BA 213 Test 3 Review(Ch10,13 and 14)

Instructor: sha Ra!anu"a!

1. Which of the following statements is a good description of the variances that should be investigated under the management by exception concept? A) all variances should be investigated. B) only unfavorable variances should be investigated. C) a small random sample of all variances should be investigated. #) unusua$$% $ar&e 'avora($e and un'avora($e variances shou$d (e investi&ated) . !he direct labor standards for a particular product are" # hours of direct labor $ %1 .&& per direct labor'hour ( %#).&& *uring +ctober, -,-.& units of this product were made, which was 1.& units less than budgeted. !he labor cost incurred was %1./,0)1 and 1-,#.& direct labor' hours were wor2ed. !he direct labor variances for the month were" Labor Rate Variance %1,11# 3 %1,11# 3 *1,+14 , %1,11# 4 Labor Efficiency Variance %1&& 3 %1&& 4 *+00 %1&& 4

A) B) C) *)

3se the following to answer 5uestions - and #" 6tench 4oods Company uses a standard cost system to collect costs related to the production of its garlic flavored yogurt. !he garlic 7materials) standards for each container of yogurt produced are &.) ounces of crushed garlic at a standard cost of % .-& per ounce. *uring the month of 8une, 6tench purchased 0.,&&& ounces of crushed garlic at a total cost of %101,&&&. 6tench used 1#,&&& of these ounces to produce 01,.&& containers of yogurt. -. What is 6tench9s materials price variance for the month of 8une? A) *1,-00 'avora($e B) %1.,1#& unfavorable C) %10, .& favorable *) % -,)&& favorable #. What is 6tench9s materials 5uantity variance for the month of 8une? A) %1,.&& favorable B) *1-,+40 un'avora($e C) %10, .& favorable

*) % -,)&& favorable 3se the following to answer 5uestions .'1&" :ardoe, ;nc., manufactures a single product in which variable manufacturing overhead is assigned on the basis of direct labor hours. !he company uses a standard cost system and has established the following standards for one unit of product" Standard Standard Price Quantity or Rate *irect materials.............................. 1.. pounds %-.&& per pound *irect labor.................................... &.1 hours %1.&& per hour <ariable manufacturing overhead.. &.1 hours %1. . per hour During March, the following activity was recorded by the company:

Standar d Cost %#..& %-.1& %&.0.

The company produced 3,000 units during the month. A total of 8,000 pounds of material were purchased at a cost of $23,000. There was no beginning inventory of materials on hand to start the month; at the end of the month, 2,000 pounds of material remained in the warehouse. During March, 1600 direct labor hours were worked at a rate of $6.50 per hour. Variable manufacturing overhead costs during March totaled $1,800. .. !he materials price variance for =arch is" A) *1,000 , B) %1,&&& 3 C) %0.& 4 *) %0.& 3 1. !he materials 5uantity variance for =arch is" A) %#,.&& 4 B) %1&,.&& 4 C) %1&,.&& 3 #) *4,-00 0. !he labor rate variance for =arch is" A) %#)& 3 B) *.00 C) %#)& 4 *) %)&& 4 ). !he labor efficiency variance for =arch is"

A) B) C) *)

%.,&#& 3 %1, && 3 *1,200 , %.,&#& 4

/. !he variable overhead spending variance for =arch is" A) % && 3 B) %1&& 3 C) %1&& 4 #) *200 , 1&. !he variable overhead efficiency variance for =arch is" A) %1,&.& 4 B) %1,&.& 3 C) *2-0 , *) % .& 3 3se the following to answer 5uestions 11'1-" !he Collins Company uses standard costing and has established the following direct material and direct labor standards for each unit of the single product it ma2es" *irect materials............ # gallons at %) per gallon *irect labor.................. 1 hour at %11 per hour *uring 8uly, the company made 1,&&& units of product and incurred the following costs" *irect materials purchased......... 1,)&& gallons at %). & per gallon *irect materials used.................. ., && gallons *irect labor used......................... .,1&& hours at %1..-& per hour 11. !he material price variance for 8uly was" A) %.,-1& favorable B) *-,3+0 un'avora($e C) %.,&#& favorable *) %.,&#& unfavorable 1 . !he materials 5uantity variance for 8uly was" A) % ,/1& unfavorable B) % ,#&& unfavorable C) */,+00 un'avora($e *) %/,)#& unfavorable 1-. !he labor rate variance for 8uly was" A) %-,/ & unfavorable

B) %1,1 & unfavorable C) %1,1 & favorable #) *3,/20 'avora($e 1#. !he =ilham Company has two divisions ' >ast and West. !he divisions have the following revenues and expenses" East %0 &,&& & -0&,&&& 1-&,&&& 1 &,&& & %1&&,&& & West %-.&,&&& #&,&&& )&,&&& .&,&&& % 7 &,&&&)

6ales.............................................................. <ariable costs............................................... !raceable fixed costs.................................... Allocated common corporate costs............... ?et operating income 7loss)..........................

=anagement at =ilham is pondering the elimination of the West *ivision since it has shown an operating loss for the past several years. ;f the West *ivision were eliminated, its traceable fixed costs could be avoided. !otal common corporate costs would be unaffected by this decision. @iven these data, the elimination of the West *ivision would result in an overall company net operating income of" A) %1&&,&&& B) %)&,&&& C) %1 &,&&& #) *-0,000 1.. 8ordan Company budgeted sales of #&&,&&& calculators at %#& per unit last year. <ariable manufacturing costs were budgeted at %11 per unit, and fixed manufacturing costs at %1& per unit. A special order for #&,&&& calculators at % each was received by 8ordan in =arch. 8ordan has sufficient plant capacity to manufacture the additional 5uantity without incurring any additional fixed manufacturing costsA however, the production would have to be done on an overtime basis at an estimated additional cost of %- per calculator. Acceptance of the special order would not affect 8ordan9s normal sales and no selling expenses would be incurred. What would be the effect on net operating income if the special order were accepted? A) %1 &,&&& decrease B) *1+0,000 increase C) % #&,&&& decrease *) % )&,&&& increase

Bayshore Company manufactures and sells :roduct B. Cesults for last year are as follows" 6ales 71&,&&& units at %1.& each).............. Dess expenses" <ariable production costs....................... 6ales commissions 71.E of sales).......... 6alary of product line manager............... !raceable fixed advertising expense...... 4ixed manufacturing overhead............... !otal expenses........................................... ?et operating loss...................................... %1,.&&,&&& %/&&,&&& .,&&& 1/&,&&& 10.,&&& 11&,&&& 1,1.&,&&& % 71.&,&&&)

Bayshore is reexamining all of its product lines and is trying to decide whether to discontinue :roduct B. *ropping the product would have no effect on the total fixed manufacturing overhead incurred by the company. 11. Assume that dropping :roduct B will have no effect on the sale of other product lines. ;f the company drops :roduct B, the change in annual net operating income due to this decision will be a" A) *10,000 decrease B) %1.&,&&& increase C) %11&,&&& decrease *) %-1&,&&& decrease 3se the following to answer 5uestions 10'1)" !he !albot Company ma2es wheels that it uses in the production of bicycles. !albot9s costs to produce 1&&,&&& wheels annually are" *irect materials.............................. *irect labor.................................... <ariable overhead.......................... 4ixed overhead.............................. %-&,&& & %.&,&& & % &,&& & %0&,&& &

An outside supplier has offered to sell !albot similar wheels for %1. . per wheel. ;f the wheels are purchased from the outside supplier, %1.,&&& of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for %#.,&&& per year. 10. ;f !albot chooses to buy the wheel from the outside supplier, then the change in annual net operating income due to accepting the offer is a" A) *3-,000 increase B) %1&,&&& decrease C) %#.,&&& increase *) %0&,&&& increase 1). What is the highest price that !albot could pay the outside supplier for the wheel and still be economically indifferent between ma2ing or buying the wheels? A) %1.0& B) *1)+0 C) %1... *) %1.1. Cegis Company ma2es the plugs it uses in one of its products at a cost of %-1 per unit. !his cost includes %) of fixed overhead. Cegis needs -&,&&& of these plugs annually, and +rlan Company has offered to sell them to Cegis at %-- per unit. ;f Cegis decides to purchase the plugs, %1&,&&& of the annual fixed overhead will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. 1/. ;f Cegis Company purchases the plugs but does not rent the unused facility, the company would" A) save %-.&& per unit. B) lose %1.&& per unit. C) save %1.&& per unit. #) $ose *3)00 0er unit)

!he following are the 8ensen Company9s unit costs of ma2ing and selling an item at a volume of 1,&&& units per month 7which represents the company9s capacity)" =anufacturing" *irect materials................................ *irect labor....................................... <ariable overhead............................. 4ixed overhead................................. 6elling and Administrative" <ariable............................................ 4ixed................................................. %1.&& % .&& %&..& %&.#& % .&& %&.)&

:resent sales amount to 0&& units per month. An order has been received from a customer in a foreign mar2et for 1&& units. !he order would not affect current sales. 8ensen9s total fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 0&& units and 1,&&& units. !he variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales. &. Fow much will the company9s profits be increased or 7decreased) if it prices the 1&& units at %0 each? A) %7-&) B) *1-0 C) %& *) %-1& 1. Assume the company has .& units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. !he sale of these defective units will have no effect on the company9s other sales. What cost is relevant as a guide for setting a minimum price? A) %...& B) %../& C) *2)00

*) %-..&

3se the following to answer 5uestions

' -"

!he =olis Company has the capacity to produce 1.,&&& ha2s each month. Current regular production and sales are 1&,&&& ha2s per month at a selling price of %1. each. Based on this level of activity, the following unit costs are incurred" *irect materials.......................................... *irect labor................................................ <ariable manufacturing overhead............. 4ixed manufacturing overhead.................. <ariable selling expense............................ 4ixed administrative expense.................... %..& & %-.& & %&.0 . %1.. & %&. . %1.& &

!he fixed costs, both manufacturing and administrative, are constant in total within the relevant range of 1&,&&& to 1.,&&& ha2s per month. !he =olis Company has received a special order from a customer who wants to pay a reduced price of %1& per ha2. !here would be no selling expense in connection with this special order. And, this order would have no effect on the company9s other sales. . 6uppose the special order is for #,&&& ha2s this month. ;f this offer is accepted by =olis, the company9s operating income for the month will" A) increase by %1,&&& B) decrease by %1,&&& C) increase (% *-,000 *) decrease by %.,&&&

-. 6uppose the special order is for 1,&&& ha2s this month and thus some regular sales would have to be given up. ;f this offer is accepted by =olis, the company9s operating income for the month will" A) increase by %1,&&& B) increase by %0,.&& C) increase by %.,&&& #) increase (% *1,-00 #. ?eu Company is considering the purchase of an investment that has a positive net present value based on a discount rate of 1 E. !he internal rate of return would be" A) Gero. B) 1 E. C) &reater than 121) *) less than 1 E. ..!he internal rate of return for a proHect can be determined" A) only if the proHect9s cash flows are constant. B) (% 'indin& the discount rate that %ie$ds a 2ero net 0resent va$ue 'or the 0ro"ect. C) by subtracting the company9s cost of capital from the proHect9s profitability index. *) only if the proHect profitability index is greater than Gero. 1. ;n net present value analysis, the release of wor2ing capital at the end of a proHect should be" A) ignored. B) included as a cash outflow. C) inc$uded as a cash in'$ow. *) included as a tax deduction. 0. !he Daws company has decided to buy a machine costing %11,&&&. >stimated cash savings from using the new machine amount to %#,1 & per year. !he machine will have no salvage value at the end of its useful life of six years. ;f the re5uired rate of return for Daws Company is 1 E, the machine9s internal rate of return is closest to" A) 1 E B) 141 C) 11E *) 1)E ). Farrison Company is studying a proHect that would have an eight'year life and would re5uire a %-&&,&&& investment in e5uipment which has no salvage value. !he proHect would provide net operating income each year as follows for the life

of the proHect" 6ales............................................... Dess cash variable expenses.......... Contribution margin...................... Dess fixed expenses" 4ixed cash expenses................... *epreciation expenses................ ?et operating income..................... %1.&,&& & -0,.& & %.&&,&& & &&,&& & -&&,&&&

1)0,.& & %11 ,.& &

!he company9s re5uired rate of return is 1&E. What is the paybac2 period for this proHect? A) - years B) 2 %ears C) .. years *) .10 years /. 7;gnore income taxes in this problem.) An investment proHect re5uires an initial investment of %1&&,&&&. !he proHect is expected to generate net cash inflows of % ),&&& per year for the next five years. Assuming a 1 E discount rate, the proHect9s paybac2 period is" A) &. ) years B) -.-1 years C) 3)-3 %ears *) 1.#& years -&.7;gnore income taxes in this problem.) :earson Co. is considering the purchase of a % &&,&&& machine that is expected to reduce operating cash expenses by %1.,&&& per year. !his machine, which has no salvage value, has an estimated useful life of . years and will be depreciated on a straight'line basis. 4or this machine, the simple rate of return would be" A) 1&E B) 12)-1 C) &E *) - ..E 3se the following to answer 5uestions -1'-#" 7;gnore income taxes in this problem.) :er2y 4ood Corporation produces and sells coffee Helly. :er2y currently produces the Helly using a manual operation but is considering the

purchase of machinery to automate its operations. ;nformation related to the two operations is as follows" Automate Manual d Operatio n Operation I %# &,&&& I 1 years I %& % 1&,&&& % 1&,&&& %1-.,&&& %# ,&&& %-&,&&& %0 ,&&&

Cost of machinery...................................... 3seful life of machinery............................ >xpected salvage value in 1 years........... >xpected annual revenue 7.&,&&& Hars)...... >xpected annual variable costs.................. >xpected annual fixed costs......................

:er2y9s discount rate is 1 E. :er2y uses the straight'line method of depreciation. -1. What is the net present value of automating operations using the incremental cost approach? A) %11,/#& B) %.1,/#& C) *(104,10+) *) %11 ,1)# - . Within what range does the internal rate of return fall? A) +1 to .1 B) 1&E to 1 E C) 1 E to 1#E *) 1)E to &E --. What is the simple rate of return for automating operations? A) 3).1 B) 1 .1E C) 1#..E *) ./E -#.Juestion has been deleted due to incorrect information.

3se the following to answer 5uestions -.'-1"

Dambert =anufacturing has %1&&,&&& to invest in either :roHect A or :roHect B. !he following data are available on these proHects" Project A %1&&,&&& %#&,&&& %1&,&&& Project %1&,&&& %#&,&&& %-.,&&&

Cost of e5uipment needed now............................. Wor2ing capital investment needed now............... Annual cash operating inflows.............................. 6alvage value of e5uipment in 1 years..................

Both proHects will have a useful life of 1 years. At the end of 1 years, the wor2ing capital investment will be released for use elsewhere. Dambert9s re5uired rate of return is 1#E. !he company uses the total cost approach to evaluating alternatives. -.. !he net present value of :roHect A is" A) %.1,&&& B) *+0,120 C) %..,.1& *) %/#,#.& -1. !he net present value of :roHect B is" A) %/&,-.. B) %01,11. C) %-1,11. #) *-4,3-4ro($e!: !ranter, ;nc., is considering a proHect that would have a ten'year life and would re5uire a %1,.&&,&&& investment in e5uipment. At the end of ten years, the proHect would terminate and the e5uipment would have no salvage value. !he proHect would provide net operating income each year as follows" 6ales........................................................... Dess variable expenses............................... Contribution margin.................................. Dess fixed expenses" 4ixed out'of'poc2et cash expenses......... *epreciation........................................... ?et operating income................................. % ,&&&,&& & 1,1&&,&&& /&&,&&& %.&&,&&& 1.&,&&& 1.&,&&& % .&,&&&

All of the above items, except for depreciation, represent cash flows. !he company9s re5uired rate of return is 1 E. Ce5uired" a. Compute the proHect9s net present value.

b. Compute the proHect9s internal rate of return to the nearest whole percent. c. Compute the proHect9s paybac2 period. d. Compute the proHect9s simple rate of return.

Answer: a. 6ince depreciation is the only noncash item on the income statement, the net annual cash flow can be computed by adding bac2 depreciation to net operating income. % .&,&& & 1.&,&&& %#&&,&& & $ear%s & ;nitial investment............... ?et annual cash flows........ ?et present value............... ?ow 1'1& !"# 'acto r 1.&&& ..1.& Present Value %71,.&&,&&&) , 1&,&&& % 01&,&&&

?et operating income............ *epreciation.......................... ?et annual cash flow............

Amount %71,.&&,&&& ) %#&&,&&&

b. !he formula for computing the factor of the internal rate of return 7;CC) is" 4actor of the ;CC ( ;nvestment re5uired K ?et annual cash inflow ( %1,.&&,&&& K %#&&,&&& ( -.0. 4actor. !o the nearest whole percent, the internal rate of return is -E. c. !he formula for the paybac2 period is" :aybac2 period ( ;nvestment re5uired K ?et annual cash inflow ( %1,.&&,&&& K %#&&,&&& ( -.0. years d. !he formula for the simple rate of return is" 6imple rate of return ( ?et operating income K ;nitial investment ( % .&,&&& K %1,.&&,&&& ( 11.0E