TEST BANK - BUSINESS ENVIRONMENT AND CONCEPTS 2

Planning and Measurement

1. In a traditional job order cost system, the issue of indirect materials to a
production department increases
A. Stores control. C. Factory overhead control.
B. Work in process control. D. Factory overhead applied.

Answer: C
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.

2. Jonathan Mfg. adopted a job-costing system. For the current year, budgeted
cost driver activity levels for direct labor hours and direct labor costs were
20,000 and $100,000, respectively. In addition, budgeted variable and fixed
factory overheads were $50,000 and $25,000, respectively. The actual costs
and hours for the year were as follows:
Direct labor 21,000
hours
Direct labor $110,00
costs 0
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?
A. $3,214. B. $5,357. C. $5,625. D. $7,500.

Answer: C
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).

3. Which of the following is assigned to goods that were either purchased or

manufactured for resale?
A. Relevant cost. C. Opportunity cost.
B. Period cost. D. Product cost.

Answer: D
Product costs include direct materials costs and, in a manufacturing
environment, direct labor and indirect manufacturing costs assigned to
goods held for resale.
4. In a process cost system, the application of factory overhead usually would
be recorded as an increase in
A. Finished goods inventory C. Cost of goods sold.
control. D. Work-in-process inventory
B. Factory overhead control. control.

Answer: D
Journal 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. Work in process receives only
applied overhead, unless some underapplied factory overhead is allocated to
work in process at the end of the period.

5. Fab Co. manufactures textiles. Among Fab’s 2004 manufacturing costs were
the following salaries and wages:
Loom operators $120,00
0
Factory 45,000
foremen
Machine 30,000
mechanics

What was the amount of Fab’s 2004 direct labor?

A. $195,00 B. $165,00 C. $150,00 D. $120,00
0. 0. 0. 0.

Answer: D
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.

6. Wages earned by machine operators in producing the firm’s product should

be categorized as
Direct Controllable by the machine
labor operators’ foreman
A. Yes Yes
B. Yes No
C. No Yes
D. No No

Answer: A
A direct cost is a cost that is traceable to the product. The wages of workers
working directly in the production of a product are direct costs. This cost is
also controllable. A cost is controllable if the foreman has significant
influence over it. The foreman is responsible for allocating workers to
production and often for scheduling production.
7. If a product required a great deal of electricity to produce, and crude oil
prices increased, which of the following costs most likely increased?
A. Direct materials. C. Prime costs.
B. Direct labor. D. Conversion costs.

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

8. The accountant for Champion Brake, Inc. 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 450,00
0
WIP (units) 100,00
0
Finished Goods 150,00
(units) 0

What is the amount of over/underapplied overhead for the year?

A. $15,000 B. $50,000 C. $65,000 D. $67,000

Answer: B
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.

9. Indirect labor is a
A. Prime cost. C. Period cost.
B. Conversion cost. D. Nonmanufacturing cost.

Answer: B
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.

10. Based on the following data, what is the gross profit for the company?
Sales $1,000,0
00
 Net purchases of raw 600,000
materials
Cost of goods manufactured 800,000
Marketing and administrative 250,000
expenses
Indirect manufacturing costs 500,000

Beginning Ending
inventory inventory
Work in $500,000 $400,000
process
Finished 100,000 500,000
goods

A. $200,00 B. $400,00 C. $600,00 D. $900,00

0 0 0 0

Answer: C
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.

11. In June, Delta 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: C
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.

12. In the past, four direct labor hours were required to produce each unit of
product Y. Material costs were $200 per unit, the direct labor rate was $20
per hour, and factory overhead was three times 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?
A. $4,820,0 B. $5,060,0 C. $5,200,0 D. $6,500,0
00. 00. 00. 00.

Answer: B
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 $60 per
per hour) unit
Overhead per unit = (3.6 X (4 hours labor X .75 X $216 per
$20 per hour)) unit
Total cost per unit = $230 + $60 +$216 $506 per
unit
Total cost of manufacturing = $506 per unit X $5,060,000
10,000 units

13. On January 1 Maples had two jobs in process: #506 with assigned costs of
$10,500 and #507 with assigned costs of $14,250. During January three new
jobs, #508 through #510, were started and three jobs, #506, #507, and
#508, were completed. Materials and labor costs added during January were
as follows:
Job Materia Labor
number ls
506 $0 $2,00
0
507 0 1,500
508 4,000 3,600
509 3,800 2,000
510 2,600 3,100

Manufacturing overhead is assigned at the rate of 200 percent of labor. What

is the January cost of goods manufactured and transferred from work-in-
process?
A. $25,300 B. $35,850 C. $42,950 D. $50,050

Answer: D
Jobs 506 – 508 were the only jobs completed so the costs of these jobs is the
focus of this question. DM and DL for those jobs is $35,850, but OH had to be
added at ($2,000 + $1,500 + $3,600) x 200% = ($7,100 x 2) + $35,850 =
$50,050.
14. During the month of March 2005, Nale Co. used $300,000 of direct
materials. On March 31, 2005, Nale’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. $250,00 C. $300,00 D. $350,00
0. 0. 0.

Answer: D
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 + ending material inventory + material
=
purchases used
ending inventory - beginning inventory
Purchases =
+ material used
Purchases = inventory increase + materials used
Purchases = $50,000 + $300,000
= $350,000

15. Hoyt Co. manufactured the following units:

5,00
Saleable
0
Unsaleable (normal
200
spoilage)
Unsaleable (abnormal
300
spoilage)

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: B
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

16. In its April 2005 production, Hern Corp., which does not use a standard cost
system, incurred total production costs of $900,000, of which Hern attributed
$60,000 to normal spoilage and $30,000 to abnormal spoilage. Hern should
account for this spoilage as
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: D
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.

17. When production levels are expected to decline within a relevant range, and
a flexible budget is used, what effect would be anticipated with respect to
each of the following?
Variable costs per Fixed costs per
unit unit
A. No change No change
B. Increase No change
C. No change Increase
D. Increase Increase

Answer: C
Variable cost per unit in the relevant range is defined to be a constant. This
assumption enables cost-volume-profit analysis and many other functions
within cost accounting. Total fixed cost is assumed to be constant in the
relevant range. With declining production, fixed costs per unit would
increase because the number of units produced is decreasing.

18. When using a flexible budget, a decrease in production levels within a

relevant range
A. Decreases variable cost per C. Increases total fixed costs.
unit. D. Increases variable cost per
B. Decreases total costs. unit.

Answer: B
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.

19. Sender, Inc. estimates parcel mailing costs using the data shown on the chart
below.
 What is Sender’s estimated cost for mailing 12,000 parcels?
A. $36,000. B. $45,000. C. $51,000. D. $60,000.

Answer: C
The following equation must be estimated:
or Mailing cost = fixed cost + (cost per parcel X
y = a + bx
# or parcels)
A = fixed cost = $15,000 (from the picture - the Y intercept)
variable cost
B = = ($75,000 - $15,000)/($20,000 - 0) = $3.00
(slope)

The estimated cost for mailing 12,000 parcels is $15,000 + $3.00($12,000) =

$51,000.

20. Day Mail Order Co. applied the high-low method of cost estimation to
customer order data for the first 4 months of 2005. What is the estimated
variable order filling cost component per order?
Order
Month Cost
s
January 1,200 $3,120
Februar
1,300 $3,185
y
March 1,800 $4,320
April 1,700 $3,895
$14,52
6,000
0

A. $2.00. B. $2.42. C. $2.48. D. $2.50.

Answer: A
The calculation of the variable cost per unit (or slope term) uses the high and
low production points, provided they are representative of the distribution.
The change in the cost for the two points (March is high, January is low) is
divided by the change in activity level.
Slop ($4,320 - $3,120)/(1,800 -
=
e 1,200) = $2.00

21. Mat Co. estimated its material handling costs at two activity levels as follows:
Kilos Cost
 handled
$160,00
80,000
0
60,000 132,000

What is Mat’s estimated cost for handling 75,000 kilos?

A. $150,00 B. $153,00 C. $157,50 D. $165,00
0. 0. 0. 0.

Answer: B
Fixed costs and variable cost per unit must be estimated from the data using
the high-low method. Total costs can then be estimated using the following
equation: y = a + b(x), where y = total costs, a = fixed costs, b = variable
cost per unit, and x = number of kilos. 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, a +
=
000 1.40(80,000)
$48,0
= a
00

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

22. 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?
Fixed costs per Variable costs per
unit unit
A. Decrease Decrease
B. No change No change
C. No change Decrease
D. Decrease No change

Answer: D
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 because 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.
23. 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?
A. $0.00163 per pound. C. $0.58036 per pound.
B. $0.00232 per pound. D. $1.72000 per pound.

Answer: B
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.

Activity based costing

24. Nile Co.’s cost allocation and product costing procedures follow activity-
based costing principles. Activities have been identified and classified as
being either value-adding or nonvalue-adding as to each product. Which of
the following activities, used in Nile’s production process, is nonvalue-
adding?
A. Design engineering activity. D. Raw materials storage
B. Heat treatment activity. activity.
C. Drill press activity.

Answer: D
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.

25. 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
A. Process management. C. Shared services.
B. Outsourcing. D. Off-shoring.

Answer: C
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.
26. Which of the following items often provides a significant risk with off-shore
operations?
A. Cost of moving/restructuring operations.
B. Cultural/language issues.
C. Service is less specific to the needs of specialized processes.
D. Delivery is often less timely.

Answer: B
Off-shore operations are especially vulnerable to cultural/language issues
and difficulty protecting intellectual property rights.

27. Book Co. uses the activity-based costing approach for cost allocation and
product costing purposes. Printing, cutting, and binding functions make up
the manufacturing process. Machinery and equipment are arranged in
operating cells that produce a complete product starting with raw materials.
Which of the following are characteristic of Book’s activity-based costing
approach?
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.

A. I only. C. I and III.

B. I and II. D. II and III.

Answer: C
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.

28. In an activity-based costing system, cost reduction is accomplished by

identifying and eliminating
All cost Nonvalue-adding
drivers activities
A. No No
 B. Yes Yes
C. No Yes
D. Yes No

Answer: C
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.

29. Gram Co. develops computer programs to meet customers’ special

requirements. How should Gram categorize payments to employees who
develop these programs?
Direct Costs Value-adding
costs
A. Yes Yes
B. Yes No
C. No No
D. No Yes

Answer: A
The salaries of the employees working on the programs are directly related
to the value-added activity of developing the computer programs. 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.

30. Which of the following items is a process management approach that

involves radical change?
A. Continuous improvement. D. Business process
B. Outsourcing. reengineering.
C. Shared services.

Answer: D
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.
31. 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. A single cause and effect relationship.
B. Multiple cause and effect relationships.
C. Relative net sales values of the products.
D. A product’s ability to bear cost allocations.

Answer: B
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.

32. A manufacturing company has several product lines. Traditionally, it has

allocated manufacturing overhead costs between product lines based on total
machine hours for each product line. 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?
A. Electricity expense. C. Employee benefits expense.
B. Repair and maintenance D. Depreciation expense.
expense.

Answer: C
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.

Absorption and Direct Costing

33. 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?
Period costs Product costs
A. $0 $180,000
B. $80,000 $100,000
C. $100,000 $80,000
D. $180,000 $0

Answer: D
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 in 2005.

34. Using the variable costing method, which of the following costs are assigned
to inventory?
 Variable selling and Variable factory overhead
administrative costs costs
A. Yes Yes
B. Yes No
C. No No
D. No Yes

Answer: D
Variable costing assigns only variable manufacturing costs 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.

35. In an income statement prepared as an internal report using the direct

(variable) costing method, fixed selling and administrative expenses would
A. Not be used.
B. Be treated the same as variable selling and administrative expenses.
C. Be used in the computation of operating income, but not in the
computation of the contribution margin.
D. Be used in the computation of the contribution margin.

Answer: C
Sales
- Variable Manufacturing
- Variable Selling and
Administrative
= Contribution Margin
- Fixed Manufacturing
- Fixed Selling and
Administration
= Operating Income

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

36. The absorption costing method includes in work in process and finished
goods inventories:
Fixed factory Variable factory
overhead overhead
A. No No
B. No Yes
C. Yes Yes
D. Yes No

Answer: C
 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.

37. Which of the following statements is correct regarding the difference

between the absorption costing and variable costing methods?
A. When production equals sales, absorption costing income is greater than
variable costing income.
B. When production equals sales, absorption costing income is LESS than
variable costing income.
C. When production is greater than sales, absorption costing income is
greater than variable costing income.
D. When production is LESS than sales, absorption costing income is greater
than variable costing income.

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

38. A manufacturing company 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
A. Manufacturing fixed costs had increased.
B. Selling and administrative fixed expenses had decreased.
C. Sales prices and variable costs had increased proportionately.
D. Sales prices had declined proportionately less than variable costs.

Answer: B
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.

39. A manufacturing company 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
A. Sales prices and variable costs had declined proportionately.
 B. Sales prices had declined proportionately more than variable costs.
C. Manufacturing fixed costs had increased.
D. Selling and administrative fixed expenses had increased.

Answer: D
Gross profit is the difference between sales and the cost of goods sold. The
cost of goods sold 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 administrative
expenses, must be responsible for the variation in income.

40. 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 stockholders’
equity
A. Same Same
B. Same Smaller
C. Greater Same
D. Greater Smaller

Answer: D
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.

41. 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
 A. $0. B. $20,000. C. $70,000. D. $90,000.

Answer: B
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. In
this case, absorption costing 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.

42. A single-product company prepares income statements 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
A. Less than the units sold in 2005.
B. Less than the activity level used for allocating overhead to the product.
C. In excess of the activity level used for allocating overhead to the product.
D. In excess of the units sold in 2005.

Answer: A
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.

Job Order and Process Costing

43. The forming department is the first of a two-stage production process.
Spoilage is identified when the units have completed the forming process.
The costs of spoiled units are assigned to units completed and transferred to
the second department in the period when spoilage is identified. The
following information concerns forming’s conversion costs in May 2005:
Units Conversion
costs
Beginning work-in-process (50% 2,00
$10,000
complete) 0
8,00
Units started in May 75,500
0
Spoilage-normal 500
7,00
Units completed and transferred
0
Ending work-in-process (80% 2,50
 complete) 0

Using the weighted average method, what was forming’s conversion cost
transferred to the second production department?
A. $59,850. B. $64,125. C. $67,500. D. $71,250.

Answer: C
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
$67,5
Conversion cost of goods transferred out: $9(7,500)
00

44. 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?
A. $200,00 B. $288,00 C. $368,00 D. $480,00
0. 0. 0. 0.

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

45. A direct labor overtime premium should be charged to a specific job when
the overtime is caused by the
A. Increased overall level of activity.
B. Customer’s requirement for the early completion of a job.
C. Management’s failure to include the job in the production schedule.
D. Management’s requirement that the job be completed before the annual
factory vacation closure.

Answer: B
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.
46. Weighted average and first in, first out (FIFO) equivalent units would be the
same in a period when which of the following occurs?
A. No beginning inventory exists.
B. No ending inventory exists.
C. Beginning inventory units equal ending inventory units.
D. Both a beginning and an ending inventory exist, but they are not
necessarily equal.

Answer: A
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.

47. A process costing system was used for a department that began operations in
January 2005. 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?
Equivalent units for weighted Equivalent units for weighted
average compared to FIFO - average compared to FIFO -
January February
A. Same Same
B. Greater number Greater number
C. Greater number Same
D. Same Greater number

Answer: D
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.

48. Yarn Co.’s inventories in process were at the following stages of completion
on April 30, 2004:
No. of Percent
units complete
100 90
50 80
200 10
 Equivalent units of production amounted to
A. 150. B. 180. C. 330. D. 350.

Answer: A
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)

49. In computing the current period’s manufacturing cost per equivalent unit,
the FIFO method of process costing considers current period costs
A. Only.
B. Plus cost of beginning work in process inventory.
C. Less cost of beginning work in process inventory.
D. Plus the cost of ending work in process inventory.

Answer: A
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). Goods transferred out will reflect the
earlier cost and effort applied to beginning inventory at the cost per
equivalent unit in the previous period. But it will also reflect the remaining
work to complete the inventory during this period, at the cost per equivalent
unit for the current period. This also means that the goods started and
completed during the period, and the ending inventory work in process, will
reflect only the current period costs. The FIFO assumption does not mix the
costs and effort of two periods when computing cost per equivalent unit.

50. The following information pertains to Lap Co.’s Palo Division for the month of
April:
Number of Cost of
units materials
Beginning work in
15,000 $5,500
process
Started in April 40,000 18,000
Units completed 42,500
Ending work in
12,500
process

All materials are added at the beginning of the process. Using the weighted
average method, the cost per equivalent unit for materials is
A. $0.59. B. $0.55. C. $0.45. D. $0.43.

Answer: D
 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).

51. During the current year, the following manufacturing activity took place for a
company’s products:
10,000 70%
Beginning work in process:
units complete
Units started into production 150,000
during the year: units
140,000
Units completed during the year:
units
20,000 25%
Ending work in process:
units complete

What was the number of equivalent units produced using the first-in, first-out
method?
A. 138,000. B. 140,000. C. 145,000. D. 150,000.

Answer: A
The FIFO method lets the costs and EUs associated with beginning WIP flow
on to Finished Goods and bases the unit cost of production for the current
period on the EUs started (and completed) during the period.
Nominal % Equivalent
Units Complete Units
Beginning WIP 10,000 30% 3,000
Units started and finished 130,000 100% 130,000
Ending WIP 20,000 25% 5,000
Units to account for or
160,000 138,000
Equivalent units

52. A standard cost system may be used in

A. Neither process costing nor job order costing.
B. Process costing, but not job order costing.
C. Either job order costing or process costing.
D. Job order costing, but not process costing.

Answer: C
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.

53. 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 Material G
A. Yes No
B. No Yes
C. No No
D. Yes Yes

Answer: A
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.

54. In a job cost system, manufacturing overhead is

An indirect cost of A necessary element in
jobs production
A. No Yes
B. No No
C. Yes Yes
D. Yes No

Answer: C
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.

55. Birk Co. uses a job order cost system. The following debits (credits) appeared
in Birk’s work in process account for the month of April 2005:
Description Amoun
April
t
1 Balance $4,000
Direct
30 24,000
materials
30 Direct labor 16,000
Factory
30 12,800
overhead
To finished (48,000
30
goods )
 Birk 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?
A. $3,000. B. $5,200. C. $8,800. D. $24,000.

Answer: B
Ending balance in work in process:
$4,000 + $24,000 + $16,000 + $12,800 - $48,000 (all $8,80
attributable to Job No. 5, the only remaining job) = 0
(2,00
Less direct labor charged to Job No. 5 0)
(1,60
Less overhead charged to Job No. 5: .80($2,000) 0)
$5,20
Equals materials charged to Job No. 5: 0

56. 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 Actual fixed
costs
A. Greater than Greater than
expected expected
B. Greater than Less than
expected expected
C. Less than Greater than
expected expected
D. Less than Less than
expected expected

Answer: C
Underapplied overhead occurs when actual overhead was greater than
applied overhead. Applied Overhead = (bud. 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.

Joint and By-product Costing

57. Mighty, Inc. processes chickens for distribution to major grocery chains. The
two major products resulting from the production process are white breast
meat and legs. Joint costs of $600,000 are incurred during standard
production runs each month, which produce a total of 100,000 pounds of
white breast meat and 50,000 pounds of legs. Each pound of white breast
meat sells for $2 and each pound of legs sells for $1. If there are no further
processing costs incurred after the split-off point, what amount of the joint
 costs would be allocated to the white breast meat on a net realizable value
basis?
A. $120,00 B. $200,00 C. $400,00 D. $480,00
0. 0. 0. 0.

Answer: D
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.

58. Kode Co. manufactures a major product that gives rise to a by-product called
May. May’s only separable cost is a $1 selling cost when a unit is sold for $4.
Kode accounts for May’s sales by deducting the $3 net amount from the cost
of goods sold of the major product. There are no inventories. If Kode were to
change its method of accounting for May from a by-product to a joint
product, what would be the effect on Kode’s overall gross margin?
A. No effect.
B. Gross margin increases by $1 for each unit of May sold.
C. Gross margin increases by $3 for each unit of May sold.
D. Gross margin increases by $4 for each unit of May sold.

Answer: B
The current method of accounting for May is to reduce the cost of goods sold
of the major product by net sales of $3 per unit of May. The effect of this
method of accounting is to increase gross margin by $3 per unit of May sold.
If the method of accounting were changed to joint product accounting, then
sales would increase to $4 per unit of May sold, without any addition to
variable cost. The $1 cost associated with each unit of May would be
classified as a sales expense, which is subtracted below gross margin. The $1
expense would no longer affect gross margin. Therefore, by changing the
method of accounting, the gross margin increases by $1, while expenses
below gross margin in the income statement increase by $1. Gross margin
would reflect the full $4 gross sales of May, rather than only the net
reduction in the cost of goods sold of $3.

59. Which of the following is not a basic approach to allocating costs for costing
inventory in joint-cost situations?
A. Sales value at split-off.
B. Flexible budget amounts.
C. Physical measures, such as weights or volume.
D. Constant gross margin percentage net realizable value method.

Answer: B
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.
60. 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?
A. $200,00 B. $240,00 C. $260,00 D. $300,00
0. 0. 0. 0.

Answer: D
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).

61. The following information pertains to a by-product called Moy:

5,000
Sales in 2005
units
Selling price per
$6
unit
Selling costs per
2
unit
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?
A. $0. B. $10,000. C. $20,000. D. $30,000.

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

62. 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- $120,00
off point 0
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?
 Gasoline By-Product
A. $105,000 $25,000
B. $115,000 $0
C. $108,000 $37,000
D. $100,000 $0

Answer: S
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 (not sale). In this
case, 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:
$30,00
+Sales value
0
(25,00
-Less separable by-product costs
0)
=Equals net realizable value $5,000

Cost of Goods Sold for Main

Product:
$120,0
+Joint production cost
00
-Less net realizable value of by-
(5,000)
product
=Adjusted production cost for main $115,0
product 00
(15,00
-Less ending inventory of gasoline
0)
=Equals cost of goods sold for $100,0
gasoline 00

63. LM Enterprises produces two products in a common production process,

each of which is processed further after the split-off point. Joint costs
incurred for the current month are $36,000. The following information for
the current month was
Produc Units Units Separable Selling price per
t produced sold costs unit
L 10,000 9,500 $20,000 $8
M 5,000 4,000 40,000 20
 What amount would be the joint cost allocated to product M, assuming that
LM Enterprises uses the estimated net realizable value method to allocate
costs?
A. $20,000 B. $12,000 C. $15,000 D. $18,000

Answer: D
Using NRV, the final revenue for L is $8 (10,000 units produced) = $80,000;
the final revenue for M is $20 (5,000 units produced) = $100,000; Sales less
separable costs is $80,000 - $20,000 = $60,000 for L, while sales less
separable costs for M is $100,000 - $40,000 = $60,000 for M also.
Accordingly, both products have the same net realizable value, so the
$36,000 in joint costs would be split 50/50 providing each with an allocation
of $18,000.

Planning and Control – Budgeting

64. A 2005 cash budget is being prepared for the purchase of Toyi, a
merchandise item. The budgeted data are as follows:
Cost of goods sold for $300,00
2005 0
Accounts payable
20,000
1/1/05
Inventory - 1/1/05 30,000
Inventory - 12/31/05 42,000

Purchases will be made in 12 equal monthly amounts and paid for in the
following month. What is the 2005 budgeted cash payment for the purchase
of Toyi?
A. $295,00 B. $300,00 C. $306,00 D. $312,00
0. 0. 0. 0.

Answer: C
First, the budgeted annual purchases of the item must be determined, and
then the budgeted payment amount is calculated.
Beginning + purchases = ending + cost of goods
inventory inventory sold
$30,000 + purchases = $42,000 + $300,000
purchases = $312,000

Budgeted cash = accounts +

payment payable at 1/1/05 (11/12)purchases
for purchases in
2005
=$20,000 + (11/12)
($312,000)
= $306,000
 Only 11/12 of the 2005 purchases, i.e., the purchases made in the first eleven
months, will be paid for in 2005 under the company’s policy of payment for
purchases.

65. Johnson 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 Johnson’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?
A. $60,000 B. $70,000 C. $75,000 D. $87,500

Answer: B
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).

66. Which of the following would be most impacted by the use of the percentage
of sales forecasting method for budgeting purposes?
A. Accounts payable. C. Bonds payable.
B. Mortgages payable. D. Common stock.

Answer: A
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.

67. Which of the following types of budgets is the last budget to be produced
during the budgeting process?
A. Cash. C. Cost of goods sold.
B. Capital. D. Marketing.

Answer: A
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.

68. A flexible budget is appropriate for a

Marketing Direct material usage
budget budget
A. No No
 B. No Yes
C. Yes Yes
D. Yes No

Answer: C
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.

69. A static budget contains which of the following amounts?

A. Actual costs for actual output. C. Budgeted costs for actual
B. Actual costs for budgeted output.
output. D. Budgeted costs for budgeted
output.

Answer: D
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.

70. 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?
Variable food Fixed supervisory
costs salaries
A. Yes Yes
B. Yes No
C. No Yes
D. No No

Answer: B
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.
71. 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
Flexible Standard costing
budgeting
A. Yes Yes
B. Yes No
C. No Yes
D. No No

Answer: A
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.

72. Lon Co.’s budget committee is preparing its master budget on the basis of
the following projections:
$2,800,0
Sales
00
Decrease in
70,000
inventories
Decrease in accounts
150,000
payable
Gross margin 40%

What are Lon’s estimated cash disbursements for inventories?

A. $1,040,0 B. $1,200,0 C. $1,600,0 D. $1,760,0
00. 00. 00. 00.

Answer: D
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.
Purcha
= cost of sales - inventory decline
ses
= (.60)($2,800,000) - $70,000
= $1,610,000

If accounts payable (AP) is to decrease, payments on AP must exceed

purchases. Estimated payments on AP = $1,610,000 + $150,000 decrease in
AP = $1,760,000.
73. 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?
A. $ 8,000 B. $18,000 C. $26,000 D. $30,000

Answer: C
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)).

74. 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?
A. $700,00 B. $672,00 C. $614,00 D. $586,00
0. 0. 0. 0.

Answer: B
Variable cost per office = ($500,000 - $70,000)/5 $86,00
=
0
Total estimated cost of seven offices = $86,000(7) + $672,0
=
$70,000 (fixed cost) 00

75. What is the required unit production level given the following factors?
Units
1,00
Projected sales
0
Beginning inventory 85
Desired ending
100
inventory
Prior-year beginning
200
inventory

A. 915. B. 1,015. C. 1,100. D. 1,215.

Answer: B
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.

Forecasting Technique
76. The coefficient of determination, r squared, in a multiple regression equation
is the
 A. Percentage of variation in the independent variables explained by the
variation in the dependent variable.
B. Percentage of variation in the dependent variable explained by the
variation in the independent variables.
C. Measure of the proximity of actual data points to the estimated data
points.
D. Coefficient of the independent variable divided by the standard error of
regression coefficient.

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

77. In using regression analysis, which measure indicates the extent to which a
change in the independent variable explains a change in the dependent
variable?
A. p-value. C. Standard error.
B. r-squared. D. t-statistic.

Answer: B
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.

78. 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?
A. .167. B. .200. C. .250. D. .333.

Answer: B
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) - $40,000(p) + $60,000(1-
=
$10,000 p)
$50,000(p) = $10,000
p = .20
 When the probability of frost exceeds .20, the expected income from
providing frost protection exceeds that of not providing frost protection. This
can be verified by entering a probability higher than .20 into both income
expressions and determining the income. This is the expected result. As the
probability of frost increases, the expected benefits of providing frost
protection also increase.
The opposite is true for probabilities lower than .20.

79. Box Co. uses regression analysis to estimate the functional relationship
between an independent variable (cost driver) and overhead cost. Assume
that the following equation is being used:
y
A + Bx
=

What is the symbol for the independent variable?

A. y B. x C. Bx D. A

Answer: B
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.

80. A management accountant performs a linear regression of maintenance cost

vs. production using a computer spreadsheet. The regression output shows
an “intercept” value of $322,897. How should the accountant interpret this
information?
A. Y has a value of $322,897 when x equals zero.
B. x has a value of $322,897 when Y equals zero.
C. The residual error of the regression is $322,897.
D. Maintenance cost has an average value of $322,897.

Answer: A
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.

81. 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?
A. $3,090. B. $4,590. C. $9,030. D. $9,045.

Answer: D
 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.

82. In describing the regression equation used for cost prediction, Y = a + bx,
which of the following is correct?
A. Y is the total revenue. C. a and b are valid for all levels
B. a is the variable rate. of activity.
D. a is the total fixed cost.

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

Cost-Volume-Profit Analysis
83. The sales and cost information for Gamore Company are as follows:
$5,000,0
Sales (250,000 units)
00
Direct materials and 1,500,00
direct labor 0

Factory overhead:
Variable 200,000
Fixed 350,000

Selling and general

expenses:
Variable 50,000
Fixed 300,000

Gamore’s breakeven point in the number of units is

A. 49,240. B. 50,000. C. 62,500. D. 92,860.

Answer: B
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.

84. At the breakeven point, the contribution margin equals total

A. Variable costs. C. Selling and administrative
B. Sales revenues. costs.
D. Fixed costs.

Answer: D
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.

85. A ceramics manufacturer sold cups last year for $7.50 each. The variable
cost of manufacturing was $2.25 per unit. The company needed to sell
20,000 cups to break even. Its net income was $5,040. This year, the
company expects the price per cup to be $9.00; the variable manufacturing
cost to increase by 33.3%; and the fixed costs to increase by 10%. How many
cups (rounded) does the company need to sell this year to break even?
A. 17,111. B. 17,500. C. 19,250. D. 25,667.

Answer: C
To calculate the breakeven point, we must first find the fixed cost of the prior
year. Fixed costs (FC) / contribution margin (CM) = breakeven point in units.
Thus, using prior year data, FC / ($7.50 - $2.25) = 20,000 units. Solving for
FC = $105,000. Current year FC = 1.1(prior year FC) = $115,500; thus,
breakeven units for the current year = $115,500 / ($9 - $3) = $19,250.

86. State College is using cost-volume-profit analysis to determine tuition rates

for the upcoming school year. Projected costs for the year are as follows:
Contribution margin per
$1,800
student
Variable expenses per
1,000
student
360,00
Total fixed expenses
0

Based on these estimates, what is the approximate break-even point in

number of students?
A. 129 B. 200 C. 360 D. 450

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

87. Trendy Co. produced and sold 30,000 backpacks during the last year at an
average price of $25 per unit. Unit variable costs were the following:
Variable manufacturing costs $9
Variable selling and
6
administrative costs
Total $15

Total fixed costs were $250,000. There was no year-end work-in-process

inventory. If Trendy had spent an additional $15,000 on advertising, then
sales would have increased by $30,000. If Trendy had made this investment,
what change would have occurred in Trendy’s pretax profit?
A. $3,000 increase. C. $3,000 decrease.
B. $4,200 increase. D. $4,200 decrease.
 Answer: C
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. 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.

88. A company that produces 10,000 units has fixed costs of $300,000, variable
costs of $50 per unit, and a sales price of $85 per unit. After learning that its
variable costs will increase by 20%, the company is considering an increase
in production to 12,000 units. Which of the following statements is correct
regarding the company’s next steps?
A. If production is increased to 12,000 units, profits will increase by
$50,000.
B. If production is increased to 12,000 units, profits will increase by
$100,000.
C. If production remains at 10,000 units, profits will decrease by $50,000.
D. If production remains at 10,000 units, profits will decrease by $100,000.

Answer: D
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.

89. Wren Co. manufactures and sells two products with selling prices and
variable costs as follows:
A B
Selling $18.0 $22.0
price 0 0
Variable
12.00 14.00
costs

Wren’s total annual fixed costs are $38,400. Wren sells four units of A for
every unit of B. If the operating income last year was $28,800, what was the
number of units Wren sold?
A. 5,486. B. 6,000. C. 9,600. D. 10,500.

Answer: D
Adding an operating income of $28,800 to fixed costs of $38,400 =
contribution margin (CM) of $67,200. Total CM for A = $6, while CM for B =
$8. Since the ratio of units in the sales mix is 4 parts A to 1 part B, the
proper equation would be 6(4/5)Q + 8(1/5)Q = $67,200; thus, Q = 10,500.
90. In 2004, Thor Lab supplied hospitals with a comprehensive diagnostic kit for
$120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a
profit before income taxes of $200,000. Due to an adverse legal decision,
Thor’s 2005 liability insurance increased by $1,200,000 over 2004. Assuming
the volume and other costs are unchanged, what should the 2005 price be if
Thor is to make the same $200,000 profit before income taxes?
A. $120.00. B. $135.00. C. $150.00. D. $240.00.

Answer: B
The problem first requires that the variable cost per unit (V) be computed so
that the price can then be made a variable. V does not change in the
question.
80,000($120 - V) - $200,00
=
$1,000,000 0
V = $105

Now to solve for the new selling price S

80,000(S - $105) - $200,00
=
$2,200,000 0
S = $135

91. The most likely strategy to reduce the breakeven point would be to
A. Increase both the fixed costs and the contribution margin.
B. Decrease both the fixed costs and the contribution margin.
C. Decrease the fixed costs and increase the contribution margin.
D. Increase the fixed costs and decrease the contribution margin.

Answer: C
The breakeven point is the ratio of fixed costs to the contribution margin
ratio (or contribution margin per unit for the unit breakeven point). If the
fixed costs are decreased (numerator), and the contribution margin is
increased (increasing the denominator of either breakeven formula), then the
ratio and, therefore, the breakeven 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.

92. Del Co. has fixed costs of $100,000 and breakeven sales of $800,000.
What is its projected profit at $1,200,000 sales?
A. $50,000. B. $150,00 C. $200,00 D. $400,00
0. 0. 0.

Answer: A
 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.
fixed cost/contribution
Breakeven sales =
margin ratio
$800,000 = $100,000/cmr
.125 = cmr
Projected profit = .125($1,200,000) =
$50,000
- $100,000

93. 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?
A. 21,000 B. 21,600 C. 21,960 D. 22,600

Answer: D
This is a detailed problem that 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.

94. In the profit-volume chart below, EF and GH represent the profit-volume

graphs of a single-product company for 2004 and 2005, respectively.

If the 2004 and 2005 unit sales are identical, how did the total fixed costs
and unit variable costs of 2005 change as compared to 2004?
2005 total fixed 2005 unit variable
costs costs
A. Decreased Increased
B. Decreased Decreased
C. Increased Increased
D. Increased Decreased
 Answer: A
The changes in 2005 from 2004 are as follows: fixed costs decreased (the Y
intercept is less negative for G), and the variable cost per unit increased (the
slope of G is less than the slope of F). The slope of the profit-volume graph is
the contribution margin per unit. With the increasing variable cost per unit,
the contribution margin decreases. The change in 2005 indicates a turn away
from capital-intensive production and a relative increase in the use of labor.

95. 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?
A. $16,000. B. $24,000. C. $80,000. D. $96,000.

Answer: B
The margin of safety is the difference between current sales and breakeven
sales. Thus, breakeven 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 fixed cost/contribution
=
sales margin ratio
$120,000 = Fixed cost/.20
$24,000 = Fixed cost

96. 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 budgeted breakeven point and budgeted margin of safety?
Budgeted breakeven Budgeted margin of
point safety
A. Increase Increase
B. Increase Decrease
C. Decrease Decrease
D. Decrease Increase

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

Sales and Direct Cost Variance Analysis

97. Central Winery manufactured two products, A and B. The estimated demand
for product A was 10,000 bottles, and for product B, 30,000 bottles. The
estimated sales price per bottle for A was $6.00, and for B, $8.00. The actual
 demand for product A was 8,000 bottles, and for product B, 33,000 bottles.
The actual price per bottle for A was $6.20, and for B, $7.70. What amount
would be the total selling price variance for Central Winery?
A. $3,700 unfavorable. C. $3,700 favorable.
B. $8,300 unfavorable. D. $14,100 favorable.

Answer: B
The total selling price variance is determined by taking the difference
between the actual and estimated selling prices for each product and
multiplying the difference by the actual sales volume for the product. It is
calculated as follows:
Product A price variance = ($6.20 - $6.00) * $1,600
=
8,000 Favorable
Product B price variance = ($7.70 - $8.00) & $9,900
=
33,000 Unfavorable
Total price variance = $1,600 Favorable + $8,300
=
$9,900 Unfavorable Unfavorable

98. The following direct labor information pertains to the manufacture of product
Glu:
2 direct labor
Time required to make one unit
hours
Number of direct workers 50
Number of productive hours per week,
40
per worker
Weekly wages per worker $500
Workers’ benefits treated as direct
20% of wages
labor costs

What is the standard direct labor cost per unit of product Glu?
A. $30. B. $24. C. $15. D. $12.

Answer: A
The standard direct labor cost per unit is the product of the standard wage
rate per hour used for direct labor computations, and the standard quantity
of hours per unit. This firm includes benefits in the wage rate used for direct
labor application:
Standard direct labor cost = [($500)(1.2)/40 hours)](2)
per unit = $30
The 1.2 factor above is the effect of including the employee benefits (at 20%
of wages) in direct labor.

99. For the current period production levels, XL Molding Co. budgeted 8,500
board feet of production and used 9,000 board feet for actual production.
Material cost was budgeted at $2 per foot. The actual cost for the period was
$3 per foot. What was XL’s material efficiency variance for the period?
A. $1,000 favorable. C. $1,500 favorable.
B. $1,000 unfavorable. D. $1,500 unfavorable.
 Answer: B
A direct efficiency variance is the difference between the actual quantity and
the standard quantity allowed multiplied by the standard price. The variance
is unfavorable because the actual quantity is greater than expected based on
the standard.

100. Relevant information for material A follows:

Actual quantity 6,500
purchased lbs.
Standard quantity 6,000
allowed lbs.
Actual price $3.80
Standard price $4.00

What was the direct material quantity variance for material A?

A. $2,000 favorable. C. $1,900 unfavorable.
B. $1,900 favorable. D. $2,000 unfavorable.

Answer: D
Quantity variances are calculated as the actual quantity less standard
quantity, multiplied by standard price: (AQ - SQ) SP. Thus, (6,500 lbs. - 6,000
lbs.) $4.00 = $2,000. The variance is unfavorable since actual quantity
required of 6,500 lbs. was more than the planned level of 6,000 lbs.

101. Virgil Corp. uses a standard cost system. In May, Virgil purchased and
used 17,500 pounds of materials at a cost of $70,000. The materials usage
variance was $2,500 unfavorable, and the standard materials allowed for
May production was 17,000 pounds. What was the materials price variance
for May?
A. $17,500 favorable. C. $15,000 favorable.
B. $17,500 unfavorable. D. $15,000 unfavorable.

Answer: A
This answer is correct. Using the model suggested in the study text to
perform the calculations:
Units Price/Uni Total
t
Standard 17,000 x Std. = ???
Costs lbs. Price
Actual Costs 17,500 x $4.00* =
lbs. $70,000
Differences (500) lbs. ??? ???
*Actual Price = $70,000/17,500 lbs. = $4.00

Usage = = Difference in Units x

variance ($2,500) Std. Price
= (500) x Std. Price
 Std. Price = ($2,500) / (500) = $5.00
per unit

Substituting the standard price into the previous calculation, we now have:
Units Price/Uni Total
t
Standard 17,000 x $5.00 =
Costs lbs. $85,000
Actual Costs 17,500 x $4.00* =
lbs. $70,000
Differences (500) lbs. $1.00 $15,000

Price = Difference in x Actual Quantity =

variance Price Used
$1.00 x 17,500 = 17,500 favorable
various

Check Usage + Price = Total Difference in

: Variance Variance Costs
($2,500) + $17,500 = $15,000

A manufacturing company that produces trivets has established the following

standards for the current year:
$3.0
Standard price per pound
0
Standard material usage
2.00
per trivet

102. During April, the company purchased 10,000 pounds of material for
$33,000 and used 9,400 pounds to produce 4,500 trivets. Four thousand
trivets were sold during April. What amount should be reported as the
materials’ quantity (usage) variance?
A. $1,200 unfavorable. C. $3,000 unfavorable.
B. $1,320 unfavorable. D. $4,200 unfavorable.

Answer: A
Since this is a usage variance and we are given the standard price of $3, we
only need to multiply that sp = $3 by the difference between the quantities.
Actual quantity used of 9,400 lbs. is given. Std quantity allowed is found by
multiplying the 2 lb. std quantity by the actual outputs of 4,500 lbs. = 9,000
lbs. By using the formula (SQ - AQ) SP we have (9,000 - 9,400) $3 = $1,200.

103. Yola Co. manufactures one product with a standard direct labor cost of
four hours at $12.00 per hour. In June, 1,000 units were produced using
4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency
variance was
A. $1,220. B. $1,200. C. $820. D. $400.
 Answer: B
= (actual labor hours)(standard wage
The DL efficiency variance rate) - (standard labor hours)(standard
wage rate)
(4,100)($12) - (1,000 units x 4 =
$49,200 - $48,000 = $1,200
hours)($12)

104. Selected costs associated with a product are as follows:

Total standard hours for units
5,000
produced
$111,625.
Total actual direct labor cost
00
Actual per hour labor rate $23.50
Standard per hour labor rate $24.00

What amount is the total direct labor price variance?

A. $2,375 unfavorable. C. $2,500 unfavorable.
B. $2,375 favorable. D. $2,500 favorable.

Answer: B
To solve this we would use the formula (SP - AP) AQ. We are given SP and AP,
but not AQ. We can find the AQ by dividing the actual total cost of $111,625
by the AP of $23.50 to get 4,750 hours. Now we multiply AQ of 4,750 by the
$0.50 difference between the SP of $24 and the AP of $23.50 to get the price
variance of $2,375. Since the actual price of $23.50 is less than the expected
standard cost of $24, the variance is favorable.

105. Management has reviewed the standard cost variance analysis and is
trying to explain an unfavorable labor efficiency variance of $8,000. Which of
the following is the most likely cause of the variance?
A. The new labor contract increased wages.
B. The maintenance of machinery has been inadequate for the last few
months.
C. The department manager has chosen to use highly skilled workers.
D. The quality of raw materials has improved greatly.

Answer: B
An unfavorable labor efficiency variance reflects the use of a greater quantity
of labor hours than planned. This can be caused by inadequate machine
maintenance, which results in equipment not running as fast or as smoothly,
increasing labor time. This can also cause machines to create defective units
in some cases, which may require additional time for rework.

106. Smart Co. uses a static budget. When actual sales are less than budget,
Smart would report favorable variances on which of the following expense
categories?
Sales Building rent
commissions
 A. Yes Yes
B. Yes No
C. No Yes
D. No No

Answer: B
When actual sales are less than budget, the cost of sales commissions will be
less than planned. This results in a favorable cost variance on sales
commissions. Building rent will remain unchanged by planned versus actual
sales.

Overhead Variance Analysis

107. The following information pertains to Roe Co.’s 2004 manufacturing
operations:
Standard direct labor hours per unit 2
Actual direct labor hours 10,500
Number of units produced 5,000
Standard variable overhead per standard $3
direct labor hour
Actual variable overhead $28,00
0

Roe’s 2004 unfavorable variable overhead efficiency variance was

A. $0. B. $1,500. C. $2,000. D. $3,500.

Answer: B
The variable overhead efficiency variance is computed only for variable
overhead and equals:
(actual DL hours - standard DL hours)(standard variable overhead per DL
hour) = [10,500 - 5,000(2)]($3) = $1,500.

108. In manufacturing 5,000 units, 10,000 direct labor hours should have been
used at standard (5,000 units x 2 hours per unit). The actual number of hours
used in the period was 500 more than this standard amount. At $3 standard
variable overhead cost per direct labor, that means that $1,500 of variable
overhead was incurred, because more direct labor hours were used than the
standard. Which of the following standard costing variances would be least
controllable by a production supervisor?
A. Overhead volume. C. Labor efficiency.
B. Overhead efficiency. D. Material usage.

Answer: A
The overhead volume variance equals the difference between the master
budget for fixed overhead and applied fixed overhead. The variance has one
cause only: producing a number of units different from that specified in the
master budget. The variance can be broken down into the following: (master
budget production volume - actual production volume)(PF)(SQ), where PF is
the predetermined overhead rate for fixed overhead based on direct labor
 hours, and SQ is the standard quantity of direct labor hours per unit. The
production supervisor has less control over the actual production volume
than the factors underlying the other variances listed, because actual
production is strongly influenced by sales demand, a factor not under the
control of the production supervisor. The supervisor has some responsibility
for the volume level, however, when the volume falls below required levels
due to maintenance and other internal problems. But typically, the volume
variance is not one of the variances that is considered controllable by the
production supervisor.

109. In 2005, a department’s three-variance overhead standard costing system

reported unfavorable spending and volume variances. The activity level
selected for allocating overhead to the product was based on 80% of
practical capacity. If 100% of practical capacity had been selected instead,
how would the reported unfavorable spending and volume variances have
been affected?
Spending Volume variance
variance
A. Increased Unchanged
B. Increased Increased
C. Unchanged Increased
D. Unchanged Unchanged

Answer: C
The spending variance is unaffected by the volume used for allocating the
fixed overhead. The spending variance for the variable overhead is the
difference between the actual overhead and the budgeted overhead based on
actual direct labor hours. The spending variance for the fixed overhead is the
difference between the actual overhead and the master budget for the fixed
overhead. Neither variance is affected by the denominator used for allocating
the fixed overhead. However, the volume variance (computed for fixed
overhead only) is the difference between the master budgeted fixed overhead
and the allocated fixed overhead. The allocated fixed overhead is the product
of the predetermined overhead rate per direct labor hour, and standard
direct labor hours. An increase in the denominator of the predetermined
fixed overhead rate from 80% to 100% of capacity would cause the
predetermined overhead rate to decline, along with the allocated fixed
overhead. This would increase the volume variance because the master
budgeted fixed overhead would remain unchanged.

Relevant Costs
110. Which one of the following costs, if any, is relevant when making financial
decisions?
Sunk Costs Opportunity
Costs
A. Yes Yes
B. Yes No
C. No Yes
 D. No No

Answer: C
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,
therefore, are not relevant when making financial (or other) 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). As the name implies, these are the costs of forgoing
one opportunity by choosing another opportunity.

111. Which of the following items is never relevant to a sell or process further
decision?
A. Incremental revenue after the split-off point.
B. Incremental cost after the split-off point.
C. Joint costs.
D. Additional contribution margin realized if processed further.

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

112. Allen Harvey, an accounting major, is considering a full-time internship

during the spring semester of his junior year. 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?
Opportunity Incremental
Cost Cost
A. $6,000 $6,000
B. $6,000 $10,000
C. $10,000 $10,000
D. $10,000 $13,000

Answer: B
Opportunity cost comprises the benefits associated with an alternative that is
given up as a result of choosing another alternative. In this case, by 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. 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.

113. The following information is available on Crain Co.’s two product lines:
Chairs Tables
Sales $180,00 $48,00
0 0
Variable costs (96,000 (30,00
) 0)
Contribution 84,000 18,000
margin
Fixed costs:
Avoidable (36,000 (12,00
) 0)
Unavoidable (18,000 (10,80
) 0)
Operating income $30,000 ($4,80
(loss) 0)

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?
A. $13,200. B. $18,000. C. $24,000. D. $28,800.

Answer: B
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.

114. Which of the following would be considered a relevant fixed cost in making
a special order decision?
A. Unavoidable fixed costs associated with current business.
B. Contribution margin of any current business replaced.
C. Depreciation on existing production equipment.
D. Incremental fixed costs associated with the order.

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

115. A company receives an offer to purchase a special order of units of a

product that normally sells for $10 each to regular customers. The cost of
manufacturing the units is shown here. 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 $2
costs
Unavoidable fixed $3
costs

A. $5. B. $8. C. $3. D. $10.

Answer: A
With idle capacity, only the avoidable costs need to be covered. These include
direct materials, direct labor, and avoidable fixed costs. These total $5.

116. A company is offered a one-time special order for its product and has the
capacity to take this order without losing current business. Variable costs per
unit and fixed costs in total will be the same. The gross profit for the special
order will be 10%, which is 15% less than the usual gross profit. What impact
will this order have on total fixed costs and operating income?
A. Total fixed costs increase, and operating income increases.
B. Total fixed costs do not change, and operating income increases.
C. Total fixed costs do not change, and operating income does not change.
D. Total fixed costs increase, and operating income decreases.

Answer: B
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.

117. Clay Co. has considerable excess manufacturing capacity. A special job
order’s cost sheet includes the following applied manufacturing overhead
costs:
Fixed costs $21,00
0
Variable 33,000
costs

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?
A. $36,700. B. $40,750. C. $54,000. D. $58,050.

Answer: B
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.

118. Rodder, Inc. manufactures a component in a router assembly. The selling

price and unit cost data for the component are as follows:
Selling price $15
Direct materials cost 3
Direct labor cost 3
Variable overhead cost 3
Fixed manufacturing 2
overhead cost
Fixed selling and 1
administration cost

The company received a special one-time order for 1,000 components.

Rodder 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 Rodder should accept for the component?
A. $9. B. $12. C. $14. D. $24.

Answer: C
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).

119. A company is considering outsourcing one of the component parts for its
product. The company currently makes 10,000 parts per month. Current
costs are as follows:
Per unit Total
Direct materials $4 $40,00
0
Direct labor 3 30,000
Fixed plant facility 2 20,000
cost

The company decides to purchase the part for $8 per unit from another
supplier and rents its idle capacity for $5,000/month. How will the company’s
monthly costs change?
A. Decrease $15,000. C. Increase $5,000.
B. Decrease $10,000. D. Increase $10,000.

Answer: C
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 + $15,000 in fixed
cost that are presumed unavoidable versus a cost to make of $90,000.
120. 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. What are the relevant costs for this
decision? Based only on these costs, which option should the company
choose?
Relevant Buy and Make
Costs Decision
A. $60 and $56 Make
B. $60 and $56 Buy
C. $56 and $24 Buy
D. $56 and $24 Make

Answer: A
Relevant costs to make and buy are correct, but without considering any
additional information, since the cost to make is cheaper than the cost to buy,
the prudent decision would be to make the rackets.

Transfer Pricing
121. In the GPK Coffee Company, the 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 600 1,000
externally
Market selling price $2.00 $1.50
Avoidable outlay costs per unit $1.50 $1.30
Unavoidable costs per unit based $0.20 $0.20
on capacity

Bean Division:
Number of units of strudel needed 400 400
Budgeted price per unit $1.95 $1.45

Given the facts in case 1, what are the minimum and maximum transfer
prices?
Minimum Maximum
A. $1.95 $2.00
B. $1.50 $2.00
C. $1.30 $1.95
D. $1.50 $1.95

Answer: B
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. These values are $1.50 and $2.00, respectively.
122. In the GPK Coffee Company, the 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 600 1,000
externally
Market selling price $2.00 $1.50
Avoidable outlay costs per unit $1.50 $1.30
Unavoidable costs per unit based $0.20 $0.20
on capacity

Bean Division:
Number of units of strudel needed 400 400
Budgeted price per unit $1.95 $1.45

Will the internal transfer likely take place? Answer for Case 1 and 2
separately.
Case 1 Case 2
A. Yes Yes
B. Yes No
C. No Yes
D. No No

Answer: B
In case 1, the floor of $1.50 and ceiling of $2.00 provide a viable range for
the transfer to take place. Moreover, excess capacity allows for no service
disruption to regular customers. In case 2, for the transfer to take place, the
units necessary would need to be denied from regular customers, since no
excess capacity exists; thus, the transfer will likely not take place.

123. 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?
A. $15. B. $20. C. $25. D. $40.

Answer: C
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.

124. 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?
A. Actual cost. C. Actual cost plus mark-up.
B. Standard variable cost. D. Negotiated price.

Answer: B
Standard variable cost is preferable. 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.

125. In the GPK Coffee Company, the 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 600 1,000
externally
Market selling price $2.00 $1.50
Avoidable outlay costs per unit $1.50 $1.30
Unavoidable costs per unit based $0.20 $0.20
on capacity

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?
Minimum Maximum
A. $1.45 $1.50
B. $1.50 $2.00
C. $1.30 $1.50
D. $1.50 $1.50

Answer: D
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.
Quality and Inventory Management
126. Key Co. changed from a traditional manufacturing operation with a job
order costing system to a just-in-time operation with a back-flush costing
system.

What is (are) the expected effect(s) of these changes on Key’s inspection

costs and recording detail of costs tracked to jobs in process?
Inspection Detail of costs tracked
costs to jobs
A. Decrease Decrease
B. Decrease Increase
C. Increase Decrease
D. Increase Increase

Answer: A
A backflush costing system is used in just-in-time inventory systems. Part of
the philosophy of JIT is to reduce nonvalue-added activities, and reduce
defects. Part of the aim is to reduce accounting costs that are nonvalue-
added. Backflush costing systems simplify product costing by costing
production at the completion of an order. Minimal inventories are
maintained, and cellular production facilities are used. Thus, there is much
less need to maintain detailed records of cost by job. The job is simply costed
at completion. There is no need to know the cost until that time. Inspection
costs are reduced because zero defects is a goal. Production stops until the
cause of the defect can be identified and fixed.

127. In a quality control program, which of the following is (are) categorized as

internal failure costs?
I. Rework.
II. Responding to customer complaints.
III. Statistical quality control procedures.

A. I only. C. III only.

B. II only. D. I, II, and III.

Answer: A
An internal failure cost is incurred when a product that does not conform to
its design specifications is detected before shipment to customers. The cost
to rework items that do not meet design specifications is incurred before the
items are shipped, and therefore, qualify as internal failure costs. Other
internal failure costs include spoilage, scrap, and breakdown maintenance.
Responding to customer complaints occurs after items are shipped, and
therefore, is not included in internal failure costs. The cost of receiving and
responding to customer complaints is a component of external failure costs.
Statistical quality control programs are designed to distinguish between in-
control and out-of-control operations, and thus, to signal when to investigate
the operation, determine the problem, and solve the problem. These
programs are partially preventive in nature because they often provide
 signals of developing problems that have not yet reached the point where
remedial action is cost-effective. These programs also play an appraisal role
in identifying units that fail to conform to design specifications. Their cost is
incurred regardless of whether the product fails to meet its design
specifications.

128. The benefits of a just-in-time system for raw materials usually include
A. Elimination of nonvalue-adding operations.
B. Increase in the number of suppliers, thereby ensuring competitive
bidding.
C. Maximization of the standard delivery quantity, thereby lessening the
paperwork for each delivery.
D. Decrease in the number of deliveries required to maintain production.

Answer: A
A JIT system seeks to reduce those activities that do not increase the value of
the product to the customer. For example, the time required to move
materials between departments is reduced and paperwork is minimized.
Operations are streamlined and simplified. JIT is much more than the
minimization of inventories.

129. As a consequence of finding a more dependable supplier, Dee Co. reduced

its safety stock of raw materials by 80%. What is the effect of this safety
stock reduction on Dee’s economic order quantity?
A. 80% decrease. C. 20% increase.
B. 64% decrease. D. No effect.

Answer: D
Safety stock is a buffer for variations in demand and lead-time for the
delivery of material. Safety stock affects the reorder point, but does not enter
into the quantity to be ordered.

130. Bell Co. changed from a traditional manufacturing philosophy to a just-in-

time philosophy. What are the expected effects of this change on Bell’s
inventory turnover and inventory as a percentage of total assets reported on
Bell’s balance sheet?
Inventory Inventory
turnover percentage
A. Decrease Decrease
B. Decrease Increase
C. Increase Decrease
D. Increase Increase

Answer: C
One of the striking effects of a JIT system is the lowered level of inventory
maintained by the firm. Rather than maintain a large amount of inventory as
a buffer for stockouts, the JIT system purchases inventory only when
 necessary. The inventory is to arrive just in time for its use in production or
sales. Thus, much less inventory must be maintained at any one time.
Inventory = cost of goods sold/average
turnover inventory
Inventory = ending inventory
percentage balance/total assets

With lower amounts of inventory on hand at any time, inventory turnover

INCREASES because its denominator decreases, and inventory percentage
DECREASES because its numerator decreases by a greater percentage than
does its denominator. Inventories turnover much more frequently because
the quantity on hand is so small and inventory is sold soon after it is acquired
or produced.

131. As part of a benchmarking process, a company’s costs of quality for the

current month have been identified as follows:
Employee training $20,00
0
Product recalls 8,000
Scrap 4,500
Quality inspectors 48,000
Preventive 19,500
maintenance
Supplier education 17,500
expense
Materials inspection 60,000
expense
Processing product 2,500
returns

What amount is the company’s prevention cost for the current month?
A. $39,500 C. $165,00 D. $175,50
B. $57,000 0 0

Answer: B
Prevention costs are those that try to include proactive efforts to prevent
defects before the products are produced. In this problem these include
employee training, preventive maintenance, and supplier education expense
for a total of $57,000.

132. To evaluate its performance, the Blankie Co. is comparing its costs of
quality from one year to the next. The relevant costs are as follows:
First Second
Year Year
Prevention $45,000 $60,000
Appraisal 25,000 35,000
Internal 80,000 50,000
failure
 External 75,000 65,000
failure

Which of the following conclusions can Blankie draw about its quality
program?
A. It has been a failure, because conformance costs decreased by $40,000
while nonconformance costs increased by $25,000.
B. It has been a success, because conformance costs decreased by $40,000
and nonconformance costs increased by $25,000.
C. It has been a failure, because conformance costs increased by $25,000
while nonconformance costs decreased by $40,000.
D. It has been a success, because conformance costs increased by $25,000
while nonconformance costs decreased by $40,000.

Answer: D
This answer is based on two parts: (1) the determination of success or
failure, and (2) the amount of conformance costs v. non-conformance costs.
Success is defined by minimizing total costs (costs decreased by $15,000).
Conformance costs are prevention and appraisal, and non-conformance costs
are internal and external failure.

133. The economic order quantity formula assumes that

A. Periodic demand for the good is known.
B. Carrying costs per unit vary with the quantity ordered.
C. Costs of placing an order vary with the quantity ordered.
D. Purchase costs per unit differ due to quantity discounts.

Answer: A
The formula for economic order quantity is the square root of the following
expression:
2 X annual demand X cost to place
an order
carrying cost per unit per year

Annual demand (period demand) is part of the formula. Purchase costs per
unit and order costs per order must remain constant. Safety stock affects the
order variations in point, but not the order quantity.

134. Which changes in costs are most conducive to switching from a traditional
inventory ordering system to a just-in-time ordering system?
Cost per Inventory unit
purchase order carrying costs
A. Increasing Increasing
B. Decreasing Increasing
C. Decreasing Decreasing
D. Increasing Decreasing

Answer: B
 A JIT system is designed to reduce inventory carrying costs by ordering more
frequently, but in lower quantities, so that inventories are kept to a minimum.
When inventory holding costs (lost interest, security costs, warehousing
costs) are rising, there is an incentive to reduce inventories and instead
order inventories only when they are needed (and so they arrive just in time
for use). In addition, declines in the cost of purchasing make the JIT system
even more appropriate. A JIT system orders smaller numbers of units per
order, but orders more frequently to avoid inventory build up. Thus, JIT
increases total order costs. With decreasing order costs, the total ordering
costs is kept to a reasonable level. Furthermore, the decrease in holding
costs from holding less inventory more than covers the increased cost of
ordering more frequently.

135. Which of the following techniques effectively measures improvements in

product quality as a result of internal failure costs?
A. Inspection of in-process goods.
B. Recording the number of products returned over time.
C. Tracking the number of products reworked.
D. Tracking warranty expenses over time.

Answer: C
The item “Tracking the number of products reworked” is the only choice
given that reflects an internal failure.

136. Nonfinancial performance measures are important to engineering and

operations managers in assessing the quality levels of their products. Which
of the following indicators can be used to measure product quality?
I. Returns and allowances.
II. Number and types of customer complaints.
III. Production cycle time.

A. I and II only. C. II and III only.

B. I and III only. D. I, II, and III.

Answer: A
Only returns and allowances and customer complaints are measures of
product quality. Returns and allowances are direct measures of the quality of
the product; a high frequency of returns and allowances indicates lower
product quality. Customer complaints about product quality are an important
input to firms about the quality of their product. However, production cycle
time, also called manufacturing lead time, is the time from setup to the
finished good. Cycle time is relevant to determining the optimal production
system, but is not directly concerned with product quality. Longer waiting
times in the manufacturing setting may indicate the need to increase the
number of machines, but again, there is no direct tie-in to quality.

137. Which quality definition can be described as “meeting or exceeding the

needs and wants of customers?”
 A. Manufacturing quality. C. Quality of design.
B. Customer quality. D. Quality of conformance.

Answer: C
“Meeting or exceeding the needs and wants of customers” is the definition of
the quality of design.

Balanced Scorecard and Benchmarking

138. Under the balanced scorecard concept developed by Kaplan and Norton,
employee satisfaction and retention are measures used under which of the
following perspectives?
A. Customer. C. Learning and growth.
B. Internal business. D. Financial.

Answer: C
This answer is correct. Measures of learning and growth are related to the
quality, vitality, and productivity of the workforce and include such things as
employee turnover, new product development, product improvements,
employee satisfaction levels, and personnel training and education.

139. The management of a company would do which of the following to

compare and contrast its financial information to published information
reflecting optimal amounts?
A. Budget. C. Benchmark.
B. Forecast. D. Utilize best practices.

Answer: C
Benchmarking provides a relevant comparison when trying to achieve the
optimal outcome by comparing to others.

140. Which of the following balanced scorecard perspectives examines a

company’s success in targeted market segments?
A. Financial. C. Internal business process.
B. Customer. D. Learning and growth.

Answer: B
The customer perspective evaluates the organization’s success in targeted
customer and market segments.

141. Which measures would be useful in evaluating the performance of a

manufacturing system?
I. Throughput time.
II. Total setup time for machines/Total production time.
III. Number of rework units/Total number of units completed.

A. I and II only. C. I and III only.

B. II and III only. D. I, II, and III.
 Answer: D
All three measures are relevant to the evaluation of how a manufacturing
system is performing. Throughput time is the total time required for an item
to make its way through the manufacturing system. The ratio of setup time to
total production time reflects the adaptability of the system to required
changes in production capability. If this ratio is excessive, the firm is unable
to alter its product to meet changing customer demand. The ratio of rework
to total units is a measure of quality. A lower ratio indicates higher quality
and less interruption to the production process.

142. Which of the following performance measures is nonfinancial?

A. Percentage of defective C. Gross profit margin.
products. D. Economic value-added.
B. Return on investment.

Answer: A
“Percentage of defective products” is not an expression of money. All other
answer choices are expressed in dollars or a return metric that is comprised
of dollars.

Strategic Management
143. Which of the following steps in the strategic planning process should be
completed first?
A. Translate objectives into C. Develop performance
goals. measures.
B. Determine actions to achieve D. Create a mission statement.
goals.

Answer: D
The creation of the mission statement, the purpose of the organization, is the
first step in the strategic planning process. All strategies should be directly
derived from and consistent with the mission statement.

144. Which of the following topics is the focus of managerial accounting?

A. Financial statements and other financial reports.
B. Historical cost principles.
C. The needs of creditors.
D. The needs of the organization’s internal parties.

Answer: D
The most important purpose of management accounting is to provide
enterprise optimization by providing decision support to meet the needs of
the organization’s internal parties.

145. A cost leadership strategy, in addition to focusing on the company’s ability

to sell a large volume of low-cost products, is often aided by all of the
following characteristics except
 A. Proprietary production technology.
B. Access to low-cost production inputs (raw materials, labor, etc.).
C. More highly desirable product features.
D. Access to low-cost capital.

Answer: C
Having more highly desirable product features is a characteristic of a
differentiation strategy, not a cost leadership strategy.

146. SWOT analysis includes considerations of what four strategic dimensions?

A. Synergies, willingness, openness, and targets.
B. Strengths, weaknesses, opportunities, and targets.
C. Synergies, weaknesses, openness, and threats.
D. Strengths, weaknesses, opportunities, and threats.

Answer: D
SWOT analysis is a process of environmental scanning involving an analysis
and assessment of the dimensions of strengths, weaknesses, opportunities,
and threats.

147. Vince Inc. has developed and patented a new laser disc reading device that
will be marketed internationally. Which of the following factors should Vince
consider in pricing the device?
I. Quality of the new device.
II. Life of the new device.
III. Customers’ relative preference for quality compared to price.

A. I and II only. C. II and III only.

B. I and III only. D. I, II, and III.

Answer: D
All three factors are relevant in setting the price. Consider automobiles as
the product for which a price must be set. The quality of the car has a direct
effect on price. Perceived differences in quality are one of the most important
factors by which firms set prices for different vehicles. Consider the
difference in price between a Buick and a Chevrolet, for example. The life of
the new item is the length of time the firm has to recoup its initial investment
in researching and developing the product, marketing it, and any retooling
required (most of which are fixed costs). The life can also be defined as the
number of units or total sales expected of the product. The longer the life (or
greater the total sales expected), the lower the price can be, all other factors
being the same. How customers trade off price and quality is also an
important factor. If price is by far the more important factor, then increases
in quality that cause the price to increase significantly will not cause sales
increases. On the other hand, in the high-end auto market, some customers
are willing to pay large sums to obtain significant quality increases. Thus,
customer preferences for quality relative to price can affect the pricing of the
product.
Competitive Analysis
148. Related to the CFROI metric, “the required annual cash investment needed
to replace fixed assets” is the definition of what?
A. Free cash flow.
B. Economic depreciation.
C. Economic value added (EVA).
D. Cash flow return on investment (CFROI).

Answer: B
The required annual cash investment needed to replace fixed assets is the
definition of economic depreciation.

149. The target capital structure of Traggle Co. is 50% debt, 10% preferred
equity, and 40% common equity. The interest rate on debt is 6%, the yield on
the preferred is 7%, the cost of common equity is 11.5%, and the tax rate is
40%. Traggle does not anticipate issuing any new stock. What is Traggle’s
weighted average cost of capital?
A. 6.50%. B. 6.77%. C. 7.10%. D. 8.30%.

Answer: C
The calculation of the weighted average cost of capital (WACC) involves
proportional weighting for debt and equity with the debt figure reduced for
deductible taxes. Thus, the cost of debt is 1.8% = 50% (6%) (1 - .4); the cost
of owners’ equity is split for the preferred 0.7% = 10% (7%); and the
common 4.6% = 40% (11.5%). Thus, the WACC is 7.1% = 1.8% + 0.7% +
4.6%.

150. Brewster Co. has the following financial information:

Fixed costs $20,00
0
Variable 60%
costs
Sales price $50

What amount of sales is required for Brewster to achieve a 15% return on

sales?
A. $33,333 C. $80,000 D. $133,33
B. $50,000 3

Answer: C
This answer follows a contribution margin income statement format involving
a 15% markup on sales, solves for quantity, (i.e., $50Q - 0.6(50Q) - $20,000 =
0.15(50Q)), and then multiplies quantity by price ($50 x 1,600 = $80,000).
Note: variable costs are 60% of sales, not 60% of total costs.

151. A company’s target gross margin is 40% of the selling price of a product
that costs $89 per unit. The product’s selling price should be
 A. $124.60. B. $142.40. C. $148.33. D. $222.50.

Answer: C
If P = price and C = cost, and cost is $89, target gross margin is .4P, and P -
C = .4P. Thus, we solve for P in the equation P - $89 = .4P to find P =
$148.33.

152. The following information pertains to Quest Co.’s Gold Division for 2004:
Sales $311,00
0
Variable cost 250,000
Traceable fixed 50,000
costs
Average invested 40,000
capital
Imputed interest 10%
rate

Quest’s return on investment was

A. 10.00%. B. 13.33%. C. 27.50%. D. 30.00%.

Answer: C
ROI = division income/average invested capital = ($311,000 - $250,000 -
$50,000)/$40,000 = .275
Traceable fixed costs are deducted in determining division income. Corporate
fixed costs would not be deducted. The imputed interest rate is not relevant
to the question.

153. Which of the following accurately reflects prevailing thought processes

regarding the new value based metrics?
A. Accrual-based metrics are discredited.
B. Cost of capital is increasingly ignored.
C. Shareholder value is not typically viewed as being as important as
achieving strategic objectives.
D. All of the above reflect prevailing thought processes regarding the new
value based metrics.

Answer: A
Accrual-based metrics are discredited, since they are not designed to reflect
true economic substance, but to meet other external reporting goals.

154. A company has a tax rate of 40%. Information for the company is as
follows:
Amount Before-tax
Cost
Mortgage $1,200,0 7.2%
bonds 00
Common $3,800,0 10%
 stock 00

What is the weighted average cost of capital (WACC)?

A. 9.33%. B. 8.64%. C. 0.08%. D. 8.60%.

Answer: B
The calculation is ($1.2M / $5M) (.072) (1 - .4) + ($3.8M / $5M) (.1).

155. Wexford Co. has a subunit that reported the following data for year 1:
Asset (investment) 1.5
turnover times
Sales $750,00
0
Return on sales 8%

The imputed interest rate is 12%. What is the division residual income for
year 1?
A. $60,000. B. $30,000. C. $20,000. D. $0.

Answer: D
To solve for residual income (RI), you must first solve for assets (investment)
and income. Since an asset turnover of 1.5 is sales/investment and sales is
$750,000, we use $750,000 / x = 1.5, where x = investment. Thus,
investment is $500,000. Since a return on sales of 8% is profit/sales and sales
is $750,000, we use x / $750,000 = 8%, where x = income. Thus, income is
$60,000. Now, RI = income less the rate given at 12% multiplied by the
investment. Thus, RI is 0 = $60,000 - .12 ($500,000).

156. A company has two divisions. Division A has an operating income of $500
and total assets of $1,000. Division B has an operating income of $400 and
total assets of $1,600. The company’s required rate of return is 10%. Division
B’s residual income would be which of the following amounts?
A. $40. B. $240. C. $400. D. $640.

Answer: B
Residual income is calculated as operating income less the investment (total
assets here) multiplied by the required rate of return. Thus, Division B’s
residual income is $400 - .1($1,600) = $240.

Ratio Analysis
157. Galax, Inc. had an operating income of $5,000,000 before interest and
taxes. Galax’s net book value of plant assets on January 1 and December 31
were $22,000,000 and $18,000,000, respectively. Galax achieved a 25%
return on investment for the year, with an investment turnover of 2.5. What
were Galax’s sales for the year?
A. $55,000,000. C. $45,000,000.
B. $50,000,000. D. $20,000,000.
 Answer: B
ROI = (income / sales) * asset turnover; and ROI = 25% = $5M / sales * 2.5.
Thus, solving for sales, the result is $50M.

158. To measure inventory management performance, a company monitors its

inventory turnover ratio. Listed below are selected data from the company’s
accounting records:
Current Prior
year year
Annual sales $2,525,00 $2,125,0
0 00
Gross profit 40% 35%
percent

Beginning finished goods inventory for the current year was 15% of the prior
year’s annual sales, and ending finished goods inventory was 22% of the
current year’s annual sales. What was the company’s inventory turnover at
the end of the current period?
A. 1.82. B. 2.31. C. 2.73. D. 3.47.

Answer: D
Inventory turnover is calculated by dividing the cost of goods sold by the
average inventory. Cost of goods sold = $2,525,000(1 - .4) = $1,515,000;
average inventory is [.15(2,125,000) + .22(2,525,000)] / 2 = $437,125. Thus,
inventory turnover = $1,515,000 / $437,125.

159. North Bank is analyzing Belle Corp.’s financial statements for a possible
extension of credit. Belle’s quick ratio is significantly better than the industry
average. Which one of the following factors should North consider as a
possible limitation of using this ratio when evaluating Belle’s
creditworthiness?
Accounts Marketable Inventori
Receivable Securities es
A. Yes Yes Yes
B. Yes Yes No
C. Yes No Yes
D. Yes No No

Answer: B
The quick ratio (also called the acid-test ratio) measures the relationship
between current assets that are cash or can be converted to cash quickly and
the total of current liabilities. Current assets that can be converted to cash
quickly include (in addition to cash) accounts receivable and marketable
securities (expected to be sold in the near term). Inventories are not included
in the quick ratio because, normally, they cannot be converted to cash
quickly. By excluding inventories (and other current assets that cannot be
converted to cash quickly, e.g., prepaid assets), the measure of assets
available to pay current liabilities in the quick ratio is more conservative than
 the measure of assets used in the working capital (or current) ratio; thus, the
quick ratio is also called the acid-test ratio.

160. How is contribution margin (CM) different from gross margin (GM)?
A. CM equals sales less cost of goods sold; GM equals sales less total
expenses.
B. CM equals sales less variable costs; GM equals sales less cost of goods
sold.
C. CM classifies cost by manufacturing v. non-manufacturing; GM classifies
cost by variable and fixed cost behavior.
D. CM is used for external reporting; GM is used internally for cost-volume-
profit analysis.

Answer: B
CM classifies costs by behavior and is used internally. CM = sales less
variable costs; GM equals sales less cost of goods sold.

161. The DuPont method of ROI uses sales to analyze what two elements of
return separately?
A. Income and assets.
B. Income and common stockholders’ equity.
C. Gross sales and net sales.
D. Income and cost of capital.

Answer: A
Income and assets are related to sales to determine return on sales and the
efficiency with which assets were used to generate those sales.

162. Which metric is often used as an alternative to ROI and is generally

defined as “operating Income less (the required rate of return multiplied by
invested capital)?”
A. Times interest earned. C. Cash value added.
B. Economic value added. D. Residual income.

Answer: D
Residual income = operating income - required rate of return (invested
capital).

163. Which of the following terms describe or are consistent with systematic
risk?
A. Portfolio risk. C. Diversifiable risk.
B. Market risk. D. Company-specific risk.

Answer: B
Systematic risk is also known as market risk or nondiversifiable risk and is
associated with large-scale economic events or natural disasters and typically
affects all companies to some degree.
164. How is strategic risk best managed?
A. Focusing on business continuity needs.
B. Focusing on hedging of commodities contracts.
C. Focusing on portfolio and price risk.
D. Focusing on rigorous forecasting and planning.

Answer: D
Strategic risk involves the possibility of the failure of the basic action plan
that guides a company to achieve its mission. Thus, rigorous long-term
forecasting and planning are necessary to mitigate this risk.

165. Which of the following types of risk are best addressed with insurance?
A. Peril or hazard. C. Price risk.
B. Speculative risks. D. Portfolio risk.

Answer: A
Insurance is specifically designed to reduce or eliminate peril or hazard risk
where a specific type of risk of loss is involved (i.e., pure risk).

166. Why is cost avoidance a faster way to increase profits than to increase
revenue?
A. Cost avoidance is part of a well thought out strategic approach.
B. Increasing revenue often results in at least some proportional cost
increases.
C. Cost avoidance targets committed costs.
D. Efforts to increase revenue relate to committed costs only.

Answer: B
Avoiding costs provides a direct and immediate effect on profits, while
increasing revenue often results in at least some proportional cost increases
as well.

167. Which of the following types of risk are best addressed with hedging?
A. Strategic and operating risk. C. Disaster recovery.
B. Foreign currency exchange. D. Liquidity.

Answer: B
Hedging offsets exposure to future price fluctuations by locking in a given
price in the future. Thus, foreign currency exchange or commodities would
provide examples where hedging would be an appropriate risk management
technique.

Performance Improvement Tools

168. What is the objective of the demand flow approach?
A. To link process flows and manage them based on customer demand.
B. To mathematically link “push-based” inventory features.
C. To mathematically facilitate constraint management.
D. To mathematically assist disruptive flow management in forecasting.
 Answer: A
The objective of the demand flow or demand flow technology (DFT) approach
is to link process flows and manage those flows based on customer demand.

169. What tools does Six Sigma commonly use to achieve quality control?
A. Demand flow technology tools (e.g., continuous flow planning).
B. Tools common to TQM (e.g., control charts).
C. Constraint management optimization tools (e.g., capacity analysis).
D. Push-model tools (e.g., forecasting using regression).

Answer: B
Six Sigma is very similar to total quality management (TQM) and uses TQM
tools such as Jago Co. has two products that use the same manufacturing
facilities and cannot be subcontracted. Each product has sufficient orders to
utilize the entire manufacturing capacity.

170. Jago Co. has two products that use the same manufacturing facilities and
cannot be subcontracted. Each product has sufficient orders to utilize the
entire manufacturing capacity.
For short-run profit maximization, Jago should manufacture the product with
the
A. Lower total manufacturing costs for the manufacturing capacity.
B. Lower total variable manufacturing costs for the manufacturing capacity.
C. Greater gross profit per hour of manufacturing capacity.
D. Greater contribution margin per hour of manufacturing capacity.

Answer: D
This is a short run situation. In the long run, the firm should expand to take
advantage of the market for its products. But given that capacity cannot be
increased in the short run, the product that produces the highest
contribution margin per hour should be produced. There are only so many
hours of production capacity available. Maximizing the contribution margin
per hour also maximizes profits and cash flow, as fixed costs remain
unchanged.control charts, run charts, pareto histograms, and Isikawa (fish-
bone) diagrams.

171. Which of the following production processes best describes lean

manufacturing?
A. Making a small number of a high variety of unique products with
relatively low-skilled labor.
B. Making a large number of standardized products with highly skilled labor.
C. Making small batches of a high variety of unique products with cross-
trained labor.
D. Making a large number of standardized products with relatively low-
skilled labor.

Answer: C
 Lean manufacturing is accurately described as using small batches of a high
variety of unique products with highly skilled, cross-trained labor.

172. Which of the following statements correctly describes the structural

differences between mass and lean manufacturing?
A. Mass production usually has lower setup times than lean production.
B. Mass production usually has dedicated equipment and highly skilled
laborers.
C. Mass production usually has flexible equipment and highly skilled
laborers.
D. Mass production usually has higher setup times and dedicated
equipment.

Answer: D
Mass production is typically characterized by higher setup times, dedicated
equipment, and low-skilled workers with a high degree of specialization. In
contrast, lean production is characterized by lower setup times, flexible
equipment, and highly skilled, cross-trained workers.

Project Management
173. Which of the following roles is typically taken on by a project team
member?
A. Uses unique skills cooperatively to achieve a common outcome.
B. Provides temporary direct supervision.
C. Behaves as the customer.
D. Responsible for accomplishing the outcome within budget.

Answer: A
In the context of project management, using unique skills cooperatively to
achieve a common outcome is the role of a project team member.

174. The process of adding resources to shorten selected activity times on the
critical path is called
A. Work breakdown structuring C. Accelerating.
(WBS). D. Crashing.
B. Activity-resource-trading
(ART).

Answer: D
The process of adding resources to shorten selected activity times on the
critical path is called “crashing.”

175. When using PERT, project completion times are measured by a pessimistic,
optimistic, and most probable estimate...
A. And assigning equal weight to each of the estimates to calculate an
average.
B. And assigning a weight of one for the pessimistic and optimistic estimates
and a weight of two for the most probable estimate and dividing by four.
 C. And assigning a weight of one for the pessimistic and optimistic estimates
and a weight of four for the most probable estimate and dividing by six.
D. And assigning weights for the estimates based on the judgment of the
project manager as to the probabilities of each of the outcomes.

Answer: C
Project completion time is measured by assigning a weighting of one for each
of the optimistic and pessimistic estimates, a weighting of four for the most
probable estimate, adding them together, and then dividing by six.

176. When using PERT or CPM, activity slack is calculated as

A. The maximum amount of time that an activity can be delayed without
delaying the entire project.
B. The difference between the estimated activity time and the actual time
once the actual completion time is known.
C. The extra time the project manager adds to the most probable activity
time estimate to ensure that the completion time is met.
D. The time difference between the shortest and longest paths in the
network.

Answer: A
Slack time is always calculated as the maximum amount of time that an
activity can be delayed without delaying the entire project.

177. Which type of project risk is related to managing people, time, cost
restrictions, and the interrelationships among activities?
A. Planning risk. C. Monitoring risk.
B. Implementing risk. D. Forecasting risk.

Answer: B
Managing people, time, cost restrictions, and the interrelationships among
activities is a function of implementing risk.