Ch. 5

Question 1

What type of costing normally results substantially

greater unit costs for low-volume products

(which consume more resources i.e. setup costs) than is reported by traditional product costing?

Answer 1

activity-based costing

when client produces products that heterogeneously consume resources

Question 2

What type of cost pools does Activity-based costing (ABC) utilize?

What type of costs does it accumulate?

Answer 2

multiple cost pools

indirect costs.

Question 3

How is residual interest determined?

What is the formula for residual income (RI)?

Answer 3

Imputed interest on assets
- net income
= residual interest

imputed cost of investment
- operating income
= residual income

Question 4

What does residual income seek to maximize ?

Answer 4

Absolute dollars of income

Question 5

What time period are both residual income and ROI measure results for?

What investment do both residual income and ROI use?

Answer 5

Single time period

average investment

Question 6

Imputed interest rate is the same as ____ rate

Answer 6

Imputed Interest Rate = Target rate

Question 7

Return on investment (ROI) and residual income (RI) are two commonly used performance measures. Imputed costs are used in:

Answer 7

RI but not ROI.

Question 8

Companies that differentiate between their budget performance vs. best practice are using __________?

Name an example

Answer 8

benchmarking (i.e. standard)

compare process performance with best practice performers either external or internal

Question 9

The performance of a standard cost center should be evaluated by comparing what?

Answer 9

actual costs with flexible budget costs

Question 10

What type of personnel should be involved in setting standards to allow better use of standard costs?

What type of analysis should this type of personnel be involved with to help improve managerial decision making?

Answer 10

line personnel

variance analysis

Question 11

What is bottom-up budgeting?

Answer 11

begins with a list of items that individual departments want, assigns a cost to each item on the list, and then totals up all the items to arrive at an overall budget number.
also called participative budgeting,

Question 12

With bottom-up budgeting, managers at the lower level are allowed to provide input into budgeted amounts for their department or division. Some managers might do what?

Answer 12

overstate their expected spending amount; this is known as padding or building slack into the budget.

Question 13

What does Regression analysis estimate?

Answer 13

the dependent cost variable

utilizes historical data for physical measures (the independent variable) and corresponding cost data to generate estimates of the dependent cost variable (i.e., explains the dependent variable in terms of the independent variable)

Question 14

When production is greater than sales, absorption costing income is GREATER OR LESS than variable costing income

Answer 14

production > sales = absorption > variable

Question 15

What management practices involves concentrating on areas that deserve attention and placing less attention on areas operating as expected?

Answer 15

Management by exception

Question 16

Using the variable costing method, which of the following costs are assigned to inventory?

Answer 16

only variable manufacturing costs (DM, DL and VOH)

variable selling and admin costs are period costs = expensed

Question 17

What may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of materials handled?

Answer 17

Multiple regression analysis

Question 18

What makes up the external environment?

Answer 18

Opportunities and threats

Question 19

What makes up the internal environment?

Answer 19

strengths, weaknesses, and competitive advantages

Question 20

What are the transferred-in costs when using FIFO process costing system?

Answer 20

costs incurred in all other departments and

costs incurred in preceding departments

Question 21

What are 4 areas of cost of quality?

Which cost is harmful to a company?

Answer 21

prevention, appraisal, internal failure, and external failure

external failure involves problems after shipment (warranty, product liability and loss of customer goodwill)

Question 22

In a traditional job order cost system, what does the issue of indirect materials to a production department increase?

Answer 22

Factory overhead control

Indirect materials used is a part of factory overhead cost.

A factory overhead control account is used to accumulate actual factory overhead cost incurred.

Question 23

Outsourcing works well for what?

Answer 23

It works equally well for services as well as goods

Question 24

Which allocation method uses simultaneous equations to allocate service department costs to all service departments that use their services?

Answer 24

reciprocal method

The most accurate method of allocating service department costs

The reciprocal allocation method uses simultaneous equations to allocate service department costs to all service departments that use their services.

Question 25

Which allocation is where the service department costs are not allocated to other service departments?

Answer 25

direct method

The least accurate because it only considers service work performed for production departments.

Question 26

Which allocation method is used for service department costs are allocated sequentially so that those service departments allocated first do not receive allocations from other service departments?

Answer 26

step-down method

improves on the direct method by allocating some service department work (but not all work, as does the reciprocal method) done for other service departments.

Question 27

The process of strategic planning begins with what?

Answer 27

1. Defining company’s mission statement

2. Then developing strategic goals that are compatible with that mission

Question 28

Which costing method will yield the lowest inventory value?

Variable, process, absorption or hybrid

Answer 28

variable costing (also known as direct costing) includes only variable manufacturing costs in inventory.

Since it excludes fixed manufacturing overhead, it results in a lower inventory value than alternative methods.

Question 29

What is variable costing also called?

Answer 29

Direct costing

Question 30

When inventory recognized Net realizable value in Year 1. Then sold in year 2. What amount should be recognized in year 2?

Sales in 20X2 5,000 units
Selling price per unit $6
Selling costs per unit 2
Processing costs 0

Answer 30

Year 1
Debit by-product inventory 20,000
Credit work In progress 20,000
Sales 5,000 units x (sales price $6 - cost $2) = 20,000

Year 2
Debit cash 5,000 x $6 = 30,000
Credit by-product inventory 20,000
Cash for selling costs 5,000 x 2 = 10,000

Question 31

A corporation manufactures two qualities (brands) of barbed-wire fencing for sale to wholesalers and large ranchers. Which would be the best type of costing system for such a company to use?

Answer 31

A process costing system is used in those cases where a company produces a standardized product that is sold to many different customers. The production department becomes the cost center.

An economic order quantity (EOQ) system is an inventory control tool, not a cost system.

A job order system is used where products are differentiated from one customer to the next. Each job (customer) is a separate cost center.

Retail inventory is a method for estimating inventory using retail prices. It is not a costing me

Question 32

A standard cost system may be used in job order costing or process costing?

Answer 32

either job order costing or process costing

Question 33

Which of the following costing methods will yield the lowest inventory value?

Absorption
Hybrid
Process
Variable

Answer 33

Variable costing (also known as direct costing) includes only variable manufacturing costs in inventory. Since it excludes fixed manufacturing overhead, it results in a lower inventory value than alternative methods.

Absorption costing includes both fixed and variable manufacturing costs in inventory.

A hybrid system includes elements of both job order and process costing, which normally include both fixed and variable costs in inventory.

A process costing system normally includes both fixed and variable costs in inventory.

Question 34

Which is appropriate if the client’s products heterogeneously consume resources…. activity-based or direct costing?

Answer 34

activity-based costing would be appropriate if the client’s products heterogeneously consume resources (each takes different levels of resources)

ABC systems are used to assign indirect costs, not direct costs clearly associated with specific products.

a pure substance or a homogeneous mixture consists of a single phase.
heterogeneous mixture consists of two or more phases.

Question 35

What method is used to estimate costs for the manufacturing processes of unique products, new, labor intensive, long production runs, and labor becomes more skilled?

Answer 35

Learning curve analysis

Question 36

What is the scattergraph method?

Answer 36

The method of breaking down mixed costs that involves graphing and the visual estimation of a regression line

The scattergraph method takes a graph of all observed cost-activity points and draws a regression line through the points based on visual inspection, creating the cost formula from the regression line.

Question 37

When using throughput costing, are costs are allocated to cost objects?

Answer 37

*No costs are allocated.

Throughput costing is a method of determining which costs are assigned as product costs and is an alternative to variable and absorption costing. Only direct materials are assigned to products. Direct labor and all manufacturing overhead costs are expensed when incurred. As such, no costs are allocated.

Question 38

Operating managers at the middle and lower levels are most likely to buy in and support budgets prepared in a ________ manner.

Answer 38

participatory

Question 39

Responsibility accounting holds managers responsible for what?

Answer 39

Controllable amounts

Question 40

What does a Pareto diagram best identify?

Answer 40

Recurring, costly defects and problems

Known as the 80/20 rule, the Pareto principle states that a small number of causes (20%) are responsible for a large number of effects (80%). In business process performance, this principle suggests that correcting a small number of design, implementation, or other types of problems can have a large positive effect on overall performance.

A Pareto diagram ranks related measures, such as defects or problems, based on how many times they occur. It helps companies separate problems into the components that are significant compared to those that are immaterial.

Question 41

What is management by exception?

Answer 41

involves concentrating on areas that deserve attention and paying less attention to areas operating as expected.

Question 42

What is cost of goods manufactured?

Answer 42

It is the total cost of the completed product is transferred out of work in process inventory account and into the finished goods inventory account.

Beginning WIP
\+ raw material used
\+ direct labor
\+ overhead applied 
- ending WIP
=COGM

Question 43

Under a standard cost system, labor price variances are usually attributable to:

Answer 43

labor rate predictions.

the use of a single average standard rate.

the assignment of different skill levels of workers than planned.

Labor price (rate) variances should not be attributable to union contracts approved before the budgeting cycle

Question 44

What does The formula y = a + bx stand for?

Answer 44

y = Dependent variable
x = Independent variable
a = y − Intercept
b = Variable coefficient

Question 45

Using the variable costing method, which of the following costs are assigned to inventory?

Answer 45

Variable factory overhead costs ONLY

Question 46

What is normal costing?

What is actual costing?

Answer 46

Normal costing assigns overhead costs to cost objects during production.

Actual costing assigns overhead costs at the end of the accounting period.

Question 47

Which responsibility centers are responsible for both revenues and costs?

Answer 47

Investment and profit centers
The concept of responsibility accounting separates a company into segments of responsibility in order to enable a more efficient method of large organization management. Responsibility accounting holds managers responsible for controllable amounts of costs, revenues, and assets.

Question 48

What are the four perspectives of a balanced scorecard?

Answer 48

customer satisfaction, learning and growth (innovation), internal business process improvements, and financial measures

Question 49

What is the measure of goodness of fit of the output?

Answer 49

Goodness of fit is measured by the r-squared (R2) statistic, which is the coefficient of determination. It indicates the proportion of variance in the dependent variable that is statistically explained (determined) by the independent variable using the regression equation. In other words, it indicates how well data points fit a line or curve (goodness of fit).

Question 50

Why is the reciprocal method considered to be the best method of allocating support costs?

Answer 50

It recognizes that all service departments provide work efforts to and from each other.

This method requires simultaneous equations and, where there are more than two service departments involved, a computer program is generally used.

Question 51

What is gross margin (gross profit)?

Answer 51

the available amount for covering operating expenses and profit contribution.

Question 52

Which of the following hierarchies is associated with the following two costs incurred by a carving knife manufacturer?

Answer 52

Unloading direct materials received from a supplier: Batch-unit level, as the amounts received from a supplier occur in batches which are delivered periodically as each batch arrives.

Running production machines: Unit level. Unit-level costs include activities that are performed on each individual unit of a product or service.

Question 53

Which evaluation method is most appropriate for evaluating profit centers?

Answer 53

Compare actual revenues and expenses to budgeted revenue and expenses

Question 54

Which of the following is most likely considered an investment center?

Answer 54

The Southeast division of store locations for a “big box” retailer

Investment centers consist of subdivisions responsible for costs, revenues, and profitable utilization of invested capital and are the most decentralized division

Question 55

How do you determine which project is the better candidate for expansion?

Answer 55

The highest ROI

ROI is the optimal use of invested capital.

Question 56

The return on investment (ROI) is a widely used measure to compare investment options. The measure is an indicator of what?

Answer 56

1. it is an indicator of management’s effectiveness,
2. a measure of the company’s ability to earn a satisfactory ROI, and
3. a method to estimate future earnings.

The measure is not an indicator of the company’s risk.

Question 57

Why is economic value added (EVA) superior to other financial performance measures?

Answer 57

It considers accounting distortions that may detract from management decisions.

Question 58

What is residual income?

Answer 58

It is a performance evaluation method used to mitigate problems that result when using ROI or profit to evaluate performance.

Question 59

The basic formula for the return on investment (ROI) ratio is Income ÷ Investment. There is no set definition of invested capital. The definition of income used in the ratio must change to match the different measures of invested capital. What are two examples?

Answer 59

If investments are defined as average common stockholders’ equity, income would be defined as Net income - Preferred dividends.

If investments are defined as total assets, income would be defined as Net income + (Interest × (1 - Tax rate)).

Question 60

What does Economic Value Added (EVA) measure?

Answer 60

surplus or excess value created by an investment.

is calculated as return on capital minus cost of capital multiplied by invested capital.

It measures the marginal benefit obtained by using assets effectively to generate a return.

Question 61

Which of the following is a component of the learning and growth perspective?

Answer 61

** employee turnover

The balanced scorecard views an organization from four perspectives, one of which is learning and growth. This perspective forms the foundation of all knowledge-worker organizations and includes employee morale and satisfaction, employee turnover, product life cycle, timing of new products to market when compared to their competitors, and management and employee training opportunities.

Question 62

In some cases, management will know the amount of variance before an overhead variance analysis is performed. Which variances are in this category?

Answer 62

FOH efficiency & VOH production volume

Fixed overhead efficiency variance (not possible to reduce the cost of fixed OH by trying to be more efficient)

and variable overhead production volume variance (will not exist because the variable OH applied amount is the same as the amount allowed on the flexible budget)

both will always be zero

Question 63

In which of the following situations is it appropriate to use a static budget in the performance evaluation of a production manager?

When the static budget activity is what?

Answer 63

on the equivalent level as actual activity

Static budgets are prepared prior to the beginning of the accounting period and reflect the level of activity at which the company plans to operate. Any budget used for performance evaluation purposes should reflect the same volume of units sold or produced as the number actually achieved.

Question 64

When disposing of overapplied or underapplied overhead that is considered to be material in amount, on what basis would a manager select the particular account(s) chosen to which the amount will be closed in a normal costing system?

Answer 64

During the period, all incurred overhead will be in the chosen account(s).

When the Manufacturing Overhead account balance is considered material, it is allocated proportionally and adjusted to Cost of Goods Sold, Work-in-Process, and Finished Goods. These accounts are selected because they contain all of the manufacturing overhead cost for the period.

Question 65

Which variance will Strata Dairy investigate to determine if its workers were efficient in producing the ice cream it actually produced?

Answer 65

Direct labor quantity variance

The direct labor efficiency variance, also called the direct labor quantity variance, exists when fewer or more hours of labor are used than the quantity allowed in the budget, computed as follows:

Direct labor efficiency variance = Standard price × (Standard hours – Actual hours)

Question 66

What are typical cost objects?

What is a packaging machine for the company’s products considered?

Answer 66

pizza, purchase order, childs clothing

packaging machine is a cost generator for depreciation and maintenance. The costs of a machine need to be allocated to cost objects. The cost related to the machine is likely part of a cost pool.

Question 67

Assuming no units of products are lost or spoiled, the number of units accounted for in weighted-average process costing should be the same as the:

Answer 67

number of physical units to account for.

“Units accounted for” is a physical-unit concept. Equivalent units reflect estimates made by managers about the completion stage of unfinished units. All physical units that start in production plus those in beginning inventory must be accounted for as units that are completed and transferred out, and those that are still in process at the end of the period.

Question 68

Ratios are used for many purposes in financial statement analysis. To determine the return on investment for a company, the numerator of the fraction used should be:

Answer 68

income before nonrecurring items plus interest expense net of income tax.

Return on investment for a company should be income before nonrecurring items plus interest expense net of income tax divided by the investment that was risked to earn that income.

Basic formula is income / investment

Question 69

Return on Investment

Answer 69

1. when computing ROI, the definition of income is dependent on the definition of the investment.
2. ROI calculations generally use book values; therefore, the focus is on the company rather than the investor.
3. ROI is the best measure of management’s ability to use all of the assets available to the enterprise.
4. ROI is of great importance to long-term creditors and investors since it is a good way to project future earnings.

Question 70

Which pair of variances are the responsibility of the production manager?

Answer 70

Materials quantity variance and variable overhead efficiency variance

Production supervisors control employees and make sure they are using direct materials efficiently. They also control how efficiently employees use indirect materials or perform indirect labor (wages), both of which are parts included as variable overhead.
Labor price variance would be assigned to human resources.
The material price variance would be assigned to the purchasing department.

Question 71

To determine which of a company’s segments generates the largest contribution to shareholder wealth to the parent company, a company should calculate and assess the company’s:

Answer 71

residual income.

Residual income (RI) is a method of measuring performance of investment centers that measures the amount a division adds to shareholder value of the parent company.

Question 72

Transferred-in costs are treated as if they are:

Answer 72

a separate direct material added at the beginning of the process.

Transferred-in costs are processing costs incurred in all other departments and production processes that occurred prior to entering the current department.

Question 73

Kry, Inc. has four divisions, a cost of capital of 5.5%, and a 7.5% required rate of return. The East Division experienced a return on investment of 8.9%. The expected return on investment of the expansion by itself is estimated to be 7.6%. If project is undertaken, the segment’s return on investment with the expansion is expected to be 8.6%. If the East Division is evaluated using return on investment, will the manager invest?

Answer 73

No. The segment’s return on investment is expected to decrease, causing the division’s segmental return and the performance to decline. (ROI would decrease from 8.9% to 8.6%.)

The question asks what WILL the manager do. What a manager SHOULD do is accept the investment, as its return of 7.6% exceeds the company’s minimum expected return of 7.5%.

Question 74

Which ratios are utilized in the planning and forecasting process?

Answer 74

free cash flow - cash actually available

additional funds needed formula - as company grows, additional funding is necessary. sales are forecasted and total assets necessary to support those sales are estimated

capital intensity ratio - dollar value of assets needed to create a dollar of sales