PATS (B4) Flashcards
Costs are allocated to cost objects in many ways and for many reasons. Which one of the Following is a purpose of cost allocation?
A. Evaluating revenue center performance.
B. Measuring income and assets for external reporting.
C. Budgeting cash and controlling expenditures.
D. Aiding in variable costing for internal reporting.
B.
Answer (A) is incorrect because A revenue center is evaluated on the basis of revenue generated, without regard to costs.
Answer (B) is correct. Cost allocation is the process of assigning and reassigning costs to cost objects. It is used for those costs that cannot be directly associated with a specific cost object. Cost allocation is often used for purposes of measuring income and assets for external reporting purposes. Cost allocation is less meaningful for internal purposes because responsibility accounting systems emphasize controllability, a process often ignored in
cost allocation.
Answer (C) is incorrect because Cost allocation is not necessary for cash budgeting and controlling expenditures.
Answer (D) is incorrect because Allocations are not needed for variable costing, which concerns direct, not indirect, costs.
Which of the following is a period cost rather than a product cost of a manufacturer?
A. Direct materials.
B. Variable overhead.
C. Fixed overhead.
D. Abnormal spoilage.
D.
Answer (A) is incorrect because Direct materials are product costs.
Answer (B) is incorrect because Variable overhead is a product cost.
Answer (C) is incorrect because Fixed overhead is a product cost.
Answer (D) is correct. Materials, labor, and overhead (both fixed and variable) are examples of product costs. Abnormal spoilage is an example of a period cost. Abnormal spoilage is not inherent in a production process and should not be categorized as a product cost. Abnormal spoilage should be charged to a loss account in the period that detection of the spoilage occurs.
A company experienced a machinery breakdown on one of its production lines. As a consequence of the breakdown, manufacturing fell behind schedule, and a decision was made to schedule overtime to return manufacturing to schedule. Which one of the following methods is the proper way to account for the overtime paid to the direct laborers?
A. The overtime hours times the sum of the straight-time wages and overtime premium would be charged entirely to manufacturing overhead.
B. The overtime hours times the sum of the straight-time wages and overtime premium would be treated as direct labor.
C. The overtime hours times the overtime premium would be charged to repair and maintenance expense, and the overtime hours times the straight-time wages would be treated as direct labor.
D. The overtime hours times the overtime premium would be charged to manufacturing overhead, and the overtime hours times the straight-time wages would be treated as direct labor.
D.
Answer (A) is incorrect because The straight-time wages times the overtime hours should still be treated as direct labor.
Answer (B) is incorrect because Only the straight-time wages times the overtime hours is charged to direct labor.
Answer (C) is incorrect because Labor costs are not related to repairs and maintenance expense.
Answer (D) is correct. Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Factory overhead consists of all costs, other than direct materials and direct labor, that are associated with the manufacturing process. Thus, straight-time wages would be treated as direct labor; however, because the overtime premium cost is a cost that should be borne by all production, the overtime
hours times the overtime premium should be charged to manufacturing overhead.
Which of the following statements is true for a firm that uses variable costing?
A. The cost of a unit of product changes because of changes in number of units manufactured.
B. Profits fluctuate with sales.
C. An idle facility variation is calculated.
D. Product costs include variable administrative costs.
B.
Answer (A) is incorrect because The cost of a unit of product changing owing to a change in the number of units manufactured is a characteristic of absorption costing systems.
Answer (B) is correct. In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales.
Answer (C) is incorrect because Idle facility variation is a characteristic of absorption costing systems.
Answer (D) is incorrect because Neither variable nor absorption costing includes administrative costs in inventory.
A standard costing system is most often used by a firm in conjunction with
A. Management by objectives.
B. Target (hurdle) rates of return.
C. Participative management programs.
D. Flexible budgets.
D.
Answer (A) is incorrect because MBO is a behavioral, communication-oriented, responsibility approach to employee self-direction. Although MBO can be used with standard costs, the two are not necessarily related.
Answer (B) is incorrect because Rates of return relate to revenues as well as costs, but a standard costing system concern costs only.
Answer (C) is incorrect because Participative management stresses multidirectional communication. It has no relationship to standard costs
Answer (D) is correct. A standard cost is an estimate of what a cost should be under normal operating conditions based on accounting and engineering studies. Comparing actual and standard costs permits an evaluation of the effectiveness of managerial performance. Because of the impact of fixed costs in most businesses, a standard costing system is usually not effective unless the company also has a flexible budgeting system. Flexible budgeting uses standard costs to prepare budgets for multiple activity levels
The manager of the assembly department of a company would like to estimate the fixed and variable components of the department’s cost. To do so, the manager has collected information on total cost and output for the past 24 months. To estimate the fixed and variable components of total cost, the manager should use:
A. Regression analysis.
B. Game theory.
C. Sensitivity analysis.
D. Queuing theory.
A. Regression.
Answer (A) is correct. Regression analysis is a statistical technique for measuring the relationship between variables. It estimates the component of the dependent variable that varies with changes in the independent variable and the component that does not vary.
Answer (B) is incorrect because Game theory is a mathematical approach to decision making in which the actions of competitors are considered.
Answer (C) is incorrect because Sensitivity analysis studies how changes in one or more variables affect the optimal solution in a linear programming model.
Answer (D) is incorrect because Queuing theory is used to minimize the sum of the costs of waiting lines and servicing waiting lines when items arrive randomly at a service point and are serviced sequentially.
The inventory control supervisor at Wilson Manufacturing Corporation reported that a large quantity of a part purchased for a special order that was never completed remains in stock. The order was not completed because the customer defaulted on the order. The part is not used in any of Wilson’s regular products. After consulting with Wilson’s engineers, the vice president of production approved the substitution of the purchased part for a regular part in a new product. Wilson’s engineers indicated that the purchased part could be substituted providing it was modified. The units manufactured using the substituted part required additional direct labor hours resulting in an unfavorable direct labor efficiency variance in the Production Department. The unfavorable direct labor efficiency variance resulting from the substitution of the purchased part in inventory is best assigned to the:
A. Sales manager.
B. Inventory supervisor.
C. Production manager.
D. Vice president of production.
D. Vice president.
Answer (A) is incorrect because The sales manager did not make the substitution decision. Answer (B) is incorrect because The inventory supervisor did not make the substitution decision. Answer (C) is incorrect because The production manager did not make the substitution decision.
Answer (D) is correct. An unfavorable direct labor efficiency variance is normally charged to the production manager, the person with the most control over the amount and kinds of direct labor used. However, that individual is not responsible. (S)he was told to use the nonconforming part that required extra labor time. Thus, the variance should be charged to the vice president of production, the individual who most influenced the incurrence of the cost.
An advantage of using a flexible budget compared to a static budget is that, in a flexible budget,
A. Shortfalls in planned production are clearly presented.
B. Standards can easily be changed to adjust to changing circumstances.
C. Fixed cost variances are more clearly presented.
D. Budgeted costs for a given output level can be compared with actual costs for the same level of output.
D.
Answer (A) is incorrect because Shortfalls in planned production should be clearly presented by any budget system.
Answer (B) is incorrect because Easily changed standards defeat the purpose of having standards.
Answer (C) is incorrect because Fixed cost variances are no more clearly presented under a flexible budgeting system than they are under any other.
Answer (D) is correct. The actual level of production for a period is rarely identical to the level that was projected when the period was being planned. Flexible budgets use standard costs to report what costs “should” have been incurred given the actual level of production achieved.
Large firms often seek to control risk through allocating or rationing capital among divisions. When capital is rationed, managers are most likely to choose among prospective investments based on their
A. Net present value (NPV) rankings.
B. Internal rate of return (IRR) rankings.
C. Payback periods.
D. Profitability index rankings.
D.
Answer (A) is incorrect because Managers will most likely not choose their investments based solely on the NPV of the projects when capital is rationed. This method does not take into consideration the limited resources available. The net initial investment is also a factor that must be considered when selecting among prospective projects.
Answer (B) is incorrect because Managers will most likely not choose their investments based solely on the IRR of the project when capital is rationed. The internal rate of return expresses a project’s return in percentage terms. The IRR of an investment is the discount rate at which the investment’s NPV equals zero. This method does not take into consideration the fact that resources may be limited.
Answer (C) is incorrect because Managers will most likely not choose their investments based solely on the payback periods of the project when capital is rationed. The payback period is the number of years required to return the original investment, that is, the time necessary for a new asset to pay for itself. Note that no consideration is made for the time value of money under this method. In addition, this method does not take into consideration the fact that resources may be limited.
Answer (D) is correct. The profitability index is a method for ranking projects to ensure that limited resources are placed with the investments that will return the highest NPV. This can be calculated by dividing the NPV of the future cash flows by the net investment.
If a project has a profitability index that is greater than 1.0, it means that the
A. Initial investment exceeds the cash flows.
B. Cash flows exceed the initial investment.
C. Required return is less than the internal rate of return.
D. Internal rate of return is equal to the required return.
C.
Answer (A) is incorrect because The profitability index can be calculated by dividing the PV of future cash flows by the net investment. In order for this to be greater than 1, the initial investment must be less than the PV of the cash flows, not greater than the cash flows.
Answer (B) is incorrect because The profitability index can be calculated by dividing the PV of future cash flows by the net investment. In order for this to be greater than 1, the PV of the cash flows must exceed the initial net investment. This question simply states that the cash flows must exceed the initial investment, which does not take into consideration the PV factors.
Answer (C) is correct. The profitability index can be calculated by dividing the PV of future cash flows by the net investment. In order for this to be greater than 1, the required return must be less than the internal rate of return. If the required rate of return is less than the internal rate of return, this means that the project will be profitable for the company because the return on the project is higher than the company’s required rate.
Answer (D) is incorrect because The profitability index can be calculated by dividing the PV of future cash flows by the net investment. In order for this to be greater than 1, the internal rate of return does not have to be equal to the required rate of return.
In evaluating independent capital investment projects, the best reason for a firm to accept such projects is a(n.
A. Accounting rate of return greater than zero.
B. Initial investment greater than the present value of cash inflows.
C. Profitability index greater than one.
D. Internal rate of return greater than the accounting rate of return.
C. Profitability index greater than one.
Answer (A) is incorrect because Accounting rate of return is a poor method for evaluating capital projects.
Answer (B) is incorrect because To be acceptable, the initial investment should be less than the present value of the cash inflows.
Answer (C) is correct. The profitability index is an efficient means for ranking capital projects. It is the ratio of the net present value of a project’s cash flows to the net investment. Any project with a profitability index > 1 is expected to be profitable.
Answer (D) is incorrect because Any comparison with the accounting rate of return is a poor basis for evaluating capital projects.
Senior executives of organizations should see all of the following types of financial and nonfinancial information EXCEPT:
A. market share among targeted customer and market segments.
B. hourly quality and yield statistics for all manufacturing and service processes.
C. profit and cash flow statements of the enterprise.
D. monthly customer satisfaction and retention statistics.
B.
The role of managerial accounting information in assisting management is a(n):
A. financial-directing role.
B. attention-directing role.
C. planning and controlling role.
D. organizational role.
B.
The process of encouraging and authorizing workers to take appropriate initiatives to improve the overall firm is commonly known as:
A. planning and control.
B. employee empowerment.
C. personnel aggressiveness.
D. decision making.
B.
Which of the following business models considers financial, customer, internal operating, and other measures in the evaluation of performance?
A. Deterministic simulation.
B. Balanced scorecard.
C. Payoff matrix.
D. Decision tree.
B.
