
Variable cost.
146
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
```
147
Conversion cost pricing:
Could be used when the customer furnishes the material used in manufacturing a product.
148
A cost that bears an observable and known relationship to a quantifiable activity base is a(n):
Engineered cost.
149
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.
150
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.
151
The distribution of overhead costs is known as:
Cost allocation.
152
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.
153
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.
154
Which of the following would cause overhead to be overapplied?
Actual overhead is less than overhead applied.
155
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.
156
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.
157
```
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
158
```
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
159
```
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
```
160
```
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
```
161
```
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
```
162
```
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
```
163
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.
164
Activity based costing refines product cost information because the cost system:
Emphasizes long-term product analysis (when fixed costs become variable costs).
165
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.
166
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
167
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.
168
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.
169
```
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
```
170
The use of activity-based costing normally results in:
Substantially greater unit costs for low-volume products than is reported by traditional product costing.
171
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).
172
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
```
173
```
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
```
174
```
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].
175
```
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
```
176
```
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
```
177
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
178
A CPA would recommend implementing an activity-based costing system under which of the following circumstances?
The client produced products that heterogeneously consume resources.
179
```
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
```
180
```
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
```
181
```
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
182
```
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
183
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.
184
Limitations of an activity-based costing system include which of the following?
The expense of obtaining cost data is relatively high.
185
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.
```
186
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
```
187
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.
188
```
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.
```
189
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
190
The relevance of a particular cost to a decision is determined by:
Potential effect on the decision.
191
In a decision analysis situation, which one of the following costs is generally not relevant to the decision?
Historical cost.
192
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.
193
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
```
194
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.
195
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
```
196
```
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
```
197
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
198
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.
199
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
200
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.
201
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.
202
```
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.
```
203
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
```
204
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
205
```
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
```
206
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
207
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
208
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.
209
```
Which of the following costing methods provide(s) the added benefit of usefulness for external reporting purposes?
I.
Variable.
II.
Absorption.
```
II only.
210
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
```
211
```
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
212
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
```
213
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.
214
```
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.
215
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.
216
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].
217
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
```
218
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.
219
A regression equation:
Estimates the dependent variables.
220
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.
221
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)
```
222
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
223
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.
224
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
225
```
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.
226
Multiple regression differs from simple regression in that it:
Has more independent variables.
227
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.
228
Which of the following costs are not included in inventoriable costs under a variable (or direct) costing system?
Fixed overhead.
229
Which of the following costs are included in product or inventoriable costs in an absorption costing system?
Direct material, direct labor and all overhead.
230
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.
231
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.
232
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.
233
The opportunity cost of making a component part where there is no alternative use for the factory is:
Zero.
234
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.
235
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
236
Assumptions underlying cost-volume-profit analysis include all of the following, except:
Total costs are directly proportional to volume over the relevant range.
237
```
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
```
238
```
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
```
239
```
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
```
240
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.
241
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.
```
242
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
```
243
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
```
244
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.
245
```
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
```
246
```
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
```
247
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.
248
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
```
249
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
```
250
```
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
251
```
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
```
252
Which of the following forecasting methods relies mostly on judgment?
Delphi.
253
An increase in production levels within a relevant range most likely would result in:
Increasing the total cost.
254
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.
255
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.
256
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
257
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.
258
Which of the following statements is true regarding opportunity cost?
Idle space that has no alternative use has an opportunity cost of zero.
259
In managerial accounting, the term "relevant range" is often used to describe:
The range over which cost relationships are valid.
260
```
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:
261
Break-even analysis assumes that over the relevant range:
Unit variable costs are unchanged
262
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.
263
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
264
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
265
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
```
266
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
267
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.
268
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.
269
Which of the following costing methods will yield the lowest inventory value?
Variable.
270
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.
271
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.
272
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
273
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
```
274
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
275
```
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
```
276
```
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
```
277
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
278
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.
279
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
280
```
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.
```
281
```
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.
282
```
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:
283
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
```
284
The goals and objectives upon which an annual profit plan is most effectively based are:
A combination of financial, quantitative, and qualitative measures
285
Which of the following Performance Management Measures integrates both financial and non-financial measures of performance?
Balanced Scorecard.
286
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.
287
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.
288
The variance that arises solely because the quantity actually sold differs from the quantity budgeted to be sold is:
Sales volume variance
289
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.
290
Controllable revenue would be included in a performance report for a:
Profit Center
Cost Center
Profit Center = Yes
Cost Center = No
291
The performance measurement tool generally associated with the display of information evaluating multiple dimensions of business outcomes is referred to as the:
Balanced scorecard.
292
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.
293
Responsibility accounting defines an operating center that is responsible for revenue and costs as a(n):
Profit center.
294
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.
295
A successful responsibility accounting reporting system is dependent upon:
The proper delegation of responsibility and authority.
296
Which of the following balanced scorecard perspectives examines a company's success in targeted market segments?
Customer.
297
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.
298
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
299
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
300
Which is not an example of responsibility accounting?
Product center.
301
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
302
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.
303
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.
304
Which of the following is a disadvantage of participative budgeting?
It is more time consuming.
305
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
306
```
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)
307
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
```
308
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
```
309
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
310
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
```
311
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
```
312
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
```
313
A flexible budget is appropriate for a:
Marketing budget
Direct material usage budget
Marketing budget = Yes
Direct material usage budget = Yes
314
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
```
315
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.
316
Which of the following budgets provides information for preparation of the owner's equity section of a budgeted balance sheet?
Budgeted income statement
317
```
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
318
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
319
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.
320
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
321
Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes?
Accounts payable
322
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.
323
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.
324
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
```
325
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
326
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
327
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
328
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
329
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.
330
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
331
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.
332
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:
333
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
334
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
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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
```
335
Which of the following is a characteristic of a flexible budget?
Provides budgeted numbers for various activity levels.
336
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
```
337
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
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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
```
