VII - Cost Accounting

Question 1

What is Cost Accounting?

Answer 1

Cost Accounting is a component of GAAP that records Ending Inventory on the Balance Sheet for
o Direct Materials
o Direct Labor
o Work in Process
o Finished Goods

Cost Accounting also records for the Income Statement

Question 2

What is the difference between Cost Accounting and Managerial Accounting?

Answer 2

Cost Accounting - External Focus- GAAP

Managerial Accounting - Internal Focus- Not GAAP

Question 3

What are Product Costs (aka Inventory Costs)?

Answer 3

Prime Costs

Conversion Costs

Question 4

What are included in Prime Costs?

Answer 4

Direct Material USED - Have become part of the product or had a direct impact on the product

Direct Labor Used - Employees who worked on product and had direct impact

Question 5

What is Factory Overhead?

Answer 5

All factory costs except for DM and DL used in production- including Spoilage (except for abnormal spoilage- which is a period cost and not included in OH).

Question 6

What is included in Fixed Factory Overhead?

Answer 6

FFO : Estimated Costs / Normal Capacity

Uses Normal Activity

Examples of Fixed Factory OH: Depreciation (SL)- Utilities- Taxes

Under/Over-applied Fixed OH always goes to COGS

Question 7

What is included in Variable Overhead?

Answer 7

VO : Estimated Activity / Actual Activity

Uses Actual Activity

Examples of Variable Factory OH: Deprecation (Units of Prod)- Indirect materials (supplies & insignificant items)- Indirect labor (factory foreman- janitors- machine maintenance)

Question 8

Where is Under/Over-applied Variable OH recorded?

Answer 8

If Immaterial - Goes to COGS

If Material - Goes to WIP- Finished Goods- or COGS- based on their Ending Balance

Question 9

Where is Under/Over-applied Fixed OH recorded?

Answer 9

It always goes to COGS

Question 10

What is indicated by a Debit balance in Actual Factory Overhead? How is it corrected?

Answer 10

Under-applied overhead.

If it’s Fixed OH- under-applied goes to COGS.

If it’s Variable OH- under-applied goes to COGS if immaterial- but is allocated to WIP- FG or COGS based on ending balances.

Question 11

What is indicated by a Credit balance in Applied Factory Overhead? How is it corrected?

Answer 11

A credit balance indicates over-applied overhead.

If Fixed overhead- it is corrected from COGS.

If Variable overhead- it is corrected through COGS if immaterial- but if material overage is allocated to WIP- FG or COGS based on ending balances.

Question 12

Which variables are used to calculate Direct Material balances?

Answer 12

Beginning Balance DR Net purchases (plus freight-in)CR Direct Materials Used
: Ending balance (goes to BS)

Question 13

What variables are used to calculated Work in Process (WIP)?

Answer 13

Beginning Balance (End Bal of Previous WIP)DR Direct Materials UsedDR Direct Labor Used (Conversion Cost)CR COGMDR Factory Overhead Applied (Conversion Cost)
: Ending Balance (Goes to BS)

Question 14

What variables are included in Finished Goods calculations?

Answer 14

Beginning BalanceDR COGM
: COGAS (Cost of Goods Avail for Sale)
CR COGS
: Ending Balance (Goes to BS)

Question 15

How does Freight In affect Cost Accounting calculations?

Answer 15

Inventory (Product) Cost

Part of DM Purchases

Question 16

How does Freight Out affect Cost Accounting?

Answer 16

Selling (Period) Cost

Not part of inventory

Question 17

When is Job-Order Costing used?

Answer 17

Used when costs are easily connected to a specific product or product line

Can also be applied to services

Calculation is the same as normal cost accounting - just use your T Accounts
- DM to WIP to FG to COGS
- You’re likely going to be solving for the last job in the queue

Question 18

What is the Direct Method for allocating service department costs?

Answer 18

No services allocated between service departments- even if they serve each other. Only allocate to product(s)

Question 19

What is the Step Method for allocating service department costs?

Answer 19

Services can be allocated to both other service departments and the product(s)

Question 20

Under process costing- how are the units shipped calculated?

Answer 20

Beginning Inventory+ Units Started- Ending Inventory
: No. Units Shipped

Question 21

Which two inventory methods are used under Process Costing?

Answer 21

FIFO

Weighted Average

Question 22

What is another name for Process Costing?

Answer 22

Equivalent Units of Production

Question 23

How will Equivalent Finished Units under FIFO compare to EFU under the Weighted Average method?

Answer 23

EFU FIFO will always be LESS than EFU Weighted Avg (unless Beginning Inventory is Zero)

Question 24

How are Direct Materials calculated under the Weighted Average Method?

Answer 24

Beginning Inventory + Current Costs / EFU WA

Question 25

How are Conversion Costs calculated under Weighted Average Method?

Answer 25

Beginning Inventory + Current Costs / EFU WA

Question 26

How are Equivalent Finished Units calculated for Direct Materials?

Answer 26

Units Shipped + EI x % Complete DM
: EFU (Weighted Average Method)

• Beginning Inventory x % Complete
  : EFU (FIFO)

Question 27

How are Equivalent Finished Units calculated for Conversion Costs?

Answer 27

Units Shipped+ EI x % Complete CC
: EFU (Weighted Average)

• Beginning Inventory x % Complete
  : EFU (FIFO)

Question 28

How are Direct Materials calculated under the FIFO method?

Answer 28

Current Costs / EFU FIFO

Note: FIFO method uses Current Period costs only and ignores Beginning Inventory

Question 29

How are Conversion Costs calculated under the FIFO method?

Answer 29

Current Costs / EFU FIFO

FIFO method uses Current Period costs only and ignores Beginning Inventory

Question 30

How is WIP calculated?

Answer 30

Beginning balance (DM- DL- OH)+ Current Costs (DM- DL- OH)- COGM (Goes to Finished Goods)+ DM EFU x Cost per DM EFU+ CC EFU x Cost per CC EFU
: Ending WIP

Question 31

How do period costs and product costs relate to net sales- gross margin and operating income?

Answer 31

Net Sales - Product Costs
: Gross Margin
- Period Costs
: Operating Income

Question 32

What is the focus of Activity Based Costing (ABC)?

Answer 32

Focuses on eliminating non-value-added activities for poor quality and inventory and things customers don’t want or don’t care about

Inventory is expensive to store and storing something is not a value-added expenditure

Uses Cost Pools - Different departments can have different OH rates

Uses Several OH rates based on Activity - Cost Pool / Cost Driver

Question 33

How do Cost Pools and Allocations compare under ABC versus traditional costing system?

Answer 33

Cost Pools and Allocations increase compared to a traditional costing system

Question 34

What is Backflush Costing?

Answer 34

Connected to Just-in-Time Production- which is part of Activity-Based Costing and Total Quality Management (TQM)

• Works backward to flush out COGS
• Mostly GAAP

Question 35

What are the characteristics of By-Products?

Answer 35

Usually immaterial and common costs aren’t allocated to them
Low Market Value
Can be valued at NRV
Can be treated as a contra expense and netted against COGS - Can be treated as a contra sale and netted against Sales
Recognition rules are very flexible with valuing and classifying by-products

Question 36

What are Cost Functions?

Answer 36

Measure how costs change relative to activity levels

High-Low Method

Change in Cost (High-Low pts) / Change in Activity (High-Low pts)

Question 37

Product vs Period Costs?

Answer 37

Product - can be associated with production of revenue aka COGS (hits gross profit)
Period - can’t be matched with revenue aka Selling/admin exp (hits net profit)

Question 38

1 Direct labor, material are “primary costs” of product so aka these are….
2 What are needed to “convert” goods to a final product?

Answer 38

1 Prime costs
DLabor is also a conversion cost
2 DL and factory overhead are conversion costs

Question 39

Indirect labor is a….. (cost)

• Prime
• Conversion
• Period

Answer 39

Conversion cost

Goes from Raw Material to OvHead “Factory OH control”, then to Work In Progress

Question 40

Loom operators 120,000
Factory foremen 45,000
Machine mechanics 30,000
What was the amount of direct labor?

Answer 40

120,000
Direct labor includes the wages of only those employees working directly in the manufacture of the product. Only the loom operators meet this definition. The factory foremen are supervisory, and the machine mechanics maintain the machines.

Question 41

In a process cost system, the application of factory overhead usually would be recorded as an increase in

• Finished goods inventory control.
• Factory overhead control.
• Cost of goods sold.
• Work-in-process inventory control.

Answer 41

WIP Inv Control
Entries to record the manufacturing cost are similar for job-order and process costing. When overhead is applied, it is debited to work in process. The credit is to factory overhead applied. WIP receives only applied overhead, unless some underapplied factory overhead is allocated to work in process at the end of the period.

Question 42

Acct applies overhead based on machine hours. The budgeted overhead and machine hours for the year are $260,000 and 16,000, respectively. The actual overhead and machine hours incurred were $275,000 and 20,000. The cost of goods sold and inventory data compiled for the year is as follows:
Direct Materials $ 50,000
COGS 450,000
WIP (units) 100,000
Finished Goods (units) 150,000
What is the amount of overapplied overhead?

Answer 42

$50k
Traditional overhead allocation happens in 3 steps. (1) Establish the estimated overhead and divide by the estimated machine hours to get a predetermined rate (POR) of $16.25 = $260,000 / 16,000MH; (2) Multiply the POR ($16.25) by the “actual” number of machine hours (20,000) to get allocated overhead of $325,000; (3) Compare the $325,000 allocated to the actual of $275,000. This difference is $50,000 overapplied.

Question 43

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 overheads were $50,000 and $25,000, respectively.
The actual costs and hours for the year were as follows:
Direct labor hours 21,000
Direct labor costs $110,000
Machine hours 35,000
For a particular job, 1,500 direct labor hours were used. Using direct labor hours as the cost driver, what amount of overhead should be applied to this job?

Answer 43

$5625
Overhead is applied to jobs using a pre-determined overhead rate, which is calculated by dividing estimated overhead costs (both variable and fixed) by a budgeted or estimated quantity of a cost driver. In this case, the total overhead costs of $75,000 are divided by the 20,000 budgeted direct labor hours to arrive at an overhead application rate of $3.75 per direct labor hour.
The costs are applied to production based on the 1,500 actual direct labor hours used ($3.75 * 1,500 = $5,625).

Question 44

If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?

• Direct materials.
• Direct labor.
• Prime costs.
• Conversion costs.

Answer 44

Conversion Cost

When used in products, both electricity and crude oil are classified as manufacturing overhead.

Question 45

Indirect labor is a

• Prime cost.
• Conversion cost.
• Period cost.
• Nonmanufacturing cost.

Answer 45

Conversion cost
Conversion cost is the sum of direct labor and overhead. It is so named because this is the cost of the efforts that convert raw material into finished goods. Indirect labor is included in overhead and, thus, is part of conversion cost.

Question 46

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

• Stores control.
• Work in process control.
• Factory overhead control.
• Factory overhead applied.

Answer 46

FOH Control
The issuance (use in production) of indirect materials results in a debit (increase) to factory overhead control. This account accumulates actual overhead cost incurrence. Actual overhead is not debited to work in process. Rather, work in process is debited to factory overhead applied.

Question 47

FOH Control vs FOH Applied

Answer 47

FOH control is on the left side (debit) of T acct

FOH applied is on the right (credit) of T acct and becomes WIP Inv Control

Question 48

Which of the following is assigned to goods that were either purchased or manufactured for resale?

• Relevant cost.
• Period cost.
• Opportunity cost.
• Product cost.

Answer 48

Product costs include direct materials costs and, in a manufacturing environment, direct labor and indirect manufacturing costs assigned to goods held for resale.

Question 49

D Co. experienced scrap, normal spoilage, and abnormal spoilage in its manufacturing process. The cost of units produced includes
A. Scrap, but not spoilage.
B. Normal spoilage, but neither scrap nor abnormal spoilage.
C. Scrap and normal spoilage, but not abnormal spoilage.
D. Scrap, normal spoilage, and abnormal spoilage.

Answer 49

C. Scrap and normal spoilage, but not abnormal spoilage.
Scrap is the material left over after making a product. It has minimal or no sales value. Scrap is automatically included in work in process for a product because it is part of the material cost of a product. In many manufacturing settings, it is impossible to use every bit of material input. For example, the circular punch-outs for conduit boxes are scrap.
Normal spoilage is output that cannot be sold through normal channels. It is an inherent result of production. In many cases, it is not cost effective to attempt to reduce the normal spoilage cost to zero. It is a normal part of the production process and, therefore, its cost is included in the cost of units produced.
Abnormal spoilage is considered avoidable. It occurs as a result of an unexpected event, such as a machine breakdown or accident. This cost is treated as a loss rather than a normal production cost.

Question 50

During the month of March 2005, N Co. used $300,000 of direct materials. On March 31, 2005, N’s direct materials inventory was $50,000 more than it was on March 1, 2005.
Direct material purchases during the month of March 2005 amounted to
A. $0.
B. $250,000.
C. $300,000.
D. $350,000.

Answer 50

350K (read carefully young grasshopper)
Purchases is the amount required to provide the materials used ($300,000) and the increase in inventory ($50,000) for total purchases of $350,000.
Beginning material inventory + purchases = ending material inventory + material used
Purchases = ending inventory - beginning inventory + material used
Purchases = inventory increase + materials used
Purchases = $50,000 + $300,000
= $350,000

Question 51

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
Beg WIP: 500K, End WIP, 400K
Beg Finished Goods:  100k, End FG: 500k

Answer 51

600k
This calculation uses the Cost of Goods Manufactured and the Cost of Goods Sold (CGS) statement format to produce CGS of $400,000. Then, subtracting CGS from Sales of $1,000,000 provides Gross Profit of $600,000.

Question 52

In the past, 4 direct labor hours were required to produce each unit of Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was 3 times the direct labor cost.
In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates that these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times the direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units.
What amount should management budget for the cost of goods manufactured?

Answer 52

$5,060,000
The three factors of production - materials, labor, and overhead - must be adjusted to reflect the new budget constraints. This means that
Materials per unit = $200 + $30 = $230 per unit
Direct labor per unit = (4 hours labor X .75 X $20 per hour) = $60 per unit
Overhead per unit = (3.6 X (4 hours labor X .75 X $20 per hour)) = $216 per unit
Total cost per unit = $230 + $60 +$216 = $506 per unit
Total cost of manufacturing = $506 per unit X 10,000 units = $5,060,000

Question 53

H Co incurred total production costs of $900,000, of which was attributed as: $60,000 to normal spoilage and $30,000 to abnormal spoilage. H should account for this spoilage as:
A. Period cost of $90,000.
B. Inventoriable cost of $90,000.
C. Period cost of $60,000 and inventoriable cost of $30,000.
D. Inventoriable cost of $60,000 and period cost of $30,000.

Answer 53

D. Inventoriable cost of $60,000 and period cost of $30,000.
The distinction between normal and abnormal spoilage is that normal spoilage is an expected part of the production process. The cost represents units or materials that were lost in the normal production process. They are indirect manufacturing costs (overhead) and, thus, are inventoriable. Abnormal spoilage is unexpected, and is over and above the anticipated level. It represents a loss for financial accounting purposes. No benefit is derived from abnormal spoilage.

Question 54

Units: Saleable 5,000
    Unsaleable (normal spoilage) 200
    Unsaleable (abnormal spoilage) 300
The manufacturing cost totaled $99,000. What amount should Hoyt debit to finished goods?
A. $90,000.
B. $93,600.
C. $95,400.
D. $99,000.

Answer 54

$93,600
Normal spoilage is a manufacturing cost because it is an expected and inherent part of production. Thus, it is included in the cost of finished goods. Abnormal spoilage is the amount of spoilage in excess of normal spoilage, and it is treated as a period cost.
The total units completed are 5,500 (5,000 + 200 + 300). Of this total, 5,200 are included in finished goods. Thus, 5,200/5,500 of the total cost incurred is included in finished goods. The remainder is a period cost.
Debit to finished goods = $93,600 = (5,200/5,500)$99,000

Question 55

M Co. estimated its material handling costs at two activity levels as follows:
Kilos handled: 1) 80,000 2) 60,000
Cost: 1) $160,000 2) $132,000
What is Mat’s estimated cost for handling 75,000 kilos?

Answer 55

$153,000
The variable cost per unit (slope of the line) is the change in cost divided by the change in kilos:
b = ($160,000 - $132,000)/(80,000 - 60,000) = $1.40. The fixed cost (y intercept point) can be derived from either data point by entering the variable cost per unit and one of the data points into the equation:
$160,000 = a + 1.40(80,000)
$48,000 = a. Therefore, at 75,000 kilos, an activity within the range of the data, we can expect the following amount of cost: Cost = $48,000 + $1.40(75,000) = $153,000

Question 56

When production levels are expected to increase within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following costs?
How does this affect Fixed cost per unit (no change/decrease) and Variable cost per unit (no change/decrease)?

Answer 56

Fixed cost per unit - Decrease
Variable cost per unit - No change
Total fixed costs are a constant amount in the relevant range. Therefore, when increasing production levels within that range, cost per unit decreases. Fixed costs per unit are not useful for prediction purposes, they change as production levels change.
Variable costs per unit are a constant amount in the relevant range. But total variable costs increase in constant proportion to increases in production. Variable costs are useful for forecasting because unit costs are reasonably constant in the relevant range, allowing for direct predictions of total variable cost at any level in the range.

Question 57

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?

Answer 57

$ 0.00232 per pound
Given that the truck costs $16,250 per year = 125,000 miles @ $0.13 per mile, and given that the truck has a capacity of 7,000,000 lbs. per year = 250 loads @ 28,000 lbs. each, the cost per lb. is $.00232 = $16,250 / 7,000,000 lbs.

Question 58

When using a flexible budget, a decrease in production levels within a relevant range:

• Decreases variable cost per unit.
• Decreases total costs.
• Increases total fixed costs.
• Increases variable cost per unit.

Answer 58

Decreases Total Costs
Total costs decrease when production decreases. The decrease equals the decline in total variable costs resulting from the production of fewer units. Fixed costs are assumed to be constant.

Question 59

Which of the following are characteristic of Book’s activity-based costing approach? (I, II, III and/or for each)
I. Cost drivers are used as a basis for cost allocation.
II. Costs are accumulated by department or function for the purposes of product costing.
III. Activities that do not add value to the product are identified and reduced to the extent possible.

Answer 59

Both I. and III. are common characteristics of the ABC approach.
For the purpose of cost estimation and allocation. Single variables such as direct labor hours or machine hours are not used, but rather, multiple variables are identified (which could include the latter two), in an effort to identify the underlying relationship between cost and its causes. Also, nonvalue-added activities are identified and eliminated or reduced. Inventories are typically reduced along with the related storage and security activities, and paperwork and other activities that do not add value to the product are minimized. However, II. is not a characteristic of ABC systems. II. is a statement of the way overhead costs are allocated in traditional costing systems. ABC disaggregates overhead costs into specific activities or drivers, computes overhead rates for each driver, and then allocates overhead to products based on their consumption or the use of the driver. Thus, ABC first allocates overhead to activities and then to products, rather than to departments and then to products, as is the case with traditional systems.

Question 60

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?

• A single cause and effect relationship.
• Multiple cause and effect relationships.
• Relative net sales values of the products.
• A product’s ability to bear cost allocations.

Answer 60

Multiple cause and effect relationships
Activity-based costing seeks multiple cost drivers to explain the behavior of cost. The technique recognizes that there is no single independent variable to explain how a cost behaves. Breaking down costs into lower levels of aggregation also helps to identify the factors that are relevant in explaining cost, and to exclude other factors.

Question 61

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: up or down
Allocation bases: up or down)

Answer 61

Both increase with ABC
ABC systems identify more cost drivers (allocation bases) than traditional costing systems do. Cost drivers are independent variables that help to explain the behavior of cost and are useful in providing cost allocations that more closely reflect the causal factors affecting cost behavior. Costs are divided into a greater number of cost pools for this purpose, to group together those costs that behave similarly and that may be related to smaller production cells. The number of different costs in each pool is smaller than is the case for traditional systems, which may aggregate costs by department or product line.

Question 62

Which of the following items is a process management approach that involves radical change?

• Continuous improvement.
• Outsourcing.
• Shared services.
• Business process reengineering.

Answer 62

Business process reengineering is a process analysis approach that typically results in radical change. This is a different approach from incrementally reducing and eliminating non-value added activities, and otherwise improving processes.

Question 63

Which of the following items often provides a significant risk with off-shore operations?

• Cost of moving/restructuring operations.
• Cultural/language issues.
• Service is less specific to the needs of specialized processes.
• Delivery is often less timely.

Answer 63

Culture/Language
Off-shore operations are especially vulnerable to cultural/language issues and difficulty protecting intellectual property rights.

Question 64

Gram Co. develops computer programs to meet customers’ special requirements. How should Gram categorize payments to employees who develop these programs?
Direct cost Y/N
Value-adding cost Y/N

Answer 64

Both yes
The salaries are directly traceable to the end product. Without the work of these employees, the products would not be possible. As the number of specialized program orders increases (for different programs), the salary cost increases. The work of these programmers could not be eliminated without jeopardizing this part of the business, and thus, it is a value-added cost. A value-added cost is one that, if eliminated, would reduce the value of the product to the customer.

Question 65

A Co has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

• Electricity expense.
• Repair and maintenance expense.
• Employee benefits expense.
• Depreciation expense.

Answer 65

Employee benefits
Employee benefits expense provides no clear relationship to the manufacturing operations portion of the company. At least the other allocation bases have some relationship to the manufacturing process.

Question 66

Where one part of an organization provides an essential business process where previously it had been provided by multiple parts of that same organization, this is called

• Process management.
• Outsourcing.
• Shared services.
• Off-shoring.

Answer 66

Shared services
The definition of shared services is where one part of an organization provides an essential business process where previously it was provided by multiple parts of that same organization is the definition of shared services.

Question 67

Which of the following activities, used in Nile’s production process, is nonvalue-adding?

• Design engineering activity.
• Heat treatment activity.
• Drill press activity.
• Raw materials storage activity.

Answer 67

Raw Material storage
A value-added activity is one that makes the product or service more valuable to the customer.
The only activity listed in the answer alternatives that adds no value to the product or service as perceived by the customer is raw materials storage.
ABC systems and JIT purchasing systems are frequently used together. One objective is to minimize inventory holdings. The level of inventory held has no bearing on product quality or the satisfaction of the customer. By reducing inventories, less material must be stored, reducing all the attendant activities and costs related to material storage. Thus, the total cost is reduced without affecting the customer and sales.

Question 68

In an activity-based costing system, cost reduction is accomplished by identifying and eliminating
I Cost drivers
II Nonvalue-adding activities

Answer 68

Nonvalue-adding activies
ABC systems increase (rather than eliminate) the number of cost drivers, to enable better modeling of cost along cause-effect lines. Cost drivers are explanatory variables that help to explain the behavior of cost. One or two independent variables typically are insufficient to explain the behavior of many indirect manufacturing costs.
ABC systems also seek to eliminate nonvalue-added activities, which are activities that do not add to the value of the product as perceived by the customer. In so doing, the total cost of producing the product is reduced without any effect on the value of the product.

Question 69

Absorbtion (full accrual) vs direct (variable) costing?

Answer 69

Treatment of fixed manufacturing costs
Absorbtion - variable and fixed manuf
Direct/Variable - uses only variable, internal use only, not for reporting purposes

Question 70

The absorption costing method includes in work in process and finished goods inventories:
Fixed FOH: Y/N?
Variable FOH: Y/N?

Answer 70

Both yes
Absorption costing includes both fixed and variable manufacturing costs in product costs, and factory overhead costs are included in work in process and finished goods inventories.

Question 71

Using the variable costing method, which of the following costs are assigned to inventory?
Variable selling/admin costs: Y/N?
Variable factory OH: Y/N?

Answer 71

Variable costing assigns only variable manufacturing costs (FOH) to inventory. Variable manufacturing costs include direct materials, direct labor, and variable factory overhead. Fixed factory overhead is treated as a period expense. Variable selling and administrative costs, although deducted to arrive at a contribution margin, are not included as inventoriable costs, but are expensed in full each period.

Question 72

Cay Co.’s 2005 fixed manufacturing overhead costs totaled $100,000, and variable selling costs totaled $80,000. Under direct costing, how should these costs be classified?
Amt as period?
Amt as product?

Answer 72

all 180k as period cost.
Variable selling costs are period costs under both direct and absorption costings. Direct costing also treats fixed manufacturing costs as period costs. Under direct costing, only variable manufacturing costs are treated as product costs. Therefore, the total cost of $180,000 is classified as a period cost and expensed.

Question 73

In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would

• Be treated the same as variable selling and administrative expenses.
• Be used in the computation of operating income, but not in the computation of the contribution margin.
• Be used in the computation of the contribution margin.

Answer 73

Be used in the computation of operating income, but not in the computation of the contribution margin.

The contribution margin equals sales minus variable costs. Fixed costs are deducted from the contribution margin to calculate income.

Question 74

Direct costing: Fixed manuf overhead: 100k
variable selling cost: 80k
How is this classified? Period/Product cost

Answer 74

180k period cost
Selling costs/op expenses - period costs
Direct puts FMOH (the differer) as period cost
(product of absorption)

Question 75

A Co prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated the budgeted figures, whereas income was substantially below the budgeted amount. There were no beginning or ending inventories.
The most likely explanation for the income shortfall is that, compared to budget, actual
-Sales prices had declined proportionately more than variable costs.
-Manufacturing fixed costs had increased.
-Selling and administrative fixed expenses had increased.

Answer 75

Selling and administrative fixed expenses had increased.
Gross profit is the difference between sales and COGS. COGS includes the fixed and variable manufacturing costs assigned to the units sold. Contribution margin equals sales less variable costs. Both the gross profit and the contribution margin are approximately as expected, which implies that sales, variable manufacturing costs, variable selling and administrative expenses, and fixed manufacturing costs are as expected. The only remaining component, fixed selling and admin exp, must be responsible.

Question 76

Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For 2005, unit standard costs were unchanged from 2004. In 2005, 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 S/E?

Answer 76

Current - up, Ro S/E - smaller
Current ratio = current assets/current liabilities. Return on stockholders’ equity = net income/average owners’ equity. Absorption costing allocates both variable and fixed manufacturing costs to inventory. Variable costing assigns only variable manufacturing cost to inventory and expenses fixed manufacturing overhead as a period cost. Therefore, ending inventory, and thus, current assets, are higher under absorption costing by the amount of fixed overhead allocated to ending inventory. The current ratio under absorption costing is, therefore, higher than under variable costing. Income in the current period is the same under both absorption costing and variable costings because the fixed overhead allocation rate has not changed, and ending inventory quantities have not changed. Therefore, total expenses recognized for the life of the firm for absorption costing are less than for variable costing by the amount of fixed overhead remaining in those 5,000 units at the end of 2005. Thus, retained earnings are higher for absorption costing, causing the denominator of return on stockholders’ equity to be greater, and finally causing the ratio to be smaller for absorption costing.

Question 77

A single-product company prepares I/S using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in 2005 was the same as in 2004. The 2005 variable costing statement reported a profit, whereas the 2005 absorption costing statement reported a loss. The difference in reported income could be explained by the units produced in 2005 being

• Less than the units sold in 2005.
• Less than the activity level used for allocating overhead to the product.
• In excess of the activity level used for allocating overhead to the product.
• In excess of the units sold in 2005.

Answer 77

Less than the units sold in 2005.
Absorption costing includes fixed manufacturing costs as part of product costs; direct costing expenses fixed manufacturing costs as a period expense. Because of this, inventory valuation under absorption costing is more than inventory valuation under direct costing. When a firm sells more than it produces, it must use some of its existing inventory. Since absorption costing has a higher inventory valuation, the cost of goods sold under absorption costing will be higher (and income lower) than under direct costing.

Question 78

Which of the following statements is correct regarding the difference between the absorption costing and variable costing methods?

• When production equals sales, absorption costing income is greater than variable costing income.
• When production equals sales, absorption costing income is LESS than variable costing income.
• When production is greater than sales, absorption costing income is greater than variable costing income.
• When production is LESS than sales, absorption costing income is greater than variable costing income.

Answer 78

When production is greater than sales, absorption costing income is greater than variable costing income. This is why managers are often tempted to overproduce.

Question 79

At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand. Variable and fixed manufacturing costs per unit were $90 and $20, respectively. If Killo uses absorption costing rather than direct (variable) costing, the result would be a higher pretax income of? ($)

Answer 79

$20k
Absorption costing includes both variable and fixed manufacturing costs as product costs. Direct costing includes only variable manufacturing costs as product cost and expenses fixed manufacturing costs as a period expense. Absorption includes $20,000 of fixed manufacturing costs (1,000 x $20) in ending inventory while direct costing expenses the full amount of fixed manufacturing costs. Pretax income is consequently $20,000 higher for absorption costing.

Question 80

A Co prepares income statements using both absorption and variable costing methods. At the end of a period, actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the income increase is that, compared to budget, actual

• Manufacturing fixed costs had increased.
• Selling and administrative fixed expenses had decreased.
• Sales prices and variable costs had increased proportionately.
• Sales prices had declined proportionately less than variable costs.

Answer 80

Selling and administrative fixed expenses had decreased.
Gross profit is the difference between sales and the cost of goods sold. The cost of goods sold includes fixed and variable manufacturing costs assigned to the units sold. Contribution margin equals sales less variable costs. Both the gross profit and the contribution margin are approximately as expected, which implies that sales, variable manufacturing costs, variable selling and administrative expenses, and fixed manufacturing costs are as expected. The only remaining component, fixed selling and administrative expenses, must be responsible for the variation in income.

Question 81

Overhead allocation timeline

Answer 81

Estimated/Predet OH Rate - beginning
Allocation/Applied - middle
Close to COGS/Prorate - end

Question 82

B Co. uses a job order cost system. The following debits (credits) appeared in B's work in process account for the month of April 2005:
April	Description	Amount
1	Balance	$4,000
30	Direct materials	24,000
30	Direct labor	16,000
30	Factory overhead	12,800
30	To finished goods	(48,000)
B applies overhead to production at a predetermined rate of 80% of the direct labor cost. Job No. 5, the only job still in process on April 30, 2005, was charged with direct labor of $2,000. What was the amount of direct materials charged to Job No. 5?

Answer 82

5,200
Ending balance in work in process:
$4,000 + $24,000 + $16,000 + $12,800 - $48,000 (all attributable to Job No. 5, the only remaining job) = $8,800
Less direct labor charged to Job No. 5: (2,000)
Less OH charged to Job No. 5: 80%x($2,000)= (1,600)
Equals materials charged to Job No. 5: $5,200

Question 83

A standard cost system may be used in

• Neither process costing nor job order costing.
• Process costing, but not job order costing.
• Either job order costing or process costing.
• Job order costing, but not process costing.

Answer 83

Both types of systems use standard cost systems. Standards are reasonable expectations of input quantity per unit of output and input cost per unit of input. Both systems can specify reasonable expectations for both of these types of standards.

Question 84

A direct labor overtime premium should be charged to a specific job when the overtime is caused by the

• Increased overall level of activity.
• Customer’s requirement for the early completion of a job.
• Management’s failure to include the job in the production schedule.
• Management’s requirement that the job be completed before the annual factory vacation closure.

Answer 84

Customer’s requirement for the early completion of a job.
When the requirements of a specific job cause overtime to be incurred, the premium is incremental to that job and should be charged to it. A customer’s immediate need for a product requiring personnel to stay overtime would be an example.

Question 85

A job order cost system uses a predetermined factory overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations?
Actual volume: less/greater than expected?
actual fixed costs: less/greater than expected?

Answer 85

Actual vol - less and/or actual fixed - over
Underapplied overhead occurs when actual overhead was greater than applied overhead.
Applied Overhead = (budgeted FOH/bud. volume) X (actual volume)
For overhead to be underapplied, either the actual fixed costs must be greater than the budgeted fixed costs or the actual volume must be less than the budgeted volume.

Question 86

In a job cost system, manufacturing overhead is{ I, II, both, neither?
I. Indirect cost of a job
II. A necessary element in production

Answer 86

Both
Another term for overhead is indirect cost. Indirect costs cannot be traced to specific jobs. In other words, overhead is not directly attributable to specific jobs.
All manufacturing cost is, by definition, a necessary ingredient of the total production cost. All jobs consume some overhead or receive the services of an overhead department or cost center.

Question 87

Conversion and direct costs timeline

Answer 87

Conversion cost - evenly throughout process

Direct materials - not evenly, just at a certain point (beg, end, ect)

Question 88

The following information concerns forming’s conversion costs in May 2005:

Units Conversion costs
Beginning work-in-process (50% complete) 2,000 $10,000
Units started in May 8,000 75,500
Spoilage-normal 500
Units completed and transferred 7,000
Ending work-in-process (80% complete) 2,500

Answer 88

The weighted average method counts all work done, including the beginning inventory, in the computation of the cost per equivalent unit. The method, thus, produces costs per equivalent unit that are averages of the work done in two different periods. Normal spoilage is detected at completion.
Thus, the spoiled units receive a full complement of conversion (and material) cost. Equivalent units for conversion cost under the weighted average method:
Units completed and transferred out, including normal spoilage 7,500
Ending inventory (.80)2,500 2,000
Equals total equivalent units of work for conversion cost through the end of the current period 9,500
Total conversion cost/equivalent unit for conversion cost = ($10,000 + $75,500)/9,500 = $9.
Conversion cost of goods transferred out: $9(7,500) = $67,500.

Question 89

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?

Answer 89

368k

This answer is correct because (40,000 units * $5 materials cost * 100%) + (40,000 units * $7 conversion cost * 60%).

Question 90

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.
• No ending inventory exists.
• Beginning inventory units equal ending inventory units.
• Both a beginning and an ending inventory exist, but they are not necessarily equal.

Answer 90

No beginning inventory exists.
The only distinguishing difference between the FIFO and weighted average methods of calculating equivalent units is the treatment of beginning inventory. Thus, the results will be equivalent for the two methods, where no beginning inventory exists.

Question 91

In process 2, material G is added when a batch is 60% complete. Ending work in process units, which are 50% complete, would be included in the computation of equivalent units for:
Conversion costs: yes/no?
Material G: yes/no?

Answer 91

Conversion costs - yes, material g - no
Conversion costs include labor and overhead, and thus, are incurred continuously. The ending inventory would be 50% complete with respect to conversion costs. But material is added at the 60% point and the inventory is only 50% complete. Thus, no materials would be present in the ending inventory for this process. These units would be the same as zero units with respect to material, for the purpose of costing ending inventory.

Question 92

In computing the current period’s manufacturing cost per equivalent unit, the FIFO method of process costing considers current period costs

• Only.
• Plus cost of beginning work in process inv.
• Less cost of beginning work in process inv.
• Plus the cost of ending work in process inv.

Answer 92

ONLY
FIFO considers only the current period cost and effort in computing cost per equivalent unit. The cost of the work performed during the previous period, embodied in beginning inventory work in process, is assumed to be the first transferred out (first-in, first-out).

Question 93

The following information pertains to L Co.’s Division for the month:
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

Answer 93

$0.43
Under the weighted average method, the cost per equivalent unit includes all the work done through the end of the current period, including the work performed on beginning inventory during the previous period. This is why the method is called the weighted average method. In this situation, material is added at the beginning of the process. Therefore, all units are considered complete with respect to materials. The costs associated with this effort form the numerator of the calculation.
The sum of units completed plus units in ending inventory equals 55,000 (42,500 + 12,500). The total cost incurred on material equals $23,500 ($5,500 + $18,000). Thus, the cost per equivalent unit for materials is $.43 ($23,500/55,000).

Question 94

Approximately the same number of physical units, at the same degree of completion, were in work in process at the end of both January and February. Monthly conversion costs are allocated between ending work in process and units completed. Compared to the FIFO method, would the weighted average method use the same or a greater number of equivalent units to calculate the monthly allocations (jan, feb)?

Answer 94

Same in Jan, greater in Feb
The weighted average method (WA) uses the equivalent units of work to complete beginning inventory, as well as goods started in the period. There is no beginning inventory in January; thus, WA and FIFO would use the same equivalent units for calculating costs per equivalent unit and for allocating to work in process and transferred out units. However, in February, there is a beginning inventory, and WA would use a greater number of equivalent units. FIFO uses only the current number of units started in the period to compute cost per equivalent unit for each input.

Question 95

Yarn Co.’s inventories in process were at the following stages of completion on April 30, 2004:
No. of units Percent complete
100 90
50 80
200 10
Equivalent units of production amounted to

Answer 95

150
The equivalent units of production for the period is the amount of work, measured in terms of completed units, that was performed during the period. In total, 150 equivalent units of work were performed during the period, which is the same amount of work that would have been performed had 150 units been started and completed during the period.
150 = .90(100) + .80(50) + .10(200)

Question 96

Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?

• Sales value at split-off.
• Flexible budget amounts.
• Physical measures, such as weights or volume.
• Constant gross margin percentage net realizable value method.

Answer 96

Flexible budget amounts
Acceptable joint cost allocation methods include sales value at split-off, physical measures, and constant gross margin. Flexible budget amounts are not used for joint cost allocation.

Question 97

The following information pertains to a by-product called Moy:
Sales in 2005: 5,000 units
Selling price per unit $6
Selling costs per unit 2
Processing costs 0
The inventory of Moy was recorded at net realizable value when produced in 2004 and net proceeds from the sale were used to reduce joint costs. No units of Moy were produced in 2005. What amount should be recognized as profit on Moy’s 2005 sales?

Answer 97

$0

Where the net proceeds from the sale are used to reduce joint costs, no profit is recognized on sales of by-products.

Question 98

Mighty, Inc. processes chickens for distribution. 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 net realizable value basis?

Answer 98

480k
The calculation is Value of breast meat / Value of both meats * Joint costs = (100,000 lbs. * $2) / ((100,000 lbs * $2) + (50,000 lbs. * $1)) * $600,000 = $480,000.

Question 99

Mig Co., which began operations in 2003, produces gasoline and a gasoline by-product. The following information is available pertaining to 2003 sales and production:
Total production costs to split-off point $120,000
Gasoline sales 270,000
By-product sales 30,000
Gasoline inventory, 12/31/03 15,000
Additional by-product costs:
Marketing 10,000
Production 15,000
Mig accounts for the by-product at the time of production. What are Mig’s 2003 cost of sales for gasoline and the by-product?

Answer 99

Gas: 100k, by product: 0
The value of the by-product, being insignificant in relation to the cost of the primary product, is treated as a reduction in the cost of the primary product at production. The separable costs associated with the by-product reduce the amount by which the cost of sales of gasoline is decreased.
In this question, the value of the by-products is recognized at production, the net realizable value of the by-product at production is subtracted from the cost of the primary product (gasoline). None of the joint production cost is allocated to the by-product. Thus, the cost of sales for the by-product is zero. The $25,000 of costs associated with the by-product ($10,000 + $15,000) reduces the net realizable value of the by-product. For the primary product:
Net Realizable Value of the By-product:
+Sales value $30,000
-Less separable by-product costs (25,000)
=Equals net realizable value $5,000
Cost of Goods Sold for Main Product:
+Joint production cost $120,000
-Less net realizable value of by-product (5,000)
=Adjusted production cost for main product $115,000
-Less ending inventory of gasoline (15,000)
=Equals cost of goods sold for gasoline $100,000

Question 100

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?

Answer 100

300k
The total physical quantity produced is 400,000 gallons (240,000 + 160,000). Sixty percent of this quantity is attributable to Product X (240,000 gallons / 400,000 gallons); therefore, 60% of the joint costs should be allocated to Product X ($500,000 * 60% = $300,000).

Question 101

Which of the following types of budgets is the last budget to be produced during the budgeting process?

• Cash.
• Capital.
• Cost of goods sold.
• Marketing.

Answer 101

Cash
The cash budget is the last budget to be prepared and includes a plan for earning and financing all of the strategic action plans of the enterprise and other incidental issues earning and requiring cash flow.

Question 102

J Co., distributor of candles, has reported the following budget assumptions for year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is J’s only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of year 1. What is the budgeted gross margin for year 1?

Answer 102

70k
Gross Profit ($70,000) is determined by subtracting Cost of Goods Sold ($350,000) from Sales ($420,000). Sales is calculated by multiplying a markup of 20% based on cost of goods sold (i.e., $420,000 = 1.2($350,000). Cost of Goods Sold is easily determined by using an accounts payable T-account to calculate purchases of $350,000 by using the cash paid of $300,000 and the beginning and ending balances of accounts payable ($100,000 and $150,000, respectively).

Question 103

A static budget contains which of the following amounts?

• Actual costs for actual output.
• Actual costs for budgeted output.
• Budgeted costs for actual output.
• Budgeted costs for budgeted output.

Answer 103

Budgeted cost, budgeted output
A static budget is a comprehensive financial plan produced at the beginning of the year for the entire enterprise and does not change (or flex) during the year. Thus, it uses budgeted costs based on budgeted output.

Question 104

A company forecast first quarter sales of 10,000 units, second quarter sales of 15,000 units, third quarter sales of 12,000 units and fourth quarter sales of 9,000 units at $2 per unit. Past experience has shown that 60% of the sales will be in cash and 40% will be on credit. All credit sales are collected in the following quarter, and none are uncollectible. What amount of cash is forecasted to be collected in the second quarter?

Answer 104

26k
The correct forecasted cash collected in the second quarter of $26,000 consists of 60% of second quarter sales ($18,000 = 15,000 ($2) (.6)) and 40% of first quarter’s sales of ($8,000 = 10,000 ($2) (.4)).

Question 105

Cook Co.’s total costs of operating five sales offices last year were $500,000, of which $70,000 represented fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices operated. Last year’s costs and the number of sales offices can be used as the bases for predicting annual costs. What would be the budgeted costs for the coming year if Cook were to operate seven sales offices?

Answer 105

627k
Variable cost per office = ($500,000 - $70,000)/5
= $86,000
Total estimated cost of seven offices = $86,000(7) + $70,000 (fixed cost)
= $672,000

Question 106

When a manager is concerned with monitoring total cost, total revenue, and net profit conditioned upon the level of productivity, an accountant would normally recommend: (I, II, both, neither)
I. Flexible budgeting
II. Standard costing

Answer 106

Both are important in evaluating results.
Profit is heavily dependent on the level of output achieved. Thus, the flexible budget allows a benchmark for evaluating the actual performance at that output level.
Standard costs allow an evaluation of the efficiency with which inputs have been used, and the effectiveness of the procurement function. Both have an important effect on cost and profit.

Question 107

Lon Co.’s budget committee is preparing its master budget on the basis of the following projections:
Sales $2,800,000
Decrease in inventories 70,000
Decrease in accounts payable 150,000
Gross margin 40%
What are Lon’s estimated cash disbursements for inventories?

Answer 107

First, purchases must be computed, and then the estimated payments to be made on accounts payable. With inventory declining, purchases must equal cost of sales less the decline in inventory. In other words, purchases are less than cost of sales if inventory declines. If the gross margin is 40% of sales, then cost of sales is 60% of sales.
Purchases= cost of sales - inventory decline
= (.60)($2,800,000) - $70,000
= $1,610,000
If A/P is to decrease, payments on A/P must exceed purchases. Estimated payments on A/P = $1,610,000 + $150,000 decrease in A/P = $1,760,000.

Question 108

A flexible budget is appropriate for a: (I, II, both, neither)
I. Marketing budget
II. Direct material usage budget

Answer 108

Both
Flexible budgets are budgets produced at different activity levels. Direct material usage budgets are commonly prepared for different activity levels to indicate the level of cost that should be incurred at those levels. The actual cost is then compared with the budget for the level of activity actually attained. The comparison is much more relevant for evaluation purposes than would be the comparison between the actual and the master or static budgets if the level of activity in the master and static budgets were not the same.
The same idea applies for marketing cost, although there typically is less “flex” in this type of budgeted cost. A good proportion of the marketing cost is fixed. Other portions are variable (e.g., commissions). Both costs, however, can be expressed as part of a flexible budget. Many flexible budgets include fixed components. The term “flexible” budget does not imply the exclusion of fixed costs.

Question 109

The basic difference between a master budget and a flexible budget is that a master budget is

• Based on one specific level of production, and a flexible budget can be prepared for any production level within a relevant range.
• Only used before and during the budget period, and a flexible budget is only used after the budget period.
• Based on a fixed standard, whereas a flexible budget allows management latitude in meeting goals.
• For an entire production facility, whereas a flexible budget is applicable to single departments only.

Answer 109

First one
A master, also called a static, budget is developed for planning and resource allocation purposes. Therefore, it is based on one specific level of activity.
A flexible budget, as its name implies, can be developed for any activity level within the range that the firm has the capacity to produce.

Question 110

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

Answer 110

1015
Since the desired ending inventory is 15 units more than the beginning inventory, production must be 15 units greater than the projected sales level of 1,000 units.

Question 111

Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes?

• Accounts payable.
• Mortgages payable.
• Bonds payable.
• Common stock.

Answer 111

A/P
The percentage of sales forecasting method is used to define operating costs such as cost of goods sold, supplies expense, sales discounts, etc. It also defines the percentage of sales that are collected in cash and the percentage of purchases that are paid for in cash and, consequently, accounts payable.

Question 112

Lanta Restaurant compares monthly operating results with a static budget.
When actual sales are less than budget, would Lanta usually report favorable variances on variable food costs and fixed supervisory salaries? (I, II, neither, both)
I. Variable food costs
II. Fixed supervisor salaries

Answer 112

Variable - yes, fixed - no
When sales are lower than in the static budget, total actual variable costs will also be lower than in the static budget, because variable costs per unit are constant. A favorable variance results.
At lower sales levels, lower variable costs are expected. However, there should be no variance for fixed salaries. The level of fixed cost budgeted should be the same as actually incurred.

Question 113

The regression analysis results for ABC Co. are shown as y = 90x + 45. The standard error (Sb) is 30 and the coefficient of determination (r2 ) is 0.81. The budget calls for the production of 100 units. What is ABC’s estimate of total costs?

Answer 113

$9045
Total cost (y) is expressed as $90 of variable cost per unit + $45 of fixed cost. Given that x represents units, we solve for y = $90(100) + $45 = $9,045.

Question 114

The coefficient of determination, r squared, in a multiple regression equation is the:

• Percentage of variation in the independent variables explained by the variation in the dependent variable.
• Percentage of variation in the dependent variable explained by the variation in the independent variables.
• Measure of the proximity of actual data points to the estimated data points.
• Coefficient of the independent variable divided by the standard error of regression coefficient.

Answer 114

Percentage of variation in the dependent variable explained by the variation in the independent variables.

The definition of r squared reflects the overall model’s explanatory power of the independent variables in predicting the dependent variable.

Question 115

In describing the regression equation used for cost prediction, Y = a + bx, which of the following is correct?

• Y is the total revenue.
• a is the variable rate.
• a and b are valid for all levels of activity.
• a is the total fixed cost.

Answer 115

a is fixed cost

The constant, a in a regression equation to calculate cost depicts the total fixed cost.

Question 116

In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable?

• p-value.
• r-squared.
• Standard error.
• t-statistic.

Answer 116

r-squared
The coefficient of determination, identified as R2 (R-squared), indicates the degree to which the behavior of the independent variable(s) predicts or explains the dependent variable.

Question 117

y = A + Bx.

What is the symbol for the independent variable?

Answer 117

The independent variable (x) is the one that is believed to have a causal effect on cost, the dependent variable (y). The variable is called “independent” because its level is first set in order to determine the effect on cost. For example, x might be output level. The firm is interested in determining the effect of different outputs (set first) on cost (determined second). Cost is “dependent” on the independent variable output.

Question 118

Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value.
An unprotected crop subject to frost has an expected market value of $40,000.
If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost.
What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection? (decimal)

Answer 118

.200
There are two states of nature that can affect the firm’s earnings: frost and no frost. There are also two actions under consideration: provide frost protection for $10,000, or do not. The expected income under each action will depend on the probability of frost. Let p = the probability of frost. Expected net income if frost protection is provided = $90,000(p) + $60,000(1-p) - $10,000. Expected net income if frost protection is not provided = $40,000(p) + $60,000(1-p). The firm is indifferent between the two actions when the expected net income is the same for both. Setting the two expressions equal to each other and solving for p determines at what probability of frost the two actions provide the same income.
$90,000(p) + $60,000(1-p) - $10,000 = $40,000(p) + $60,000(1-p)
$50,000(p) = $10,000

Question 119

A management accountant performs a linear regression of maintenance cost vs. production. 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.
• x has a value of $322,897 when Y equals zero.
• The residual error of the regression is $322,897.
• Maintenance cost has an average value of $322,897.

Answer 119

Y has a value of $322,897 when x equals zero.
The regression equation has the format: Y = A + Bx, where Y is the dependent variable, A is point where the regression line intercepts the Y access, B is the slope of the line, and x is the independent variable. The Y intercept occurs when x equals zero.

Question 120

Distributor has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through D’s thrift store for $1. D assigns the following probabilities to selling additional boxes:
Additional sales Probability
60 .6
100 .4
What is the expected value of D’s decision to buy 100 additional boxes of muffins?

Answer 120

$52
Income or net cash inflow is expected to increase:
$52 = .6[60($3-$2) + 40($1-$2)] + .4[100($3-$2)].

The .6[ ] term reflects the expected sales of 60 units at regular price less their cost, and 40 at the reduced price less their cost. The .4[ ] term reflects the expected sales all at regular prices less their cost.

Question 121

Cost-volume-profit before or after tax?

Answer 121

CVP is before tax model (applies to operating income, not net)

Question 122

Cost-volume-profit affect on income versus how will it affect break even point (likely)?

Answer 122

Income and break even point are usually opposite

other than volume changes

Question 123

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%, they’re considering an increase in production to 12,000 units. Which of the following statements is correct regarding the co’s next steps?

• Production to 12,000 units, profits will increase by $50,000.
• Production to 12,000 units, profits will increase by $100,000.
• Production at 10,000 units, profits will decrease by $50,000.
• Production at 10,000 units, profits will decrease by $100,000.

Answer 123

Production at 10,000 units, profits will decrease by $100,000.
At the current level of 10,000 units, a contribution margin per unit of $35 = $85 - $50, and fixed costs of $300,000, the contribution margin is $350,000 and the operating income is $50,000. If variable costs increase by 20%, the contribution margin per unit decreases to $25 = $35 - $60, or $300,000 total, resulting in an operating loss of $50,000. Thus, profits would decrease by $100,000.

Question 124

The sales and cost information for G Co are as follows:
Sales (250,000 units) $5,000,000
Direct materials and direct labor 1,500,000
Factory overhead:
Variable 200,000
Fixed 350,000
Selling and general expenses:
Variable 50,000
Fixed 300,000
G’s breakeven point in the number of units is

Answer 124

50,000
Given sales of $5,000,000 and total variable costs of 1,750,000, the contribution margin (CM) is the difference of $3,250,000. Then the CM is divided by the units: $3,250,000 / 250,000 units = $13 CM per unit. From here, the BE point in units is equal to the total fixed costs divided by the CM per unit: $650,000 / $13 = 50,000 units.

Question 125

T Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were $15/unit in total. Total fixed costs were $250,000. There was no year-end work-in-process inventory. If T had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If T had made this investment, what change would have occurred in T’s pretax profit?

Answer 125

3000 decrease in income
This problem compares the increase in revenue due to the possible increased spending on advertising. The $15,000 for advertising is just another fixed cost.
Use: [($25 x 30,000) +30000] The contribution margin ratio is used to determine 40% of the new revenue of $780,000= $312,000 resulting in only $12,000 more in contribution margin as compared to a new fixed advertising cost $15,000. The difference between the $15,000 and the $12,000 is a $3,000 decrease in income.

Question 126

The most likely strategy to reduce the breakeven point would be to

• Increase both the fixed costs and the contribution margin.
• Decrease both the fixed costs and the contribution margin.
• Decrease the fixed costs and increase the contribution margin.
• Increase the fixed costs and decrease the contribution margin.

Answer 126

The breakeven point is the ratio of fixed costs to the contribution margin ratio (or contribution margin per unit for the unit BE point). If the fixed costs are decreased (numerator), and the contribution margin is increased (increasing the denominator of either BE formula), then the ratio & obviously BE point decrease. Decreasing the fixed costs causes the numerator of the ratio to decrease, and increasing the contribution margin causes the denominator to increase. Both changes have the effect of decreasing the ratio. This also makes real-world sense. If fixed costs have decreased, it is easier for the firm to break even because there are less fixed costs to cover. Likewise, if the contribution margin increases, each unit provides a greater contribution to covering fixed costs, thus requiring the sale of fewer units to break even.

Question 127

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?

Answer 127

22,600
Requires working backwards through a contribution margin (CM) formatted income statement to determine total CM of $113,400. CM per unit ($5.25) is given by subtracting variable cost ($2.25) from price ($7.50). Year one units sold of 21,600 is calculated by dividing total CM ($113,400) by CM per unit ($5.25). Year two units sold (22,600 units) is equal to year one units plus 1,000 units.

Question 128

Del Co. has fixed costs of $100,000 and breakeven sales of $800,000.
What is its projected profit at $1,200,000 sales?

Answer 128

$50k
The objective is to determine the contribution margin ratio and apply it to the sales figure. This results in the total contribution margin because the contribution margin ratio is (sales - variable costs)/sales. Then subtract fixed cost to find the projected profit.
Breakeven sales = fixed cost/contribution margin ratio
$800,000 = $100,000/cmr
.125 = cmr
Projected profit = .125($1,200,000) - $100,000 = $50,000

Question 129

At the breakeven point, the contribution margin equals total

• Variable costs.
• Sales revenues.
• Selling and administrative costs.
• Fixed costs.

Answer 129

Fixed costs
Profit is equal to Sales - Variable Costs - Fixed Costs. At the breakeven point, profit is zero. Since the contribution margin equals sales minus variable costs:
Contribution Margin - Fixed Costs = 0, and therefore
Contribution Margin = Fixed Costs.

Question 130

Projected costs for the year are as follows:
Contribution margin per unit $ 1,800
Variable expenses per unit 1,000
Total fixed expenses 360,000
Based on these estimates, what is the approximate break-even point in number of units?

Answer 130

200 units
This answer satisfies the basic breakeven quantity formula of fixed costs divided by contribution margin per unit (i.e., $360,000/$1,800).

Question 131

Breakeven chart vs Volume profit chart

Answer 131

Breakeven chart uses 2+ lines

Volume profit chart is only 1 line

Question 132

On January 1, 2005, Lake Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged.
How did this increase affect Lake’s (1) budgeted breakeven point and (2) budgeted margin of safety?
(increase or decrease)

Answer 132

Breakeven increase, margin of safety decrease
Contribution margin percentage (cmr) = (sales - var costs)/sales breakeven sales = fixed cost/cmr Budgeted margin of safety = Budgeted sales - breakeven sales. If direct labor wage rates increase, then the total var cost increases. Contribution margin and cmr are decreased, causing BE sales to increase. (The firm is now contributing less per sales unit toward the fixed cost.) With the increase in BE sales, the margin of safety declines. (The firm has less breathing room now because actual sales are closer to the BE point, which has increased.)

Question 133

Where are fixed costs on a graph?

Answer 133

At Y intercept, will be negative amount

Question 134

Breakeven analysis assumes that over the relevant range

• Unit revenues are nonlinear.
• Unit variable costs are constant.
• Total costs are constant.
• Total fixed costs are nonlinear.

Answer 134

Unit variable costs are constant.
In a graph with the Y-axis being cost and the X-axis being activity level, total var cost begins at the origin and is an upward sloping line. The slope of this curve is variable cost per unit of activity and is a constant. If variable cost were not assumed to be a constant in the relevant range, breakeven analysis would not be possible.

Question 135

Cott Company has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott’s fixed cost?

Answer 135

$24k
The margin of safety is the difference between current sales and breakeven sales. Thus, BE sales are $120,000 ($200,000 - $80,000).
In other words, the firm has breathing room of $80,000 of sales. Sales could fall by this amount before the firm would dip below breakeven.
breakeven sales = Fixed cost/contribution margin percentage
$120,000 = Fixed cost/.20
$24,000 = Fixed cost

Question 136

Which of the following items is never relevant to a sell or process further decision?

• Incremental revenue after the split-off point.
• Incremental cost after the split-off point.
• Joint costs.
• Additional contribution margin realized if processed further.

Answer 136

Joint Costs
Joint costs are sunk costs that are unavoidable, regardless of whether the item is sold at split-off or processed further.

Question 137

Allen Harvey is considering a full-time internship during the spring semester. The internship opportunity is located in the town where he attends school, so he would be able to continue to live in his apartment that costs $600 per month.
The internship would pay $1,200 per month for January through May. If he does not take the internship, he will attend school at a cost of $4,000 for the semester.
If Harvey decides to stay in school full-time during the spring semester, which one of the following would be the amount of his opportunity cost and the amount of his incremental (or differential) cost?

Answer 137

OC 6000, IncC 10k
By going to school, Harvey incurs a total economic cost of $10,000. Or, put another way, if Harvey goes to work, he earns $6,000 and does not have the $4,000 cost of going to school.
Opportunity cost is choosing to stay in school, Harvey foregoes the pay he would have received from the internship, or $1,200 x 5 months (January - May) = $6,000.
Incremental cost (also called differential cost) is the difference in total cost between two decision alternatives; in this case, between going to school and going to work.
Going to school would cost $4,000 for the semester. Going to work would have provided a benefit of $6,000 (5 months x $1,200 per month). Thus, the total difference between the two alternatives is $10,000.

Question 138

Which one of the following costs, if any, is relevant when making financial decisions? (I, II, neither, both)
I. Sunk cost
II. Opportunity cost

Answer 138

Opportunity cost only
Sunk costs are resource costs that have already been incurred. These costs will not be changed as a result of current or future decision-making and aren’t relevant when making financial decisions.
Opportunity costs are the benefits (e.g., revenues) given up when a selection of one course of action precludes another course of action (and the benefit it would have provided)

Question 139

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)
Contribution margin 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?

Answer 139

18k
If the table product line is discontinued, the contribution margin of $18,000 will be forfeited. However, $12,000 in fixed costs will be avoided, and the factory space rented will increase cash flow by $24,000 for a net increase of $18,000.
30000-10800+4800+24000 = 48000 -30k = 18k

Question 140

Relevant costs include: variable, fixed costs? (one, both, neither?)

Answer 140

Relevant costs only include variable costs, fixed are assumed unavoidable

Question 141

A co receives an offer to purchase a special order of units of a product that normally sells for $10 each. If all other conditions are favorable, what is the absolute lowest price that the company would be able to feasibly accept for the order if it has enough idle capacity to handle the order?
Cost per unit
Direct materials $2
Direct labor $1
Avoidable fixed costs $2
Unavoidable fixed costs $3

Answer 141

$5
2+1+2 (no fixed costs)
With idle capacity, only the avoidable costs need to be covered. These include direct materials, direct labor, and avoidable fixed costs. These total $5.

Question 142

Tennis rackets can be purchased for $60 each from an outside vendor. It costs the manufacturer $80 a piece to produce them, of which 30% is unavoidable fixed overhead cost. 1) What are the relevant costs for this decision ($, $)? 2) Based only on these costs, which option should the company choose (make or buy)?

Answer 142

$60 and $56, Make
Relevant costs to buy are given at $60, while relevant costs to make are equal to only the avoidable costs of $56 = (1 - .3) $80. Since the cost to make is cheaper than the cost to buy, the prudent decision would be to make the rackets.

Question 143

A co 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 increase, and operating income increases.
• Total fixed costs do not change, and operating income increases.
• Total fixed costs do not change, and operating income does not change.
• Total fixed costs increase, and operating income decreases.

Answer 143

Total fixed costs do not change, and operating income increases.
The problem states that fixed costs stay the same. So, as long as the contribution margin is positive and variable costs remain constant on a per unit basis, increased volume will cause income to increase.

Question 144

R 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 co received a special one-time order for 1,000 components. R has an alternative use for production capacity for the 1,000 components that would produce a contribution margin of $5,000. What amount is the lowest unit price R should accept for the component?

Answer 144

$14
This price covers the total variable cost of $9 and provides a contribution margin equal to that of the alternative use ($14-$9 = $5 CM per unit; $5,000/1,000 units = $5 CM per unit).

Question 145

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?

Answer 145

$40750
33k + 7750 = 40750
None of the applied fixed manufacturing costs should be considered, because the company has excess capacity, implying that the special job will not cause any additional fixed capacity costs to be incurred. Only the external design costs and variable costs are included, as only those costs are truly incremental and caused by the special job.

Question 146

A co is considering outsourcing one of the component parts for its product. The co currently makes 10,000 parts per month. Current costs are as follows:
Per unit Total
Direct materials $4 $40,000
Direct labor 3 30,000
Fixed plant facility cost 2 20,000
The co decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the co’s monthly costs change?

Answer 146

increase $5000
Variable costs are presumed to be avoidable and fixed costs are presumed to be unavoidable to start with. Then $5,000 for rent was avoidable when they decided to buy. Thus, the cost to buy is $95,000 = $80,000 (8x10k) + $15,000 (20-5) in fixed cost that are presumed unavoidable versus a cost to make of $90,000 (40+30+20).

Question 147

Which of the following would be considered a relevant fixed cost in making a special order decision?

• Unavoidable fixed costs associated with current business.
• Contribution margin of any current business replaced.
• Depreciation on existing production equipment.
• Incremental fixed costs associated with the order.

Answer 147

Incremental fixed costs associated with the order.

Incremental costs of any type that are created as a result of accepting a special order decision are relevant.

Question 148

C Co, strudel division has strudel that can be sold either to outside customers or to the bean division that also sells coffee. Information about these divisions is given below:
Case 1 Case 2
Strudel Division:
Capacity in units of strudel 1,000 1,000
Number of units sold or demanded externally 600 1,000
Market selling price $2.00 $1.50
Avoidable outlay costs per unit $1.50 $1.30
Unavoidable costs per unit based on capacity $0.20 $0.20
Bean Division:
Number of units of strudel needed 400 400
Budgeted price per unit $1.95 $1.45
Given the facts in case 2, what are the minimum and maximum transfer prices?

Answer 148

$1.50 min price, $1.50 max price
Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price. However, this is only true where idle capacity exists to make the transfer. There is no idle capacity in case 2. Thus, the market value serves as both the ceiling and the floor for price. This value is $1.50.

Question 149

Match: (for idle capacity)
1. Min transfer price (floor)
2. Max transfer price (ceiling)
A. Market price
B. Avoidable outlay costs

Answer 149

1B, 2A
Following the general rule, the minimum transfer price (floor) is equal to the avoidable outlay costs, while the maximum transfer price (ceiling) is equal to the market price

Question 150

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?

Answer 150

$25 (selling price)
The price of $25 per unit leaves Division A no worse off by selling to Division B than it would be if it sold the units on the outside market.

Question 151

Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?

• Actual cost.
• Standard variable cost.
• Actual cost plus mark-up.
• Negotiated price.

Answer 151

Standard Variable cost
The “variable” part of the cost description results in passing to the purchasing division only the incremental costs of the item. The purchasing division should not pay for the fixed costs of the selling division unless the order caused those fixed costs to increase (which is not implied by the question’s data). The “standard” part of the cost description makes sure that the purchasing division is not charged for inefficiencies in the selling division.
The question does not contain sufficient information to deviate from a commonly used rule for setting transfer prices: standard variable cost + lost contribution margin to seller.