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Basic Concepts

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Chapter 5Activity-Based Management and Activity-Based Costing
MULTIPLE CHICE
1. An objective of activity-based management is to
a.eliminate the majority of centralized activities in an organization.b.reduce or eliminate non-value-added activities incurred to make a
product or provide a service.c.institute responsibility accounting systems in decentralized organizations.d.all of the above
ANS: !"#: $asy %&: '-1
(. )hich of the follo*ing is+are part of activity-based management,
Activity analysis-ost driver analysis
a.yes yesb.no yesc.no nod.yes no
ANS: A !"#: $asy %&: '-.
.. )hich of the follo*ing falls under the Activity-ased /anagement umbrella,
-ontinuous
improvementusiness process
reengineeringActivity-based
costing
a.no no yesb.yes no noc.yes yes
yesd.no yes no
ANS: - !"#: $asy %&: '-'
0. 1he sum of the non-value-added time and the value-added time e2uals
a.inspection time.b.production time.c.the product life cycle.d.cycle time.
ANS: ! !"#: $asy %&: '-(
'. )hich of the follo*ing add customer value,
a.setup timeb.storage timec.idle timed.processing time
ANS: ! !"#: $asy %&: '-(
3. 4ead time minus production time is e2ual to
a.idle time.b.storage time.c.non-value-added time.d.value-added time.
ANS: - !"#: $asy %&: '-(
5. )hen a firm redesigns a product to reduce the number of component parts6 the firm is
a.increasing consumer value.b.increasing the value added to the product.c.decreasing product variety.d.decreasing non-value-added costs.
ANS: ! !"#: /oderate %&: '-1
7. Non-value-added activities that are necessary to businesses6 but not costs that customers are *illing to pay for are kno*n as
a.business-value-added activities.b.long-term variable activities.c.short-term variable activities.d.superior business activities.
ANS: A !"#: /oderate %&: '-1
8. )hich of the follo*ing *ould not be considered a value-added activity in the preparation of a ta9 return,
a.printing a copy of the return for the clientb.printing a copy of the return for the ":Sc.installing ta9 soft*ared.checking for accuracy
ANS: - !"#: $asy %&: '-1
1;. )hich of the follo*ing is considered a value-added activity,
"dle time"nspection time1ransfer time
a.yes yes nob.no no noc.yes no
yesd.no yes yes
ANS: !"#: $asy %&: '-(
11. A process map
a.should indicate only value-added activities.b.is also kno*n as a detailed flo*chart.c.should indicate only those steps+processes that are
obvious in the production of goods+services.d.is also kno*n as a value chart.
ANS: !"#: $asy %&: '-(
1(. A value chart should include *hich of the follo*ing,
Service time"nspection time1ransfer time
a.yes no yesb.no no yesc.yes yes
nod.yes yes yes
ANS: ! !"#: $asy %&: '-(
1.. 1he actual time it takes to perform a specific task is called
a.inspection time.b.service time.c.transfer time.d.2uality time.
ANS: !"#: $asy %&: '-(
10. /anufacturing cycle efficiency is a measure of
a.bottlenecks.b.effectiveness.c.efficiency.d.2uality.
ANS: - !"#: $asy %&: '-(
1'. )hich of the follo*ing is typically regarded as a cost driver in traditional accounting practices,
a.number of purchase orders processedb.number of customers servedc.number of transactions processedd.number of direct labor hours
*orked
ANS: ! !"#: $asy %&: '-.
13. )hen a company is labor-intensive6 the cost driver that is probably !east significant *ould be
a.direct labor hours.b.direct labor dollars.c.machine hours.d.cost of materials used.
ANS: - !"#: $asy %&: '-.
15. An activity driver is used for *hich of the follo*ing reasons,
1o measure demands1o measure resources consumed
a.yes yesb.yes noc.no yesd.no
no
ANS: A !"#: $asy %&: '-.
17. 1he term cost driver refers to
a.any activity that can be used to predict cost changes.b.the attempt to control e9penditures at a reasonable level.c.the person *ho gathers
and transfers cost data to the management accountant.d.any activity that causes costs to be incurred.
ANS: ! !"#: /oderate %&: '-.
18. -ost allocation bases in activity-based costing should be
a.cost drivers.b.value-added activities.c.activity centers.d.processes.
ANS: A !"#: $asy %&: '-.
(;. -osts that are common to many different activities *ithin an organization are kno*n as <<<<<<<<<<<< costs.
a.product- or process-levelb.organizational-levelc.batch-leveld.unit-level
ANS: !"#: $asy %&: '-.
(1. "n activity-based costing6 cost reduction efforts are directed at specific
a.cost categories.b.cost pools.c.processes.d.cost drivers.
ANS: ! !"#: $asy %&: '-.
((. Setup time is
A batch costA value-added costA production cost
a.no no yesb.yes yes noc.yes
no yesd.no yes yes
ANS: - !"#: $asy %&: '-.
(.. )hich of the follo*ing have an impact on long-term variable costs,
=roduct variety=roduct comple9ity=rocess comple9ity
a.no no nob.no yes yesc.yes
no yesd.yes yes yes
ANS: ! !"#: /oderate %&: '-0
(0. "n allocating variable costs to products6
a.a volume-based cost driver should be used.b.direct labor hours should al*ays be used as the allocation base.c.a company should use the
same allocation base that it uses for fi9ed costs.d.a company should never use more than one cost driver.
ANS: A !"#: $asy %&: '-0
('. )hich of the follo*ing is not a dra*back of mass customization,
a.1he choices are too numerous.b.1he potential for errors is great.c.%nly a small percentage of available choices is normally
selected.d.All of the above are dra*backs.
ANS: ! !"#: /oderate %&: '-'
(3. Simultaneous engineering helps companies accomplish *hich of the follo*ing,
:educes product:educes processcomple9itycomple9ity
a.no nob.yes yesc.yes nod.no yes
ANS: !"#: $asy %&: '-'
(5. #or traditional costing purposes6 :>! costs are
a.capitalized and allocated over the product life cycle.b.e9pensed as incurred.c.capitalized and amortized over three years.d.charged to the
future accounting periods that receive the benefit of the :>! e9penditures.
ANS: !"#: $asy %&: '-3
(7. 1raditionally6 managers have focused cost reduction efforts on
a.activities.b.processes.c.departments.d.costs.
ANS: ! !"#: $asy %&: '-'
(8. 1oday6 traditional accounting methods are
a.still appropriate for financial reporting.b.still appropriate for providing useful cost information to internal managers.c.still appropriate
for both internal and e9ternal financial reporting.d.outdated for all purposes.
ANS: A !"#: $asy %&: '-3
.;. =roduct costing systems in use over the last 0; years
a.concentrated on using multiple cost pools and cost drivers.b.*ere often technologically incapable of handling activity-based costing
information.c.have generally been responsive to changes in the manufacturing environment.d.have been appropriate for managerial
decision purposes as long as they met the re2uirements of generally accepted accounting principles.
ANS: !"#: /oderate %&: '-'
.1. 1raditional overhead allocations result in *hich of the follo*ing situations,
a.%verhead costs are assigned as period costs to manufacturing operations.b.?igh-volume products are assigned too much overhead6 and
lo*-volume products are assigned too little overhead.c.4o*-volume products are assigned too much6 and high-volume products are
assigned too little overhead.d.1he resulting allocations cannot be used for financial reports.
ANS: !"#: $asy %&: '-'
.(. 1raditionally6 overhead has been assigned based on direct labor hours or machine hours. )hat effect does this have on the cost of a high-
volume item,
a.over-costs the productb.under-costs the productc.has no effect the product costd.cost per unit is unaffected by product volume
ANS: A !"#: $asy %&: '-'
... :elative to traditional product costing6 activity-based costing differs in the *ay costs are
a.processed.b.allocated.c.benchmarked.d.incurred.
ANS: !"#: $asy %&: '-'
.0. @nder activity-based costing6 benchmarks for product cost should contain an allo*ance for
a.idle time.b.idle time and scrap materials.c.spoilage.d.None of the responses are correct.
ANS: ! !"#: /oderate %&: '-0
.'. "n activity-based costing6 final cost allocations assign costs to
a.departments.b.processes.c.products.d.activities.
ANS: - !"#: $asy %&: '-0
.3. "n activity-based costing6 preliminary cost allocations assign costs to
a.departments.b.processes.c.products.d.activities.
ANS: ! !"#: $asy %&: '-0
.5. "n allocating fi9ed costs to products in activity-based costing6
a.direct labor hours should al*ays be used as the allocation base.b.a company should use the same allocation base that it uses for variable
costs.c.a cost driver that is not volume-related should be used.d.machine hours should al*ays be used.
ANS: - !"#: /oderate %&: '-0
.7. %f the follo*ing6 *hich is the best reason for using activity-based costing,
a.to keep better track of overhead costsb.to more accurately assign overhead costs to cost pools so that these costs are better controlledc.to
better assign overhead costs to productsd.to assign indirect service overhead costs to direct overhead cost pools
ANS: - !"#: $asy %&: '-'
.8. A- should be used in *hich of the follo*ing situations,
a.single-product firms *ith multiple stepsb.multiple-product firms *ith only a single processc.multiple-product firms *ith multiple
processing stepsd.in all manufacturing firms
ANS: - !"#: $asy %&: '-'
0;. Activity-based costing and activity-based management are effective in helping managers do all of the follo*ing e"cept
a.trace technology costs to products.b.promote e9cellence standards.c.identify only value-added activities.d.analyze performance
problems.
ANS: - !"#: /oderate %&: '-'
01. Alobal competition has forced American industry to
a.seek increased governmental regulation.b.improve product 2uality and customer service.c.narro* product lines.d.decrease its social
responsibility.
ANS: !"#: $asy %&: '-1
0(. 1he costs of non-2uality *ork do not include
a.the cost of handling complaints.b.the cost of scrap.c.*arranty costs.d.original design costs.
ANS: ! !"#: $asy %&: '-3
0.. "n the Bne* eraB of manufacturing6 good performance indicators are
a.production-based.b.sales-based.c.cost-based.d.consumer-based.
ANS: ! !"#: $asy %&: '-3
00. 1raditional standard costs are inappropriate measures for performance evaluation in the Bne* eraB of manufacturing because they
a.build in allo*ances for non-value-adding activities.b.are based on historical information.c.donCt reflect current costs.d.are ideal goals.
ANS: A !"#: /oderate %&: '-3
0'. 1he amount of time bet*een the development and the production of a product is
a.the product life cycle.b.lead time.c.production time.d.value-added time.
ANS: !"#: $asy %&: '-1
03. #or one product that a firm produces6 the manufacturing cycle efficiency is (; percent. "f the total production time is 1( hours6 *hat is the
total manufacturing time,
a.1'.; hoursb.3;.; hoursc.1(.; hoursd.(.0 hours
ANS: !"#: $asy %&: '-(
05. Activity analysis allo*s managers to
a.classify activities so that processes can be eliminated.b.devise *ays to minimize or eliminate non-value-added activities.c.evaluate
process performance to gain competitive advantages.d.all of the above.
ANS: !"#: $asy %&: '-.
07. )hich of the follo*ing statements about business-value-added activities DEAsF is true,
a.EAs reflect the same processes in all organizations.b.A process map *ill not reflect EAs because such activities are not essential to
process performance.c.EAs are actually value-added activities of an organization that relate to administrative processes.d."t is
impossible to eliminate all EAs in an organization.
ANS: ! !"#: $asy %&: '-1
08. A value chart indicates
a.all steps in a process and the time it takes for them to be completed.b.the value-added steps in a process and the time it takes for them to
be completed.c.the time and cost of all value-added steps in a process.d.the time and costs of all value-added and non-value-added steps in
a process.
ANS: A !"#: /oderate %&: '-1
';. "n the pharmaceutical or food industries6 2uality control inspections *ould most likely be vie*ed as
a.non-value-added activities.b.business-value-added activities.c.value-added-activities.d.process-efficiency activities.
ANS: - !"#: !ifficult %&: '-1
'1. A just-in-time manufacturing process should have s#$stantia!!y less of *hich of the follo*ing than a traditional manufacturing process,
"dle time1ransfer timeEalue-added time-ycle time
a.yes yes yes yesb.yes no no
yesc.yes yes no yesd.no yes yes
no
ANS: - !"#: !ifficult %&: '-3
'(. /anufacturing cycle efficiency should be increased by employing *hich of the follo*ing techni2ues,
&"1#le9ibleatch"nventory/anufacturing Systems/anufacturing
a.yes yes yesb.yes yes noc.no
no nod.yes no yes
ANS: !"#: /oderate %&: '-(
'.. A key concept underlying cost driver analysis is that
a.all cost drivers identified should be used for cost accumulation.b.the cost of measuring a driver does not e9ceed the benefits of using
it.c.only costs occurring at the unit-level should be assigned to products or services.d.organizational+facility costs are non-value-added
and should never be assigned to products or services.
ANS: !"#: /oderate %&: '-.
'0. )hen cost driver analysis is used6 organizational profit or loss can be determined by subtracting
a.organizational costs from total margin provided by products.b.organizational costs from total product revenue.c.total product costs from
total product revenue.d.total unit6 batch6 product+process6 and organizational level costs incurred for a period from total product revenue.
ANS: A !"#: /oderate %&: '-.
''. An activity center is an organizational unit
a.that makes a single product or performs a single service.b.in *hich only value-added activities are performed.c.that incurs only unit6
batch6 or product+process level costs.d.for *hich management *ants separate activity information.
ANS: ! !"#: $asy %&: '-0
'3. 1he follo*ing items are used in tracing costs in an A- system. "n *hich order are they used,
D1F cost objectD(F cost driverD.F activity driverD0F cost pool
a.16 (6 .6 0b.(6 .6 06 1c.(6 06 .6 1d.06 .6 16 (
ANS: - !"#: !ifficult %&: '-0
'5. 1he B:ule of %neB underlies the premise that all costs are
a.variable.b.fi9ed.c.unit-based.d.short-term.
ANS: A !"#: $asy %&: '-0
'7. -ra*ford -ompany makes ten different styles of ine9pensive feather masks. )hich of the follo*ing is this company most likely to have,
a.=roduct comple9ityb.=rocess comple9ityc.=roduct varietyd.=rocess customization
ANS: - !"#: $asy %&: '-'
'8. /ass customization can be achieved through the use of
a.activity-based costing.b.just-in-time inventory.c.fle9ible manufacturing systems.d.all of the above.
ANS: - !"#: $asy %&: '-'
3;. /ass customization is closely associated *ith
=roduct=roduct=rocess=aretovariety comple9ityerrorsprinciple
a.yes no no yesb.yes yes yes noc.no yes
no nod.yes no yes yes
ANS: ! !"#: !ifficult %&: '-'
31. 1he =areto principle is important to consider *hen an organization is
a.assessing *hether to employ activity-based costing versus attribute-based costing.b.evaluating the number of activities that are value-
added versus those that are non-value-added.c.deciding *hether to offer a product in one color versus in ten colors.d.determining *hether
simultaneous engineering activities *ill be impacted by the B:ule of %ne.B
ANS: - !"#: /oderate %&: '-'
3(. Simultaneous engineering can be used to
a.reduce both product and process comple9ity.b.integrate activity-based costing *ith value chain analysis.c.reduce the time-to-market of
ne* products through elimination of batch-level activities.d.reduce manufacturing cycle efficiency by reducing process *aste.
ANS: A !"#: $asy %&: '-'
3.. "f only one or t*o overhead cost pools are used6
a.it *ill be easy to determine *hich products or services are creating the most costs.b.overhead created by a specific product *ill be
assigned to all products.c.the reduction in cost accumulation and allocation time *ill raise company profits.d.allocations should be made
using only unit-based cost drivers.
ANS: !"#: $asy %&: '-0
30. A cost accumulation system should most likely be reevaluated *hen a company has
a.automated one or more production processes.b.introduced ne* products to its customers.c.had its industry deregulated.d.all of the
above.
ANS: ! !"#: $asy %&: '-'
3'. $ngaging in *hich of the follo*ing *ill result in radical changes being made to an organizationCs processes,
a.-ontinuous improvementb.enchmarkingc.:eengineeringd./ass customization
ANS: - !"#: /oderate %&: '-'
33. @se of activity-based costing and activity-based management re2uires
a.the creation of an environment for change in an organization.b.elimination of all non-value-added activities in an organization.c.that
company processes be automated and the use of direct labor be minimal.d.each process be fully mapped and all activities be identified as
value-added or non-value-added.
ANS: A !"#: $asy %&: '-'
35. )hich of the follo*ing is most likely to make the implementation of A-+A/ slo* and difficult,
a.1he inability of all employees to understand the computations involved in A-.b.A lack of involvement by or support from upper
management.c.1he need for dual costing systems.d.An inability to eliminate all business-value-added activities.
ANS: !"#: /oderate %&: '-3
37. Activity-based costing and generally accepted accounting principles differ in that A-
a.does not define product costs in the same manner as AAA=.b.cannot be used to compute an income statement6 but AAA= can.c.is
concerned only *ith costs generated from automated processes6 but AAA= is concerned *ith costs generated from both manual and
automated processes.d.information is useful only to managers6 *hile AAA= information is useful to all organizational stakeholders.
ANS: A !"#: /oderate %&: '-3
38. "f activity-based costing is implemented in an organization *ithout any other changes being implemented6 total overhead costs *ill
a.be reduced because of the elimination of non-value-added activities.b.be reduced because organizational costs *ill not be assigned to
products or services.c.be increased because of the need for additional people to gather information on cost drivers and cost pools.d.remain
constant and simply be spread over products differently.
ANS: ! !"#: !ifficult %&: '-'
%mithson Company
Smithson -ompany produces t*o products DA and F. !irect material and labor costs for =roduct A total G.' D*hich reflects 0 direct
labor hoursFH direct material and labor costs for =roduct total G(( D*hich reflects 1.' direct labor hoursF. 1hree overhead functions are
needed for each product. =roduct A uses ( hours of #unction 1 at G1; per hour6 1 hour of #unction ( at G5 per hour6 and 3 hours of
#unction . at G17 per hour. =roduct uses 16 76 and 1 hours of #unctions 16 (6 and .6 respectively. Smithson produces 7;; units of A and
76;;; units of each period.
5;. :efer to Smithson -ompany "f total overhead is assigned to A and on the basis of units produced6 =roduct A *ill have an overhead cost
per unit of
a.G 77.30.b.G1(..30.c.G1.'.;;.d.None of the responses are correct.
ANS: A
1otal %verhead=roduct A#unction?ourly
:ate?ours1otal1 G 1; ( G (; ( G 5 1 G 5 . G 17 3 G 1;7 1otals8 G 1.' =roduct
#unction?ourly
:ate?ours1otal1 G 1; 1 G 1; ( G 5 7 G '3 . G 17 1 G 17 1otals1; G 70 %?+@nit@nits
=roduced1otal G 1.' 7;; G 1;76;;; G 70 7;;; G 35(6;;; G 57;6;;; 1otal %?=roportionAllocated
%?@nits
=roduced%? per
@nit G 57;6;;; ;.;8;8;8;81 G 5;68;8.;8 7;; G 77.30 D7;;+77;;F
!"#: /oderate %&: '-.
51. :efer to Smithson -ompany "f total overhead is assigned to A and on the basis of units produced6 =roduct *ill have an overhead cost
per unit of
a.G70.;;.b.G77.30.c.G11;.30.d.None of the responses are correct.
ANS:
See I5; for 1otal %verhead -omputations1otal %?=roportionAllocated
%?@nits
=roduced%? per
@nit G 57;6;;; ;.8;8;8;8;8 G 5;86;8;.81 7;;; G 77.30 D7;;;+77;;F
!"#: /oderate %&: '-.
5(. :efer to Smithson -ompany "f total overhead is assigned to A and on the basis of direct labor hours6 =roduct A *ill have an overhead
cost per unit of
a.G'1..(.b.G(;'.(7.c.G031.77.d.None of the responses are correct.
ANS:
=roduct!4 ?rs+@nit@nits =roduced1otal !4
?oursA07;;.(;;1.'7;;;1(;;;1'(;;1otal %?=roportionAllocated
%?@nits
=roduced%? per
@nit G 57;6;;; ;.(1;'(3.13 G 1306(1;.'. 7;; & '(5)'* D.6(;;+1'6(;;F
!"#: /oderate %&: '-.
5.. :efer to Smithson -ompany "f total overhead is assigned to A and on the basis of direct labor hours6 =roduct *ill have an overhead
cost per unit of
a.G'1..(.b.G53.87.c.G'1;..(.d.None of the responses are correct.
ANS:
See I5( for !irect 4abor -omputations1otal %?=roportionAllocated
%?@nits
=roduced%? per
@nit G 57;6;;; ;.57805.370 G 31'6578.05 7;;; & +,)-* D1(6;;;+1'6(;;F
!"#: /oderate %&: '-.
50. :efer to Smithson -ompany "f total overhead is assigned to A and on the basis of overhead activity hours used6 the total product cost
per unit assigned to =roduct A *ill be
a.G73..(.b.G8'.;;.c.G11'.';.d.None of the responses are correct.
ANS: -
1otal %?=roportionAllocated
%?@nits
=roduced%? per
@nit!/ and !4+@nit1otal G 57;6;;; ;.;7('377;5 G 3060;..35 7;; G 7;.'; G .'.;; & ..5)5( D56(;;+756(;;F
!"#: /oderate %&: '-.
5'. :efer to Smithson -ompany "f total overhead is assigned to A and on the basis of overhead activity hours used6 the total product cost
per unit assigned to =roduct *ill be
a.G11'.';.b.G5...(.c.G.0.3;.d.None of the responses are correct.
ANS: !
1otal %?=roportionAllocated
%?@nits
=roduced%? per
@nit!/ and !4+@nit1otal G 57;6;;; ;.8150.118. G 51'6'83... 7;;; G 78.00 G ((.;; & ...)// D7;6;;;+756(;;F
!"#: /oderate %&: '-.
Phe!ps Company
=helps -ompany produces ';6;;; units of =roduct J and 36;;; units of =roduct K during a period. "n that period6 four set-ups *ere
re2uired for color changes. All units of =roduct J are black6 *hich is the color in the process at the beginning of the period. A set-up *as
made for 16;;; blue units of =roduct KH a set-up *as made for 06';; red units of =roduct KH a set-up *as made for ';; green units of
=roduct K. A set-up *as then made to return the process to its standard black coloration and the units of =roduct J *ere run. $ach set-up
costs G';;.
53. :efer to =helps -ompany. "f set-up cost is assigned on a volume basis for the department6 *hat is the appro9imate per-unit set-up cost for
=roduct K,
a.G.;1;.b.G.;.3.c.G.;0;.d.None of the responses are correct.
ANS:
1otal setup cost: G';; 9 0 L G(6;;;
G(6;;;+'36;;; L &()(05+
!"#: /oderate %&: '-.
55. :efer to =helps -ompany. "f set-up cost is assigned on a volume basis for the department6 *hat is the appro9imate per-unit set-up cost for
the red units of =roduct K,
a.G.;.3.b.G.111.c.G.(';.d.None of the responses are correct.
ANS: A
1otal setup cost: G';; 9 0 L G(6;;;
G(6;;;+'36;;; L &()(05+
!"#: /oderate %&: '-.
57. :efer to =helps -ompany. Assume that =helps -ompany has decided to allocate overhead costs using levels of cost drivers. )hat *ould
be the appro9imate per-unit set-up cost for the blue units of =roduct K,
a.G.;0.b.G.('.c.G.';.d.None of the responses are correct.
ANS: -
Setup cost for blue units L G';;.;;
Number of blue units produced L 16;;;
G';;+16;;; L G.';
!"#: /oderate %&: '-.
58. :efer to =helps -ompany. Assume that =helps -ompany has decided to allocate overhead costs using levels of cost drivers. )hat *ould
be the appro9imate per-unit set-up cost for the green units of =roduct K,
a.G1.;;.b.G;.('.c.G;.;0.d.None of the responses are correct.
ANS: A
Setup cost L G';;.;;
@nits produced L ';;
G';;.;;+';; L G1.;;+unit
!"#: /oderate %&: '-.
La1ayette %avings and Loan
4afayette Savings and 4oan had the follo*ing activities6 traceable costs6 and
physical flo* of driver units:
1raceable =hysical flo* of
Activities -osts !river @nits
%pen ne* accounts G';6;;; 16;;; accounts
=rocess deposits .36;;; 0;;6;;; deposits
=rocess *ithdra*als 1'6;;; (;;6;;; *ithdra*als
=rocess loan applications (56;;; 8;; applications
1he above activities are used by the &ennings branch and the -ro*ley branch:
&ennings -ro*ley
Ne* accounts (;; 0;;
!eposits 0;6;;; (;6;;;
)ithdra*als 1'6;;; 176;;;
4oan applications 1;; 13;
7;. :efer to 4afayette Savings and 4oan. )hat is the cost per driver unit for ne* account activity,
a.G;.;8c.G.;.;;b.G;.;5'd.G';.;;
ANS: !
G';6;;; + 16;;; L G';.;; per account
!"#: $asy %&: '-0
71. :efer to 4afayette Savings and 4oan. )hat is the cost per driver unit for the deposit activity,
a.G;.;8c.G.;.;;b.G;.;5'd.G';.;;
ANS: A
G.36;;;+0;;6;;; L G;.;8
!"#: $asy %&: '-0
7(. :efer to 4afayette Savings and 4oan. )hat is the cost per driver unit for the *ithdra*al activity,
a.G;.;8c.G.;.;;b.G;.;5'd.G';.;;
ANS:
G1'6;;;+(;;6;;; L G;.;5'
!"#: $asy %&: '-0
7.. :efer to 4afayette Savings and 4oan. )hat is the cost per driver unit for the loan application activity,
a.G;.;8c.G.;.;;b.G;.;5'd.G';.;;
ANS: -
G(56;;;+8;; L G.;.;;
!"#: $asy %&: '-0
70. :efer to 4afayette Savings and 4oan. ?o* much of the loan application cost *ill be assigned to the &ennings branch,
a.G.6;;;c.G 567;;b.G067;;d.G(56;;;
ANS: A
G.;.;; 9 1;; L G.6;;;
!"#: $asy %&: '-0
7'. :efer to 4afayette Savings and 4oan. ?o* much of the deposit cost *ill be assigned to the -ro*ley branch,
a.G167;;c.G '60;;b.G.63;;d.G.36;;;
ANS: A
G;.;8 M (;6;;; L G167;;
!"#: $asy %&: '-0
73. :efer to 4afayette Savings and 4oan. ?o* much of the ne* account cost *ill be assigned to the -ro*ley branch,
a.G1;6;;;c.G.;6;;;b.G(;6;;;d.G';6;;;
ANS:
0;; M G'; L G(;6;;;
!"#: $asy %&: '-0
?azel -ompany uses activity-based costing. 1he company produces t*o products: coats and hats. 1he annual production and sales
volume of coats is 76;;; units and of hats is 36;;; units. 1here are three activity cost pools *ith the follo*ing e9pected activities and
estimated total costs:
Activity
Cost Poo!Estimated
CostE"pected Activity
CoatsE"pected Activity
Hats
Tota!Activity 1G(;6;;;1;; 0;; ';;Activity (G.56;;;7;; (;;16;;;Activity .G816(;;7;;.6;;;.67;;
75. :efer to ?azel -ompany. @sing A-6 the cost per unit of coats is appro9imately:
a.G(.0;c.G 3.3;b.G..8;d.G1;.'8
ANS: -
ActivityCost A!!ocation Cost per Unit1G(;6;;; M 1;;+';; L G 06;;; + 76;;; G;.';(G.56;;; M 7;;+16;;; L G(863;; + 76;;;
..5;.G816(;; M 7;;+.67;; L G186(;; + 76;;; (.0; Tota! Cost per Unit ,),(
!"#: !ifficult %&: '-0
77. :efer to ?azel -ompany. @sing A-6 the cost per unit of hats is appro9imately:
a.G(.0;c.G1(.;;b.G..8;d.G1'.8;
ANS: !
ActivityCost A!!ocation Cost per Unit1G(;6;;; M 0;;+';; L G 136;;; + 36;;; G(.35(G.56;;; M (;;+16;;; L G 560;;+ 36;;;
1.(..G816(;; M .6;;;+.67;; L G5(6;;; + 36;;; 1(.;; Tota! Cost per Unit .5)-(
!"#: !ifficult %&: '-0
%H2T A3%4E2
1. ?o* has the increase in product variety affected the costs of American business,
ANS:
1he increase in product variety has increased the overhead costs of American firms. 1hese costs include significant setup costs to s*itch
from the production of one product to another6 costs of additional technology6 inventory carrying costs6 purchasing costs6 and scheduling
costs.
!"#: /oderate %&: '-1
(. )hat are the three classes of activities defined by activity-based management. )hat is customer response to each of these activities,
)hat is managementNs reaction to each of these activities,
ANS:
Ealue added activities--increase the *orth of a product or service to a customer and are activities for *hich the customer is *illing to pay.
/anagement is *illing to keep performing these activities.
Non-value added activities--increase the time spent on a product or service but does not increase its *orth. Such activities are
unnecessary from the customerNs point of vie*H therefore management *ill strive to reduce or eliminate such activities.
usiness value-added activities--are essential to business operationsH ho*ever6 the customer is not *illing to pay for them. /anagement
must decide *hich of these activities are truly essential and reduce those *hich are not in order to achieve a higher profit margin.
!"#: /oderate %&: '-1
.. "n activity-based costing6 ho* are cost drivers selected,
ANS:
-ost drivers are selected based on their underlying relationship to organizational costs. "deally6 a causal relationship e9ists bet*een the
cost driver and a cost pool. %nce identified6 cost drivers are used to allocate organizational costs to activities and products and are the
focus of cost control efforts.
!"#: /oderate %&: '-.
0. !iscuss the characteristics of a company for *hich A- *ould be appropriate.
ANS:
-ompanies having the follo*ing characteristics find A- useful: D1F hard-to-make products that sho* large profits and easy-to-make
products that sho* lossesH D(F profit margins that are difficult to e9plainH D.F considerable automation that makes it difficult to assign
overhead to products that use machine hours or direct labor as basesH D0F substantial overhead costs that are not in proportion to the
number of productsH and D'F a *ide variety of services or products.
!"#: /oderate %&: '-3
'. !iscuss the four different levels of costs identified by activity based costing DA-F. ?o* should these types of costs be treated in the
determination of product cost,
ANS:
1he four different levels are unit-level costs6 batch-level costs6 product- or process-level costs6 and organizational or facility costs. @nit-
level costs include direct material6 direct labor6 and some traceable machine costs. 1hese are incurred once for each item produced and are
considered part of total product cost. atch-level costs include machine setup6 material handling6 and purchasing or ordering costs. 1hese
are incurred once for each batch of items produced and are allocated over the total number of units in the batch. 1hese are also considered
part of total product cost. =roduct- or process-level costs include engineering changes6 design6 and development costs. 1hese are allocated
to the total number of units produced in the product line and are considered part of total product cost. %rganizational or facility costs
include building depreciation6 administrative salaries6 and organizational advertising. 1hese costs are not product-related and should be
deducted from net product revenue.
!"#: /oderate %&: '-.
3. A- has been criticized for a variety of reasons. !iscuss these criticisms.
ANS:
%ne criticism is that A- does not promote total 2uality management and continuous improvement. Another criticism of A- is that
A- does not adhere to generally accepted accounting principles. An A- system might allocate nonproduct costs Dresearch and
developmentF to products6 *hile not allocating some traditional product costs Dfactory depreciation on machinesF to products. A third
criticism of A- relates to the cost of implementation. An A- system takes considerable time to implement6 and therefore6 it is very
costly.
!"#: /oderate %&: '-3
P2BLEM
1. ?eirloom -ompany. manufactures hand-made pine storage bo9es for a variety of clients. As production manager6 you have developed the
follo*ing value chart:
%perationAverage Number of !ays:eceiving materials1Storing materials(?andling materials.-utting+measuring materials3Assembling
materials0uilding bo9es 5Attaching hinges("nspection1
a.!etermine the value-added activities and their total time.b.!etermine the non-value-added activities and their total time.c.-alculate the
manufacturing cycle efficiency.
ANS:
a.Ealue-added activities1ime-utting+measuring materials3Assembling materials0uilding bo9es5Attaching hinges ( 1otal production
time DdaysF18 b.Non-value-added activities1ime:eceiving1Storing(?andling."nspection11otal nonproduction time DdaysF5c.1otal lead
time L 18 O 5 L (3 days/-$ L 18+(3 L 5..1P
!"#: $asy %&: '-(
(. /c/ahon -ompany *ould like to institute an activity-based costing system to price products. 1he companyCs =urchasing !epartment
incurs costs of G'';6;;; per year and has si9 employees. =urchasing has determined the three major activities that occur during the year.

ActivityAllocation
/easureI of
=eople1otal
-ost"ssuing purchase ordersI of purchase orders1G1';6;;;:evie*ing receiving reportsI of receiving reports(G15'6;;;/aking phone
callsI of phone calls.G(('6;;;
!uring the year6 ';6;;; phone calls *ere made in the departmentH 1'6;;; purchase orders *ere issuedH and 1;6;;; shipments *ere
received. =roduct A re2uired (;; phone calls6 1'; receiving reports6 and '; purchase orders. =roduct re2uired .'; phone calls6 0;;
receiving reports6 and 1;; purchase orders.
a.!etermine the amount of purchasing department cost that should be assigned to each of these products.b.!etermine purchasing
department cost per unit if 16';; units of =roduct A and .6;;; units of =roduct *ere manufactured during the year.
ANS:
a.G1';6;;;+1'6;;; L G1; per purchase orderG15'6;;;+1;6;;; L G15.'; per receiving reportG(('6;;;+';6;;; L G0.'; per phone
call=roduct A=roduct '; purchase orders G1;$ 5001;; purchase orders G1;$1,0001'; receiving reports G15.'; 2,6250;;
receiving reports G15.'; 7,000(;; phone calls G0.'; 900.'; phone calls G0.'; 1,5751otal
cost$4,025$9,575b.=roduct AL G06;('+16';; L G(.37 per unit=roduct L G86'5'+.6;;; L G..18 per unit
!"#: /oderate %&: '-0
Chapter ..--A!!ocation o1 5oint Costs and Acco#nting 1or By-Prod#cts
MULTIPLE CHICE
1. "f a company obtains t*o salable products from the refining of one ore6 the refining process should be accounted for as aDnF
a.mi9ed cost process.b.joint process.c.e9tractive process.d.reduction process.
ANS: !"#: $asy %&: 11-1
(. &oint costs are allocated to joint products to
a.obtain a cost per unit for financial statement purposes.b.provide accurate management information on production costs of each type of
product.c.compute variances from e9pected costs for each joint product.d.allo* the use of high-lo* analysis by the company.
ANS: A !"#: $asy %&: 11-1
.. &oint costs are allocated to *hich of the follo*ing products,
y-productsScrap
a.yes yesb.yes noc.no nod.no yes
ANS: - !"#: $asy %&: 11-1
0. &oint cost allocation is useful for
a.decision making.b.product costing.c.control.d.evaluating managersC performance.
ANS: !"#: $asy %&: 11-1
'. &oint costs are useful for
a.setting the selling price of a product.b.determining *hether to continue producing an item.c.evaluating management by means of a
responsibility reporting system.d.determining inventory cost for accounting purposes.
ANS: ! !"#: $asy %&: 11-1
3. )hich of the follo*ing components of production are allocable as joint costs *hen a single manufacturing process produces several
salable products,
a.direct material6 direct labor6 and overheadb.direct material and direct labor onlyc.direct labor and overhead onlyd.overhead and direct
material only
ANS: A !"#: $asy %&: 11-(
5. $ach of the follo*ing is a method to allocate joint costs e"cept
a.relative sales value.b.relative net realizable value.c.relative *eight6 volume6 or linear measure.d.average unit cost.
ANS: ! !"#: $asy %&: 11-0
7. &oint costs are most fre2uently allocated based upon relative
a.profitability.b.conversion costs.c.prime costs.d.sales value.
ANS: ! !"#: $asy %&: 11-0
8. )hen allocating joint process cost based on tons of output6 a!! products *ill
a.be salable at split-off.b.have the same joint cost per ton.c.have a sales value greater than their costs.d.have no disposal costs at the split-
off point.
ANS: !"#: $asy %&: 11-0
1;. "f t*o or more products share a common process before they are separated6 the joint costs should be assigned in a manner that
a.assigns a proportionate amount of the total cost to each product on a 2uantitative basis.b.ma9imizes total earnings.c.minimizes
variations in unit production costs.d.does not introduce an element of estimation into the process of accumulating costs for each product.
ANS: A !"#: $asy %&: 11-(
11. Scrap is defined as a
a.finished unit of product that has no sales value.b.residual of the production process that has limited sales value.c.residual of the
production process that can be re*orked for sale as an irregular unit of product.d.residual of the production process that has no sales
value.
ANS: !"#: $asy %&: 11-1
1(. )aste created by a production process is
a.accounted for in the same manner as defective units.b.accounted for as an abnormal loss.c.material that can be sold as an irregular
product.d.discarded rather than sold.
ANS: ! !"#: $asy %&: 11-1
1.. )hile preparing a salad6 you remove the core of a head of lettuce. 1his core *ould be classified as
a.defective.b.shrinkage.c.*aste.d.scrap.
ANS: - !"#: $asy %&: 11-1
10. )hich of the follo*ing is+are synonyms for joint products,
/ain products-o-products
a. no nob. yes yesc. yes nod. no yes
ANS: !"#: $asy %&: 11-1
1'. "n a lumber mill6 *hich of the follo*ing *ould most likely be considered a primary product,
a.( 0 studsb.sa*dustc.*ood chipsd.tree bark
ANS: A !"#: $asy %&: 11-1
13. #isher -ompany produces three products from a joint process. 1he products can be sold at split-off or processed further. "n deciding
*hether to sell at split-off or process further6 management should
a.allocate the joint cost to the products based on relative sales value prior to making the decision.b.allocate the joint cost to the products
based on a physical 2uantity measure prior to making the decision.c.subtract the joint cost from the total sales value of the products before
determining relative sales value and making the decision.d.ignore the joint cost in making the decision.
ANS: ! !"#: $asy %&: 11-.
15. y-products are
a.allocated a portion of joint production cost.b.not sufficient alone6 in terms of sales value6 for management to justify undertaking the joint
process.c.also kno*n as scrap.d.the primary reason management undertook the production process.
ANS: !"#: $asy %&: 11-1
17. )hich of the follo*ing statements is tr#e regarding by-products or scrap,
a.=rocess costing is the only method that should result in by-products or scrap.b.&ob order costing systems *ill never have by-products or
scrap.c.&ob order costing systems may have instances *here by-products or scrap result from the production process.d.=rocess costing
*ill never have by-products or scrap from the production process.
ANS: - !"#: /oderate %&: 11-'
18. )hich of the follo*ing has sales value,
y-products)aste
a.no nob.yes noc.yes yesd.no yes
ANS: !"#: $asy %&: 11-'
(;. @nder an acceptable method of costing by-products6 inventory costs of the by-product are based on the portion of the joint production cost
allocated to the by-product
a.but any subse2uent processing cost is debited to the cost of the main product.b.but any subse2uent processing cost is debited to revenue
of the main product.c.plus any subse2uent processing cost.d.minus any subse2uent processing cost.
ANS: - !"#: $asy %&: 11-'
(1. )hich of the follo*ing is a 1a!se statement about scrap and by-products,
a.oth by-products and scrap are salable.b.A by-product has a higher sales value than does scrap.c.y-products and scrap are the primary
reason that management undertakes the joint process.d.oth scrap and by-products are incidental outputs to the joint process.
ANS: - !"#: $asy %&: 11-'
((. 1he split-off point is the point at *hich
a.output is first identifiable as individual products.b.joint costs are allocated to joint products.c.some products may first be sold.d.all of the
above.
ANS: ! !"#: $asy %&: 11-(
(.. A product may be processed beyond the split-off point if management believes that
a.its marketability *ill be enhanced.b.the incremental cost of further processing *ill be less than the incremental revenue of further
processing.c.the joint cost assigned to it is not already greater than its prospective selling price.d.both a and b.
ANS: ! !"#: $asy %&: 11-.
(0. )hich of the follo*ing *ould not be considered a sunk cost,
a.direct material costb.direct labor costc.joint costd.building cost
ANS: ! !"#: $asy %&: 11-.
('. 1he definition of a sunk cost is
a.a cost that cannot be recovered regardless of *hat happens.b.a cost that relates to money poured into the ground.c.considered the
original cost of an item.d.also kno*n as an opportunity cost.
ANS: A !"#: $asy %&: 11-.
(3. 1he net realizable value approach mandates that the N:E of the by-products+scrap be treated as
a.an increase in joint costs.b.a sunk cost.c.a reduction of joint costs.d.a cost that can be ignored totally.
ANS: - !"#: $asy %&: 11-'
(5. 1he net realizable value approach is normally used *hen the N:E is e9pected to be
insignificantsignificant
a.yes yesb.no yesc.no nod.yes no
ANS: !"#: $asy %&: 11-'
(7. Appro9imated net realizable value at split-off for joint products is computed as
a.selling price at split-off minus further processing and disposal costs.b.final selling price minus further processing and disposal
costs.c.selling price at split-off minus allocated joint processing costs.d.final selling price minus a normal profit margin.
ANS: !"#: $asy %&: 11-0
(8. )hich of the follo*ing is a commonly used joint cost allocation method,
a.high-lo* methodb.regression analysisc.appro9imated sales value at split-off methodd.*eighted average 2uantity techni2ue
ANS: - !"#: $asy %&: 11-0
.;. "ncremental separate costs are defined as all costs incurred bet*een <<<<<<<<<<< and the point of sale.
a.inceptionb.split-off pointc.transfer to finished goods inventoryd.point of addition of disposal costs
ANS: !"#: $asy %&: 11-.
.1. All costs that are incurred bet*een the split-off point and the point of sale are kno*n as
a.sunk costs.b.incremental separate costs.c.joint cost.d.committed costs.
ANS: !"#: $asy %&: 11-.
.(. "ncremental revenues and costs need to be considered *hen using *hich allocation method,
=hysical measuresSales value at split-off
a. yes yesb. yes noc. no nod. no
yes
ANS: - !"#: /oderate %&: 11-0
... 1he method of pricing by-products+scrap *here no value is assigned to these items until they are sold is kno*n as the
a.net realizable value at split-off point method.b.sales value at split-off method.c.realized value approach.d.appro9imated net realizable
value at split-off method.
ANS: - !"#: /oderate %&: 11-'
.0. :elative sales value at split-off is used to allocate
costs beyond split-offjoint costs
a. yes yesb. yes noc. no yesd. no
no
ANS: - !"#: $asy %&: 11-'
.'. #or purposes of allocating joint costs to joint products using the relative sales value at split-off method6 the costs beyond split-off
a.are allocated in the same manner as the joint costs.b.are deducted from the relative sales value at split-off.c.are deducted from the sales
value at the point of sale.d.do not affect the allocation of the joint costs.
ANS: ! !"#: $asy %&: 11-'
.3. Not-for-profit organizations are re2uired by the <<<<<<< to allocate joint costs.
a.A"-=Ab.#ASc.-ASd.AAS
ANS: A !"#: !ifficult %&: 11-3
2atc!i11 Company
:atcliff -ompany produces t*o products from a joint process: Q and K. &oint processing costs for this production cycle are G76;;;.
Rards
Sales price
per yard at
split-off!isposal
cost per
yard at
split-off
#urther
processing
per yard
#inal sale
price per
yardQ1,500$6.00$3.50$1.00$ 7.50K2,200 9.00 5.00 3.00 11.25
"f Q and K are processed further6 no disposal costs *ill be incurred or such costs *ill be borne by the buyer.
.5. :efer to :atcliff -ompany. @sing a physical measure6 *hat amount of joint processing cost is allocated to Q Dround to the nearest dollarF,
a.G06;;;b.G065'5c.G'6';;d.G.6(0.
ANS: !
16';;+.65;; M G76;;; L G.6(0.
!"#: $asy %&: 11-0
.7. :efer to :atcliff -ompany. @sing a physical measure6 *hat amount of joint processing cost is allocated to K Dround to the nearest dollarF,
a.G06;;;b.G.6(0.c.G'6';;d.G065'5
ANS: !
(6(;;+.65;; M G76;;; L G065'5
!"#: $asy %&: 11-0
.8. :efer to :atcliff -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to Q Dround to the nearest
dollarF,
a.G'6';;b.G(6';;c.G06;;;d.G.6(0.
ANS:
RardsSales price
at Split-off
1otalQ16';;G3.;;G 86;;;R(6(;;G8.;;G1867;;G(767;;GD86;;;+(767;;F M G76;;; L G(6';;
!"#: /oderate %&: 11-0
0;. :efer to :atcliff -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to K Dround to the nearest
dollarF,
a.G'6';;b.G06;;;c.G(6';;d.G065'5
ANS: A
RardsSales price
at Split-off
1otalQ16';;G3.;;G 86;;;R(6(;;G8.;;G1867;;G(767;;GD1867;;+(767;;F M G76;;; L G'6';;
!"#: /oderate %&: 11-0
01. :efer to :atcliff -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to Q Dround to the
nearest dollarF,
a.G06;;;b.G'631;c.G(6.8;d.G'6';;
ANS: -
RardsSales price
at Split-off!isposal
-ost+RardN:E+
Splitoff
1otal N:EQ16';;G3.;;G..';G(.';G .65';R(6(;;G8.;;G'.;; G0.;;G 767;;G1(6'';GD.65';+1(6'';F M G76;;; L G(6.8;
!"#: /oderate %&: 11-0
0(. :efer to :atcliff -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to K Dround to the
nearest dollarF,
a.G'6';;b.G06;;;c.G(6.8;d.G'631;
ANS: !
RardsSales price
at Split-off!isposal
-ost+RardN:E+
Splitoff
1otal N:EQ16';;G3.;;G..';G(.';G .65';R(6(;;G8.;;G'.;; G0.;;G 767;;G1(6'';GD767;;+1(6'';F M G76;;; L G'631;
!"#: /oderate %&: 11-0
0.. :efer to :atcliff -ompany. @sing appro9imated net realizable value at split-off6 *hat amount of joint processing cost is allocated to Q
Dround to the nearest dollarF,
a.G.6;8;b.G'6(;0c.G06;;;d.G(6.8;
ANS: A
Rards
#inal
Sales =riceSeparate
-ost per Rard
Net Sales =rice
Appro9imated N:EQ16';;G 5.';G0.'; G..;;G 06';;R(6(;;G11.('G7.'; G..('G 561';G1163';GD06';;+1163';F M G76;;; L G.6;8;
!"#: /oderate %&: 11-0
00. :efer to :atcliff -ompany. @sing appro9imated net realizable value at split-off6 *hat amount of joint processing cost is allocated to K
Dround to the nearest dollarF,
a.G(6583b.G0681;c.G06;;;d.G(6.8;
ANS:
Rards
#inal
Sales =riceSeparate
-ost per Rard
Net Sales =rice
Appro9imated N:EQ16';;G 5.';G0.'; G..;;G 06';;R(6(;;G11.('G7.'; G..('G 561';G1163';GD561';+1163';F M G76;;; L G0681;
!"#: /oderate %&: 11-0
0'. :efer to :atcliff -ompany. )hich products *ould be processed further,
a.only Qb.only Kc.both Q and Kd.neither Q or K
ANS: A
Rards
"ncremental
:evenues
"ncremental
-osts
Net
!ifferenceQ16';;G 1.';G1.;; G ;.';R(6(;;G (.('G..;; GD;.5'F
!"#: /oderate %&: 11-0
6ordon Company
Aordon -ompany produces three products: A6 6 and - from the same process. &oint costs for this production run are G(61;;.
=ounds
Sales price
per lb. at
split-off!isposal
cost per
lb. at
split-off
#urther
processing
per pound
#inal
sales price
per poundA 800$6.50$3.00$2.00$ 7.50 B1,100 8.25 4.20 3.0010.00C1,500 8.00 4.00 3.5010.50
"f the products are processed further6 Aordon -ompany *ill incur the follo*ing disposal costs upon sale: A6 G..;;H 6 G(.;;H and -6
G1.;;.
03. :efer to Aordon -ompany. @sing a physical measurement method6 *hat amount of joint processing cost is allocated to =roduct A Dround
to the nearest dollarF,
a.G5;;b.G358c.G8(5d.G080
ANS: !
D7;;+.60;;F M G(61;; L G080
!"#: $asy %&: 11-0
05. :efer to Aordon -ompany. @sing a physical measurement method6 *hat amount of joint processing cost is allocated to =roduct Dround
to the nearest dollarF,
a.G080b.G358c.G8(5d.G5;;
ANS:
D161;;+.60;;F M G(61;; L G358
!"#: $asy %&: 11-0
07. :efer to Aordon -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to =roduct Dround to the
nearest dollarF,
a.G5;;b.G013c.G5('d.G8'8
ANS: -
RardsSales price
at Split-off
1otalQ7;;G3.'; G '6(;;R161;;G7.(' G 86;5'K16';;G7.;;G1(6;;;G(36(5'GD86;5'+(36(5'F M G(61;; L G5('
!"#: /oderate %&: 11-0
08. :efer to Aordon -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to =roduct - Dround to the
nearest dollarF,
a.G8'8b.G5('c.G5;;d.G013
ANS: A
RardsSales price
at Split-off
1otalQ7;;G3.'; G '6(;;R161;;G7.(' G 86;5'K16';;G7.;;G1(6;;;G(36(5'GD1(6;;;+(36(5'F M G(61;; L G8'8
!"#: /oderate %&: 11-0
';. :efer to Aordon -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to =roduct A Dround to
the nearest dollarF,
a.G5;3b.G8'1c.G5;;d.G000
ANS: !
Rards
Sales price
at Split-off
!isposal
-osts at
Split-%ffNet :ealizable
Ealue at Splitoff
1otalQ7;;G3.';G..;;G..';G (67;;R161;;G7.('G0.(;G0.;'G 060''K16';;G7.;;G0.;;G0.;;G 36;;;G1.6(''GD(67;;+1.6(''F M G(61;; L
G000
!"#: /oderate %&: 11-0
'1. :efer to Aordon -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to =roduct - Dround to
the nearest dollarF,
a.G5;3b.G8'1c.G000d.G5;;
ANS:
Rards
Sales price
at Split-off
!isposal
-osts at
Split-%ffNet :ealizable
Ealue at Splitoff
1otalQ7;;G3.';G..;;G..';G (67;;R161;;G7.('G0.(;G0.;'G 060''K16';;G7.;;G0.;;G0.;;G 36;;;G1.6(''GD36;;;+1.6(''F M G(61;; L
G8'1
!"#: /oderate %&: 11-0
%a$rina Company
Sabrina -ompany is placing an ad in the local paper to advertise its products. 1he ad *ill run for one *eek at a total cost of G'6';;.
Sabrina -ompany has four categories of products as follo*s:
P of floor space
occupied$9pected sales
value?ard*are 20%$35,000 ?and 1ools1515,0004a*n #urniture4564,5004ight #i9tures2025,500
'(. :efer to Sabrina -ompany. )hat amount of advertising cost should be allocated to hard*are6 assuming Sabrina allocates based on
percent of floor space occupied,
a.G16.5'b.G161;;c.G(605'd.G 7('
ANS:
G'6';; M ;.(; L G161;;
!"#: $asy %&: 11-0
'.. :efer to Sabrina -ompany. Assume that Sabrina decides to allocate based on e9pected sales value. )hat amount of advertising cost
should be allocated to light fi9tures Dround to the nearest dollarF,
a.G16.5'b.G'78c.G16;;(d.G(6'.0
ANS: -
GD('6';;+10;6;;;F M G'6';; L G16;;(
!"#: /oderate %&: 11-0
7ersati!e Company
Eersatile -ompany produces four solvents from the same process: -6 !6 $6 and A. &oint product costs are G86;;;. D:ound all ans*ers to
the nearest dollar.F
arrels
Sales price
per barrel
at split-off!isposal
cost
per barrel
at split-off
#urther
processing
costs#inal
sales
price
per
barrel- 750$10.00$6.50 $2.00 $13.50 !1,000 8.004.002.5010.00$1,400 11.007.004.0015.50A2,000
15.009.504.5019.50
"f Eersatile sells the products after further processing6 the follo*ing disposal costs *ill be incurred: -6 G(.';H !6 G1.;;H $6 G..';H A6
G3.;;.
'0. :efer to Eersatile -ompany. @sing a physical measurement method6 *hat amount of joint processing cost is allocated to =roduct !,
a.G16507b.G(6005c.G16.11d.G.608'
ANS: A
D16;;;+'61';F M G86;;; L G16507
!"#: /oderate %&: 11-0
''. :efer to Eersatile -ompany. @sing a physical measurement method6 *hat amount of joint processing cost is allocated to =roduct $,
a.G.608'b.G(6005c.G16507d.G16.11
ANS:
D160;;+'61';F M G86;;; L G(6005
!"#: /oderate %&: 11-0
'3. :efer to Eersatile -ompany. @sing a physical measurement method6 *hat amount of joint processing cost is allocated to =roduct -,
a.G.608'b.G(6005c.G16507d.G16.11
ANS: !
D5';+'61';F M G86;;; L G16.11
!"#: /oderate %&: 11-0
'5. :efer to Eersatile -ompany. @sing a physical measurement method6 *hat amount of joint processing cost is allocated to =roduct A,
a.G.608'b.G(6005c.G16507d.G16.11
ANS: A
D(6;;;+'61';F M G86;;; L G.608'
!"#: /oderate %&: 11-0
'7. :efer to Eersatile -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to =roduct !,
a.G060..b.G(6(53c.G161;7d.G1617(
ANS: !
=roduct
arrelsSales =rice
at Split-%ff
1otal-5';G1;.;;G 56';;!16;;;G 7.;;G 76;;;$160;;G11.;;G 1'60;;A(6;;;G1'.;;G.;6;;;G3;68;;GD76;;;+3;68;;F M G86;;; L G1617(
!"#: /oderate %&: 11-0
'8. :efer to Eersatile -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to =roduct -,
a.G060..b.G(6(53c.G161;7d.G1617(
ANS: -
=roduct
arrelsSales =rice
at Split-%ff
1otal-5';G1;.;;G 56';;!16;;;G 7.;;G 76;;;$160;;G11.;;G 1'60;;A(6;;;G1'.;;G.;6;;;G3;68;;GD56';;+3;68;;F M G86;;; L G161;7
!"#: /oderate %&: 11-0
3;. :efer to Eersatile -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to =roduct A,
a.G060..b.G1617(c.G161;7d.G(6(53
ANS: A
=roduct
arrelsSales =rice
at Split-%ff
1otal-5';G1;.;;G 56';;!16;;;G 7.;;G 76;;;$160;;G11.;;G 1'60;;A(6;;;G1'.;;G.;6;;;G3;68;;GD.;6;;;+3;68;;F M G86;;; L G060..
!"#: /oderate %&: 11-0
31. :efer to Eersatile -ompany. @sing sales value at split-off6 *hat amount of joint processing cost is allocated to =roduct $,
a.G060..b.G1617(c.G161;7d.G(6(53
ANS: !
=roduct
arrelsSales =rice
at Split-%ff
1otal-5';G1;.;;G 56';;!16;;;G 7.;;G 76;;;$160;;G11.;;G 1'60;;A(6;;;G1'.;;G.;6;;;G3;68;;GD1'60;;+3;68;;F M G86;;; L G(6(53
!"#: /oderate %&: 11-0
3(. :efer to Eersatile -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to =roduct -,
a.G16'';b.G16;15c.G06(3.d.G(615;
ANS:
=roduct
arrels
Sales =rice
at Split-%ff
!isposal -ost at
Split-%ffNet :ealizable Ealue at Split-%ff
1otal-5';G1;.;;G3.';G..';G (63('!16;;;G 7.;;G0.;;G0.;;G 06;;;$160;;G11.;;G5.;;G0.;;G
'63;;A(6;;;G1'.;;G8.';G'.';G116;;;G(.6(('GD(63('+(.6(('F M G86;;; L G16;15
!"#: /oderate %&: 11-0
3.. :efer to Eersatile -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to =roduct !,
a.G16'';b.G16;15c.G06(3.d.G(615;
ANS: A
=roduct
arrels
Sales =rice
at Split-%ff
!isposal -ost at
Split-%ffNet :ealizable Ealue at Split-%ff
1otal-5';G1;.;;G3.';G..';G (63('!16;;;G 7.;;G0.;;G0.;;G 06;;;$160;;G11.;;G5.;;G0.;;G
'63;;A(6;;;G1'.;;G8.';G'.';G116;;;G(.6(('GD06;;;+(.6(('F M G86;;; L G16'';
!"#: /oderate %&: 11-0
30. :efer to Eersatile -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to =roduct $,
a.G16;15b.G16'';c.G(615;d.G06(3.
ANS: -
=roduct
arrels
Sales =rice
at Split-%ff
!isposal -ost at
Split-%ffNet :ealizable Ealue at Split-%ff
1otal-5';G1;.;;G3.';G..';G (63('!16;;;G 7.;;G0.;;G0.;;G 06;;;$160;;G11.;;G5.;;G0.;;G
'63;;A(6;;;G1'.;;G8.';G'.';G116;;;G(.6(('GD'63;;+(.6(('F M G86;;; L G(615;
!"#: /oderate %&: 11-0
3'. :efer to Eersatile -ompany. @sing net realizable value at split-off6 *hat amount of joint processing cost is allocated to =roduct A,
a.G16;15b.G16'';c.G(615;d.G06(3.
ANS: !
=roduct
arrels
Sales =rice
at Split-%ff
!isposal -ost at
Split-%ffNet :ealizable Ealue at Split-%ff
1otal-5';G1;.;;G3.';G..';G (63('!16;;;G 7.;;G0.;;G0.;;G 06;;;$160;;G11.;;G5.;;G0.;;G
'63;;A(6;;;G1'.;;G8.';G'.';G116;;;G(.6(('GD116;;;+(.6(('F M G86;;; L G06(3.
!"#: /oderate %&: 11-0
Uni1!o Company
@niflo -ompany produces three products from the same process that has joint processing costs of G061;;. =roducts :6 S6 and 1 are
produced in the follo*ing 2uantities: ('; gallons6 0;; gallons6 and 5'; gallons. @niflo -ompany also incurred advertising costs of
G3;6;;;. 1he ad *as used to run sales for all three products. 1he three products occupy floor space in the follo*ing ratio: ':0:8. D:ound
all ans*ers to the nearest dollar.F
33. :efer to @niflo -ompany. @sing gallons as the physical measurement6 *hat amount of joint processing cost is allocated to =roduct :,
a.G(6183b.G16151c.G16.35d.G 5.(
ANS: !
D(';+160;;F M G061;; L G5.(
!"#: $asy %&: 11-0
35. :efer to @niflo -ompany. @sing gallons as the physical measurement6 *hat amount of joint processing cost is allocated to =roduct S,
a.G(6183b.G16151c.G16.35d.G 5.(
ANS:
D0;;+160;;F M G061;; L G16151
!"#: $asy %&: 11-0
37. :efer to @niflo -ompany. @sing gallons as the physical measurement6 *hat amount of joint processing cost is allocated to =roduct 1,
a.G(6183b.G5.(c.G16.35d.G16151
ANS: A
D5';+160;;F M G061;; L G(6183
!"#: $asy %&: 11-0
38. :efer to @niflo -ompany. Assume that @niflo chooses to allocate its advertising cost among the three products. )hat amount of
advertising cost is allocated to =roduct : using the floor space ratio,
a.G.;6;;;b.G1567;3c.G161.8d.G136335
ANS: !
G3;6;;; M '+17 L G136335
!"#: $asy %&: 11-0
5;. :efer to @niflo -ompany. Assume that @niflo chooses to allocate its advertising cost among the three products. )hat amount of
advertising cost is allocated to =roduct S using the floor space ratio,
a.G811b.G106(00c.G1.6...d.G.;6;;;
ANS: -
0+17 M G3;6;;; L G1.6...
!"#: $asy %&: 11-0
51. :efer to @niflo -ompany. Assume that @niflo chooses to allocate its advertising cost among the three products. )hat amount of
advertising cost is allocated to =roduct 1 using the floor space ratio,
a.G811b.G106(00c.G1.6...d.G.;6;;;
ANS: !
8+17 M G3;6;;; L G.;6;;;
!"#: $asy %&: 11-0
5(. -ourtney -ompany manufactures products A and from a joint process. Sales value at split-off *as G5;;6;;; for 1;6;;; units of A6 and
G.;;6;;; for 1'6;;; units of . @sing the sales value at split-off approach6 joint costs properly allocated to A *ere G10;6;;;. 1otal joint
costs *ere
a.G 876;;;.b.G(;;6;;;.c.G(..6....d.G.';6;;;.
ANS:
GD5;;6;;;+16;;;6;;;F M Q L G10;6;;;
.5;Q L G10;6;;;
Q L G(;;6;;;
!"#: $asy %&: 11-0
)halen -ompany manufactures products Q and R from a joint process that also yields a by-product6 K. :evenue from sales of K is treated
as a reduction of joint costs. Additional information is as follo*s:
=roductsQRK1otal@nits produced 20,000 20,000 10,000 50,000&oint costs ? ? ?
$262,000Sales value at split-off$300,000$150,000$10,000$460,000
&oint costs *ere allocated using the sales value at split-off approach.
5.. :efer to )halen -ompany. 1he joint costs allocated to product Q *ere
a.G 706;;;b.G1;;67;;.c.G1';6;;;.d.G1376;;;.
ANS: !
G(3(6;;; M GD.;;6;;;+0';6;;;F L G1506335 preliminary allocation to =roduct Q
G1;6;;; M GD.;;6;;;+0';6;;;F L G36335 reduction in joint cost from sales of =roduct K
GD1506335 - 36335F L G1376;;;
!"#: $asy %&: 11-'
50. :efer to )halen -ompany. 1he joint costs allocated to product R *ere
a.G 706;;;b.G1;;67;;.c.G1';6;;;.d.G1376;;;.
ANS: A
G(3(6;;; M GD1';6;;;+0';6;;;F L G756... preliminary allocation to =roduct Q
G1;6;;; M GD1';6;;;+0';6;;;F L G.6... reduction in joint cost from sales of =roduct K
GD756... - .6...F L G706;;;
!"#: $asy %&: 11-'
5'. "n joint-product costing and analysis6 *hich of the follo*ing costs is relevant in the decision *hen a product should be sold to ma9imize
profits,
a.Separable costs after the split-off pointb.&oint costs to the split-off pointc.Sales salaries for the production periodd.-osts of ra*
materials purchased for the joint process.
ANS: A !"#: $asy %&: 11-.
Tropica! Company
1ropical -ompany manufactures three products in a joint process *hich costs G('6;;;. $ach product can be sold at split-off or processed
further and then sold. 1;6;;; units of each product are manufactured. 1he follo*ing information is available for the three products:
=roductSales Ealue
at Split-offSeparable =rocessing
-osts after Split-off
Sales Ealue
at -ompletionAG1(G8G(1 1; 0 15- 1' 3 18
53. :efer to 1ropical -ompany. "f =roduct A is processed beyond the split-off point6 profit *ill:
a.increase by G(1;6;;;c.increase by G 8;6;;;b.increase by G1(;6;;;d.remain unchanged
ANS: !
"ncrease in value: G8 per unit
Separable processing costs: G8 per unit
No increase in profit
!"#: $asy %&: 11-0
55. :efer to 1ropical -ompany. 1o ma9imize profits6 *hich products should 1ropical process further,
a.=roduct A onlyc.=roduct - onlyb.=roduct onlyd.=roducts A6 6 and -
ANS:
=roduct
"ncremental
:evenuesSeparable =rocessing
-osts after Split-off
"ncremental
profit "ncreaseAG8G8G; 5 0. - 0 3 D(F
!"#: /oderate %&: 11-0
%H2T A3%4E2
1. riefly discuss the four decisions that management must make concerning joint processes.
ANS:
1he four decisions that managers must make regarding joint processes are as follo*s. 1hey must try to determine *hat joint costs6 selling
costs6 and separate processing costs are e9pected to occur *hen certain products are manufactured. Ne9t6 management must decide on the
best use of resources that are available. /anagers must ne9t classify6 as joint products and+or by-products+scrap6 the output of production.
1he last decision that must be made is *hether some or all of the products *ill be processed further or sold at split-off. 1his decision is
made based on the incremental costs that *ould be incurred to process further and the incremental revenue if processed further. &oint
production costs are irrelevant to this decision.
!"#: /oderate %&: 11-.
(. riefly discuss the si9 steps in the allocation process.
ANS:
1he si9 steps are as follo*s:
1.-hoose the basis on *hich to allocate joint cost.(.4ist all values that comprise the basis...Add up all the values in the list
DI(F.0.!etermine the percentage of the total each item in I( is.'./ultiply the percentage by the cost being allocated.3.#or valuation
purposes6 divide the prorated cost by e2uivalent units of production.
!"#: /oderate %&: 11-0
.. !iscuss briefly the three monetary measurement techni2ues of joint cost allocation.
ANS:
1he sales value at split-off method assigns costs based only on the *eighted proportions of the total sales values of the joint products
*ithout consideration of disposal costs at the split-off point. 1o use this method6 all products must be salable at the split-off point. 1he net
realizable value method assigns costs based on the productCs proportional net realizable value at the split-off point. Net realizable value is
e2ual to product sales revenue at split-off minus any costs necessary to prepare and dispose of the product.
Appro9imated net realizable value at split-off method re2uires that a simulated net realizable value at split-off be calculated. 1his is e2ual
to final sales price minus incremental separate costs. "ncremental separate costs refer to all costs that are incurred bet*een split-off and
the point of sale.
!"#: /oderate %&: 11-0
0. riefly discuss the restrictions and re2uirements on service organizations and not for-profits that relate to joint cost allocation.
ANS:
Service and not-for-profit organizations incur costs that may be considered joint in nature6 such as advertising and printing of
multipurpose documents. Service organizations are not re2uired to allocate these costs to the items *orked on6 delivered6 or advertised but
may choose to do so for a better matching of revenues and e9penses. Not-for-profits are re2uired by the A"-=A to allocate these costs
among the activities of fundraising6 accomplishing an organizational program6 or conducting an administrative function.
!"#: /oderate %&: 11-3
'. riefly discuss the net realizable value at split-off point method of allocating joint costs.
ANS:
1he net realizable value at split-off method assigns joint costs based on each productCs proportional N:E at the split-off point. N:E is
e2ual to sales price minus costs that are necessary to prepare and dispose of the product. 1o use this method6 all products must be salable
at the split-off point.
!"#: /oderate %&: 11-0
3. )hy is the net realizable value of scrap used to lo*er estimated overhead costs in setting a predetermined overhead rate in a job order
costing situation in *hich scrap is e9pected on most jobs,
ANS:
1he net realizable value of scrap is used in this *ay because the amount received from the sale of scrap is considered to be a reduction of
the total cost incurred in the production process. 1his process is similar to the treatment of sales values of assets purchased and then sold
in a BbasketB of goods. 1he estimated cost of scrap is used in setting overhead ratesH therefore6 *hen the scrap is sold the amount received
should be a reduction of total overhead.
!"#: /oderate %&: 11-'
P2BLEM
4a!!ace Company
)allace -ompany produces only t*o products and incurs joint processing costs that total G.65';. =roducts Alpha and eta are produced
in the follo*ing 2uantities during each month: 06';; and 36;;; gallons6 respectively. )allace -ompany also runs one ad each month that
advertises both products at a cost of G16';;. 1he selling price per gallon for the t*o products are G(; and G15.';6 respectively.
1. :efer to )allace -ompany. )hat amount of joint processing costs is allocated to each product based on gallons produced,
ANS:
A L 06';;+1;6';; G.65'; L G163;5
" L 36;;;+1;6';; G.65'; L G(610.
!"#: $asy %&: 11-0
(. :efer to )allace -ompany. )hat amount of advertising cost is allocated to each product based on sales value,
ANS:
A = 4,500 $20.00 =$ 90,000/$195,000 $1,500 = $692I = 6,000 $17.50 = 105,000/$195,000
$1,500 = $808$195,000
!"#: /oderate %&: 11-0
4yman Company
)yman -ompany produces three products from the same process and incurs joint processing costs of G.6;;;.
Aallons
Sales price
per gallon
at split-off!isposal
cost per
gallon at
split-off
#urther
processing
costs
#inal sales
price per
gallon/2,300$ 4.50 $1.25 $1.00 $ 7.00 N1,100 6.003.002.0010.00J 50010.008.002.0015.00
!isposal costs for the products if they are processed further are:
/6 G..;;H N6 G'.';H J6 G1.;;.
.. :efer to )yman -ompany. )hat amount of joint processing cost is allocated to the three products using sales value at split-off,
ANS:
M = 2,300 $ 4.50 =$10,350/$21,950 $3,000 = $1,415N = 1,100 $ 6.00 =$ 6,600/$21,950 $3,000
= $902Q = 500 $10.00 =$ 5,000/$21,950 $3,000 = $683$21,950
!"#: /oderate %&: 11-0
0. :efer to )yman -ompany. )hat amount of joint processing cost is allocated to the three products using net realizable value at split-off,
ANS:
Sales price minus disposal costM$4.50 - $1.25 = $3.25$6.00 - $3.00 = 3.00$10.00 - $8.00 = 2.00M =
2,300 $ 3.25 =$ 7,475/$11,775 $3,000 = $1,904N = 1,100 $ 3.00 =$ 3,300/$11,775 $3,000 =
$ 841Q = 500 $ 2.00 =$ 1,000/$11,775 $3,000 = $ 255$11,775
!"#: /oderate %&: 11-0
'. Aable -ompany produces t*o main products jointly6 A and 6 and -6 *hich is a by-product of . A and are produced form the same
ra* material. - is manufactured from the residue of the process creating .
-osts before separation are apportioned bet*een the t*o main products by the net realizable value method. 1he net revenue realized from
the sale of - is deducted from the cost of . !ata for April *ere as follo*s:
-osts before separation$200,000-osts after separation: A50,000 32,000 -4,000=roduction for April6 in
pounds: A800,000 200,000 -20,000Sales for April: A640,000 !o"n#s $ $.4375 180,000 !o"n#s $ .
65 - 20,000 !o"n#s $ .30
2e8#ired: !etermine the gross profit for April.
ANS:
N:E -:$E$N@$ 20,000 .30 =$6,000-%S1%4,000& N:E$2,000N:E:A %800,000 $.4375& = $350,000
- $50,000 =$300,000B %200,000 $.65& = $130,000 - %$32,000 - $2,000&
= 100,000$400,000A44%-A1"%N:A %$300,000/$400,000 $200,000 =$150,000B %$100,000/$400,000
$200,000 = 50,000@N"1 -%S1:A %$150,000 ' $50,000&/800,000 = $ .25B %$50,000 '
$30,000&/200,000 = $ .40A:%SS =:%#"1:A %$ .4375 - $.25& 640,000 =$120,000B %$ .65 -
$.40& 180,000 = 45,000$165,000
!"#: !ifficult %&: 11-0
3. 4eigh /anufacturers produces three products from a common manufacturing process. 1he total joint cost of producing (6;;; pounds of
=roduct AH 16;;; pounds of =roduct H and 16;;; pounds of =roduct - is G56';;. Selling price per pound of the three products are G1' for
=roduct AH G1; for =roduct H and G' for =roduct -. &oint cost is allocated using the sales value method.
2e8#ired9
a.-ompute the unit cost of =roduct A if all three products are main products.
b.-ompute the unit cost of =roduct A if =roducts A and are main products and =roduct - is a by-product for *hich the cost reduction
method is used.
ANS:
a.SA4$S EA4@$@N"1 -%S1A2,000 $15 =$30,000/$45,000 $7,500 =$5,000/2,000 = $2.50B1,000 $10
=$10,000/$45,000 $7,500 =$1,667/1,000 = $1.67C1,000 $5 =$ 5,000/$45,000 $7,500 =$
833/1,000 = $ .83$45,000$7,500b.1% A44%-A1$: $7,500 - $5,000 = $2,500SA4$S EA4@$@N"1
-%S1A2,000 $15 =$30,000/$40,000 $2,500 =$1,875/2,000 = $.9375B1,000 $10 =$10,000/$40,000
$2,500 =$ 625/1,000 = $.625$40,000$2,500
!"#: $asy %&: 11-0
5. utler /anufacturing -ompany makes three products: A and are considered main products and - a by-product.
=roduction and sales for the year *ere:
((;6;;; lbs. of =roduct A6 salable at G3.;;
17;6;;; lbs. of =roduct 6 salable at G..;;
';6;;; lbs. of =roduct -6 salable at G.8;
=roduction costs for the year:
&oint costs$276,600-osts after separation: =roduct A320,000 =roduct 190,000 =roduct -6,900
2e8#ired9 @sing the by-product revenue as a cost reduction and net realizable value method of assigning joint costs6 compute unit costs
DaF if - is a by-product of the process and DbF if - is a by-product of .
ANS:
a.&%"N1 -%S1$276,600- N:E - %38,100& %50,000 - $.90& - $ 6,9001% A44%-A1$$238,500SA4$S EA4@$ -
-%S1 A#1$: S$=A:A1"%N L N:E220,000 $6 = $1,320,000 - $320,000 =$1,000,000180,000 $3 = $
540,000 - $190,000 = 350,000$1,350,000A44%-A1"%N$1,000,000/$1,350,000 $238,500 =$176,667$
350,000/$1,350,000 $238,500 = 61,833$238,500@N"1 -%S1:A %$176,667 ' $320,000&/220,000
=$2.26B %$61,833 ' $190,000&/180,000 =$1.40b.N:EA $1,000,000 =
$1,000,000/$1,388,100 $276,600 = $199,265B $350,000 ' $38,100 = 388,100/$1,388,100
$276,600 = $ 77,335 $1,388,100@N"1 -%S1A %$199,265 '
$320,000&/220,000 = $2.36B %$77,335 ' $151,900&/180,000 = $1.27
!"#: /oderate %&: 11-0
7. /cJueen -ompany processes ra* material in !epartment 1 from *hich come t*o main products6 A and 6 and a by-product6 -. A is
further processed in !epartment (6 in !epartment .6 and - in !epartment 0. 1he value of the by-product reduces the cost of the main
products6 and sales value is used to allocate joint costs.
!ept 1!ept (!ept .!ept 0-ost "ncurred:$90,000$10,000$8,000$10,000=roduction: A10,000 ()s. 20,000 ()s.
-10,000 ()s.Selling =rice: A$10/(). $5/(). -$2/().
2e8#ired9
a.-ompute unit costs for A and .
b.$nding inventory consists of '6;;; lbs. of and 16;;; lbs. of -. )hat is the value of the inventory,
c.:ecompute a and b allocating cost based on net realizable value.
ANS:
a.&%"N1 -%S1$90,000 - SA4$S EA4@$%20,000&%10,000 $2&$70,000 SA4$S EA4@$A10,000 $10
=$100,000/$200,000 $70,000 = $35,000B20,000 $ 5 = 100,000/$200,000 $70,000 =
$35,000$200,000@N"1 -%S1A%$35,000 ' $10,000&/10,000 = $4.50B%$35,000 ' $8,000&/20,000 =
$2.15b.$N!"NA "NE$N1%:RB5,000 $2.15 =$10,750C1,000 $2.00 = 2,000$12,750c.N:EA$100,000 -
$10,000 =$ 90,000/$182,000 $70,000 = $34,615B$100,000 - $8,000 = 92,000/$182,000 $70,000
= 35,385$182,000 $70,000@N"1 -%S1A%$34,615 ' $10,000&/10,000 = $4.46B%$35,385 '
$8,000&/20,000 = $2.17$N!"NA "NE$N1%:RB5,000 $2.17 =$10,850C1,000 $2.00 = 2,000$12,850
!"#: /oderate %&: 11-0
8. Aibson -orporation manufactures three identifiable product lines6 =roducts A6 6 and -6 from a basic processing operation. 1he cost of
the basic operation is G.(;6;;; for a yield of '6;;; tons of =roduct AH (6;;; tons of =roduct H and 16;;; tons of =roduct -. 1he basic
processing cost is allocated to the product lines in proportion to the relative *eight produced.
Aibson -orporation does both the basic processing *ork and the further refinement of the three product lines. After the basic operation6
the products can be sold at the follo*ing prices per metric ton:
=roduct ASG3;
=roduct SG'.
=roduct -SG.'
-osts to refine each of the three product lines follo*:
=roduct 4inesA-Eariable cost per metric ton $8 $7 $41otal fi9ed cost$20,000$16,000$6,000
1he fi9ed cost of the refining operation *ill not be incurred if the product line is not refined.
1he refined products can be sold at the follo*ing prices per metric ton:
=roduct ASG5'
=roduct SG3'
=roduct -SG0;
2e8#ired9
a.!etermine the total unit cost of each product line in a refined state.b.)hich of the three product lines6 if any6 should be refined and
*hich should be sold after the basic processing operation, Sho* computations.
ANS:
)1 A44%-A1"%Na.A5,0005,000/8,000 $320,000 =$200,000B2,0002,000/8,000 $320,000
= 80,000C1,0001,000/8,000 $320,000 = 40,0008,000$320,000@N"1 -%S1A%$200,000 '
$20,000&/5,000 ' $8 =$52B%$80,000 ' $16,000&/2,000 ' $7 =$55C%$40000 ' $6,000&/1,000 ' $4
=$50b.-?ANA$ "N :$E$N@$ - -?ANA$ "N -%S1 L -?ANA$ "N =:%#"1A$75-$60 = $15 - %$20,000/5,000& ' $8
= ' $3B$65-$53 = $12 - %$16,000/2,000& ' $7 = * $3C$40-$35 = $5 - %$6,000/1,000& ' $4 =*
$51herefore6 process only =roduct A.
!"#: /oderate %&: 11-0
1;. :eed -ompany produced three joint products at a joint cost of G1;;6;;;. 1hese products *ere processed further and sold as follo*s:
=roductSalesAdditional =rocessing -ostsA$245,000 $200,000 330,000300,000-175,000100,000
1he company has had an opportunity to sell at split-off directly to other processors. "f that alternative had been selected6 sales *ould have
been: A6 G'36;;;H 6 G(76;;;H and -6 G'36;;;.
1he company e9pects to operate at the same level of production and sales in the forthcoming year.
2e8#ired9 -onsider all the available information and assume that all costs incurred after split-off are variable.
a.-ould the company increase net income by altering its processing decisions, "f so6 *hat *ould be the e9pected overall net income,
b.)hich products should be processed further and *hich should be sold at split-off,
ANS:
a.-urrently N" is Sales $750,000 Additional =rocessing -osts%600,000&$150,000 - &-%100,000&$ 50,000 N" can be
increased by G116;;; if A is not processed.A-b. Sales$189,000 $302,000 $119,000 - -ost%200,000&%300,000&
%100,000&N"+D4%SSF$%11,000&$ 2,000 $ 19,000
!"#: $asy %&: 11-0
Chapter ---Brea:-Even Point and Cost-7o!#me-Pro1it Ana!ysis
MULTIPLE CHICE
1. -E= analysis re2uires costs to be categorized as
a.either 1i"ed or varia$!e)b.fi9ed6 mi9ed6 or variable.c.product or period.d.standard or actual.
ANS: A !"#: $asy %&: 8-168-3
(. )ith respect to fi9ed costs6 -E= analysis assumes total fi9ed costs
a.per unit remain constant as volume changes.b.remain constant from one period to the ne9t.c.vary directly *ith volume.d.remain
constant across changes in vo!#me)
ANS: ! !"#: $asy %&: 8-(68-3
.. -E= analysis relies on the assumptions that costs are either strictly fi9ed or strictly variable. -onsistent *ith these assumptions6 as
volume decreases total
a.fi9ed costs decrease.b.variable costs remain constant.c.costs decrease.d.costs remain constant.
ANS: - !"#: $asy %&: 8-(68-3
0. According to -E= analysis6 a company could never incur a loss that e9ceeded its total
a.variable costs.b.fi9ed costs.c.costs.d.contribution margin.
ANS: - !"#: $asy %&: 8-(68-3
'. -E= analysis is based on concepts from
a.standard costing.b.varia$!e costing)c.job order costing.d.process costing.
ANS: !"#: $asy %&: 8-(
3. -ost-volume-profit analysis is a techni2ue available to management to understand better the interrelationships of several factors that
affect a firmCs profit. As *ith many such techni2ues6 the accountant oversimplifies the real *orld by making assumptions. )hich of the
follo*ing is not a major assumption underlying -E= analysis,
a.All costs incurred by a firm can be separated into their fi9ed and variable components.b.1he product selling price per unit is constant at
all volume levels.c.%perating efficiency and employee productivity are constant at all volume levels.d.;or m#!ti-prod#ct sit#ations< the
sa!es mi" can vary at a!! vo!#me !eve!s.
ANS: ! !"#: $asy %&: 8-(
5. "n -E= analysis6 linear functions are assumed for
a.contri$#tion margin per #nit)b.fi9ed cost per unit.c.total costs per unit.d.all of the above.
ANS: A !"#: $asy %&: 8-(68-3
7. )hich of the follo*ing factors is involved in studying cost-volume-profit relationships,
a.product mi9b.variable costsc.fi9ed costsd.a!! o1 the a$ove
ANS: ! !"#: $asy %&: 8-(
8. -ost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only
a.fi9ed and mi9ed costs.b.relevant fi9ed costs.c.relevant variable costs.d.a re!evant range o1 vo!#me)
ANS: ! !"#: $asy %&: 8-(
1;. After the level of volume e9ceeds the break-even point
a.the contribution margin ratio increases.b.the tota! contri$#tion margin e"ceeds the tota! 1i"ed costs)c.total fi9ed costs per unit *ill
remain constant.d.the total contribution margin *ill turn from negative to positive.
ANS: !"#: $asy %&: 8-(
11. )hich of the follo*ing *ill decrease the break-even point,
!ecrease in
fi9ed cost"ncrease in direct
labor cost"ncrease in
selling price
a.yes yes yesb.yes no yesc.yes no
nod.no yes no
ANS: !"#: $asy %&: 8-(
1(. At the break-even point6 fi9ed costs are al*ays
a.less than the contribution margin.b.e8#a! to the contri$#tion margin)c.more than the contribution margin.d.more than the variable
cost.
ANS: !"#: $asy %&: 8-(
1.. 1he method of cost accounting that lends itself to break-even analysis is
a.varia$!e)b.standard.c.absolute.d.absorption.
ANS: A !"#: $asy %&: 8-(
10. Aiven the follo*ing notation6 *hat is the break-even sales level in units,
S= L selling price per unit6 #- L total fi9ed cost6 E- L variable cost per unit
a.S=+D#-+E-Fb.#-+DE-+S=Fc.E-+DS= - #-Fd.;C=>%P - 7C?
ANS: ! !"#: $asy %&: 8-(
1'. -onsider the e2uation Q L Sales - TD-/+SalesF DSalesFU. )hat is Q,
a.net incomeb.fi9ed costsc.contribution margind.varia$!e costs
ANS: ! !"#: /oderate %&: 8-(
13. "f a firmCs net income does not change as its volume changes6 the firmDCsF
a.must be in the service industry.b.must have no fi9ed costs.c.sales price must e2ual G;.d.sa!es price m#st e8#a! its varia$!e costs.
ANS: ! !"#: /oderate %&: 8-(
15. reak-even analysis assumes over the relevant range that
a.tota! varia$!e costs are !inear)b.fi9ed costs per unit are constant.c.total variable costs are nonlinear.d.total revenue is nonlinear.
ANS: A !"#: $asy %&: 8-(68-3
17. 1o compute the break-even point in units6 *hich of the follo*ing formulas is used,
a.#-+-/ per unitb.#-+-/ ratioc.-/+-/ ratiod.D#-OE-F+-/ ratio
ANS: A !"#: $asy %&: 8-(
18. A firmCs break-even point in dollars can be found in one calculation using *hich of the follo*ing formulas,
a.#-+-/ per unitb.E-+-/c.#-+-/ ratiod.E-+-/ ratio
ANS: - !"#: $asy %&: 8-(
(;. 1he contribution margin ratio a!@ays increases *hen the
a.variable costs as a percentage of net sales increase.b.variable costs as a percentage of net sales decrease.c.break-even point
increases.d.break-even point decreases.
ANS: !"#: $asy %&: 8-(68-3
(1. "n a multiple-product firm6 the product that has the highest contribution margin per unit *ill
a.generate more profit for each G1 of sales than the other products.b.have the highest contribution margin ratio.c.generate the most profit
for each unit sold.d.have the lo*est variable costs per unit.
ANS: - !"#: $asy %&: 8-068-3
((. <<<<<<<<<<<<< focuses only on factors that change from one course of action to another.
a."ncremental analysisb./argin of safetyc.%perating leveraged.A break-even chart
ANS: A !"#: $asy %&: 8-.
(.. 1he margin of safety *ould be negative if a companyDCsF
a.*as presently operating at a volume that is belo* the break-even point.b.present fi9ed costs *ere less than its contribution
margin.c.variable costs e9ceeded its fi9ed costs.d.degree of operating leverage is greater than 1;;.
ANS: A !"#: $asy %&: 8-'
(0. 1he margin of safety is a key concept of -E= analysis. 1he margin of safety is the
a.contribution margin rate.b.difference bet*een budgeted contribution margin and actual contribution margin.c.difference bet*een
budgeted contribution margin and break-even contribution margin.d.difference bet*een budgeted sales and break-even sales.
ANS: ! !"#: $asy %&: 8-'
('. /anagement is considering replacing an e9isting sales commission compensation plan *ith a fi9ed salary plan. "f the change is adopted6
the companyCs
a.break-even point must increase.b.margin of safety must decrease.c.operating leverage must increase.d.profit must increase.
ANS: - !"#: /oderate %&: 8-'
(3. As projected net income increases the
a.degree of operating leverage declines.b.margin of safety stays constant.c.break-even point goes do*n.d.contribution margin ratio goes
up.
ANS: A !"#: /oderate %&: 8-'
(5. A managerial preference for a very lo* degree of operating leverage might indicate that
a.an increase in sales volume is e9pected.b.a decrease in sales volume is e9pected.c.the firm is very unprofitable.d.the firm has very high
fi9ed costs.
ANS: !"#: /oderate %&: 8-'
Thompson Company
elo* is an income statement for 1hompson -ompany:
Sales$400,000 Eariable costs%125,000&-ontribution margin$275,000 #i9ed costs%200,000&=rofit before ta9es$ 75,000
(7. :efer to 1hompson -ompany. )hat is 1hompsonNs degree of operating leverage,
a...35b.'...c.1.0'd.(.35
ANS: A
GD(5'6;;;+5'6;;;F L ..35
!"#: /oderate %&: 8-'
(8. :efer to 1hompson -ompany. ased on the cost and revenue structure on the income statement6 *hat *as 1hompsonNs break-even point
in dollars,
a.G(;;6;;;b.G.('6;;;c.G.;;6;;;d.G(8;68;8
ANS: !
-/ =ercentage L GD(5'+0;;F L .375'
.375'9 - G7;;6;;; L ;
9 L G(8;68;8
!"#: /oderate %&: 8-.
.;. :efer to 1hompson -ompany. )hat *as 1hompsonNs margin of safety,
a.G(;;6;;;b.G5'6;;;c.G1;;6;;;d.G1;86;81
ANS: !

/argin of Safety L GD0;;6;;; - (8;68;8F
L G1;86;81
!"#: $asy %&: 8-'
.1. :efer to 1hompson -ompany. Assuming that the fi9ed costs are e9pected to remain at G(;;6;;; for the coming year and the sales price
per unit and variable costs per unit are also e9pected to remain constant6 ho* much profit before ta9es *ill be produced if the company
anticipates sales for the coming year rising to 1.; percent of the current yearNs level,
a.G856';;b.G18'6;;;c.G1'56';;d.A prediction cannot be made from the information given.
ANS: -
-ontribution /argin M 1.(; L Ne* -ontribution /argin
G(5'6;;; M 1.(; L G.'56';;
-ontribution /argin - #i9ed -osts L =rofit
GD.'56';; - (;;6;;;F L G1'56';;
!"#: /oderate %&: 8-.
7a!#e Pro
Ealue =ro produces and sells a single product. "nformation on its costs follo*:
Eariable costs: SA>AG( per unit =roductionG0 per unit#i9ed costs: SA>AG1(6;;; per year =roductionG1'6;;; per year
.(. :efer to Ealue =ro. Assume Ealue =ro produced and sold '6;;; units. At this level of activity6 it produced a profit of G176;;;. )hat *as
Ealue =roCs sales price per unit,
a.G1'.;;b.G11.0;c.G8.3;d.G1;.;;
ANS: A
=rofit O #i9ed -osts L -ontribution /argin
G176;;; O G(56;;; L G0'6;;;
G0'6;;; + '6;;; units L G8 contribution margin per unit
-ontribution /argin O Eariable -osts L Sales =rice+@nit
GD8 O D0 O (FF L G1'+@nit
!"#: /oderate %&: 8-.
... :efer to Ealue =ro. "n the upcoming year6 Ealue =ro estimates that it *ill produce and sell 06;;; units. 1he variable costs per unit and the
total fi9ed costs are e9pected to be the same as in the current year. ?o*ever6 it anticipates a sales price of G13 per unit. )hat is Ealue
=roCs projected margin of safety for the coming year,
a.G56;;;b.G(;67;;c.G1760;;d.G1.6;;;
ANS:
=rofit at 06;;; units
Aross Sales L G13 M 06;;; units L G306;;;
-ontribution /argin L GD13 - 3F L G1;+unit
DG1;M06;;;F - G(56;;; L GD0;6;;; - (56;;;F L G1.6;;;
reakeven
;.3('9 - G(56;;; L G;
9 L G0.6(;;
GD306;;; - 0.6(;;F L G(;67;;
!"#: /oderate %&: 8-'
.0. ?arris /anufacturing incurs annual fi9ed costs of G(';6;;; in producing and selling a single product. $stimated unit sales are 1('6;;;.
An after-ta9 income of G5'6;;; is desired by management. 1he company projects its income ta9 rate at 0; percent. )hat is the ma9imum
amount that ?arris can e9pend for variable costs per unit and still meet its profit objective if the sales price per unit is estimated at G3,
a.G...5b.G..'8c.G..;;d.G..5;
ANS: -
efore 1a9 "ncome: G5'6;;; + ;.3; L G1('6;;;
#i9ed -osts: (';6;;;
-ontribution /argin: G.5'6;;;
=rojected Sales G5';6;;;
less: -ontribution /argin .5'6;;;
Eariable -osts G.5'6;;;
G.5'6;;; + 1('6;;; units G.+unit
!"#: /oderate %&: 8-.
;o!: Company
1he follo*ing information relates to financial projections of #olk -ompany:
=rojected sales3;6;;; units=rojected variable costsG(.;; per unit=rojected fi9ed costsG';6;;; per year=rojected unit sales priceG5.;;
.'. :efer to #olk -ompany. ?o* many units *ould #olk -ompany need to sell to earn a profit before ta9es of G1;6;;;,
a.('6510b.1;6;;;c.76'51d.1(6;;;
ANS: !
-ontribution /argin per @nit: G'
G'9 - G';6;;; - G1;6;;;
G'9 L G3;6;;;
9 L 1(6;;; units
!"#: /oderate %&: 8-.
.3. :efer to #olk -ompany. "f #olk -ompany achieves its projections6 *hat *ill be its degree of operating leverage,
a.3.;;b.1.(;c.1.37d.(.0;
ANS:
Net profit L D3;6;;; units M G'+unitF - G';6;;;
L G.;;6;;; - G';6;;;
L G(';6;;;
!%4 L GD.;;6;;;+1(;6;;;F L 1.(;
!"#: /oderate %&: 8-'
.5. @ni2ue -ompany manufactures a single product. "n the prior year6 the company had sales of G8;6;;;6 variable costs of G';6;;;6 and fi9ed
costs of G.;6;;;. @ni2ue e9pects its cost structure and sales price per unit to remain the same in the current year6 ho*ever total sales are
e9pected to increase by (; percent. "f the current year projections are realized6 net income should e9ceed the prior yearNs net income by:
a.1;; percent.b.7; percent.c.(; percent.d.'; percent.
ANS:
-ontribution margin: G0;6;;;
Net profit: GD0;6;;; - .;6;;;F L G1;6;;;
(;P -/ increase: G0;6;;; M 1.(; L G076;;;
Net profit: GD076;;; - .;6;;;F L G176;;;
"ncrease in profit G76;;;
G76;;;+G1;6;;; L 7;P
!"#: /oderate %&: 8-.
Ec!ectic Corporation
$clectic -orporation manufactures and sells t*o products: A and . 1he operating results of the company are as follo*s:
=roduct A=roduct Sales in units2,0003,000Sales price per unit$10$5Eariable costs per unit73
"n addition6 the company incurred total fi9ed costs in the amount of G86;;;.
.7. :efer to $clectic -orporation.. ?o* many total units *ould the company have needed to sell to break even,
a..65';b.5';c..63;;d.167;;
ANS: A
4et L 1.'A
.A O (D1.'AF - G86;;; L G;
3A - G86;;; L G;
A L 16';;
L (6(';
1otal units L .65';
!"#: /oderate %&: 8-0
.8. :efer to $clectic -orporation. "f the company *ould have sold a total of 36;;; units6 consistent *ith -E= assumptions ho* many of
those units *ould you e9pect to be =roduct ,
a..6;;;b.06;;;c..63;;d..6';;
ANS: -
A O 1.'A L 36;;; units
(.'A L 36;;; units
A L (60;; units
L .63;; units
!"#: /oderate %&: 8-0
0;. :efer to $clectic -orporation. ?o* many units *ould the company have needed to sell to produce a profit of G1(6;;;,
a.765';b.(;6;;;c.1;6;;;d.760;;
ANS: A
.A O (D1.'AF - G86;;; L G1(6;;;
3A L G(16;;;
A L .6';; units
L '6('; units
1otal L 765'; units
!"#: /oderate %&: 8-0
Brittany Company
elo* is an income statement for rittany -ompany:
Sales$300,000 Eariable costs%150,000&-ontribution margin$150,000 #i9ed costs%100,000&=rofit before ta9es$ 50,000
01. :efer to rittany -ompany. )hat *as the companyCs margin of safety,
a.G';6;;;b.G1;;6;;;c.G1';6;;;d.G('6;;;
ANS:
/argin of safety L Sales - $= Sales
-/ L .';
$= Sales L .';9 - G1;;6;;; L ;
L .';9 L G1;;6;;;
9 L G(;;6;;;
GD.;;6;;; - (;;6;;;F L G1;;6;;;
!"#: /oderate %&: 8-'
0(. :efer to rittany -ompany. "f the unit sales price for rittanyNs sole product *as G1;6 ho* many units *ould it have needed to sell to
produce a profit of G0;6;;;,
a.(56';;b.(86;;;c.(76;;;d.canCt be determined from the information given
ANS: -
-ontribution /argin at G0;6;;; profit: GD0;6;;; O 1;;6;;;F L G10;6;;;
-ontribution /argin :atio: ;.';
G10;6;;; + .'; L G(7;6;;;
G(7;6;;; + G1; L (76;;; units
!"#: /oderate %&: 8-.
0.. A firm estimates that it *ill sell 1;;6;;; units of its sole product in the coming period. "t projects the sales price at G0; per unit6 the -/
ratio at 3; percent6 and profit at G';;6;;;. )hat is the firm budgeting for fi9ed costs in the coming period,
a.G163;;6;;;b.G(60;;6;;;c.G161;;6;;;d.G168;;6;;;
ANS: !
=rofit O #i9ed -ost L D1;;6;;; units M G3;+unit -/F
#i9ed -ost L D1;;6;;; units M G(0+unit -/F - =rofit
L G(60;;6;;; - G';;6;;;
L G168;;6;;;
!"#: /oderate %&: 8-.
00. Sombrero -ompany manufactures a *estern-style hat that sells for G1; per unit. 1his is its sole product and it has projected the break-
even point at ';6;;; units in the coming period. "f fi9ed costs are projected at G1;;6;;;6 *hat is the projected contribution margin ratio,
a.7; percentb.(; percentc.0; percentd.3; percent
ANS:
#i9ed -ostsL-ontribution /argin at reakeven =oint
L G1;;6;;;
reakeven Sales: G';;6;;;
-/ :atio: GD1;;6;;;+';;6;;;F L (;P
!"#: /oderate %&: 8-.
Brandon Company
randon -ompany manufactures a single product. $ach unit sells for G1'. 1he firmCs projected costs are listed belo*:
Eariable costs per unit: =roductionG' SA>AG1#i9ed costs: =roductionG0;6;;; SA>AG3;6;;; $stimated volume(;6;;; units
0'. :efer to randon -ompany. )hat is randonCs projected margin of safety for the current year,
a.G1..6...b.G1';6;;;c.G7;6;;;d.G1;;6;;;
ANS: A
-ontribution /argin L G8+unit
-ontribution /argin :atio L 3;P
reakeven =oint L G1;;6;;;+.3; L G1336335
Sales Eolume L (;6;;; units M G1'+unit L G.;;6;;;
/argin of Safety L GD.;;6;;; - 1336335F L G1..6...
!"#: /oderate %&: 8-'
03. :efer to randon -ompany. )hat is randonCs projected degree of operating leverage for the current year,
a.(.('b.1.7;c...5'd.1.35
ANS: A
-ontribution /argin L G17;6;;;
Net "ncome L 7;6;;;
!egree of %perating 4everage L G17;6;;;+7;6;;; L (.''
!"#: /oderate %&: 8-'
A!pha< Beta< and Epsi!on Companies
elo* are income statements that apply to three companies: Alpha6 eta6 and $psilon:
Alpha -o.eta -o.$psilon -o.Sales $100$100$100Eariable costs %10& %20& %30&-ontribution margin
$ 90$ 80$ 70#i9ed costs %30& %20& %10&=rofit before ta9es$ 60$ 60$ 60
05. :efer to Alpha6 eta6 and $psilon -ompanies. )ithin the relevant range6 if sales go up by G1 for each firm6 *hich firm *ill e9perience the
greatest increase in profit,
a.Alpha -ompanyb.eta -ompanyc.$psilon -ompanyd.canCt be determined from the information given
ANS: A
Alpha -ompany *ill have the greatest increase in profit6 because it has the greatest contribution margin per unit.
!"#: $asy %&: 8-.
07. :efer to Alpha6 eta6 and $psilon -ompanies. )ithin the relevant range6 if sales go up by one unit for each firm6 *hich firm *ill
e9perience the greatest increase in net income,
a.Alpha -ompanyb.eta -ompanyc.$psilon -ompanyd.canCt be determined from the information given
ANS: !
=rice per unit is not given.
!"#: $asy %&: 8-.
08. :efer to Alpha6 eta6 and $psilon -ompanies. At sales of G1;;6 *hich firm has the highest margin of safety,
a.Alpha -ompanyb.eta -ompanyc.$psilon -ompanyd.1hey all have the same margin of safety.
ANS: -
$psilon -ompany has the lo*est amount of fi9ed costs to be covered.
!"#: /oderate %&: 8-.
';. /ike is interested in entering the catfish farming business. ?e estimates if he enters this business6 his fi9ed costs *ould be G';6;;; per
year and his variable costs *ould e2ual .; percent of sales. "f each catfish sells for G(6 ho* many catfish *ould /ike need to sell to
generate a profit that is e2ual to 1; percent of sales,
a.0;6;;;b.016335c..'6;;;d.No level of sales can generate a 1; percent net return on sales.
ANS:
4et 9 L sales in dollars
9 - ..;9 - G';6;;; L .1;9
.3;9 L G';6;;;
9 L G7.6... @nits L G7.6...+G( per unit L 016335 units
!"#: !ifficult %&: 8-.
'1. 1he follo*ing information pertains to Saturn -ompanyNs cost-volume-profit relationships:
reak-even point in units sold1,000Eariable costs per unit$5001otal fi9ed costs$150,000
?o* much *ill be contributed to profit before ta9es by the 16;;1st unit sold,
a.G3';b.G';;c.G1';d.G;
ANS: -
#i9ed -ost L -ontribution /argin
L G1';6;;;
-ontribution /argin+@nit L -ontribution /argin+@nits
G1';6;;;+16;;; units L G1';+unit
!"#: /oderate %&: 8-.
'(. "nformation concerning Averie -orporationCs =roduct A follo*s:
Sales$300,000Eariable costs240,000#i9ed costs40,000
Assuming that Averie increased sales of =roduct A by (; percent6 *hat should the profit from =roduct A be,
a.G(;6;;;b.G(06;;;c.G.(6;;;d.G7;6;;;
ANS: -
-ontribution margin at G.;;6;;; in sales L G3;6;;;
"ncrease contribution margin by (;P L G3;6;;; M 1.(; L G5(6;;;
-ontribution margin - fi9ed costs L =rofit
GD5(6;;; - 0;6;;;F L G.(6;;;
!"#: /oderate %&: 8-.
'.. 4edbetter -ompany reported the follo*ing results from sales of '6;;; units of =roduct A for &une:
Sales$200,000 Eariable costs%120,000&#i9ed costs %60,000&%perating income$ 20,000
Assume that 4edbetter increases the selling price of =roduct A by 1; percent in &uly. ?o* many units of =roduct A *ould have to be sold
in &uly to generate an operating income of G(;6;;;,
a.06;;;b.06.;;c.06'0'd.'6;;;
ANS: A
"f sales price per unit is increased by 1; percent6 less units *ill have to be sold to generate gross revenues of G(;;6;;;.
Sales price per unit L G(;;6;;;+'6;;; units L G0;+unit
G0;+unit M 1.1; L G00+unit
GD(;;6;;; + 00+unitF L 06'0' units
!"#: /oderate %&: 8-.
'0. %n a break-even chart6 the break-even point is located at the point *here the total
a.revenue line crosses the total fi9ed cost line.b.revenue line crosses the total contribution margin line.c.fi9ed cost line intersects the total
variable cost line.d.revenue line crosses the total cost line.
ANS: ! !"#: $asy %&: 8-.
''. "n a -E= graph6 the slope of the total revenue line indicates the
a.rate at *hich profit changes as volume changes.b.rate at *hich the contribution margin changes as volume changes.c.ratio of increase of
total fi9ed costs.d.total costs per unit.
ANS: !"#: /oderate %&: 8-.
'3. "n a -E= graph6 the area bet*een the total cost line and the total revenue line represents total
a.contribution margin.b.variable costs.c.fi9ed costs.d.profit.
ANS: ! !"#: $asy %&: 8-.
'5. "n a -E= graph6 the area bet*een the total cost line and the total fi9ed cost line yields the
a.fi9ed costs per unit.b.total variable costs.c.profit.d.contribution margin.
ANS: !"#: $asy %&: 8-.
'7. "f a companyCs fi9ed costs *ere to increase6 the effect on a profit-volume graph *ould be that the
a.contribution margin line *ould shift up*ard parallel to the present line.b.contribution margin line *ould shift do*n*ard parallel to the
present line.c.slope of the contribution margin line *ould be more pronounced DsteeperF.d.slope of the contribution margin line *ould be
less pronounced DflatterF.
ANS: !"#: /oderate %&: 8-.
'8. "f a companyCs variable costs per unit *ere to increase but its unit selling price stays constant6 the effect on a profit-volume graph *ould
be that the
a.contribution margin line *ould shift up*ard parallel to the present line.b.contribution margin line *ould shift do*n*ard parallel to the
present line.c.slope of the contribution margin line *ould be pronounced DsteeperF.d.slope of the contribution margin line *ould be less
pronounced DflatterF.
ANS: ! !"#: $asy %&: 8-.
3;. 1he most useful information derived from a cost-volume-profit chart is the
a.amount of sales revenue needed to cover enterprise variable costs.b.amount of sales revenue needed to cover enterprise fi9ed
costs.c.relationship among revenues6 variable costs6 and fi9ed costs at various levels of activity.d.volume or output level at *hich the
enterprise breaks even.
ANS: - !"#: $asy %&: 8-.
%H2T A3%4E2
1. ?o* do changes in volume affect the break-even point,
ANS:
)ithin the relevant range6 the break-even point does not change. 1his is due to the linearity assumptions that apply to total revenues6 fi9ed
costs6 and variable costs.
!"#: /oderate %&: 8-(68-3
(. )hat major assumption do multi-product firms need to make in using -E= analysis that single-product firms need not make,
ANS:
1he assumption that must be imposed is a constant sales mi9. A multi-product firm assumes that D*ithin the relevant rangeF the sales mi9
is constant. 1his permits -E= analysis to be performed using a unit of the constant sales mi9.
!"#: /oderate %&: 8-0
.. )hat important information is conveyed by the margin of safety calculation in -E= analysis,
ANS:
1he break-even point in -E= analysis is critical because it divides profitable levels of operation from unprofitable levels of operation. 1he
margin of safety gives managers an idea of the e9tent to *hich sales can fall before operations *ill become unprofitable.
!"#: /oderate %&: 8-'
0. )hat are the major assumptions of -E= analysis,
ANS:
1. All revenue and variable cost behavior patterns are constant per unit
and linear *ithin the relevant range.
(. 1otal contribution margin Dtotal revenue divided by total variable costF is linear
*ithin the relevant range and increases proportionally *ith output.
.. 1otal fi9ed cost is constant *ithin the relevant range. 1his assumption6
in part6 indicates that no capacity additions *ill be made during
the period under consideration.
0. /i9ed costs can be accurately separated into their fi9ed and variable elements.
'. Sales and production are e2ualH thus6 there is no material fluctuation in inventory
levels. 1his assumption is necessary because fi9ed cost can be allocated
to inventory at a different rate each year. 1hus6 variable costing
information must be available. ecause -E= and variable costing both focus
on cost behavior6 they are distinctly compatible *ith one another.
3. "n a multi-product firm6 the sales mi9 remains constant. 1his assumption is necessary
so that a *eighted average contribution margin can be computed.
5. 4abor productivity6 production technology6 and market conditions *ill not
change. "f any of these changes *ere to occur6 costs *ould change correspondingly6
and selling prices might change
!"#: /oderate %&: 8-3
P2BLEM
1. 1he -oontz -ompany sells t*o products6 A and 6 *ith contribution margin ratios of 0; and .; percent and selling prices of G' and G(.';
a unit. #i9ed costs amount to G5(6;;; a month. /onthly sales average .;6;;; units of product A and 0;6;;; units of product .
2e8#ired9
a.Assuming that three units of product A are sold for every four units of product 6 calculate the dollar sales volume necessary to break
even.b.As part of its cost accounting routine6 -oontz -ompany assigns G.36;;; in fi9ed costs to each product each month. -alculate the
break-even dollar sales volume for each product.c.-oontz -ompany is considering spending an additional G865;; a month on advertising6
giving more emphasis to product A and less emphasis to product . "f its analysis is correct6 sales of product A *ill increase to 0;6;;;
units a month6 but sales of product *ill fall to .(6;;; units a month. :ecalculate the break-even sales volume6 in dollars6 at this ne*
product mi9. Should the proposal to spend the additional G865;; a month be accepted,
ANS:
a.-/ L D. G(F O D0 G.5'F L G8S= L D. G'F L D0 G(.';F L G('$ L G5(6;;; L G0;;6;;; G8+G('b.A L G.36;;; L G8;6;;; L
G.36;;; L G1(;6;;;.0..c.-/ L D' G(F O D0 G.5'F L G1.S= L D' G'F O D0 G(.';F L G.'$ L G5(6;;; O G865;; L
G(18683(G1.+.'%4!N$)-/A L .;6;;; G( L$60,000 CMA L 0;6;;; G( L$ 80,000 L 0;6;;; G.5' L 30,000 L
.(6;;; G.5' 24,000 $90,000 $104,000 - #-%72,000&- #- %81,700& %"$18,000 %"$ 22,300
At current sales levels increase advertising.
!"#: /oderate %&: 8-0
(. 1he Araves -ompany makes three products. 1he cost data for these three products is as follo*s:
=roduct A=roduct =roduct -Selling price$10$20$40Eariable costs 7 12 16
1otal annual fi9ed costs are G70;6;;;. 1he firmCs e9perience has been that about (; percent of dollar sales come from product A6 3;
percent from 6 and (; percent from -.
2e8#ired9
a.-ompute break-even in sales dollars.
b.!etermine the number of units to be sold at the break-even point.
ANS:
A-a.S=$10$20$40- E- %7& %12& %16&L -/$ 3$ 8$24-/: 30% 40% 60%-/: L D.( .;PF O D.3 0;PF O D.(
3;PF L 0(P$ L G70;6;;;+.0( L G(6;;;6;;;b.A DG(6;;;6;;; .(;F+G1; L 0;6;;; units DG(6;;;6;;; .3;F+G(; L 3;6;;; units-
DG(6;;;6;;; .(;F+G0; L 1;6;;; units
!"#: /oderate %&: 8-0
.. Anderson -ompany produces and sells t*o products: A and in the ratio of .A to '. Selling prices for A and are6 respectively6 G16(;;
and G(0;H respective variable costs are G07; and G13;. 1he companyCs fi9ed costs are G167;;6;;; per year.
-ompute the volume of sales in units of each product needed to:
2e8#ired9
a.break even.
b.earn G7;;6;;; of income before income ta9es.
c.earn G7;;6;;; of income after income ta9es6 assuming a .; percent ta9 rate.
d.earn 1( percent on sales revenue in before-ta9 income.
e.earn 1( percent on sales revenue in after-ta9 income6 assuming a .; percent ta9 rate.
ANS:
AS=$1,200S=$240 - E- %480&- E-%160&-/$ 720-/$ 80
)eighted -/ L D. G5(;F O D' G7;F L G(6'3;
a.$1,800,000 = 703.125A = 704 3 = 2,112 "n+,s $2,560B = 704 5 = 3,520b.$1,800,000 '
$800,000 = 1015.625A = 1,016 3 = 3,048 "n+,s $2,560B = 1,016 5 = 5,080c.$800,000/1
- .3 = $1,142,857$1,800,000 ' $1,142,857 = 1,149.55A = 1,150 3 = 3,450 "n+,s $2,560B
= 1,150 5 = 5,750d.-. = %3 $1,200& ' %5 $240& = $4,800/ = $1,800,000 ' $.12/ =
$4,354,839 $2,560/$4,800A = %$4,354,839 .75&/$1200 = 2,722 "n+,sB = %$4,354,839 .
25/$240 = 4,537e./ = $1,800,000 ' $.12/ 1 - .3 = $4,973,684 $2,560/$4,800A
= %$4,973,684 .75&/$1,200 = 3,109 "n+,sB = %$4,973,684 .25/$240 = 5,181
!"#: /oderate %&: 8-0
Brad!ey Corporation
"nformation relating to the current operations of radley -orporation follo*s:
Sales$120,000 Eariable costs %36,000&-ontribution margin$ 84,000 #i9ed costs %70,000&=rofit before ta9es$ 14,000
0. :efer to radley -orporation. radleyCs break-even point *as 16;;; units. -ompute radleyCs sales price per unit.
ANS:
1he break-even point is found by dividing the fi9ed costs by the -/ ratio.
1he -/ ratio is:
G706;;;+G1(;6;;; L 5;P. reakeven *ould then be:
G5;6;;;+.5; L G1;;6;;;. Since *e also kno* that the break-even point is defined as 16;;; units6 it must follo* that the unit sales price is
G1;;6;;;+16;;; L G1;;.
!"#: /oderate %&: 8-.
'. :efer to radley -orporation. -ompute radleyCs degree of operating leverage.
ANS:
1he degree of operating leverage is computed as the contribution margin divided by profit before ta9es: G706;;;+G106;;; L 3.
!"#: /oderate %&: 8-'
McAinney Corporation
/cVinney -orporation manufactures and sells t*o products: A and . 1he projected information on these t*o products for the coming
year is presented belo*:
=roduct A=roduct Sales in units4,0001,000Sales price per unit $12 $8Eariable costs per unit 8 4
1otal fi9ed costs for the company are projected at G1;6;;;.
3. :efer to /cVinney -orporation. -ompute /cVinney -orporationCs projected break-even point in total units.
ANS:
1he company anticipates a sales mi9 consisting of 0 units of =roduct A and 1 unit of =roduct . 1he total contribution margin for one unit
of sales mi9 *ould be G(;. 1his consists of G13 of contribution margin from the 0 units of =roduct A and G0 of contribution margin from
1 unit of =roduct .
1he overall company break-even point is found by dividing total fi9ed costs by the contribution margin on one unit of sales mi9:
G1;6;;;+G(; L ';; units. 1he ';; units of sales mi9 contain ';; ' units of product for a total of (6';;. %f the (6';; total units6 (6;;;
are units of =roduct A and ';; are units of =roduct .
!"#: /oderate %&: 8-0
5. :efer to /cVinney -orporation. ?o* many units *ould the company need to sell to produce an income before income ta9es e2ual to 1'
percent of sales,
ANS:
Again6 using a unit of sales mi9 as the unit of analysis6 one unit of sales mi9 sells for G'3. Since the contribution margin is G(; on one
unit of sales mi96 the -/ ratio on one unit of sales mi9 is G(;+G'3 L ..'51. 1his implies that variable costs as a percentage of sales are
e2ual to 1 - ..'51 L .30(8. "ncome before income ta9es e2ual to 1' percent of sales can be found by solving a formula of the follo*ing
type:
Sales - E- - #- L "ncome before income ta9es
"n this particular case6 *e solve the follo*ing formula:
Sales - D.30(8 SalesF - G1;6;;; L D.1' SalesF
Solving for Sales6 *e get G076(73. )e can find out ho* many units of sales mi9 are re2uired to generate sales of G076(73 by dividing
G076(73 by G'3 L 73.. 1hese 73. units of sales mi9 each contain ' units of product6 so the correct ans*er *ould be 73. ' L 06.1' units
of product6 .60'( of =roduct A and 73. of =roduct .
!"#: /oderate %&: 8-0
Perry Corporation
=erry -orporation predicts it *ill produce and sell 0;6;;; units of its sole product in the current year. At that level of volume6 it projects a
sales price of G.; per unit6 a contribution margin ratio of 0; percent6 and fi9ed costs of G' per unit.
7. :efer to =erry -orporation. )hat is the companyCs projected breakeven point in dollars and units,
ANS:
Aiven the -/ ratio of 0; percent6 and the Sales price per unit of G.;6 the -/ per unit must be G.; .0; L G1(. 1he total fi9ed costs
*ould be projected at G' 0;6;;; L G(;;6;;;. reakeven *ould be: G(;;6;;;+G1( L 136335 units. 1his *ould also e2uate to G';;6;;; of
sales.
!"#: /oderate %&: 8-.
8. :efer to =erry -orporation. )hat *ould the companyCs projected profit be if it produced and sold .;6;;; units,
ANS:
=rojected profit *ould be: Sales D.;6;;; G.;F$900,000 Eariable costs D.;6;;; G17F%540,000& -ontribution
margin$360,000 #i9ed costs%200,000& =rofit$160,000
!"#: /oderate %&: 8-.
Cast!e Corporation
1he follo*ing 2uestions are based on the follo*ing data pertaining to t*o types of products manufactured by -astle -orporation:
=er unitSales priceEariable costs=roduct R$120$ 70=roduct K$500$200
#i9ed costs total G.;;6;;; annually. 1he e9pected mi9 in units is 3; percent for =roduct R and 0; percent for =roduct K.
1;. :efer to -astle -orporation. ?o* much is -astleNs break-even point sales in units,
ANS:
$= units L #-+Dunit S= - unit E-F or unit -/D@/-F
#or multiple products6 use the *eighted -/ *ith *eights based on units of sales *eights.
$= L #- + T3;P DG1(; - G5;F O 0;P DG';; - G(;;FU
L G.;;6;;;+ DG.;+u O G1(;+uF L (6;;; units
!"#: /oderate %&: 8-0
11. :efer to -astle -orporation. )hat is -astleNs break-even point in sales dollars,
ANS:
$= dollars L #-+-/:
#or multiple products6 use *eighted -/: *ith *eights based on sales dollars as *eights or sales mi9.
Sales mi9 is 3; percent and 0; percent in units or in dollars.
)eighted average -/: L )A-/+)ASale
)A-/: L T3;P DG1(; - G5;F O 0;P DG';; - G(;;FU W D3;P G1(;F O D0;P G';;F
)A-/: L TG.; O G1(;U W TG5( O G(;;U L .''1
$= sales L (6;;; G(5( L G'006;;;
!"#: /oderate %&: 8-0
Chapter ./Capita! B#dgeting
MULTIPLE CHICE
1. )hich of the follo*ing capital budgeting techni2ues ignores the time value of money,
a.payback periodb.net present valuec.internal rate of returnd.profitability inde9
ANS: A !"#: $asy %&: 10-(
(. )hich of the follo*ing capital budgeting techni2ues may potentially ignore part of a projectCs relevant cash flo*s,
a.net present valueb.internal rate of returnc.payback periodd.profitability inde9
ANS: - !"#: $asy %&: 10-(
.. "n comparing t*o projects6 the <<<<<<<<<<< is often used to evaluate the relative riskiness of the projects.
a.payback periodb.net present valuec.internal rate of returnd.discount rate
ANS: A !"#: $asy %&: 10-(
0. )hich of the follo*ing capital budgeting techni2ues does not routinely rely on the assumption that all cash flo*s occur at the end of the
period,
a.internal rate of returnb.net present valuec.profitability inde9d.payback period
ANS: ! !"#: $asy %&: 10-(
'. Assume that a project consists of an initial cash outlay of G1;;6;;; follo*ed by e2ual annual cash inflo*s of G0;6;;; for 0 years. "n the
formula Q L G1;;6;;;+G0;6;;;6 Q represents the
a.payback period for the project.b.profitability inde9 of the project.c.internal rate of return for the project.d.projectCs discount rate.
ANS: A !"#: $asy %&: 10-(
3. All other factors e2ual6 a large number is preferred to a smaller number for all capital project evaluation measures e"cept
a.net present value.b.payback period.c.internal rate of return.d.profitability inde9.
ANS: !"#: $asy %&: 10-(
5. 1he payback method assumes that all cash inflo*s are reinvested to yield a return e2ual to
a.the discount rate.b.the hurdle rate.c.the internal rate of return.d.zero.
ANS: ! !"#: $asy %&: 10-3
7. 1he payback method measures
a.ho* 2uickly investment dollars may be recovered.b.the cash flo* from an investment.c.the economic life of an investment.d.the
profitability of an investment.
ANS: A !"#: $asy %&: 10-3
8. "f investment A has a payback period of three years and investment has a payback period of four years6 then
a.A is more profitable than .b.A is less profitable than .c.A and are e2ually profitable.d.the relative profitability of A and cannot be
determined from the information given.
ANS: ! !"#: $asy %&: 10-(
1;. 1he payback period is the
a.length of time over *hich the investment *ill provide cash inflo*s.b.length of time over *hich the initial investment is
recovered.c.shortest length of time over *hich an investment may be depreciated.d.shortest length of time over *hich the net present
value *ill be positive.
ANS: !"#: $asy %&: 10-(
11. )hich of the follo*ing capital budgeting techni2ues has been criticized because it fails to consider investment profitability,
a.payback methodb.accounting rate of returnc.net present value methodd.internal rate of return
ANS: A !"#: $asy %&: 10-3
1(. 1he time value of money is e9plicitly recognized through the process of
a.interpolating.b.discounting.c.annuitizing.d.budgeting.
ANS: !"#: $asy %&: 10-(
1.. 1he time value of money is considered in long-range investment decisions by
a.assuming e2ual annual cash flo* patterns.b.investing only in short-term projects.c.assigning greater value to more immediate cash
flo*s.d.ignoring depreciation and ta9 implications of the investment.
ANS: - !"#: $asy %&: 10-.
10. )hen using one of the discounted cash flo* methods to evaluate the desirability of a capital budgeting project6 *hich of the follo*ing
factors is generally not important,
a.method of financing the project under considerationb.timing of cash flo*s relating to the projectc.impact of the project on income ta9es
to be paidd.amounts of cash flo*s relating to the project
ANS: A !"#: $asy %&: 10-.
1'. )ith regard to a capital investment6 net cash inflo* is e2ual to the
a.cost savings resulting from the investment.b.sum of all future revenues from the investment.c.net increase in cash receipts over cash
payments.d.net increase in cash payments over cash receipts.
ANS: - !"#: $asy %&: 10-1
13. "n a discounted cash flo* analysis6 *hich of the follo*ing *ould not be consistent *ith adjusting a projectCs cash flo*s to account for
higher-than-normal risk,
a.increasing the e9pected amount for cash outflo*sb.increasing the discounting period for e9pected cash inflo*sc.increasing the discount
rate for cash outflo*sd.decreasing the amount for e9pected cash inflo*s
ANS: - !"#: /oderate %&: 10-.
15. )hen a project has uneven projected cash inflo*s over its life6 an analyst may be forced to use <<<<<<< to find the projectCs internal rate
of return.
a.a screening decisionb.a trial-and-error approachc.a post investment auditd.a time line
ANS: !"#: $asy %&: 10-0
17. 1he interest rate used to find the present value of a future cash flo* is the
a.prime rate.b.discount rate.c.cutoff rate.d.internal rate of return.
ANS: !"#: $asy %&: 10-(
18. A firmCs discount rate is typically based on
a.the interest rates related to the firmCs bonds.b.a projectCs internal rate of return.c.its cost of capital.d.the corporate Aa bond yield.
ANS: - !"#: $asy %&: 10-(
(;. "n capital budgeting6 a firmCs cost of capital is fre2uently used as the
a.internal rate of return.b.accounting rate of return.c.discount rate.d.profitability inde9.
ANS: - !"#: $asy %&: 10-(
(1. 1he net present value method assumes that all cash inflo*s can be immediately reinvested at the
a.cost of capital.b.discount rate.c.internal rate of return.d.rate on the corporationCs short-term debt.
ANS: !"#: $asy %&: 10-.
((. )hich of the follo*ing changes *ould not decrease the present value of the future depreciation deductions on a specific depreciable
asset,
a.a decrease in the marginal ta9 rateb.a decrease in the discount ratec.a decrease in the rate of depreciationd.an increase in the life
e9pectancy of the depreciable asset
ANS: !"#: /oderate %&: 10-'
(.. 1o reflect greater uncertainty Dgreater riskF about a future cash inflo*6 an analyst could
a.increase the discount rate for the cash flo*.b.decrease the discounting period for the cash flo*.c.increase the e9pected value of the
future cash flo* before it is discounted.d.e9tend the acceptable length for the payback period.
ANS: A !"#: $asy %&: 10-(
(0. A change in the discount rate used to evaluate a specific project *ill affect the projectCs
a.life.b.payback period.c.net present value.d.total cash flo*s.
ANS: - !"#: $asy %&: 10-3
('. #or a project such as plant investment6 the return that should leave the market price of the firmCs stock unchanged is kno*n as the
a.cost of capital.b.net present value.c.payback rate.d.internal rate of return.
ANS: A !"#: /oderate %&: 10-'
(3. 1he pre-ta9 cost of capital is higher than the after-ta9 cost of capital because
a.interest e9pense is deductible for ta9 purposes.b.principal payments on debt are deductible for ta9 purposes.c.the cost of capital is a
deductible e9pense for ta9 purposes.d.dividend payments to stockholders are deductible for ta9 purposes.
ANS: A !"#: $asy %&: 10-'
(5. 1he basis for measuring the cost of capital derived from bonds and preferred stock6 respectively6 is the
a.pre-ta9 rate of interest for bonds and stated annual dividend rate less the e9pected earnings per share for preferred stock.b.pre-ta9 rate of
interest for bonds and stated annual dividend rate for preferred stock.c.after-ta9 rate of interest for bonds and stated annual dividend rate
less the e9pected earnings per share for preferred stock.d.after-ta9 rate of interest for bonds and stated annual dividend rate for preferred
stock.
ANS: ! !"#: /oderate %&: 10-'
(7. 1he combined *eighted average interest rate that a firm incurs on its long-term debt6 preferred stock6 and common stock is the
a.cost of capital.b.discount rate.c.cutoff rate.d.internal rate of return.
ANS: A !"#: $asy %&: 10-(
(8. 1he *eighted average cost of capital that is used to evaluate a specific project should be based on the
a.mi9 of capital components that *as used to finance a project from last year.b.overall capital structure of the corporation.c.cost of capital
for other corporations *ith similar investments.d.mi9 of capital components for all capital ac2uired in the most recent fiscal year.
ANS: !"#: $asy %&: 10-(
.;. !ebt in the capital structure could be treated as if it *ere common e2uity in computing the *eighted average cost of capital if the debt
*ere
a.callable.b.participating.c.cumulative.d.convertible.
ANS: ! !"#: /oderate %&: 10-(
.1. 1he *eighted average cost of capital approach to decision making is not directly affected by the
a.value of the common stock.b.current budget for capital e9pansion.c.cost of debt outstanding.d.proposed mi9 of debt6 e2uity6 and e9isting
funds used to implement the project.
ANS: !"#: $asy %&: 10-(
.(. 1he <<<<<<<<<<<<<<<<<<< is the highest rate of return that can be earned from the most attractive6 alternative capital project available to
the firm.
a.accounting rate of returnb.internal rate of returnc.hurdle rated.opportunity cost of capital
ANS: ! !"#: /oderate %&: 10-3
... "f an analyst desires a conservative net present value estimate6 he+she *ill assume that all cash inflo*s occur at
a.mid year.b.the beginning of the year.c.year end.d.irregular intervals.
ANS: - !"#: $asy %&: 10-.
.0. 1he salvage value of an old lathe is zero. "f instead6 the salvage value of the old lathe *as G(;6;;;6 *hat *ould be the impact on the net
present value of the proposal to purchase a ne* lathe,
a."t *ould increase the net present value of the proposal.b."t *ould decrease the net present value of the proposal.c."t *ould not affect the
net present value of the proposal.d.=otentially it could increase or decrease the net present value of the ne* lathe.
ANS: A !"#: $asy %&: 10-.
.'. 1he net present value method of evaluating proposed investments
a.measures a projectCs internal rate of return.b.ignores cash flo*s beyond the payback period.c.applies only to mutually e9clusive
investment proposals.d.discounts cash flo*s at a minimum desired rate of return.
ANS: ! !"#: $asy %&: 10-.
.3. )hich of the follo*ing statements is tr#e regarding capital budgeting methods,
a.1he #isher rate can never e9ceed a companyCs cost of capital.b.1he internal rate of return measure used for capital project evaluation has
more conservative assumptions than the net present value method6 especially for projects that generate a positive net present value.c.1he
net present value method of project evaluation *ill al*ays provide the same ranking of projects as the profitability inde9 method.d.1he
net present value method assumes that all cash inflo*s can be reinvested at the projectCs cost of capital.
ANS: ! !"#: $asy %&: 10-.
.5. "f a project generates a net present value of zero6 the profitability inde9 for the project *ill
a.e2ual zero.b.e2ual 1.c.e2ual -1.d.be undefined.
ANS: !"#: $asy %&: 10-.
.7. "f the profitability inde9 for a project e9ceeds 16 then the projectCs
a.net present value is positive.b.internal rate of return is less than the projectCs discount rate.c.payback period is less than '
years.d.accounting rate of return is greater than the projectCs internal rate of return.
ANS: A !"#: $asy %&: 10-.
.8. "f a projectCs profitability inde9 is less than 16 the projectCs
a.discount rate is above its cost of capital.b.internal rate of return is less than zero.c.payback period is infinite.d.net present value is
negative.
ANS: ! !"#: $asy %&: 10-.
0;. 1he profitability inde9 is
a.the ratio of net cash flo*s to the original investment.b.the ratio of the present value of cash flo*s to the original investment.c.a capital
budgeting evaluation techni2ue that doesnCt use discounted values.d.a mandatory techni2ue *hen capital rationing is used.
ANS: !"#: $asy %&: 10-.
01. )hich method of evaluating capital projects assumes that cash inflo*s can be reinvested at the discount rate,
a.internal rate of returnb.payback periodc.profitability inde9d.accounting rate of return
ANS: - !"#: /oderate %&: 10-.
0(. "f the total cash inflo*s associated *ith a project e9ceed the total cash outflo*s associated *ith the project6 the projectCs
a.net present value is greater than zero.b.internal rate of return is greater than zero.c.profitability inde9 is greater than 1.d.payback period
is acceptable.
ANS: !"#: $asy %&: 10-0
0.. 1he net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in
that they
a.are easier to implement.b.consider the time value of money.c.re2uire less input.d.reflect the effects of sensitivity analysis.
ANS: !"#: $asy %&: 10-3
00. "f an investment has a positive net present value6 the
a.internal rate of return is higher than the discount rate.b.discount rate is higher than the hurdle rate of return.c.internal rate of return is
lo*er than the discount rate of return.d.hurdle rate of return is higher than the discount rate.
ANS: A !"#: $asy %&: 10-3
0'. 1he rate of interest that produces a zero net present value *hen a projectCs discounted cash operating advantage is netted against its
discounted net investment is the
a.cost of capital.b.discount rate.c.cutoff rate.d.internal rate of return.
ANS: ! !"#: $asy %&: 10-0
03. #or a profitable company6 an increase in the rate of depreciation on a specific project could
a.increase the projectCs profitability inde9.b.increase the projectCs payback period.c.decrease the projectCs net present value.d.increase the
projectCs internal rate of return.
ANS: ! !"#: /oderate %&: 10-'
05. )hich of the follo*ing capital e9penditure planning and control techni2ues has been criticized because it might mistakenly imply that
earnings are reinvested at the rate of return earned by the investment,
a.payback methodb.accounting rate of returnc.net present value methodd.internal rate of return
ANS: ! !"#: $asy %&: 10-0
07. "f the discount rate that is used to evaluate a project is e2ual to the projectCs internal rate of return6 the projectCs <<<<<<<<<<<<< is zero.
a.profitability inde9b.internal rate of returnc.present value of the investmentd.net present value
ANS: ! !"#: $asy %&: 10-0
08. As the marginal ta9 rate goes up6 the benefit from the depreciation ta9 shield
a.decreases.b.increases.c.stays the same.d.can move up or do*n depending on *hether the firmCs cost of capital is high or lo*.
ANS: !"#: /oderate %&: 10-'
';. )hen a profitable corporation sells an asset at a loss6 the after-ta9 cash flo* on the sale *ill
a.e9ceed the pre-ta9 cash flo* on the sale.b.be less than the pre-ta9 cash flo* on the sale.c.be the same as the pre-ta9 cash flo* on the
sale.d.increase the corporationCs overall ta9 liability.
ANS: A !"#: /oderate %&: 10-'
'1. "n a typical Dconservative assumptionsF after-ta9 discounted cash flo* analysis6 depreciation e9pense is assumed to accrue at
a.the beginning of the period.b.the middle of the period.c.the end of the period.d.irregular intervals over the life of the investment.
ANS: - !"#: $asy %&: 10-'
'(. 1he pre-ta9 and after-ta9 cash flo*s *ould be the same for all of the follo*ing items e"cept
a.the li2uidation of *orking capital at the end of a projectCs life.b.the initial DoutlayF cost of an investment.c.the sale of an asset at its book
value.d.a cash payment for salaries and *ages.
ANS: ! !"#: $asy %&: 10-'
'.. 1he after-ta9 net present value of a project is affected by
a.ta9-deductible cash flo*s.b.non-ta9-deductible cash flo*s.c.accounting accruals.d.all of the above.
ANS: ! !"#: /oderate %&: 10-'
'0. A projectCs after-ta9 net present value is increased by all of the follo*ing e"cept
a.revenue accruals.b.cash inflo*s.c.depreciation deductions.d.e9pense accruals.
ANS: A !"#: $asy %&: 10-'
''. /ultiplying the depreciation deduction by the ta9 rate yields a measure of the depreciation ta9
a.shield.b.benefit.c.payable.d.loss.
ANS: !"#: $asy %&: 10-'
'3. Annual after-ta9 corporate net income can be converted to annual after-ta9 cash flo* by
a.adding back the depreciation amount.b.deducting the depreciation amount.c.adding back the 2uantity Dt depreciation deductionF6
*here t is the corporate ta9 rate.d.deducting the 2uantity TD1- tF depreciation deductionU6 *here t is the corporate ta9 rate.
ANS: A !"#: $asy %&: 10-'
'5. "ncome ta9es are levied on
a.net cash flo*.b.income as measured by accounting rules.c.net cash flo* plus depreciation.d.income as measured by ta9 rules.
ANS: ! !"#: $asy %&: 10-'
'7. )hich of the follo*ing best represents a screening decision,
a.determining *hich project has the highest net present valueb.determining if a projectCs internal rate of return e9ceeds the firmCs cost of
capitalc.determining *hich projects are mutually e9clusived.determining *hich are the best projects
ANS: !"#: $asy %&: 10-3
'8. )hich of the follo*ing are ta9 deductible under @.S. ta9 la*,
a.interest payments to bondholdersb.preferred stock dividendsc.common stock dividendsd.all of the above
ANS: A !"#: $asy %&: 10-'
3;. Sensitivity analysis is
a.an appropriate response to uncertainty in cash flo* projections.b.useful in measuring the variance of the #isher rate.c.typically
conducted in the post investment audit.d.useful to compare projects re2uiring vastly different levels of initial investment.
ANS: A !"#: /oderate %&: 10-7
31. "f management judges one project in a mutually inclusive set to be acceptable for investment6
a.all the other projects in the set are rejected.b.only one other project in the set can be accepted.c.all other projects in the set are also
accepted.d.only one project in the set *ill be rejected.
ANS: - !"#: $asy %&: 10-3
3(. All other factors e2ual6 *hich of the follo*ing *ould affect a projectCs internal rate of return6 net present value6 and payback period,
a.an increase in the discount rateb.a decrease in the life of the projectc.an increase in the initial cost of the projectd.all of the above
ANS: - !"#: $asy %&: 10-3
3.. ?op*ood -orporation bought a piece of machinery. Selected data is presented belo*:
@seful life 3 yearsRearly net cash inflo* G0'6;;;Salvage value - ; -"nternal rate of return 17P-ost of capital 10P
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
1he initial cost of the machinery *as
a.G1'56.8(.b.G150688(.c.G13'671(.d.impossible to determine from the information given.
ANS: A
@se =E of Annuity for 3 years and 17P
G0'6;;; M ..0853 L G1'56.8(
!"#: /oderate %&: 10-0
30. !atasoft "ndustries is considering the purchase of a G1;;6;;; machine that is e9pected to result in a decrease of G1'6;;; per year in cash
e9penses. 1his machine6 *hich has no residual value6 has an estimated useful life of 1; years and *ill be depreciated on a straight-line
basis. #or this machine6 the accounting rate of return *ould be
a.1; percent.b.1' percent.c..; percent.d..' percent.
ANS: -
G1'6;;;+DG1;;6;;;+(F L .;P
!"#: /oderate %&: 10-'
3'. An investment project is e9pected to yield G1;6;;; in annual revenues6 has G(6;;; in fi9ed costs per year6 and re2uires an initial
investment of G'6;;;. Aiven a cost of goods sold of 3; percent of sales6 *hat is the payback period in years,
a.(.';b.'.;;c.(.;;d.1.('
ANS: A
Net cash flo* L G1;6;;; - G36;;; - G(6;;;
Net cash flo* L G(6;;;
G'6;;;+G(6;;; L (.'; years
!"#: /oderate %&: 10-(
33. A project has an initial cost of G1;;6;;; and generates a present value of net cash inflo*s of G1(;6;;;. )hat is the projectCs profitability
inde9,
a..(;b.1.(;c..7;d.'.;;
ANS:
=rofitability "nde9 L G1(;6;;;+G1;;6;;; L 1.(;
!"#: /oderate %&: 10-.
35. -lement -orporation. faces a marginal ta9 rate of .' percent. %ne project that is currently under evaluation has a cash flo* in the fourth
year of its life that has a present value of G1;6;;; Dafter-ta9F. -lement -orporation. assumes that all cash flo*s occur at the end of the
year and the company uses 11 percent as its discount rate. )hat is the pre-ta9 amount of the cash flo* in year 0, D:ound to the nearest
dollar.F Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G1'6171b.G(.6.'3c.G86737d.G0.6.5'
ANS:
G1;6;;; +;.3' L G1'6.70.31
@se =E 1able for 0 years6 11P. -onstant L ;.3'75
G1'.70.31 + ;.3'75 L G(.6.'3.
!"#: !ifficult %&: 10-'
%ea@orthy Corporation
Sea*orthy -orporation is considering the purchase of a ne* ocean-going vessel that could potentially reduce labor costs of its operation
by a considerable margin. 1he ne* ship *ould cost G';;6;;; and *ould be fully depreciated by the straight-line method over 1; years. At
the end of 1; years6 the ship *ill have no value and *ill be scuttled. Sea*orthy -ompanyNs cost of capital is 1( percent6 and its marginal
ta9 rate is 0; percent.
37. :efer to Sea*orthy -orporation. )hat is the present value of the depreciation ta9 benefit of the ne* ship, D:ound to the nearest dollar.F
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G11.6;;0b.G(7(6'1;c.G1386';3d.G(;;6;;;
ANS: A
Annual depreciation L G';6;;;
1a9 savings L G(;6;;;
@se =E of Annuity table 1; years6 1(PH -onstant L '.3';(
G(;6;;; M '.3';( L G11.6;;0
!"#: !ifficult %&: 10-'
38. :efer to Sea*orthy -orporation. "f the ship produces e2ual annual labor cost savings over its 1;-year life6 ho* much do the annual
savings in labor costs need to be to generate a net present value of G; on the project, D:ound to the nearest dollar.F Present va!#e ta$!es
or a 1inancia! ca!c#!ator are re8#ired)
a.G37608(b.G11061'0c.G77608(d.G1056075
ANS: -
N=E of 4abor Savings L G';;6;;;
@se =E of Annuity 1able 1; years6 1(PH -onstant L '.3';(
G';;6;;; + '.3';( L G77608(
!"#: !ifficult %&: 10-'
5;. Stone -orporation recently sold a used machine for G0;6;;;. 1he machine had a book value of G3;6;;; at the time of the sale. )hat is the
after-ta9 cash flo* from the sale6 assuming the companyCs marginal ta9 rate is (; percent,
a.G0;6;;;b.G3;6;;;c.G006;;;d.G.(6;;;
ANS: -
4oss of G(;6;;; generates a ta9 savings of G06;;; DG(;6;;; M (;PF
=roceeds O 1a9 Savings L After-ta9 cash flo*
G0;6;;; O G06;;; L G006;;;
!"#: /oderate %&: 10-'
;!eming Company
#leming -ompany is considering an investment in a machine that *ould reduce annual labor costs by G.;6;;;. 1he machine has an
e9pected life of 1; years *ith no salvage value. 1he machine *ould be depreciated according to the straight-line method over its useful
life. 1he companyCs marginal ta9 rate is .; percent.
51. :efer to #leming -ompany. Assume that the company *ill invest in the machine if it generates an internal rate of return of 13 percent.
)hat is the ma9imum amount the company can pay for the machine and still meet the internal rate of return criterion, Present va!#e
ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G17;6;;;b.G(1;6;;;c.G1756';;d.G1006883
ANS: !
@se =E of Annuity 1ableH 1; years6 13PH -onstant L 0.7..;
G.;6;;; M 0.7..; L G1006083
!"#: /oderate %&: 10-0
5(. :efer to #leming -ompany. Assume the company pays G(';6;;; for the machine. )hat is the e9pected internal rate of return on the
machine, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.bet*een 7 and 8 percentb.bet*een . and 0 percentc.bet*een 15 and 17 percentd.less than 1 percent
ANS:
G(';6;;;+G.;6;;; L 7...
@sing =E of Annuity 1able and 1; years6 this constant falls bet*een .P and 0P
!"#: /oderate %&: 10-0
5.. A project under consideration by -lose -orporation *ould re2uire a *orking capital investment of G(;;6;;;. 1he *orking capital *ould
be li2uidated at the end of the projectCs 1;-year life. "f -lose -orporation has an after-ta9 cost of capital of 1; percent and a marginal ta9
rate of .; percent6 *hat is the present value of the *orking capital cash flo* e9pected to be received in year 1;, Present va!#e ta$!es or
a 1inancia! ca!c#!ator are re8#ired)
a.G.36737b.G5561;;c.G'.685;d.G(.61.;
ANS:
1he return of capital is ta9-free.
@se =E of G1 1; years6 1;PH -onstant L ;..7''
G(;;6;;; M ;..7'' L G5561;;
!"#: /oderate %&: 10-'
50. iggs "ndustries is considering t*o alternative *ays to depreciate a proposed investment. 1he investment has an initial cost of G1;;6;;;
and an e9pected five-year life. 1he t*o alternative depreciation schedules follo*:
/ethod 1/ethod (Rear 1 depreciation $20,000$40,000Rear ( depreciation $20,000$30,000Rear . depreciation
$20,000$20,000Rear 0 depreciation $20,000$10,000Rear ' depreciation $20,000 $0
Assuming that the company faces a marginal ta9 rate of 0; percent and has a cost of capital of 1; percent6 *hat is the difference bet*een
the t*o methods in the present value of the depreciation ta9 benefit, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G56183b.G;c.G(6757d.G36.0(
ANS: -
Rear!ifference in !epreciationAfter-1a9 !ifference=E of G1
1able Ealue!iscounted
Ealue1G (;6;;; G 76;;;;.8;81G 56(5((G 1;6;;; G 06;;;;.7(3'G .6.;3.G -;- G ;- ;.5'1.G -;-
0GD1;6;;;FGD06;;;F;.37.;GD(65.(F'GD(;6;;;FGD76;;;F;.3(;8GD06835F1otalG (6757
LLLLLL
!"#: !ifficult %&: 10-'
%ea$reeBe Creations
Seabreeze -reations is considering an investment in a computer that is capable of producing various images that are useful in the
production of commercial art. 1he computer *ould cost G(;6;;; and have an e9pected life of eight years. 1he computer is e9pected to
generate additional annual net cash receipts Dbefore-ta9F of G36;;; per year. 1he computer *ill be depreciated according to the straight-
line method and the firmCs marginal ta9 rate is (' percent.
5'. :efer to Seabreeze -reations. )hat is the after-ta9 payback period for the computer project,
a.5.3( yearsb...8; yearsc.0.00 yearsd...11 years
ANS:
=ayback =eriod L "nvestment+After-1a9 -ash #lo*s
After 1a9 -ash #lo*s L TD36;;; M;.5'F O D(6';; M;.('FU L G'61('
=ayback =eriod L G(;6;;;+G'61(' L ..8; years
!"#: /oderate %&: 10-(610-'
53. :efer to Seabreeze -reations. )hat is the after-ta9 net present value of the proposed project Dusing a 13 percent discount rateF, Present
va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G(6(31b.GD0'0Fc.G36;3(d.GD06585F
ANS: A
@se =E of Annuity 1able 13P6 7 yearsH -onstant L 0..0.3
After-ta9 inflo*s LG'61(' M 0..0.3 L G ((6(31
G((6(31 - G(;6;;; L G(6(31
!"#: /oderate %&: 10-.
4e$$er Corporation
)ebber -orporation is considering an investment in a labor-saving machine. "nformation on this machine follo*s:
-ostG.;6;;;Salvage value in five yearsG;$stimated life' yearsAnnual depreciationG36;;;Annual reduction in e9isting costsG76;;;
55. :efer to )ebber -orporation. )hat is the internal rate of return on this project Dround to the nearest 1+(PF, Present va!#e ta$!es or a
1inancia! ca!c#!ator are re8#ired)
a..5.'Pb.('.;Pc.1;.'Pd.1..'P
ANS: -
":: L G.;6;;; + G76;;; L ..5'
@sing =E of Annuity 1able ' years. 1he constant of ..5' corresponds to a rate of 1;.'P
!"#: /oderate %&: 10-0
57. :efer to ?efty "nvestment. Assume for this 2uestion only that ?efty -o. uses a discount rate of 13 percent to evaluate projects of this
type. )hat is the projectCs net present value, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.GD36(7.Fb.GD.67;3Fc.GD(.60'1Fd.GD((6;;;F
ANS:
@se =E of Annuity 1able 13P6 ' years. -orresponding constant is ..(50.
Annual reduction in costs G76;;; M ..(50. G (36180
"nvestment D.;6;;;F
Net =resent Ealue D .67;3F
LLLLLLL
!"#: /oderate %&: 10-.
58. :efer to ?efty "nvestment. )hat is the payback period on this investment,
a.0 yearsb.(.10 yearsc...5' yearsd.' years
ANS: -
=ayback =eriod L "nitial "nvestment+-ash Savings
L G.;6;;;+G76;;;
L ..5' years
!"#: /oderate %&: 10-(
2#ston Iron@or:s
:uston "ron*orks is considering a proposal to sell an e9isting lathe and purchase a ne* computer-operated lathe. "nformation on the
e9isting lathe and the computer-operated lathe follo*:
$9isting
lathe-omputer-operated
lathe-ost $100,000$300,000Accumulated depreciation 60,000 0Salvage value no* 20,000Salvage value in 0
years 0 60,000Annual depreciation 10,000 75,000Annual cash operating costs 200,000 50,000:emaining
useful life 4 ye01s 4 ye01s
7;. :efer to :uston "ron*orks. )hat is the payback period for the computer-operated lathe,
a.1.75 yearsb.(.;; yearsc...'. yearsd...(8 years
ANS: A
=ayback =eriod L TDNe* 4athe -ost - %ld 4athe SalvageF+-ost Savings from Ne* 4atheU
=ayback =eriod L TD.;;6;;; - (;6;;;F+1';6;;;U L 1.75 years
!"#: /oderate %&: 10-(
71. :efer to :uston "ron*orks. "f the company uses 1; percent as its discount rate6 *hat is the net present value of the proposed ne* lathe
purchase, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G(.3603'b.G('3603'c.G18'607'd.G.;60((
ANS: A
Amount=E 1able -onstant
=resent EalueAnnual -ost SavingsG 1';6;;; ..1388G 05'607' Salvage Ealue 3;6;;; ;.37.;0;687; "nitial
"nvestmentD(7;6;;;F1.;;;;D(7;6;;;FNet =resent EalueG (.3603'
LLLLLLLL
!"#: /oderate %&: 10-.
4ortham Corporation
1he )ortham -orporation has recently evaluated a proposal to invest in cost-reducing production technology. According to the
evaluation6 the project *ould re2uire an initial investment of G156133 and *ould provide e2ual annual cost savings for five years. ased
on a 1; percent discount rate6 the project generates a net present value of G16577. 1he project is not e9pected to have any salvage value at
the end of its five-year life.
7(. :efer to )ortham -orporation. )hat are the e9pected annual cost savings of the project, Present va!#e ta$!es or a 1inancia! ca!c#!ator
are re8#ired)
a.G.6';;b.G06;;;c.G06';;d.G'6;;;
ANS: !
Net =resent Ealue L G 16577
"nitial "nvestment L 156133
=E of -ash "nflo*s L 1768'0
@se =E of Annuity 1able D' years6 1;P discountFH -onstant L ..58;7
G1768'0 + ..58;7 L G'6;;;
!"#: /oderate %&: 10-.
7.. :efer to )ortham -orporation. )hat is the projectCs e9pected internal rate of return, Present va!#e ta$!es or a 1inancia! ca!c#!ator are
re8#ired)
a.1;Pb.11Pc.1.Pd.10P
ANS: !
":: L 156133+'6;;; L ..0..(
@se =E of Annuity table ' years
-onstant corresponds to an ":: of 10P
!"#: /oderate %&: 10-0
2hodes Corporation
:hodes -orporation is involved in the evaluation of a ne* computer-integrated manufacturing system. 1he system has a projected initial
cost of G16;;;6;;;. "t has an e9pected life of si9 years6 *ith no salvage value6 and is e9pected to generate annual cost savings of
G(';6;;;. ased on :hodes -orporationCs analysis6 the project has a net present value of G'563('.
70. :efer to :hodes -orporation. )hat discount rate did the company use to compute the net present value, Present va!#e ta$!es or a
1inancia! ca!c#!ator are re8#ired)
a.1;Pb.11Pc.1(Pd.1.P
ANS:
N=E L G '563('
"nitial -ost L G16;;;6;;;
=E of -ash "nflo*s L G16;'563('
Annual -ost Savings LG (';6;;;
G16;'563('+G(';6;;; L 0.(.;' =E of Annuity -onstant
At 3 years6 the constant corresponds to a discount rate of 11P.
!"#: /oderate %&: 10-.
7'. :efer to :hodes -orporation. )hat is the projectCs profitability inde9,
a.1.;'7b..;'7c..80'd.1.;;;
ANS: A
=" L G16;'563('+16;;;6;;; L 1.;'7
!"#: /oderate %&: 10-.
73. :efer to :hodes -orporation. )hat is the projectCs internal rate of return, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.bet*een 1(.' and 1..; percentb.bet*een 11.; and 11.' percentc.bet*een 11.' and 1(.; percentd.bet*een 1..; and 1..' percent
ANS: A
G16;;;6;;;+G(';6;;; L 0.;;;
@sing the =resent Ealue of Annuity 1able for 3 years6 the rate falls bet*een 1(.'P and 1.P
!"#: /oderate %&: 10-0
75. -arol &ones recently invested in a project that promised an internal rate of return of 1' percent. "f the project has an e9pected annual cash
inflo* of G1(6;;; for si9 years6 *ith no salvage value6 ho* much did -arol pay for the project,
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G.'6;;;b.G0'6010c.G5(6;;;d.G.165;7
ANS:
@se =resent Ealue of Annuity 1able D3 years61'PF
G1(6;;; M ..570' L G0'6010
!"#: /oderate %&: 10-0
77. &ohn ro*ning recently invested in a project that has an e9pected annual cash inflo* of G56;;; for 1; years6 and an e9pected payback
period of ..3 years. ?o* much did &ohn invest in the project,
a.G186000b.G.36;;;c.G('6(;;d.G0;6;;;
ANS: -
9+G56;;; L ..3 years
9 L G('6(;;
!"#: /oderate %&: 10-(
78. 1he :and -orporation is considering an investment in a project that generates a profitability inde9 of 1... 1he present value of the cash
inflo*s on the project is G006;;;. )hat is the net present value of this project,
a.G1;61'0b.G1.6(;;c.G'56(;;d.G..6703
ANS: A
=E -ash "nflo*s+-ash %utflo*s L =rofitability "nde9
G006;;;+-ash %utflo*s L 1..
G006;;;+1.. L G..6703
=E -ash "nflo*s - -ash %utflo*s L Net =resent Ealue
G006;;; - G..6703 L G1;61'0
!"#: /oderate %&: 10-.
8;. "f r is the discount rate6 the formula T1+D1 O rFU refers to the
a.future value interest factor associated *ith r for one period.b.present value of some future cash flo*.c.present value interest factor
associated *ith r for one period.d.future value interest factor for an annuity *ith a duration of r periods.
ANS: - !"#: $asy %&: 10-1;
81. #uture value is the
a.sum of dollars-in discounted to time zero.b.sum of dollars-out discounted to time zero.c.difference of dollars-in and dollars-out.d.value
of dollars-in minus dollars-out for future periods adjusted for any interest-compounding factor.
ANS: ! !"#: /oderate %&: 10-1;
8(. All other things being e2ual6 as the time period for receiving an annuity lengthens6
a.the related present value factors increase.b.the related present value factors decrease.c.the related present value factors remain
constant.d.it is impossible to tell *hat happens to present value factors from the information given.
ANS: A !"#: $asy %&: 10-1;
8.. )hich of the follo*ing indicates that the first cash flo* is at the end of a period,
%rdinary annuityAnnuity due
a. yes nob. yes yesc. no yesd. no no
ANS: A !"#: $asy %&: 10-1;
80. Assume that Q represents a sum of money that ill has available to invest in a project that *ill yield a return of r. "n the formula R L QD1
O rF6 R represents the
a.future value of Q in one period.b.future value interest factor associated *ith r.c.present value of Q.d.present value interest factor
associated *ith r.
ANS: A !"#: $asy %&: 10-1;
8'. 1he capital budgeting techni2ue kno*n as accounting rate of return uses
salvage valuetime value of money
a. no nob. no yesc. yes yesd. yes no
ANS: ! !"#: $asy %&: 10-11
83. "n computing the accounting rate of return6 the <<<<<<<<<< level of investment should be used as the denominator.
a.averageb.initialc.residuald.cumulative
ANS: A !"#: $asy %&: 10-11
CodyCs 2etai!
-odyNs :etail is considering an investment in a delivery truck. -ody has found a used truck that he can purchase for G76;;;. ?e estimates
the truck *ould last si9 years and increase his storeCs net cash revenues by G(6;;; per year. At the end of si9 years6 the truck *ould have
no salvage value and *ould be discarded. -ody *ill depreciate the truck using the straight-line method.
85. :efer to -odyCs :etail. )hat is the accounting rate of return on the truck investment Dbased on average profit and average investmentF,
a.('.;Pb.';.;Pc.13.5Pd.7..P
ANS:
G(6;;;+G06;;; L ';P
Average "nvestment L DG76;;; O ;F+( L G06;;;
!"#: /oderate %&: 10-11
87. :efer to -odyCs :etail. )hat is the payback period on the investment in the ne* truck,
a.1( yearsb.3 yearsc.0 yearsd.( years
ANS: -
G76;;;+G(6;;; L 0 years
!"#: /oderate %&: 10-(
88. 4inda Smith borro*s G';6;;; from her bank on &anuary 1. She is to repay the loan in e2ual annual installments over .; years. ?o* much
is her annual repayment if the bank charges 1; percent interest, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.G16335b.G06(;;c.G(673'd.G'6.;0
ANS: !
@sing the =resent Ealue of Annuity 1able D1;P6 .; yearsF6 the constant is 8.0(38.
G';6;;;+8.0(38 L G'6.;0
!"#: /oderate %&: 10-1;
1;;. )illard oone has just turned 3'. ?e has G1;;6;;; to invest in a retirement annuity. %ne investment company has offered to pay )illard
G1;6;;; per year for 1' years Dpayments to begin in one yearF in e9change for an immediate G1;;6;;; payment. "f )illard accepts the
offer from the investment company6 *hat is his e9pected return on the G1;;6;;; investment Dassume a return that is compounded
annuallyF, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.bet*een ' and 3 percentb.bet*een 3 and 5 percentc.bet*een 5 and 7 percentd.bet*een 7 and 8 percent
ANS: A
G1;;6;;;+G1;6;;; L 1;.;;; =E of annuity 1able #actor
#or 1' years6 this factor represents a return on investment bet*een ' and 3 percent.
!"#: /oderate %&: 10-1;
1;1. Aleason Armored -ar -o. is considering the ac2uisition of a ne* armored truck. 1he truck is e9pected to cost G.;;6;;;. 1he companyCs
discount rate is 1( percent. 1he firm has determined that the truck generates a positive net present value of G156;((. ?o*ever6 the firm is
uncertain as to *hether its has determined a reasonable estimate of the salvage value of the truck. "n computing the net present value6 the
company assumed that the truck *ould be salvaged at the end of the fifth year for G3;6;;;. )hat e9pected salvage value for the truck
*ould cause the investment to generate a net present value of G;, "gnore ta9es. Present va!#e ta$!es or a 1inancia! ca!c#!ator are
re8#ired)
a.G.;6;;;b.G;c.G''6(57d.G0(6857
ANS: A
@sing the =resent Ealue of G1 table D1(P and ' yearsF6 the constant is ;.'350.
G156;((+;.'350 L G.;6;;; salvage value that *ould yield a salvage value of ;.
!"#: /oderate %&: 10-.
1;(. Steele =ublishers is considering an investment that *ould re2uire an initial cash outlay of G0;;6;;; and *ould have no salvage value. 1he
project *ould generate annual cash inflo*s of G5'6;;;. 1he firmCs discount rate is 7 percent. ?o* many years must the annual cash flo*s
be generated for the project to generate a net present value of G;, Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.bet*een ' and 3 yearsb.bet*een 3 and 5 yearsc.bet*een 5 and 7 yearsd.bet*een 7 and 8 years
ANS: -
G0;;6;;; + G5'6;;; L '...
@sing the =resent Ealue of an Annuity at 7P6 the constant falls bet*een 5 and 7 years.
!"#: /oderate %&: 10-.
1;.. A capital budget is used by management to determine
in *hat to investho* much to invest
a. no nob. no yesc. yes nod. yes
yes
ANS: ! !"#: $asy %&: 10-1
1;0. 1he *eighted average cost of capital represents the
a.cost of bonds6 preferred stock6 and common stock divided by the three sources.b.e2uivalent units of capital used by the
organization.c.overall cost of capital from all organization financing sources.d.overall cost of dividends plus interest paid by the
organization.
ANS: - !"#: $asy %&: 10-1
%H2T A3%4E2
1. "n a net present value analysis6 ho* can an analyst e9plicitly and formally consider the influence of risk on the present value of certain
cash flo*s,
ANS:
An analyst could do at least three different things to e9plicitly account
for risk. 1he analyst could: D1F adjust the discount rate to reflect the risk of the cash flo*6 D(F adjust the discounting period of the cash
flo*6 or D.F adjust the e9pected amount of the cash flo* up or do*n to reflect the risk.
!"#: /oderate %&: 10-7
(. )hat factors influence the present value of the depreciation ta9 benefit,
ANS:
1he depreciation ta9 benefit is primarily affected by three factors: the depreciation rate or method6 the ta9 rate6 and the discount rate.
!"#: /oderate %&: 10-'
.. )hy is it important for managers to be able to rank projects,
ANS:
/anagers need to be able to rank projects for t*o primary reasons. #irst6 managers need to be able to select the best project from a set of
projects that are directly competing *ith each other Dparticularly in the case of mutually e9clusive projectsF. Second6 even *hen projects
are not directly competing *ith each other6 managers may have a limited supply of capital that has to be allocated to the most *orthy of
the projects.
!"#: /oderate %&: 10-5
0. "f it is assumed that managers act to ma9imize the value of the firm6 *hat can also be assumed about the e9isting mi9 of capital
components relative to the set of all viable alternative mi9es of capital components,
ANS:
"t can be assumed that the e9isting mi9 of capital components is the one that minimizes the cost of capital D*hich6 therefore6 ma9imizes
the value of the firmF.
!"#: /oderate %&: 10-1
'. !oes a project that generates a positive internal rate of return also have a positive net present value, $9plain.
ANS:
No. A positive ":: does not necessarily mean that a project *ill also have a positive N=E. %nly if the ":: is greater than the discount
rate that is used in the N=E calculation *ill the N=E be positive.
!"#: /oderate %&: 10-3
3. )hy is the profitability inde9 a better basis than net present value to compare projects that re2uire different levels of investment,
ANS:
1he profitability inde9 relates the magnitude of the net present value to the magnitude of the initial investment. 1hus6 the =" gives some
indication of relative profitability. 1he N=E itself provides no direct indication of the level of investment that is re2uired to generate the
N=E and therefore provides no indication of relative profitability.
!"#: /oderate %&: 10-3
5. )hat is the major advantage of the accounting rate of return relative to the other techni2ues that can be used to evaluate capital projects,
ANS:
1he accounting rate of return has t*o major advantages relative to the other capital budgeting techni2ues. #irst6 it may be more
compatible as an investment criterion *ith criteria that are used to evaluate managerial and segment performance particularly for
investment centers that are evaluated on an :%" or :" basis. Second6 the accounting rate of return can be generated from accounting data
and is therefore easy to track over the life of the investment.
!"#: /oderate %&: 10-11
7. )hy is it important for organizations to conduct post investment audits of capital projects,
ANS:
1he post investment audit provides management *ith an opportunity to evaluate the actual performance of the investment relative to
e9pected performance. "f possible6 management can take corrective action *hen actual performance is poor relative to the e9pected
performance. /anagement can also use the post investment audit to evaluate the performance of those *ho provided the original
information about the investment and those *ho are in charge of the investment. "n addition6 management may use the information from
the post investment audit to improve the evaluation process of future capital projects.
!"#: /oderate %&: 10-8
8. ?o* are capital budgeting models affected by potential investments in automated e2uipment investment decisions,
ANS:
!iscount rates for present value calculations often far e9ceed a firmCs cost of capital. Automated machinery is very costly and may be at a
disadvantage in discounted cash flo* methods. Jualitative factors associated *ith automated e2uipment may not receive any *eight or
value in current capital budgeting methods. Automated e2uipment is often interrelated *ith other investments and should be bundled to
reflect this synergism. #inally6 there is the opportunity cost of not automating *hen competitors automate and your firm doesnCt.
!"#: /oderate %&: 10-7
1;. )hat are the limitations of the payback period as a capital budgeting techni2ue,
ANS:
1he payback period ignores the time value of money. "t also ignores a companyNs desired rate of return. #inally6 the payback period
ignores cash inflo*s occurring after the payback period has been reached.
!"#: /oderate %&: 10-(
P2BLEM
%ma!! Corporation
Small -orporation is considering an investment that *ill re2uire an initial cash outlay of G(;;6;;; to purchase non-depreciable assets.
1he project promises to return G3;6;;; per year Dafter-ta9F for eight years *ith no salvage value. 1he companyCs cost of capital is 11
percent.
1. :efer to Small -orporation. 1he company is uncertain about its estimate of the life e9pectancy of the project. ?o* many years must the
project generate the G3;6;;; per year return for the company to at least be indifferent about its acceptance, D!o not consider the
possibility of partial year returns.F
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
ANS:
!ividing G(;;6;;;+G3;6;;;6 gives the annuity discount factor D......F for 11 percent associated *ith the minimal re2uired time for this
project to be successful. According to the tables in Appendi9 A6 the project *ill have a positive net present value if the cash flo*s last
through year '.
!"#: /oderate %&: 10-1;
%er:in Corporation
Serkin -orporation is considering an investment in a ne* product line. 1he investment *ould re2uire an immediate outlay of G1;;6;;;
for e2uipment and an immediate investment of G(;;6;;; in *orking capital. 1he investment is e9pected to generate a net cash inflo* of
G1;;6;;; in year 16 G1';6;;; in year (6 and G(;;6;;; in years . and 0. 1he e2uipment *ould be scrapped Dfor no salvageF at the end of
the fourth year and the *orking capital *ould be li2uidated. 1he e2uipment *ould be fully depreciated by the straight-line method over
its four-year life.
(. :efer to Serkin -orporation. "f Serkin uses a discount rate of 13 percent6 *hat is the N=E of the proposed product line investment,
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
ANS:
-ash flo* RearAmount!iscount factor=resent value"nvestment0$%100,000& 1.00 $%100,000& )orking cap.
0$%200,000& 1.00 %200,000&-ash inflo*1100,000 .8621 86,210-ash inflo*2150,000 .7432 111,480-ash
inflo*3200,000 .6407 128,140-ash inflo*4200,000 .5523 110,460)orking cap. 4200,000 .5523 110,460Net
present value$246,750
!"#: /oderate %&: 10-.
.. :efer to Serkin -orporation. )hat is the payback period for the investment,
ANS:
After the first t*o years6 G(';6;;; of the original G.;;6;;; investment *ould be recouped. "t *ould take one-2uarter of the third year
DG';6;;;+G(;;6;;;F to recoup the last G';6;;;. 1hus6 the payback period is (.(' years.
!"#: /oderate %&: 10-(
0. Adam all has an opportunity to invest in a project that *ill yield four annual payments of G1(6;;; *ith no salvage. 1he first payment
*ill be received in e9actly one year. %n lo*-risk projects of this type6 all re2uires a return of 3 percent. ased on this re2uirement6 the
project generates a profitability inde9 of 1.;.8'..
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.?o* much is Adam re2uired to invest in this project,b.)hat is the internal rate of return on AdamNs project,
ANS:
a.1he present value of the G1(6;;; annuity is found by multiplying G1(6;;; by the annuity discount factor associated *ith 3 percent
interest for four years: G1(6;;; ..03'1 L G016'71.(;.#rom the information on the profitability inde96 it is kno*n that the present value
of the cash inflo*s is 1.;.8'. times the initial investment. 1hus6 the initial investment is G016'71.(;+1.;.8'. L G0;6;;;.
b.y dividing G0;6;;; by the annual cash inflo* of G1(6;;;6 it is determined that the discount factor associated *ith the ":: is .......
1his discount factor is associated *ith an interest rate that lies bet*een 5 and 7 percent. @sing interpolation6 the ":: is computed to be
appro9imately 5.5( percent.
!"#: /oderate %&: 10-0
'. =itt =roductions is considering the purchase of a ne* movie camera6 *hich *ill be used for major motion pictures. 1he ne* camera *ill
cost G.;6;;;6 have an eight-year life6 and create cost savings of G'6;;; per year. 1he ne* camera *ill re2uire G5;; of maintenance each
year. =itt =roductions uses a discount rate of 8 percent.
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.-ompute the net present value of the ne* camera.b.!etermine the payback period.
ANS:
a.-ost savings per year$5,000 /aintenance per year %700&Net cash flo*s per year$4,300
-ash!iscount factor=resent value$30,0001.0000$%30,000.00& 4,3005.5348 23,799.64 Net present value of
investment$ %6,200.36&
b.=ayback e2uals G.;6;;;+G06.;; L 3.853 years
!"#: /oderate %&: 10-.
3. :iordan -orporation is interested in purchasing a state-of-the-art *idget machine for its manufacturing plant. 1he ne* machine has been
designed to basically eliminate all errors and defects in the *idget-making production process. 1he ne* machine *ill cost G1';6;;;6 and
have a salvage value of G5;6;;; at the end of its seven-year useful life. :iordan has determined that cash inflo*s for years 1 through 5
*ill be as follo*s: G.(6;;;H G'56;;;H G1'6;;;H G(76;;;H G136;;;H G1;6;;;6 and G1'6;;;6 respectively. /aintenance *ill be re2uired in
years . and 3 at G1;6;;; and G56;;; respectively. :iordan uses a discount rate of 11 percent and *ants projects to have a payback period
of no longer than five years.
Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
a.-ompute the net present value of the ne* machine.
b.-ompute the firmCs profitability inde9.
c.-ompute the payback period.
d.$valuate this investment proposal for QRK -o.
ANS:
a.Rear-ash flo*!iscount factor=resent
value1$150,000 1.0000 $%150,000.00& 1 32,000.9009 28,828.80( 57,000.8116 46,261.20. 5,000.731
2 3,656.000 28,000.6587 18,443.60' 16,000.5935 9,496.003 3,000.5346 1,603.805 15,000.4817
7,225.505 70,000.4817 33,719.00 Net present value$ %766.10&
b.=rofitability inde9 e2uals present value of cash flo*s divided by investment: G1086(...8;+G1';6;;; L .88'
c.=ayback period is 3.11 years6 computed as follo*s:
Rear-ash #lo*-umulative -ash #lo*1$32,000$
32,000 2 57,000 89,0003 5,000 94,0004 28,000122,0005 16,000138,0006 3,000141,0007 85,00022
6,000
G1';6;;; - G1016;;; L G86;;;+G7'6;;; L .11
d.1he project is 2uantitatively unacceptable because it has a negative N=E6 a less-than-one ="6 and a payback period of over si9 years.
?o*ever6 the N=E and =" are e9tremely close to being acceptable. ecause the ne* machine *ill provide QRK zero-defect production6
the investment may be desirable if additional 2ualitative factors are considered such as improved competitive position6 customer
satisfaction6 good*ill generated6 improved product 2uality and reliability6 and a desire to be in the forefront of manufacturing capability.
QRK may *ant to attempt to 2uantify these benefits and reevaluate the machineCs acceptability as an investment.
!"#: !ifficult %&: 10-.
5. 1he :eed -ompany has been operating a small lunch counter for the convenience of employees. 1he counter occupies space that is not
needed for any other business purpose. 1he lunch counter has been managed by a part-time employee *hose annual salary is G.6;;;.
Rearly operations have consistently sho*n a loss as follo*s:
:eceipts$20,000 $9penses for food6 supplies Din cashF$19,000Salary 3,000 22,000 Net 4oss$%2,000&
A company has offered to sell :eed -ompany automatic vending machines for a total cost of G1(6;;;. Sales terms are cash on delivery.
1he old e2uipment has zero disposal value.
1he predicted useful life of the e2uipment is 1; years6 *ith zero scrap value. 1he e2uipment *ill easily serve the same volume that the
lunch counter handled. A catering company *ill completely service and supply the machines. =rices and variety of food and drink *ill be
the same as those that prevailed at the lunch counter. 1he catering company *ill pay ' percent of gross receipts to the :eed -ompany and
*ill bear all costs of food6 repairs6 and so forth. 1he part-time employee *ill be discharged. 1hus6 :eed -ompanyNs only cost *ill be the
initial outlay for the machines.
-onsider only the t*o alternatives mentioned. Present va!#e ta$!es or a 1inancia! ca!c#!ator are re8#ired)
2e8#ired9
a.)hat is the annual income difference bet*een alternatives,
b.-ompute the payback period.
c.-ompute:1. 1he net present value if relevant cost of capital is (; percent.(. "nternal rate of return.
d./anagement is very uncertain about the prospective revenue from the vending e2uipment. Suppose that the gross receipts amounted to
G106;;; instead of G(;6;;;. :epeat the computation in part c.1.e.)hat *ould be the minimum amount of annual gross receipts from the
vending e2uipment that *ould justify making the investment, Sho* computations.
ANS:
a.%ld loss GD(6;;;FNe* receipts G(;6;;; 'P L$ 1,000 !epr. G1(6;;;+1; yrs. L %1,200&Ne* D4ossF$ %200&b.-hange in
annual cash inflo* is G.6;;;=ayback L G1(6;;;+G.6;;; L 0 yrs.c.1.=E of inflo* G.6;;; 0.18(' L$12,577.50 =E of outflo*
G1(6;;; 1.; L%12,000.00&N=E$ 577.50 (.":: is appro9imately (.Pd.-hange in inflo* L G(65;; =E inflo* G(65;;
0.18(' L$11,319.75 =E outflo* G1(6;;; 1.; L%12,000.00& N=E$ %680.25&e.G1(6;;;+0.18(' L G(673(.(':eceipts
L DG(673(.(' - G(6;;;F+.;' L G156(0'
!"#: /oderate %&: 10-0
7. 1he Spotless Automobile -orporation is contemplating the ac2uisition of an automatic car *ash. 1he follo*ing information is relevant:
1he cost of the car *ash is G13;6;;;1he anticipated revenue from the car *ash is G1;;6;;; per annum.1he useful life of the car *ash is
1; years.Annual operating costs are e9pected to be: Salaries$30,000 @tilities9,600 )ater usage4,400 Supplies6,000
:epairs+maintenance10,0001he firm uses straight-line depreciation.1he salvage value for the car *ash is zero.1he companyCs cutoff
points are as follo*s: =ayback3 ye01s Accounting rate of return18% "nternal rate of return18%
"gnore income ta9es.
2e8#ired9
a.-ompute the annual cash inflo*.
b.-ompute the net present value.
c.-ompute internal rate of return.
d.-ompute the payback period.
e.-ompute the profitability inde9.
f.Should the car *ash be purchased,
ANS:
a.:evenue$100,000 - cash e9penses %60,000&Annual inflo*$ 40,000 b.=E inflo* G0;6;;; 0.0801 L$179,764 =E
outflo* G13;6;;; 1.; L%160,000& N=E L$ 19,764
c.":: factor L G13;6;;;+G0;6;;; L 0.; *hich is appro9imately (.P
d.=ayback L G13;6;;;+G0;6;;; L 0 yrs.
e.G1586530+G13;6;;; L 1.1(.'('
f.-ar *ash e9ceeds minimum on S:: and "::6 but not payback.
!"#: /oderate %&: 10-0
Chapter '--Cost Termino!ogy and Cost Behaviors
MULTIPLE CHICE
1. 1he term Brelevant rangeB as used in cost accounting means the range over *hich
a.costs may fluctuate.b.cost relationships are valid.c.production may vary.d.relevant costs are incurred.
ANS: !"#: $asy %&: (-1
(. )hich of the follo*ing defines variable cost behavior,
1otal cost reaction
to increase in activity-ost per unit reaction
to increase in activity
a.remains constant remains constantb.remains constant increasesc.increases
increasesd.increases remains constant
ANS: ! !"#: $asy %&: (-1
.. )hen cost relationships are linear6 total variable prime costs *ill vary in proportion to changes in
a.direct labor hours.b.total material cost.c.total overhead cost.d.production volume.
ANS: ! !"#: $asy %&: (-1
0. )hich of the follo*ing *ould not generally be considered a fi9ed overhead cost,
Straight-line#actory@nits-of-productiondepreciationinsurancedepreciation
a. no no nob. yes no yesc. yes yes
nod. no yes no
ANS: - !"#: $asy %&: (-1
'. An e9ample of a fi9ed cost is
a.total indirect material cost.b.total hourly *ages.c.cost of electricity.d.straight-line depreciation.
ANS: ! !"#: $asy %&: (-1
3. A cost that remains constant in total but varies on a per-unit basis *ith changes in activity is called aDnF
a.e9pired cost.b.fi9ed cost.c.variable cost.d.mi9ed cost.
ANS: !"#: $asy %&: (-1
5. ADnF <<<<<<<< cost increases or decreases in intervals as activity changes.
a.historical costb.fi9ed costc.step costd.budgeted cost
ANS: - !"#: $asy %&: (-1
7. )hen the number of units manufactured increases6 the most significant change in unit cost *ill be reflected as aDnF
a.increase in the fi9ed element.b.decrease in the variable element.c.increase in the mi9ed element.d.decrease in the fi9ed element.
ANS: ! !"#: $asy %&: (-1
8. )hich of the follo*ing al*ays has a direct cause-effect relationship to a cost,
=redictor-ost driver
a.yes yesb.yes noc.no yesd.no no
ANS: - !"#: /oderate %&: (-1
1;. A cost driver
a.causes fi9ed costs to rise because of production changes.b.has a direct cause-effect relationship to a cost.c.can predict the cost behavior
of a variable6 but not a fi9ed6 cost.d.is an overhead cost that causes distribution costs to change in distinct increments *ith changes in
production volume.
ANS: !"#: $asy %&: (-1
11. =roduct costs are deducted from revenue
a.as e9penditures are made.b.*hen production is completed.c.as goods are sold.d.to minimize ta9able income.
ANS: - !"#: $asy %&: (-(
1(. A selling cost is aDnF
product costperiod costinventoriable cost
a.yes yes nob.yes no noc.no yes nod.no
yes yes
ANS: - !"#: $asy %&: (-(
1.. )hich of the follo*ing is not a product cost component,
a.rent on a factory buildingb.indirect production labor *agesc.janitorial supplies used in a factoryd.commission on the sale of a product
ANS: ! !"#: $asy %&: (-(
10. =eriod costs
a.are generally e9pensed in the same period in *hich they are incurred.b.are al*ays variable costs.c.remain unchanged over a given
period of time.d.are associated *ith the periodic inventory method.
ANS: A !"#: $asy %&: (-(
1'. =eriod costs include
distribution costsoutside processing costssales commissions
a.yes no yesb.no yes
yesc.no no nod.yes yes
yes
ANS: A !"#: $asy %&: (-(
13. 1he three primary inventory accounts in a manufacturing company are
a./erchandise "nventory6 Supplies "nventory6 and #inished Aoods "nventory.b./erchandise "nventory6 )ork in =rocess "nventory6 and
#inished Aoods "nventory.c.Supplies "nventory6 )ork in =rocess "nventory6 and #inished Aoods "nventory.d.:a* /aterial "nventory6
)ork in =rocess "nventory6 and #inished Aoods "nventory.
ANS: ! !"#: $asy %&: (-(
15. -ost of Aoods Sold is an
a.une9pired product cost.b.e9pired product cost.c.une9pired period cost.d.e9pired period cost.
ANS: !"#: $asy %&: (-(
17. 1he indirect costs of converting ra* material into finished goods are called
a.period costs.b.prime costs.c.overhead costs.d.conversion costs.
ANS: - !"#: $asy %&: (-(
18. )hich of the follo*ing *ould need to be allocated to a cost object,
a.direct materialb.direct laborc.direct production costsd.indirect production costs
ANS: ! !"#: $asy %&: (-(
(;. -onversion cost does not include
a.direct labor.b.direct material.c.factory depreciation.d.supervisorsC salaries.
ANS: !"#: $asy %&: (-(
(1. 1he distinction bet*een direct and indirect costs depends on *hether a cost
a.is controllable or non-controllable.b.is variable or fi9ed.c.can be conveniently and physically traced to a cost object under
consideration.d.*ill increase *ith changes in levels of activity.
ANS: - !"#: /oderate %&: (-(
((. roussard -ompany is a construction company that builds houses on special re2uest. )hat is the proper classification of the carpentersC
*ages,
=roduct=eriod !irect
a.yes yes nob.yes no yesc.no no nod.no yes yes
ANS: !"#: $asy %&: (-(
(.. roussard -ompany is a construction company that builds houses on special re2uest. )hat is the proper classification of the cost of the
cement building slab used,
!irect#i9ed
a.no nob.no yesc.yes yesd.yes no
ANS: ! !"#: $asy %&: (-(
(0. roussard -ompany is a construction company that builds houses on special re2uest. )hat is the proper classification of indirect material
used,
=rime -onversion Eariable
a.no no nob.no yes yesc.yes yes yesd.yes no
no
ANS: !"#: $asy %&: (-(
('. )hich of the follo*ing costs *ould be considered overhead in the production of chocolate chip cookies,
a.flourb.chocolate chipsc.sugard.oven electricity
ANS: ! !"#: $asy %&: (-(
(3. All costs related to the manufacturing function in a company are
a.prime costs.b.direct costs.c.product costs.d.conversion costs.
ANS: - !"#: $asy %&: (-(
(5. =rime cost consists of
direct materialdirect laboroverhead
a.no yes nob.yes yes noc.yes no yesd.no
yes yes
ANS: !"#: $asy %&: (-(
(7. =lastic used to manufacture dolls is a
prime costproduct cost direct cost fi9ed cost
a.no yes yes yesb.yes no yes noc.yes yes
no yesd.yes yes yes no
ANS: ! !"#: $asy %&: (-(
(8. 1he term Bprime costB refers to
a.all manufacturing costs incurred to produce units of output.b.all manufacturing costs other than direct labor and ra* material costs.c.ra*
material purchased and direct labor costs.d.the ra* material used and direct labor costs.
ANS: ! !"#: $asy %&: (-(
.;. -onversion of inputs to outputs is recorded in the
a.)ork in =rocess "nventory account.b.#inished Aoods "nventory account.c.:a* /aterial "nventory account.d.both a and b.
ANS: A !"#: $asy %&: (-0
.1. "n a perpetual inventory system6 the sale of items for cash consists of t*o entries. %ne entry is a debit to -ash and a credit to Sales. 1he
other entry is a debit to
a.)ork in =rocess "nventory and a credit to #inished Aoods "nventory.b.#inished Aoods "nventory and a credit to -ost of Aoods
Sold.c.-ost of Aoods Sold and a credit to #inished Aoods "nventory.d.#inished Aoods "nventory and a credit to )ork in =rocess
"nventory.
ANS: - !"#: $asy %&: (-0
.(. 1he formula to compute cost of goods manufactured is
a.beginning )ork in =rocess "nventory plus purchases of ra* material minus ending )ork in =rocess "nventory.b.beginning )ork in
=rocess "nventory plus direct labor plus direct material used plus overhead incurred minus ending )ork in =rocess "nventory.c.direct
material used plus direct labor plus overhead incurred.d.direct material used plus direct labor plus overhead incurred plus beginning )ork
in =rocess "nventory.
ANS: !"#: $asy %&: (-'
... 1he final figure in the Schedule of -ost of Aoods /anufactured represents the
a.cost of goods sold for the period.b.total cost of manufacturing for the period.c.total cost of goods started and completed this
period.d.total cost of goods completed for the period.
ANS: ! !"#: $asy %&: (-'
.0. 1he formula for cost of goods sold for a manufacturer is
a.beginning #inished Aoods "nventory plus -ost of Aoods /anufactured minus ending #inished Aoods "nventory.b.beginning )ork in
=rocess "nventory plus -ost of Aoods /anufactured minus ending )ork in =rocess "nventory.c.direct material plus direct labor plus
applied overhead.d.direct material plus direct labor plus overhead incurred plus beginning )ork in =rocess "nventory.
ANS: A !"#: $asy %&: (-'
.'. )hich of the follo*ing replaces the retailing component B=urchasesB in computing -ost of Aoods Sold for a manufacturing company,
a.direct material usedb.cost of goods manufacturedc.total prime costd.cost of goods available for sale
ANS: !"#: $asy %&: (-'
.3. -osts that are incurred to preclude defects and improper processing are:
a.prevention costsc.appraisal costsb.detection costsd.failure costs
ANS: A !"#: /oderate %&: (-0
.5. -osts that are incurred for monitoring and inspecting are:
a.prevention costsc.appraisal costsb.detection costsd.failure costs
ANS: - !"#: /oderate %&: (-0
.7. -osts that are incurred *hen customers complain are:
a.prevention costsc.appraisal costsb.detection costsd.failure costs
ANS: ! !"#: /oderate %&: (-0
4i!son Company
1he follo*ing information has been taken from the cost records of )ilson -ompany for the past year:
:a* material used in production$3261otal manufacturing costs charged to production during the year Dincludes direct material6 direct
labor6 and overhead e2ual to 3;P of direct labor costF686-ost of goods available for sale826Selling and Administrative e9penses25
"nventorieseginning$nding:a* /aterial$75$ 85)ork in =rocess8030#inished Aoods90110
.8. :efer to )ilson -ompany. 1he cost of ra* material purchased during the year *as
a.G.13.b.G..3.c.G.3;.d.G011.
ANS:
eginning "nventory5'+P#rchases00,=Aoods Available for Sale011-$nding "nventoryD.(3F/aterials @sed in =roduction7'
!"#: /oderate %&: (-0
0;. :efer to )ilson -ompany. !irect labor cost charged to production during the year *as
a.G1.'.b.G(13.c.G(('.d.G.3;.
ANS: -
1otal production costsG373- :a* materialsG.(3-onversion -ostsG.3;4et 9 L !irect 4abor4et .3;9 L #actory %verhead9 O .3;9 G.3;"
&''5
!"#: $asy %&: (-0
01. :efer to )ilson -ompany. -ost of Aoods /anufactured *as
a.G3.3.b.G513.c.G5.3.d.G533.
ANS: -
eginning )"= "nventoryG 7;-osts of =roduction 373less: $nding )"= "nventory D.;F-ost of Aoods /anufacturedG5.3LLLL
!"#: /oderate %&: (-'
0(. :efer to )ilson -ompany. -ost of Aoods Sold *as
a.G381.b.G513.c.G5.3.d.G7;1.
ANS:
eginning #inished Aoods "nventoryG 8;-ost of Aoods /anufactured 5.3less: $nding #inished Aoods "nventoryD11;F-ost of Aoods
/anufacturedG513LLLL
!"#: /oderate %&: (-'
Brandt Company)
randt -ompany manufactures *ood file cabinets. 1he follo*ing information is available for &une (;;1:
eginning$nding:a* /aterial "nventory$ 6,000$ 7,500)ork in =rocess "nventory17,30011,700#inished Aoods
"nventory21,00016,300
0.. :efer to randt -ompany. !irect labor is G8.3; per hour and overhead for the month *as G863;;. -ompute total manufacturing costs for
&une6 if there *ere 16';; direct labor hours and G(16;;; of ra* material *as purchased.
a.G'76';;b.G036';;c.G0.6';;d.G0.61;;
ANS: -
egin "nv=urch$nding "nv:a* /aterials G36;;;.;; G(16;;;.;; GD56';;.;;F G186';;.;; :ate ?ours !irect 4abor G 8.3; 16';;
1060;;.;; %verhead 863;;.;; &/0<5(()((
!"#: /oderate %&: (-0
00. :efer to randt -ompany. !irect labor is paid G8.3; per hour and overhead for the month *as G863;;. )hat are prime costs and
conversion costs6 respectively if there *ere 16';; direct labor hours and G(16;;; of ra* material *as purchased,
a.G(861;; and G..68;;b.G..68;; and G(06;;;c.G..68;; and G(861;;d.G(06;;; and G..68;;
ANS:
Begin InvPurchEnding Inv:a* /aterials G36;;;.;; G(16;;;.;; GD56';;.;;F G186';;.;; :ate ?ours !irect 4abor G 8.3; 16';;
1060;;.;; %verhead 863;;.;;
=rime -osts L :a* /aterials O !irect 4abor-- G186';; O 1060;; L G..68;;
-onversion -osts L !irect 4abor O #actory %verhead--G1060;; O 863;; - G(06;;;
!"#: /oderate %&: (-0
0'. :efer to randt -ompany. !irect labor is paid G8.3; per hour and overhead for the month *as G863;;. "f there *ere 16';; direct labor
hours and G(16;;; of ra* material purchased6 -ost of Aoods /anufactured is:
a.G0861;;.b.G0'6;;;.c.G'16;;;.d.G086';;.
ANS: A
eginning )"= "nventory G 156.;; :a* /aterials G 186';; !irect 4abor 1060;; #actory %verhead 863;; 0.6';;
$nding )"= "nventory D1165;;F-ost of Aoods /anufactured G 0861;;
!"#: /oderate %&: (-'
03. :efer to randt -ompany. !irect labor is paid G8.3; per hour and overhead for the month *as G863;;. "f there *ere 16';; direct labor
hours and G(16;;; of ra* material purchased6 ho* much is -ost of Aoods Sold,
a.G306';;.b.G'867;;.c.G.767;;.d.G'.67;;.
ANS: !
eginning )"= "nventory G 156.;; :a* /aterials G 186';; !irect 4abor 1060;; #actory %verhead 863;; 0.6';;
$nding )"= "nventory D1165;;F-ost of Aoods /anufactured G 0861;; eginning #inished Aoods "nventory (16;;; $nding
#inished Aoods "nventory D136.;;F G '.67;;
!"#: /oderate %&: (-'
05. !avis -ompany manufacturers desks. 1he beginning balance of :a* /aterial "nventory *as G06';;H ra* material purchases of G(863;;
*ere made during the month. At month end6 G565;; of ra* material *as on hand. :a* material used during the month *as
a.G(360;;.b.G.061;;.c.G.56.;;.d.G(863;;.
ANS: A
eginning :/ "nventory O =urchases - $nding :/ "nventory L :/aterials @sed
G06';; O (863;; - 565;; L Q
Q L G(360;;
!"#: $asy %&: (-0
07. @rban -ompany manufacturers tables. "f ra* material used *as G7;6;;; and :a* /aterial "nventory at the beginning and end of the
period6 respectively6 *as G156;;; and G(16;;;6 *hat *as amount of ra* material *as purchased,
a.G536;;;b.G1176;;;c.G706;;;d.G1;16;;;
ANS: -
eginning :/ "nventory O =urchases - $nding :/ "nventory L :/aterials @sed
G156;;; O Q - (16;;; L G7;6;;;
Q L G706;;;
!"#: $asy %&: (-0
08. =utnam -ompany manufacturers computer stands. )hat is the beginning balance of #inished Aoods "nventory if -ost of Aoods Sold is
G1;56;;;H the ending balance of #inished Aoods "nventory is G(;6;;;H and -ost of Aoods /anufactured is G';6;;; less than -ost of
Aoods Sold,
a.G5;6;;;b.G556;;;c.G1'56;;;d.G1(56;;;
ANS: A
eg #in Aoods "nvy O -ost of Aoods /anufactured - $nding #in Aoods "nvy L -%AS
Q O G'56;;; - G(;6;;; L G1;56;;;
Q L G5;6;;;
!"#: $asy %&: (-'
%harp Enterprises
"nventories:/arch 1/arch .1:a* material$18,000$15,000)ork in process9,0006,000#inished goods27,00036,000
Additional information for /arch::a* material purchased$42,000!irect labor payroll30,000!irect labor rate per
hour7.50%verhead rate per direct labor hour10.00
';. :efer to Sharp $nterprises. #or /arch6 prime cost incurred *as
a.G5'6;;;.b.G386;;;.c.G0'6;;;.d.G.86;;;.
ANS: A
egin "nv=urch$nding "nv:a* /aterials G176;;;.;; G0(6;;;.;; GD1'6;;;.;;F G0'6;;;.;; :ate ?ours !irect 4abor G 5.'; 06;;;
.;6;;;.;; &+5<((()((
!"#: $asy %&: (-0
'1. :efer to Sharp $nterprises. #or /arch6 conversion cost incurred *as
a.G.;6;;;.b.G0;6;;;.c.G5;6;;;.d.G5(6;;;.
ANS: -
egin "nv=urch$nding "nv!irect 4abor G 5.'; 06;;; .;6;;;.;; :ate ?ours%verhead G 1;.;; 06;;; 0;6;;;.;; &+(<((()((
!"#: $asy %&: (-0
'(. :efer to Sharp $nterprises. #or /arch6 -ost of Aoods /anufactured *as
a.G1176;;;.b.G11'6;;;.c.G11(6;;;.d.G1;86;;;.
ANS: A
eginning )"= "nventory G 86;;; :a* /aterials G 0'6;;; !irect 4abor .;6;;; #actory %verhead 0;6;;; 11'6;;;
$nding )"= "nventory D36;;;F G 1176;;;
!"#: $asy %&: (-'
%H2T A3%4E2
1. !efine relevant range and e9plain its significance.
ANS:
1he relevant range is that range of activity over *hich a variable cost remains constant on a per-unit basis and a fi9ed cost remains
constant in total. /anagers can revie* the various ranges of activity and the related effects on variable cost Dper-unitF and fi9ed cost Din
totalF to determine ho* a change in the range *ill affect costs and6 thus6 the firmCs profitability.
!"#: /oderate %&: (-1
(. !efine a variable cost and a fi9ed cost. )hat causes changes in these costs, Aive t*o e9amples of each.
ANS:
A variable cost is one that remains constant on a per-unit basis but varies in total *ith changes in activity. $9amples of variable costs
include direct material6 direct labor6 and DpossiblyF utilities. A fi9ed cost is one that remains constant in total but varies on a per-unit basis
*ith changes in activity. $9amples of fi9ed costs include straight-line depreciation6 insurance6 and the supervisorCs salary.
!"#: /oderate %&: (-1
.. )hat is the difference bet*een a product cost and a period cost, Aive three e9amples of each. )hat is the difference bet*een a direct cost
and indirect cost, Aive t*o e9amples of each.
ANS:
A product cost is one that is associated *ith making or ac2uiring inventory. A period cost is any cost other than those associated *ith
making or ac2uiring products and is not considered inventory. Students *ill have a variety of e9amples6 but direct material6 direct labor6
and overhead are product costs. Selling and administrative e9penses are considered period costs. A direct cost is one that is physically and
conveniently traceable to a cost object. !irect material and direct labor are direct costs. An indirect cost is one that cannot be conveniently
traced to a cost object. Any type of overhead cost is considered indirect.
!"#: /oderate %&: (-(
0. )hat are three reasons that overhead must be allocated to products,
ANS:
%verhead must be allocated because it is necessary to D1F determine fill cost6 D(F it can motivate managers6 and D.F it allo*s managers to
compare alternative courses of action.
!"#: /oderate %&: (-(
'. )hy should predetermined overhead rates be used,
ANS:
=redetermined overhead rates should be used for three reasons: D1F to assign overhead to )ork in =rocess during the production cycle
instead of at the end of the periodH D(F to compensate for fluctuations in actual overhead costs that have no bearing on activity levelsH and
D.F to overcome problems of fluctuations in activity levels that have no impact on actual fi9ed overhead costs.
!"#: /oderate %&: (-(
3. 4ist and e9plain three types of 2uality costs.
ANS:
=revention costs--incurred to improve 2uality by precluding product defects and improper processing from occurring.
Appraisal costs--incurred to find mistakes not eliminated through prevention.
#ailure costs--can be internal Dscrap and re*orkF or e9ternal Dcosts of returns6 *arranty costsF.
!"#: /oderate %&: (-0
P2BLEM
1. Aiven the follo*ing information for /c-urley -orporation6 prepare the necessary journal entries6 assuming that the :a* /aterial
"nventory account contains both direct and indirect material.
a.=urchased ra* material on account G(76';;.b.=ut material into production: G1'6;;; of direct material and G.6;;; of indirect
material.c.Accrued payroll of G8;6;;;6 of *hich 5; percent *as direct and the remainder *as indirect.d."ncurred and paid other overhead
items of G.36;;;.e.1ransferred items costing G736';; to finished goods.f.Sold goods costing G516.;; on account for G1(065;;.
ANS:
a.:/ "nventory28,500A+=28,500b.)"= "nventory15,000/anufacturing %?3,000:/ "nventory18,000c.)"=
"nventory63,000/anufacturing %?27,000Salaries+)ages =ayable90,000d./anufacturing %?36,000-ash36,000e.#A
"nventory86,500)"= "nventory86,500f.A+:124,700Sales124,700-AS71,300#A "nventory71,300
!"#: /oderate %&: (-0
(. =repare a Schedule of -ost of Aoods /anufactured Din good formF for the Araves -ompany from the follo*ing information for &une
(;Q7:
"nventorieseginning$nding:a* /aterialG 365;;G 768;;)ork in =rocess1565;;((63';#inished Aoods(865.;18688;
Additional information: purchases of ra* material *ere G0365;;H 1865;; direct labor hours *ere *orked at G11..; per hourH overhead
costs *ere G..6.;;.
ANS:
Araves -ompany
Schedule of -ost of Aoods /anufactured
#or the /onth $nded &une .;6 (;Q7
)ork in =rocess D&une 1F$ 17,700 :a* /at. D&une 1F$ 6,700 =urchases 46,700 :a* /at. Available53,400 :a* /at. D&une
.;F %8,900&:a* /at. @sed$ 44,500!irect 4abor D1865;; 9 G11..;F222,610/anufacturing %verhead 33,3001otal
/anufacturing -osts 300,410 1otal Aoods in =rocess$318,110 )ork in =rocess D&une .;F %22,650&-ost of Aoods
/anufactured$295,460
!"#: /oderate %&: (-'
.. "n &une (;Q76 the Araves -ompany has -ost of Aoods /anufactured of G(836;;;H beginning #inished Aoods "nventory of G(865.;H and
ending #inished Aoods "nventory of G18688;. =repare an income statement in good form. D"gnore ta9es.F 1he follo*ing additional
information is available:
Selling $9penses$ 40,500Administrative $9penses19,700Sales475,600
ANS:
Araves -ompany
"ncome Statement
#or the /onth $nded &une .;6 (;Q7Sales$475,600 -ost of Aoods Sold:#inished Aoods D&une 1F$ 29,730 -ost of Aoods /fCd
296,000 1otal Aoods Available$325,730 #inished Aoods D&une .;F %19,990&-ost of Aoods Sold %305,740&Aross
/argin$169,860 %perating $9penses:Selling$40,500 Administrative19,700 1otal %perating $9penses %60,200&"ncome
from operations$109,660
!"#: /oderate %&: (-'
0. 1he follo*ing information is for the :ayne /anufacturing -ompany for November.
"nventorieseginning$nding:a* /aterial$17,400$13,200)ork in =rocess31,15028,975#inished Aoods19,20025,500
!irect 4abor D(16;;; !4? X G1.F:a* /aterial =urchases$120,000"nsurance-%ffice2,570"ndirect 4abor11,200%ffice Supplies
$9pense900#actory Supplies @sed350"nsurance-#actory1,770%ther $9penses:!epr. %ffice $2uipment3,500!epr.-#actory
$2uipment17,300:epair+/aintenance-#actory7,400
-alculate total manufacturing costs6 cost of goods manufactured6 and cost of goods sold.
ANS:
/anufacturing -osts::a* /aterial DNov. 1F$ 17,400 =urchases 120,000 :a* /aterial Available$137,400 :a* /aterial DNov.
.;F %13,200&:a* /aterial @sed$124,200!irect 4abor D(16;;; 9 G1.F273,000%verhead:!epr.-#actory $2uipment
$17,300 :epairs+/aintenance-#actory7,400 "ndirect 4abor11,200 "nsurance-#actory1,770 #actory Supplies
@sed 350 1otal %verhead 38,0201otal /anufacturing -osts $435,220
-ost of Aoods /anufactured:1otal /anufacturing -osts$435,220 )ork in =rocess DNov. 1F31,150 )ork in =rocess DNov. .;F
%28,975&-ost of Aoods /anufactured$437,395
-ost of Aoods Sold:#inished Aoods DNov. 1F$ 19,200 -ost of Aoods /anufactured 437,395 1otal Aoods
Available$456,595 #inished Aoods DNov. .;F %25,500&-ost of Aoods Sold$431,095
!"#: /oderate %&: (-'
'. #rom the follo*ing information for the Aalveston -ompany6 compute prime costs and conversion costs.
"nventorieseginning$nding:a* /aterial$ 9,900$ 7,600)ork in =rocess44,50037,800#inished Aoods36,58061,300
:a* material purchased during the period cost G0;67;;H overhead incurred and paid or accrued for the period *as G(165';H and (.63;;
direct labor hours *ere incurred at a rate of G1..5' per hour.
ANS:
=rime -osts::a* /aterial DeginningF$ 9,900 =urchases 40,800 :a* /aterial Available$50,700 :a* /aterial D$ndingF
%7,600&:a* /aterial @sed$ 43,100!irect 4abor%23,600 2 $13.75& 324,500=rime -osts$367,600
-onversion -osts:!irect 4abor DAboveF$324,500%verhead 21,750-onversion -osts$346,250
!"#: /oderate %&: (-'
3. 1he follo*ing miscellaneous data has been collected for a manufacturing company for the most recent year-end:
"nventories:eginning$nding:a* material$50,000$55,000)ork in process40,00045,000#inished goods60,00050,000-osts
recorded during the year:=urchases of ra* material$195,000!irect labor150,000-ost of goods sold595,000
2e8#ired9 =repare a cost of goods manufactured statement sho*ing ho* all unkno*n amounts *ere determined.
ANS:
$A"N )"=$ 40,000O !/ D1F190,000O !-150,000O %??= $250,000- $N! )"= %45000&L -%A/ D(F$585,000
D1F $A :/$ 50,000O =@:-?AS$ 195,000- $N! :/ %55,000&L !/ $190,000
D(F$A"N #A$ 60,000 O -%A/? = $585,000- $N! #A %50,000&L -%AS$595,000
!"#: /oderate %&: (-'
5. 1he follo*ing information *as taken from the records of the $nterprise -orporation for the month of &uly. D1here *ere no inventories of
*ork in process or finished goods on &uly 1.F
@nits-ostSales during month8,000$ ?/anufacturing costs for month:!irect material32,000!irect labor20,000%verhead costs
applied15,000%verhead costs under-applied 800"nventories6 &uly .1:)ork in process1,000?#inished goods2,000?
"ndirect manufacturing costs are applied on a direct labor cost basis. 1he under-applied balance is due to seasonal variations and *ill be
carried for*ard. 1he follo*ing cost estimates have been submitted for the *ork in process inventory of &uly .1: material6 G.6;;;H direct
labor6 G(6;;;.
2e8#ired9
a.!etermine the number of units that *ere completed and transferred to finished goods during the month.b.-omplete the estimate of the
cost of *ork in process on &uly .1.c.=repare a manufacturing statement for the month.d.!etermine the cost of each unit completed during
the month.e.!etermine the total amount debited to the %verhead -ontrol accounts during the month.
ANS:
a.76;;; S%4! O (6;;; $N!"NA #A L 1;6;;; @N"1Sb.!/ $3,000!- 2,000 %? 1,500$15,000 2
$2,000$6,500$20,000 c.!/$32,000 !420,000 %?15,000 - $N! )"= %6,500&L
-%A/$60,500 d.-%A/+-%/=4$1$ @N"1S L$ 60,500L G3.;'+@N"11;6;;; @N"1Se.%? A==4"$!$15,000O %?
@N!$:A==4"$! 800A-1@A4 %?$15,800
!"#: /oderate %&: (-'
7. 1he /agnolia #orest -orporation had the follo*ing account balances:
2a@ Materia! Man#1act#ring verhead
al. 1+1 .;6;;; -redits ,!ebits.7'6;;;-redits ,!ebits 0(;6;;;
al. 1(+.1 3;6;;;
4or: in Process ;actory 4ages Paya$!e
al. 1+1
!irect material 5;6;;;
.(;6;;;-redits71;6;;;!ebits1586;;;al.1+1 -redits1;6;;;
15'6;;; 11;6;;;%verhead 0;;6;;;
al. 1(+.136;;;al. 1(+.1 ,
;inished 6oods Cost o1 6oods %o!d
al. 1+1 0;6;;; -redits ,!ebits ,!ebits ,al. 1(+.1 1.;6;;;
2e8#ired:
a.)hat *as the cost of ra* material put into production during the year,b.?o* much of the material from 2uestion 1 consisted of indirect
material,c.?o* much of the factory labor cost for the year consisted of indirect labor,d.)hat *as the cost of goods manufactured for the
year,e.)hat *as the cost of goods sold for the year Dbefore considering under- or overapplied overheadF,f."f overhead is applied to
production on the basis of direct material6 *hat rate *as in effect during the year,g.)as manufacturing overhead under- or overapplied,
y ho* much,h.-ompute the ending balance in the )ork in =rocess "nventory account. Assume that this balance consists entirely of
goods started during the year. "f G.(6;;; of this balance is direct material cost6 ho* much of it is direct labor cost, /anufacturing
overhead cost,
ANS:
a.G.;6;;; O G0(;6;;; - G3;6;;; L G.8;6;;;b.G.8;6;;; - G.(;6;;; !/ L G5;6;;;c.G15'6;;; - G11;6;;; !4 L G3'6;;;d.G71;6;;;e.
G0;6;;; O G71;6;;; - G1.;6;;; L G5(;6;;;f.G0;;6;;;+G.(;6;;; L 1('P !/ -ostg.%? Actual$385,000 %? Applied 400,000 %?
%verapplied$ 15,000 h.eginning )"=$ 70,000 !/$32000O !/320,000 !4 D1o alanceF18,000O !-110,000 #%?
D1F 40,000O %?400,000 $nd )"=$90,000- $nding )"= %90000&L -%A/$810,000 D1F G.(6;;; 9 1('P L G0;6;;;
!"#: /oderate %&: (-'
Chapter .*Emerging Management Practices
MULTIPLE CHICE
1. 1he focus of =: is improving
a.products.b.processes.c.cost reduction.d.decision making.
ANS: !"#: $asy %&: 17-1
(. =: is not associated *ith
a.employee layoffs.b.outsourcing initiatives.c.technology ac2uisition.d.plant e9pansion.
ANS: ! !"#: $asy %&: 17-1
.. =: stands for
a.business product reengineering.b.business purchase reengineering.c.business process reengineering.d.business process reduction.
ANS: - !"#: $asy %&: 17-1
0. )ho is not involved in the successful implementation of =:,
a.investorsb.customersc.suppliersd.top management
ANS: A !"#: $asy %&: 17-1
'. )hich of the follo*ing is not a trend promoting the increased use of =:,
a.advancement of technologyb.pursuit of increased 2ualityc.price competition caused by globalizationd.business e9pansion
ANS: ! !"#: $asy %&: 17-1
3. !o*nsizing results in aDnF
a.reduction in *orkforce.b.restructuring of processes.c.elimination of noncore businesses.d.all of the above.
ANS: ! !"#: $asy %&: 17-(
5. An advantage of do*nsizing is
a.decreased costs in the long run.b.layoffs.c.one-time losses.d.reduced communication.
ANS: A !"#: $asy %&: 17-(
7. %utsourcing and marketing *orld*ide enable firms to
a.develop ne* markets.b.reduce input costs.c.manage effects of peaks and valleys in local economies.d.all of the above.
ANS: ! !"#: $asy %&: 17-(
8. !iversity applies to differences in
a.race.b.religion.c.culture.d.all of the above.
ANS: ! !"#: $asy %&: 17-.
1;. $:= stands for
a.enterprise resource production.b.enterprise resource purchasing.c.enterprise resource planning.d.enterprise resource processing.
ANS: - !"#: $asy %&: 17-0
11. $:= systems are
a.packaged soft*are.b.methods of e9amining processes.c.*ays to do*nsize.d.*ays to e9pand geographical operations.
ANS: A !"#: $asy %&: 17-0
1(. $:= systems should help a company
a.improve 2uality.b.improve service.c.reduce overhead.d.all of the above.
ANS: ! !"#: $asy %&: 17-0
1.. !ata mining is used to
a.uncover 2uality problems.b.study customer retention.c.identify cost drivers.d.all of the above.
ANS: ! !"#: $asy %&: 17-0
10. !ata mining
a.is packaged soft*are.b.is a method of e9amining processes.c.uses statistical techni2ues to solve problems.d.is a *ay to do*nsize.
ANS: - !"#: $asy %&: 17-0
1'. A strategic alliance is a
a.packaged soft*are.b.*ay for t*o companies to jointly contribute to the supply chain.c.*ay to do*nsize.d.method of e9amining
processes.
ANS: !"#: $asy %&: 17-'
13. Strategic alliances take the form of
a.joint ventures.b.technology s*aps.c.licensing.d.all of the above.
ANS: ! !"#: $asy %&: 17-'
15. DAF <<<<<<<<<< allo*s a company to accomplish a technology s*ap.
a.data miningb.strategic alliancec.diversityd.=:
ANS: !"#: $asy %&: 17-'
17. <<<<<<<<<<<<< is a philosophy of increasing a firmCs performance by involving all *orkers.
a.%pen-book managementb.!ata miningc.!iversity
d.Strategic alliance
ANS: A !"#: $asy %&: 17-3
18. !isclosing detailed financial information to all employees is a characteristic of
a.open-book management.b.data mining.c.diversity.d.strategic alliance.
ANS: A !"#: $asy %&: 17-3
(;. <<<<<<<<<<<<< is a *ay of teaching accounting concepts to financially unsophisticated employees.
a.!ata miningb.%pen-book managementc.Aame playingd.=:
ANS: - !"#: $asy %&: 17-3
(1. 1o make game playing successful6 the employees must be able to
a.mine data.b.form strategic alliances.c.*in.d.use $:=.
ANS: - !"#: $asy %&: 17-3
((. #or game playing to *ork6 motivation must come from
a.individual employees.b.lo*er management.c.the board of directors.d.upper management.
ANS: ! !"#: $asy %&: 17-3
(.. <<<<<<<<<<<<< is a characteristic of a company that is best suited for open-book management.
a.4arge sizeb.!ecentralized managementc.-entralized managementd.Service-oriented
ANS: !"#: $asy %&: 17-3
(0. $/S stands for
a.environmental manufacturing system.b.employee management system.c.emergency medical services.d.environmental management
system.
ANS: ! !"#: $asy %&: 17-5
('. <<<<<<<<<<<< is DareF a strategy for dealing *ith environmental effects.
a.$nd-of-pipe strategiesb.=rocess improvementsc.=ollution preventiond.All of the above
ANS: ! !"#: $asy %&: 17-5
(3. $/S has to do *ith handling
a.pollution.b.manufacturing.c.scrap.d.by-products.
ANS: A !"#: $asy %&: 17-5
%H2T A3%4E2
1. !efine business process reengineering D=:F.
ANS:
usiness process reengineering is a tool to achieve large6 2uick gains in effectiveness or efficiency through redesigning the e9ecution of
specific business functions. "t is a method of e9amining processes to identify and then eliminate6 reduce6 or replace functions and
processes that add little customer value to products or services. =: is designed to bring radical changes to an organizationCs operations.
=: is often associated *ith employee layoffs6 outsourcing initiatives6 and technology ac2uisition.
!"#: /oderate %&: 17-1
(. )hy has =: usage increased,
ANS:
1.1he advancement of technology has made possible electronic remittance of accounts payable and the use of robotic e2uipment to move
and assemble components in a manufacturing facility. Advancements in technology have improved efficiencies throughout the supply
chain.
(.1he pursuit of increased 2uality is necessary because global competition allo*s consumers to purchase products and services from the
highest 2uality providers in the *orld. =: is a useful tool for increasing 2uality because it focuses attention on processes associated *ith
poor 2uality and indicates *ays in *hich 2uality can be improved by replacing6 changing6 or eliminating those processes.
..=: usage is increasing because of the increase in price competition caused by globalization. 1o successfully compete on the basis of
price6 firms must identify *ays to become more efficient and thus reduce costs.
!"#: /oderate %&: 17-1
.. )hat is do*nsizing and ho* is it accomplished,
ANS:
!o*nsizing is any management action that reduces employment upon restructuring operations in response to competitive pressures.
$vents typical of do*nsizing are reduction of the *orkforce6 restructuring of jobs and processes6 and reduction or elimination of noncore
businesses.
!"#: /oderate %&: 17-(
0. )hat are the risks and dangers of do*nsizing,
ANS:
1. #irms can find that layoffs have depleted the in-house talent poolH therefore the ability to
solve problems creatively and generate ideas may have been diminished.
(. !o*nsizing may reduce trust and morale bet*een employees and management. "n turn6
communication bet*een these t*o groups may decrease.
.. !o*nsizing can destroy a corporate culture that embraced lifetime employment as a key
factor in attracting ne* employees. "n turn6 this can diminish morale and trust.
!"#: /oderate %&: 17-(
'. 1o *hat does *orkforce diversity refer,
ANS:
"t refers to the fact that companies often find that their employees have very diverse backgrounds such as religion6 race6 values6 *ork
habits6 cultures6 political ideologies6 and education levels.
!"#: /oderate %&: 17-.
3. )hat are enterprise resource planning systems D$:=sF,
ANS:
1hey are packaged soft*are programs that allo* companies to:
D1F automate and integrate the majority of their business processes6 D(F share common data and practices across the entire enterprise6 and
D.F produce and assess information in a real-time environment. $:= soft*are includes brand names such as SA=6 :+.6 =eopleSoft6 and
aan.
!"#: /oderate %&: 17-0
5. )hat is data mining and ho* is it used,
ANS:
!ata mining uses statistical techni2ues and is useful in uncovering 2uality problems6 studying customer retention6 determining *hich
promotions generate the greatest sales impact6 and identifying cost drivers.
!"#: $asy %&: 17-0
7. !efine a strategic alliance.
ANS:
"t is an interorganizational agreement that goes beyond normal customer+supplier arrangements involving t*o or more firms *ith
complimentary core competencies to jointly contribute to the supply chain.
!"#: $asy %&: 17-'
8. )hat forms can strategic alliances take,
ANS:
Strategic alliances can take the forms of joint ventures6 e2uity investment6 licensing6 joint :>! arrangements6 technology s*aps6 and
e9clusive buyer+seller agreements.
!"#: $asy %&: 17-'
1;. )hat is open-book management,
ANS:
"t is a philosophy about increasing a firmCs performance by involving all *orkers and ensuring that all *orkers have access to operational
and financial information necessary to achieve performance improvements.
!"#: $asy %&: 17-3
11. )hat are the principles of open-book management,
ANS:
1.1urn the management of a business into a game that employees can *in.(.%pen the books and share financial and operating information
*ith employees...1each the employees to understand the companyCs financial statements.0.Sho* employees ho* their *ork influences
financial results.'.4ink nonfinancial measures to financial results.3.1arget priority areas and empo*er employees to make
improvements.5.:evie* results together and keep employees accountable.7.=ost results and celebrate successes.8.!istribute bonus
a*ards based on employee contributions to financial outcomes.1;.Share the o*nership of the company *ith employees Di.e.6 stock
optionsF.
!"#: /oderate %&: 17-3
1(. ?o* should employees be motivated so open-book management *ill succeed,
ANS:
1he obvious *ay for upper management to motivate *orkers is to link their compensation to increases in profits from the effective use of
the financial and operating information provided to them.
!"#: $asy %&: 17-3
1.. )hat are the characteristics of firms best-suited to open-book management,
ANS:
-haracteristics of best-suited firms are small size6 decentralized management6 a history of employee empo*erment6 and the presence of
trust bet*een employees and managers.
!"#: $asy %&: 17-3
10. !efine an environmental management system D$/SF.
ANS:
$/S is a system that accounts for both environmental costs and the impact of environmental issues in every aspect of operations.
Accountants are increasingly concerned *ith measuring business performance *ith regard to environmental issues and management of
environmental cost. "n the future6 investors are likely to evaluate a companyCs environmental track record along *ith its financial record
*hen making financial decisions. =rimary environmental issues are energy consumption and pollution.
!"#: /oderate %&: 17-5
1'. )hat are the three generic strategies for dealing *ith environmental effects of operations,
ANS:
1.End-of-pipe strategies. )ith this approach6 managers produce the *aste or pollutant and then find a *ay to clean it up.(.Process
improvements. 1his approach involves changes to recycle *astes internally6 reduce production of *aste6 or adopt production processes
that generate no *aste...Pollution prevention. 1his approach involves eliminating production of pollutants.
!"#: /oderate %&: 17-5
Chapter .,Imp!ementing D#a!ity Concepts
MULTIPLE CHICE
1. An all-inclusive definition of 2uality vie*s it as the ability of products+services to
a.only meet internal design specifications.b.meet the customerCs stated or implied needs.c.be produced using all value-added production
activities.d.be produced *ith no re*ork costs.
ANS: !"#: $asy %&: 13-1
(. )hich of the follo*ing is 1a!se as it relates to 2uality,
a.Juality is the total of all characteristics of a product or service that impacts on its ability to meet the needs of a specific person.b.Juality
must al*ays be vie*ed from the userCs perspective.c.Juality is never concerned *ith *hat the user thinks6 feels6 or deems
important.d.1he definition of 2uality has evolved through time and is more currently comprehensive than in the past.
ANS: - !"#: $asy %&: 13-1
.. =roductivity is measured by the
a.total 2uantity of output generated from a limited amount of input during a time period.b.2uantity of good output generated from a
specific amount of input during a time period.c.2uantity of good output generated from the 2uantity of good input used during a time
period.d.total 2uantity of input used to generate total 2uantity of output for a time period.
ANS: !"#: /oderate %&: 13-1
0. )hich of the follo*ing can be used to indicate factors that slo* do*n or cause unnecessary *ork in a process,
a.activity analysisb.total 2uality managementc.cost of 2ualityd.all of the above
ANS: A !"#: $asy %&: 13-1
'. )hich of the follo*ing are undesirable from a consumer perspective but are fre2uently needed,
a.value-neutral activitiesb.value-added activitiesc.non-value-added activitiesd.none of the above
ANS: - !"#: $asy %&: 13-1
3. )hich of the follo*ing *ould typically be vie*ed as non-value-added activities,
/oving"nspectingAttaching productStoringmaterialra* materialcomponentsfinished goods
a.yes yes yes nob.no no no
yesc.no yes no yesd.yes yes no
yes
ANS: ! !"#: $asy %&: 13-1
5. <<<<<<<<<< places the primary responsibility for 2uality on the maker or producer.
a.=areto analysisb.Juality controlc.enchmarkingd.Activity analysis
ANS: !"#: $asy %&: 13-1
7. All attempts to reduce variability and defects in products reflect the implementation of
a.activity analysis.b.statistical process control.c.2uality control.d.control charts.
ANS: - !"#: $asy %&: 13-1
8. -ontrol charts are appropriate devices in
a.total 2uality control.b.statistical process control.c.total 2uality management.d.all of the above.
ANS: ! !"#: /oderate %&: 13-1
1;. A control chart graphs
a.actual process results relative to a range of acceptable variation.b.e9pected process results relative to upper and lo*er control
limits.c.actual process results relative to value-added and non-value-added activities.d.the cost of process malfunctions relative to the cost
of reducing process variations.
ANS: A !"#: $asy %&: 13-1
11. 1he addition or removal of product or service characteristics to satisfy additional needs6 especially price6 reflect the <<<<<<<< of a
product or service.
a.valueb.gradec.2ualityd.durability
ANS: !"#: /oderate %&: 13-1
1(. Ealue reflects the ability of a product to
a.provide the best 2uality at any price.b.have all possible product and service characteristics.c.meet the majority of a customerCs needs at
the lo*est possible price.d.have the longest technical or service life and the best *arranty.
ANS: - !"#: /oderate %&: 13-1
1.. -omparing the *ay a Bbest-in-classB company performs a specific activity Dsuch as distributionF is called
a.process benchmarking.b.results benchmarking.c.total 2uality management benchmarking.d.S=- benchmarking.
ANS: A !"#: $asy %&: 13-(
10. enchmarking allo*s a company to
a.identify its strengths and *eaknesses.b.imitate those ideas that are readily transferable.c.improve on methods in use by others.d.all of the
above.
ANS: ! !"#: $asy %&: 13-(
1'. enchmarking against direct competitors creates the risk of
a.creating products or services *ith identical specifications.b.becoming stagnant relative to process improvements.c.being taken over by
the competitors to prevent a loss of ideas.d.all of the above.
ANS: !"#: /oderate %&: 13-(
13. :everse engineering is used in
a.statistical process control.b.process benchmarking.c.results benchmarking.d.price fi9ing.
ANS: - !"#: /oderate %&: 13-(
15. enchmarking against noncompetitors is e9tremely important in
a.process benchmarking.b.results benchmarking.c.reverse engineering.d.all of the above.
ANS: A !"#: /oderate %&: 13-(
17. enchmarking
identifies Bbest-in-classB companiesanalyzes the Bnegative gapB
a. yes nob. no yesc.
yes yesd. no no
ANS: - !"#: $asy %&: 13-(
18. enchmarking does *hich of the follo*ing activities relative to a Bbest-in-classB D"-F company,
-ompares "-Cs
products and
processes
*ith o*n-opies "-Cs
products and
processes
directly"mproves on
"-Cs products
and
processes
a. yes yes yesb. yes no noc. no
no yesd. yes no yes
ANS: ! !"#: $asy %&: 13-(
(;. )hich of the follo*ing is not a step in benchmarking procedures,
a.analyze the Bpositive gapBb.engage in continuous improvementc.analyze the Bnegative gapBd.identify Bbest-in-classB companies
ANS: A !"#: /oderate %&: 13-(
(1. )hich of the follo*ing is not a critical element in a total 2uality management system,
a.employee involvementb.activity-based costingc.continuous improvementd.problem prevention emphasis
ANS: !"#: /oderate %&: 13-.
((. A total 2uality system should be designed to promote a reorientation of thinking from an emphasis on
a.internal 2uality improvements to an emphasis on e9ternal benchmarking.b.the planning process to an emphasis on the performance
evaluation process.c.inspection to an emphasis on prevention.d.process benchmarking to an emphasis on results benchmarking.
ANS: - !"#: /oderate %&: 13-.
(.. )hich of the follo*ing is the first element of kno*ledge needed by a company *anting to pursue total 2uality management,
a.*hat the companyCs customers *antb.*ho the companyCs customers arec.ho* the companyCs processes are designedd.*hat the
components of the companyCs product are
ANS: !"#: $asy %&: 13-.
(0. 1otal 2uality management is inseparable from the concept of
a."S% certification.b.centralized organizational structure.c.continuous improvement.d.the product life cycle.
ANS: - !"#: $asy %&: 13-.
('. A company *ill not achieve *orld-class status unless a 2uality focus
a.allo*s that company to achieve one or more major 2uality a*ards.b.becomes an integral part of the organizationCs culture.c.emphasizes
the elimination of all 2uality costs for compliance and noncompliance.d.has been mandated by management for *orkers to pursue.
ANS: !"#: $asy %&: 13-.
(3. )hich of the follo*ing statements is tr#e,
a.1he more customers a company has6 the better off the company is.b.A company should spare no e9pense to provide customer
satisfaction.c./ost customers stop doing business *ith a company because of poor product or service 2uality.d.-ost-benefit analysis can
help identify customers that cost more than they are *orth to the company.
ANS: ! !"#: $asy %&: 13-0
(5. 1he four categories of product 2uality costs are
a.e9ternal failure6 internal failure6 prevention6 and carrying.b.e9ternal failure6 internal failure6 prevention6 and appraisal.c.e9ternal failure6
internal failure6 training6 and appraisal.d.*arranty6 product liability6 training6 and appraisal.
ANS: !"#: $asy %&: 13-0
(7. 1he number of product defects discovered by consumers is *hat kind of performance indicator,
JualitativeJuantitative#inancialNonfinancial
a.yes no no yesb.no yes no yesc.no
yes yes nod.yes no no yes
ANS: !"#: $asy %&: 13-0
(8. /oney spent on employee training is a
a.prevention cost.b.appraisal cost.c.empo*erment cost.d.=areto cost.
ANS: A !"#: $asy %&: 13-0
.;. =roduction 2uality is affected by
a.*orker productivity.b.the amount of failure costs incurred.c.*orker skill level.d.just-in-time suppliers.
ANS: - !"#: $asy %&: 13-0
.1. /istakes not eliminated by prevention costs may cause
appraisal costsfailure costs
a.no nob.no yesc.yes nod.yes yes
ANS: ! !"#: $asy %&: 13-0
.(. =roduct 2uality includes all of the follo*ing e"cept
a.appeal.b.performance.c.durability.d.price.
ANS: ! !"#: $asy %&: 13-0
... :ecalls are fairly common events for automobile manufacturers. 1he costs of recalling and repairing a car create
internal failure costse9ternal failure costsprevention costs
a. yes yes nob. yes yes yesc.
no yes nod. yes no yes
ANS: A !"#: $asy %&: 13-0
.0. An appraisal cost is created by
a.installing automated technology.b.re*orking products.c.verifying procedures.d.rescheduling and setup.
ANS: - !"#: $asy %&: 13-0
.'. -ompliance costs include
prevention costsappraisal costsinternal failure costs
a. yes no nob. no yes yesc. yes
yes nod. yes yes yes
ANS: - !"#: $asy %&: 13-0
.3. /anagement can decide *here to concentrate its 2uality prevention dollars using
a.statistical process control charts.b.just-in-time inventory systems.c.a feedback loop.d.=areto analysis.
ANS: ! !"#: $asy %&: 13-'
.5. ?istorically6 the cost of 2uality has been
a.included in account balances for items such as )ork in =rocess "nventory and marketing e9penses.b.detailed in various Bcost of 2ualityB
account balances on the "ncome Statement.c.immaterial because no accounts *ere developed to detail these amounts.d.generally spent in
the prevention rather than the appraisal category.
ANS: A !"#: $asy %&: 13-'
.7. A significant cost of 2uality that is not recorded in the accounting records is the
a.failure cost for a customer complaint center.b.cost of re*orking products to bring them up to specification.c.opportunity costs of forgone
future sales.d.appraisal cost for product e2uipment.
ANS: - !"#: $asy %&: 13-'
.8. A cost of 2uality report compares current period 2uality costs in specified categories to
a.last yearCs 2uality costs.b.current period budgeted 2uality costs.c.total 2uality costs for the period.d.both a and b.
ANS: ! !"#: $asy %&: 13-'
0;. )hich of the follo*ing is not one of the three objectives of a 2uality program,
a.=roduct 2uality should be consistent to al*ays meet the purchaserCs needDsF.b.A 2uality program should give management confidence
that the 2uality is and *ill be at a constant level.c.A 2uality program should give customers confidence that the intended 2uality *ill be
achieved in products.d.=roduct 2uality should al*ays vary because customers change their *ants and needs over time.
ANS: ! !"#: /oderate %&: 13-3
01. 1he most visible embodiment of total 2uality management in the @nited States is
a.being a*arded the !eming =rize.b.achieving "S% 8;;; certification.c.meeting industry standards.d.receiving the aldrige A*ard.
ANS: ! !"#: $asy %&: 13-3
0(. )hich of the follo*ing are categories judged for the aldrige A*ard,
enchmarkingusiness
results@se of S=- and
=areto analysis-ustomer
focus
4eadership
a. no yes no yes yesb. yes yes yes
yes yesc. yes yes no yes nod. no no
no no no
ANS: A !"#: /oderate %&: 13-3
0.. 1he "S% 8;;; series refers to
a.international guidelines for 2uality standards.b.provisions regarding benchmarking activities in the $uropean @nion.c.guidelines for
appropriate e9penditures on the various categories of 2uality costs.d.all of the above.
ANS: A !"#: $asy %&: 13-7
00. 1he "S% 8;;; standards
a.indicate *hich companiesC products are better than those of competitors.b.allo* management to decide ho* to meet the standards for
2uality assurance.c.include specific directives about product design6 material procurement6 and environmental responsibilities.d.compose
a program of 2uality assurance under *hich companies are registered by the "nternational %rganizational for Standardization.
ANS: !"#: $asy %&: 13-7
0'. A 2uality audit involves a revie* of
manufacturing
processescost of
2uality standards2uality
documentation
a. yes yes yesb. no yes yesc. no
no nod. yes no yes
ANS: ! !"#: $asy %&: 13-7
03. :egistration under "S% 8;;; is
a.re2uired for all companies doing business internationally.b.re2uired for all $uropean companies doing business in $urope.c.not re2uired
for @.S. companies unless they use $uropean suppliers.d.re2uired for all companies producing regulated products to be sold in the
$uropean @nion.
ANS: ! !"#: $asy %&: 13-7
7ariance Corporation
Eariance -orporation is a manufacturer of a versatile statistical calculator. 1he follo*ing information is a summary of defective and
returned units for the previous year.
1otal defective units1,000Number of units re*orked750Number of customer units returned150=rofit for a good unit$40=rofit for a
defective unit$25-ost to re*ork a defective unit$10-ost of a returned unit$151otal prevention cost$10,0001otal appraisal
cost$5,000
05. :efer to Eariance -orporation. 1he profit lost by selling defective units not re*orked is
a.G('6;;;.b.G1'6;;;.c.G1765';.d.G.65';.
ANS: !
('; units not re*orked M G1' incremental difference L &0<+5(
!"#: /oderate %&: 13-0
07. :efer to Eariance -orporation. 1he total re*ork cost is
a.G56';;.b.G1'6;;;.c.G(6';;.d.G.65';.
ANS: A
5'; units re*orked M G1;+unit re*ork cost L &+<5((
!"#: /oderate %&: 13-0
08. :efer to Eariance -orporation. 1he cost of processing customer returns is
a.G86;;;.b.G(6';;.c.G((6';;.d.G(6(';.
ANS: !

1'; returned units M G1'+unit L &'<'5(
!"#: /oderate %&: 13-0
';. :efer to Eariance -orporation. 1he total failure cost is
a.G1'6;;;.b.G1.6';;.c.G116(';.d.G76(';.
ANS:
5'; units re*orked M G1;+unitG 56';;1'; units returned M G1'+unit (6(';('; units not re*orked M G1'+unit .65'; Tota!&.0<5((
LLLLLL
!"#: /oderate %&: 13-0
'1. :efer to Eariance -orporation. 1he total 2uality cost is
a.G1'6;;;.b.G1'65';.c.G(76';;.d.G116(';.
ANS: -
1otal failure costsG1.6';;1otal prevention costs 1;6;;;1otal appraisal costs '6;;;Tota! 8#a!ity costs&'*<5((
LLLLLL
!"#: /oderate %&: 13-0
'(. :efer to Eariance -orporation. 1he profit lost by selling defective units to Areenstein -ompany totals G1600;. 1he total re*ork cost for
5;; units is G(76;;;. 1he difference bet*een the profit earned on a good unit and a defective unit is G1(. ?o* many total defective units
did Eariance -orporation produce,
a.1(;b.50;c.5.3d.7(;
ANS: !
!efective units sold G1600;+G1( per unit1(; units@nits re*orked5;; unitsTota! de1ective #nits*'( #nits
LLLLLLL
!"#: /oderate %&: 13-0
'.. !enison -ompanyCs cost of compliance is G'76;;;. Appraisal cost is G(16;;; and failure cost is G.(6;;;. 1he companyCs total 2uality cost
is
a.G'.6;;;.b.G586;;;.c.G8;6;;;.d.G1116;;;.
ANS: -
-ost of complianceG'76;;;#ailure cost .(6;;;Tota! 8#a!ity cost&-(<(((
EEEEEE
!"#: /oderate %&: 13-0
%H2T A3%4E2
1. !iscuss the four categories of 2uality costs.
ANS:
=revention costs are incurred to prevent product or service defects and decrease the number of nonconforming units produced. 1hese
costs include items such as 2uality training programs6 2uality reporting6 2uality audits6 and 2uality circles. :a* material vendors are
selected *ith the understanding that all delivered materials meet acceptable 2uality limits.
Appraisal costs arise from determining *hether products are in agreement *ith their specifications. 1hese costs include inspection of ra*
material6 supervising appraisal
activities6 and product acceptance or sampling finished batches to see if they meet specifications.
#ailure costs make up the other t*o types of 2uality costs. "nternal failure costs result *hen the products donCt meet specifications and
must be re*orked or discarded. 1hese costs include scrap6 re*ork6 retesting6 and design changes. ?igh-2uality prevention should
eliminate internal failure costs. $9ternal failure costs occur *hen buyers note defects after delivery. 1hese costs can be very high and
include lost sales from poor performance of the product6 returns due to poor 2uality6 *arranties6 and product liability.
!"#: /oderate %&: 13-0
(. )hat is the relationship bet*een the incurrence of the various types of 2uality costs and the 2uantity of output that meets specification,
ANS:
As the number of conforming units increases6 both types of failure costs decrease rapidly. 1o decrease failure costs6 more prevention costs
must be incurred. "dentifying defective products before they leave the factory can decrease the e9ternal failure costs immensely. Although6
such identification may increase internal failure costs. A greater emphasis on prevention *ill decrease appraisal costs and also failure
costs. 1hus6 over time6 overall 2uality costs *ill decrease.
!"#: /oderate %&: 13-0
.. )hat is continuous improvement, ?o* does it relate to total 2uality management,
ANS:
-ontinuous improvement is behavior that encourages employees6 either production or service6 to perform their tasks better as time passes.
1hus6 because product or service 2uality levels improve6 continuous improvement is directly related to 1J/. $mployees are also
encouraged to Bgroup thinkB and brainstorm in 2uality circles to recognize and correct problems in the business environment.
!"#: /oderate %&: 13-.
0. !iscuss the concept of total 2uality management.
ANS:
1J/ is a company-*ide 2uality system that emphasizes employee involvement in improving product or service 2uality throughout the
firm. "t uses a continuous improvement process that is al*ays striving to update upon the e9isting system. "t uses techni2ues that
encourage employees to make suggestions about ho* the product or production process can be improved. 1J/ necessitates an internal
managerial system of decision making6 controlling6 and planning. 1J/ involves continuous improvement that e9ceeds customer+client
e9pectations.
!"#: /oderate %&: 13-.
'. ?o* do control charts mesh *ith the concept of total 2uality control D1J-F,
ANS:
-ontrol charts are graphical6 statistical presentations that identify occurrences of products or services as to *hether they fall *ithin some
measure of performance. @pper and lo*er limits of acceptability are displayed on the chart. 1J- e9pects all products to meet
specifications. 1hus6 no measures of units or services performed should e9ceed these limits.
!"#: /oderate %&: 13-1
3. !iscuss the relationship bet*een benchmarking and total 2uality management D1J/F.
ANS:
1J/ is a system of the organization that emphasizes continuous improvement processes that meet or e9ceed customer 2uality
e9pectations. "t emphasizes 2uality principles throughout the firm. enchmarking is the process of investigating6 comparing6 and
evaluating a companyCs processes6 products6 and+or services against those of companies believed to be the Bbest in class.B enchmarking
stresses 2uality improvement by finding out ho* other firms are doing *hat you do better and attempting to pattern your o*n processes
after *hat these firms are doing and striving to improve those processes. enchmarking has been implemented by many firms that have
adopted &"1 and that have insisted their suppliers do the same. 1hese firms gain insight on ho* to follo* &"1 by communicating
*ith other firms.
!"#: /oderate %&: 13-.
5. -ompare and contrast results benchmarking and process benchmarking.
ANS:
:esults benchmarking is associated *ith 2uality but is concerned *ith *hether the final product meets product+service specifications.
=rocess benchmarking focuses on practices of competitors or non-competitors that are considered Bbest-in-classB and tries to adopt
features *ith *hich the 2uestioning company has problems
!"#: /oderate %&: 13-(
7. !iscuss increased competition and improved problem solving skills as they relate to benchmarking.
ANS:
"ncreased competition and improved problem solving skills are t*o benefits of benchmarking. enchmarking helps companies become
more competitive in their markets by e9amining *hat competitors do in relation to organization practices. %nce these differences are
determined6 the organization *ill be in a better position to make changes that *ill help make the organization more competitive.
enchmarking also increases problem-solving skills among employees in the organization by providing a frame*ork in *hich to operate
more effectively. An increase in problem solving ability should promote team*ork *ith the organization6 *hich is critical to not only
benchmarking6 but to total 2uality control.
!"#: /oderate %&: 13-(
8. )hat are the four tenets of total 2uality management D1J/F,
ANS:
1. 1o dictate continuous improvement for an internal managerial system of planning6
controlling6 and decision making for continuous improvement.
(. 1o re2uire participation by everyone in the organization.
.. 1o focus on improving goods and services from the customerNs point of vie*.
0. 1o value long-term partnerships *ith suppliers.
!"#: /oderate %&: 13-.
P2BLEM
Co:es$#ry Corporation
-okesbury -orporation is a manufacturer of electronic blood pressure monitors for
home use. 1he follo*ing is a summary of 2uality costs for the first year of operations.
1otal defective units1,500Number of units re*orked800Number of customer units returned200=rofit for a good unit$50=rofit for a
defective unit$30-ost to re*ork a defective unit$12-ost of a returned unit$201otal prevention cost$17,5001otal appraisal
cost$9,500
1. :efer to -okesbury -orporation. -ompute the profit lost by selling defective units not re*orked.
ANS:
K L D! - RF D=1 - =( F L D16';; - 7;;FDG'; - G.;F L G106;;;
!"#: /oderate %&: 13-0
(. :efer to -okesbury -orporation. -ompute the total re*ork cost.
ANS:
: L DRF DrF L D7;;F DG1(F L G863;;
!"#: /oderate %&: 13-0
.. :efer to -okesbury -orporation. -ompute the cost of processing customer returns.
ANS:
) L D!rF D*F L D(;;F DG(;F L G06;;;
!"#: /oderate %&: 13-0
0. :efer to -okesbury -orporation. )hat is the total failure cost,
ANS:
# L K O : O ) L G106;;; O G863;; O G06;;; L G(563;;
!"#: /oderate %&: 13-0
'. :efer to -okesbury -orporation. !etermine the total 2uality cost.
ANS:
1 L V O A O # L G156';; O G86';; O G(563;; L G'063;;
!"#: /oderate %&: 13-0
%eating Concepts
Seating -oncepts has just finished its first year of business. Seating -oncepts makes decorative outdoor furniture. 1he firm manufactured
(6';; pieces of furniture during the year: (60;; *ere sold at garden centers for G0'36;;;H 1;; pieces *ere defective and could only be
sold as scrap metal D(' pounds each and can be sold for G(.'; per poundF. No defective units could be re*orked. !uring the year the
follo*ing costs *ere incurred:
1otal appraisal cost$9,0001otal prevention cost25,7001otal production cost250,0001otal selling and administrative cost70,000
3. :efer to Seating -oncepts. -ompute the total profits lost by the company from selling scrap units during its first year of operations.
ANS:
=rice for good units: G0'36;;; W (60;; L G18;
=rice for defective units: G36(';M W 1;; L G 3(.';
M(' pounds 1;; pieces G(.';+pound.
=rofits lost: 1;; DG18;.;; - G3(.';F L G1(65';
!"#: /oderate %&: 13-0
5. :efer to Seating -oncepts. -ompute the total 2uality cost incurred by the company during the first year of operations.
ANS:
=revention cost$25,700Appraisal cost9,0001otal failure cost 12,750$47,450
!"#: $asy %&: 13-0
Chapter .'Introd#ction to Cost Management %ystems
MULTIPLE CHICE
1. A management information system should do *hich of the follo*ing,
-ollect
data%rganize data
for managersAnalyze data
for management
a.yes no yesb.yes yes noc.no no
yesd.yes yes yes
ANS: !"#: $asy %&: 1(-1
(. A management information system should emphasize satisfying
a.e9ternal demands for information.b.e9ternal and internal demands for information.c.internal demands for information.d.the Accounting
!epartmentCs demands for information.
ANS: - !"#: $asy %&: 1(-1
.. )ho of the follo*ing are e9ternal users of data gathered by a management information system,
-reditors:egulatory odiesSuppliers
a.yes no yesb.no no noc.no yes
yesd.yes yes yes
ANS: ! !"#: $asy %&: 1(-1
0. )hich of the follo*ing is not a primary component of a control system,
a.operatorb.communications net*orkc.effectord.assessor
ANS: A !"#: $asy %&: 1(-1
'. )hich of the follo*ing *ould be considered a detector,
a.computer programb.source documentc.variance reportd.all of the above
ANS: !"#: $asy %&: 1(-1
3. )hich of the follo*ing statements is 1a!se concerning a management control system,
a.A management control system may be referred to as a black bo9.b.A management control system should serve as a guide to
organizations.c.A management control system should help implement strategies.d.A management control system is separate from a cost
management system.
ANS: ! !"#: $asy %&: 1(-1
5. #eedback is reflected in *hich component of a management control system,
a.sensorb.assessorc.effectord.detector
ANS: - !"#: $asy %&: 1(-1
7. :eactions to information provided by the management control system are
a.formulated in the organizationCs strategic plan.b.judgmental6 and are based on interpretations and circumstances.c.assessed by the
communications net*ork of the /-S.d.determined as those activities that *ill be most efficient and effective given the organizationCs
available technology.
ANS: !"#: $asy %&: 1(-1
8. A cost management system should
a.identify and evaluate ne* activities.b.determine *hether the organization is effective and efficient.c.identify the cost of consumed
resources *ithin the organization.d.all of the above.
ANS: ! !"#: $asy %&: 1(-(
1;. A cost management system should provide information to
a.all functional areas of the organization.b.only the accounting area of the organization.c.only the production area of the
organization.d.organizational managers6 but not to staff personnel.
ANS: A !"#: $asy %&: 1(-(
11. )hich of the follo*ing is not a primary goal of a cost management system,
a.use cost drivers to develop product costsb.improve understanding of activitiesc.develop organizational strategiesd.measure performance
ANS: - !"#: $asy %&: 1(-(
1(. A cost management system *ill provide the means to develop
a.the most accurate product or service costs.b.a reasonably accurate product or service cost given cost-benefit analysis.c.a product or
service cost that does not include any non-value-added overhead.d.a costing system that traces all costs directly to individual products or
services.
ANS: !"#: $asy %&: 1(-(
1.. 1he costs generated by the cost management system are used to
a.assess product+service profitability.b.establish prices for products *ith significant competition.c.determine underlying reasons for
variations from standards.d.all of the above.
ANS: A !"#: $asy %&: 1(-(
10. "nformation about the life-cycle performance of a product or service should be provided in the
#inancial accounting system-ost management system
a.yes yesb.yes noc.no yesd.no
no
ANS: - !"#: $asy %&: 1(-(
1'. -ost control is an important function of the
#inancial accounting-ost accounting-ost managementsystemsystemsystem
a.no no yesb.yes yes noc.no
yes yesd.yes yes no
ANS: - !"#: $asy %&: 1(-(
13. A cost management system *ould be an integral part of implementing *hich of the follo*ing,
Strategic resource-ore competency-entralizedmanagementassessmentmanagement
a.no yes yesb.no no noc.yes
no yesd.yes yes no
ANS: ! !"#: $asy %&: 1(-(
15. )hich of the follo*ing organizational characteristics critically affect the design of a cost management system,
-ulture-ritical success factors/ission#orm
a.yes yes yes yesb.yes no yes
noc.no yes no yesd.no yes yes no
ANS: A !"#: $asy %&: 1(-.
17. A cost management system
a.is finalized *hen the information currently being produced is the same as the information currently desired.b.can be generically
designed to fit the information needs of the majority of domestic Dbut not globalF organizations.c.must be continuously improved to adapt
to changes in an organizationCs internal and e9ternal environment.d.that has been appropriately designed from gap analysis6 does not need
to be changed unless there is a change in organizational management or culture.
ANS: - !"#: /oderate %&: 1(-.
18. "n a highly regulated6 monopolistic industry6 such as the electrical utility or 1E cable6 a cost management system is
a.of limited need because costs are typically passed along to customers via the rate structure.b.essential because of the need to provide the
highest degree of cost efficiency possible for customers.c.critical to the needs of empo*ered employees making decisions at various
levels of the organizational hierarchy.d.of no use because there is no attempt by management to control costs.
ANS: A !"#: $asy %&: 1(-.
(;. )hich of the follo*ing statements is tr#e,
a.A good cost management system is a key consideration in determining an organizationCs mission.b.1he organizationCs mission is a
critical success factor in assessing ho* to react to competition.c.Vno*ledge of an organizationCs critical success factors help to clarify
organizational mission and develop a cost management system.d.An organization must establish a position of cost leadership to compete
in a global business environment.
ANS: - !"#: $asy %&: 1(-.
(1. )hich of the follo*ing indicates the mission being pursued by a subunit that is
using cash,generating cash,
a.s03e 4013es,b.)"+(# s03ec.4013es, )"+(#d.)"+(# 4013es,
ANS: ! !"#: /oderate %&: 1(-.
((. :educing the time-to-market for a ne* product
a.is only possible if a company has formed strategic alliances *ith its suppliers.b.generally increases long-run product costs because of
the need to develop ne* production processes.c.results in the ability of a firm to pursue a cost leadership competitive strategy.d.may result
in design fla*s6 a need for engineering change orders6 and customer Bbad *ill.B
ANS: ! !"#: $asy %&: 1(-.
(.. An increase in the use of technology has caused
a.fe*er costs to be susceptible to short-run control.b.companies to be more fle9ible in responding to changing short-term
conditions.c.managers to be less concerned about capacity utilization because of the increased ability to produce in large 2uantities.d.a
decline in the amount of fi9ed costs in an organization.
ANS: A !"#: /oderate %&: 1(-.
(0. $ngaging in product design for manufacturability reduces
1raining costs=reproduction design timeAssembly time
a.yes yes yesb.no yes
yesc.yes no yesd.no no
no
ANS: - !"#: $asy %&: 1(-.
('. Substantial reductions in product cost can be obtained by
a.decreasing capacity utilization.b.using focused factory arrangements.c.using tried and true manufacturing techni2ues.d.using product
life cycle accounting.
ANS: !"#: $asy %&: 1(-.
(3. "n conjunction *ith a cost management system6 gap analysis refers to comparing
a.the information being received by competitorsC managers to the information being received by in-house managers.b.the information
needed to *hat is available.c.current cost information to projected cost information.d.budget figures to actual spending.
ANS: !"#: $asy %&: 1(-'
(5. )hich of the follo*ing limits an organizationCs ability to minimize the BgapsB found *hen a gap analysis has been performed,
4imited resourcesNumber of managers1echnology capabilities
a.yes yes yesb.yes no
yesc.no yes nod.no no
yes
ANS: !"#: $asy %&: 1(-'
(7. )hich of the follo*ing is considered a BfeederB system to the cost management system,
=ayrolludgeting"nventory valuation
a.yes no yesb.yes yes yesc.no no
nod.yes yes no
ANS: !"#: $asy %&: 1(-.
(8. )hich of the follo*ing is a primary element of a cost management system,
"nformation:eporting/otivation$valuation
a.yes yes yes yesb.no yes yes noc.yes
no no yesd.yes yes yes no
ANS: ! !"#: $asy %&: 1(-0
.;. As part of its control function6 a cost management system is useful for
-ost behaviorEA+NEA activityAssignment of jointanalysisidentificationcosts to joint products
a.yes yes yesb.no yes yesc.yes
no nod.yes yes no
ANS: ! !"#: $asy %&: 1(-.
.1. <<<<<<<<<<< refers to avoiding competition in making a product distinct from that of competitors by adding value or features for *hich
consumers are *illing to pay more.
a.Vaizenb.!ifferentiationc.-onfrontationd.-ost leadership
ANS: !"#: $asy %&: 1(-.
.(. !istinguishing a product by adding additional features or value is part of *hich of the follo*ing competitive strategies,
!ifferentiation-ost leadership-onfrontation
a.yes no yesb.yes yes yesc.yes no
nod.no yes yes
ANS: A !"#: $asy %&: 1(-.
... A cost leadership strategy emphasizes
a.product features.b.lo* prices.c.just-in-time production capabilities.d.short-run opportunities for cost minimization.
ANS: !"#: $asy %&: 1(-.
.0. )hich of the follo*ing competitive strategies is least profitable,
a.differentiationb.cost leadershipc.confrontationd.price fi9ing
ANS: - !"#: $asy %&: 1(-.
.'. A commonly recognized critical success factor for most organizations is
Juality
!ecentralization
Short cycle time:esponsiveness
to change
a.yes yes yes nob.yes no yes
yesc.no yes no yesd.no no yes
no
ANS: !"#: $asy %&: 1(-.
.3. "n a decentralized organization6
a.all functions are delegated to subunit managers *ho are closest to the information.b.subunits under the control of a single manager are
normally grouped by organizational structure.c.it *ould be difficult to group geographically related subunits pursuing different missions
under the same manager.d.functions such as financing and product+service pricing are typically retained by top management.
ANS: - !"#: $asy %&: 1(-.
.5. %rganizational form directly affects *hich of the follo*ing,
!ecision-making
authority
-ost of capital
1a9ation
/ission
a.no yes yes yesb.yes yes yes noc.no
yes no yesd.yes yes no no
ANS: !"#: $asy %&: 1(-.
.7. As an organization moves to decentralize its operations6 an effective reporting system *ill have <<<<<<<<<<<<<< *hen the organization
*as centralized.
a.about the same importance asb.less importance thanc.more importance thand.a level of importance that depends on organizational size
as compared to
ANS: - !"#: $asy %&: 1(-.
.8. 1he performance measurement system should encourage each manager to act in a manner that
a.makes the managerCs units profits as high as possible.b.most positively supports the organizationCs mission and competitive
strategies.c.increases his+her performance re*ard in the form of profit sharing.d.reduces the need for informational elements in support of
the managerCs planning function.
ANS: !"#: $asy %&: 1(-0
0;. =erformance reports are useful only to the e9tent that performance is measured against
a.a meaningful benchmark.b.the performance of all other units or managers.c.the budget as adopted for the period.d.competitorsC
achievements.
ANS: A !"#: $asy %&: 1(-0
01. 1he accounting function in an organization is e9pected to support managers in *hich of the follo*ing functions,
=lanning-ontrolling$valuating performance
a.yes yes nob.no yes noc.no no
yesd.yes yes yes
ANS: - !"#: $asy %&: 1(-0
0(. :elating resource consumption and cost to alternative product and process designs can be achieved through
a.kaizen costing.b.reverse engineering.c.computer simulation.d.all of the above.
ANS: - !"#: $asy %&: 1(-0
0.. 1he re*ard system for subunit managers of mature businesses should emphasize
a.long-term competitive prospects.b.near-term profit and cash flo*.c.success in product design and development.d.e9ceeding last yearCs
subunit profit.
ANS: !"#: $asy %&: 1(-0
00. =rofit sharing is a method of employee compensation that
a.allocates an e2ual amount of profit re*ard to each manager in the organization.b.allo*s organizational profits to be divided among
employees in a non-ta9able status.c.is contingent based on the level of subunit profit generated.d.is used in many foreign companies but is
virtually none9istent in most @.S. organizations.
ANS: - !"#: $asy %&: 1(-0
0'. /ost managers evaluate decision alternatives based on ho*
a.much the decision *ill increase or decrease organizational profits.b.the outcomes may affect selected performance measurement and
re*ard criteria.c.much the outcome *ill reduce the organizationCs cost of capital.d.easily the decision impacts can be 2uantified in the
organizationCs cost
management system.
ANS: !"#: /oderate %&: 1(-0
03. =erformance measurements and a re*ard system are part of *hich cost management element,
a.motivationalb.informationalc.reportingd.all of the above
ANS: A !"#: $asy %&: 1(-0
05. #ocus on cost control and assessing core competencies are part of *hich cost management element,
a.motivationalb.informationalc.reportingd.all of the above
ANS: !"#: $asy %&: 1(-0
07. )hich of the follo*ing should be able to provide the financial information needed for budget preparation,
-ost management
system#inancial accounting
system-ost accounting
system
a.no yes yesb.no yes noc.yes
no yesd.yes yes yes
ANS: ! !"#: $asy %&: 1(-0
08. "n the future competitive environment6 companies *ill emphasize
a.achievement of financial results.b.development of strategic alliances.c.development of annual plans.d.conformity to project
e9pectations.
ANS: !"#: $asy %&: 1(-0
';. 1he life cycles of many products are becoming shorter
a.causing companies to recognize that it may be more advantageous to confront6 rather than compete *ith6 the competition.b.making
products in the maturity stage of their life cycle the basis on *hich firms e9pect gro*th to be generated.c.so companies spend less and
less on product design and development because products *ill not last as long as previously.d.meaning that tools such as benchmarking
and target costing become less important in adapting to the competitive environment.
ANS: A !"#: /oderate %&: 1(-.
'1. A responsibility accounting system provides information to top management about the
a.organizational responsibilities of each subunit manager.b.performance of each organizational subunit and its manager.c.ability of each
subunit manager to ensure a satisfactory cost to revenue relationship.d.all of the above.
ANS: !"#: $asy %&: 1(-0
'(. )hich of the follo*ing should be considered in a cost management system design,
-ost
principles=ersonnel
training principles"nvestment
management principles
a.yes yes yesb.no yes yesc.no
no nod.yes no yes
ANS: ! !"#: $asy %&: 1(-0
%H2T A3%4E2
1. !iscuss the four primary components of a control system.
ANS:
1he four components include the follo*ing: a detector *hich is a measuring device that identifies *hat is happening in the controlled
processH an assessor that helps determine the significance of *hat is happeningH an effector that changes the behavior if indicated by the
assessorH and a communications net*ork that transmits information bet*een the detector and assessor and bet*een the assessor and the
effector.
!"#: /oderate %&: 1(-1
(. !efine a cost management system and indicate ho* it should help managers.
ANS:
A cost management system is a set of formal methods developed for planning and controlling an organizationCs cost activities relative to
the goals and objectives of the organization. A cost management system should determine ho* effective and efficient the organizationCs
activities are and identify the cost of resources consumed in performing these activities. 1he system should also identify and evaluate any
ne* activities that may improve future performance of the organization *hile being a*are of the changing environment in *hich the
business operates.
!"#: /oderate %&: 1(-(
.. !iscuss from *here an organization receives information and *hat happens to information *ithin an organization.
ANS:
An organization receives information from its e9ternal operating environment that includes the follo*ing: competition6 suppliers6
creditors6 and the government. 1his information is then circulated throughout the organization in both a vertical and horizontal direction.
1he information gathered by the organization is used for planning6 decision making6 evaluating performance6 and controlling *ithin the
organization.
!"#: /oderate %&: 1(-1
0. !iscuss the characteristics of an organization for *hich a true cost management system *ould be appropriate.
ANS:
1he organization for *hich a true -/S *ould be appropriate *ould have specified strategic goals to *hich its operating position is
linked. "ts technology6 human behavior6 and information systems *ould be integrated as *ould its managerial and operating systems. 1he
organization *ould engage in intergroup coordination and coordinated management through employee empo*erment. A focus *ould be
on cost elimination rather than cost allocation-thus implying an activity-based management approach. =erformance evaluation *ould rely
on both financial and nonfinancial measurements. #inally6 the company *ould utilize changing technologies and embrace customer values
and customer satisfaction as part of organizational culture. 1his organization *ould be confronting high-2uality *orld*ide competition.
!"#: /oderate %&: 1(-(
'. )hat are the si9 primary goals of a cost management system, "llustrate ho* a -/S achieves each of these goals.
ANS:
1he si9 goals of a cost management system are D1F to develop fairly accurate product costs by using cost drivers6 D(F to assess product
and+or service life-cycle performance6 D.F to improve understanding of activities and processes6 D0F to control costs6 D'F to measure
performance6 and D3F to pursue organizational strategies. 1he illustrations given by the students should support details provided by the
te9t.
!"#: /oderate %&: 1(-(
3. 4ist and discuss the four stages in the design of a cost management system.
ANS:
1he four stages in designing a cost management system are D1F analyze6
D(F determine6 D.F perform6 and D0F assess. "n the first stage6 organizational structure6 culture6 and form must be analyzed6 as *ell as the
mission and critical success factors of the organization. 1he second stage involves determining *hat outputs are desired *hile considering
motivational6 informational6 and reporting elements of the organization. 1he third stage involves performing gap analysis bet*een desired
output and current output. 1he fourth stage is to assess the improvements generated by reducing the gap.
!"#: /oderate %&: 1(-.
5. !efine confrontation strategy and indicate *hy many companies may believe it is the only *ay to face competitors.
ANS:
-onfrontation strategy means that a company6 *hile attempting to differentiate its products or becoming a lo*-cost producer6 meets the
competition head-on-kno*ing that any competitive advantage *ill last only a short time. -onfrontation may become the *ay of the future
because of decreased product life cycles Dcompanies are better at reverse engineering and continuous improvement than in the pastF.
!"#: /oderate %&: 1(-.
7. Name five items that *ould be considered critical success factors by most *orld-class companies. )hy is each of these factors so
important to organizational longevity,
ANS:
1he five items most commonly named are timeliness Dtime-to-marketF6 2uality6 customer service6 efficiency+cost control6 and
responsiveness to change. $ach student *ill have different ideas as to *hy these items are important6 but the ans*er should address the
global business environment and thus6 the increase in competition6 reduction in product life cycles6 costs to obtain versus retain
customers6 litigation issues6 and so forth.
!"#: /oderate %&: 1(-.
8. )hat are five *ays that an organization could reduce product costs, =rovide an e9ample of ho* each method *ould cause cost reduction.
ANS:
1he ans*er could include any of the follo*ing: D1F developing ne* production processes6 D(F capture learning curve and e9perience data6
D.F increase capacity6 D0F use a focused factory arrangement6 D'F design products for manufacturability6 D3F design products for logistical
support6 D5F design products for reliability6 D7F design products for maintainability6 and D8F use advanced technology in manufacturing
products. $9amples *ill differ by student.
!"#: /oderate %&: 1(-.
1;. !iscuss the three elements of a cost management system.
ANS:
/otivational elements include performance measurements and the re*ard structure of the organization. Support of the organizational
mission and competitive strategy are also considered motivational elements. "nformational elements include support of the budgeting
process as *ell as support of cost reduction initiatives. -ore competencies assessment and make-or-outsource decision analyses are part
of informational elements. $mphasis is placed on product life cycle6 and distinctions must be made bet*een value-added and non-value-
added activities in the informational elements of a cost management system. 4astly6 reporting elements include the preparation of
financial statements and provision of details for responsibility accounting systems.
!"#: /oderate %&: 1(-0
Chapter .Introd#ction to Cost Management
MULTIPLE CHICE
1. "n comparing financial and management accounting6 *hich of the follo*ing more accurately describes management accounting
information,
a.historical6 precise6 usefulb.re2uired6 estimated6 internalc.budgeted6 informative6 adaptabled.comparable6 verifiable6 monetary
ANS: - !"#: $asy %&: 1-1
(. /anagement and financial accounting are used for *hich of the follo*ing purposes,
/anagement accounting#inancial accounting
a.+n,e1n0( e2,e1n0(b.e2,e1n0( +n,e1n0(c.+n,e1n0(
+n,e1n0(d.e2,e1n0( e2,e1n0(
ANS: A !"#: $asy %&: 1-1
.. %ne major difference bet*een financial and management accounting is that
a.financial accounting reports are prepared primarily for users e9ternal to the company.b.management accounting is not under the
jurisdiction of the Securities and $9change -ommission.c.government regulations do not apply to management accounting.d.all of the
above are true.
ANS: ! !"#: $asy %&: 1-1
0. )hich of the follo*ing statements about management or financial accounting is 1a!se,
a.#inancial accounting must follo* AAA=.b./anagement accounting is not subject to regulatory reporting standards.c.oth management
and financial accounting are subject to mandatory recordkeeping re2uirements.d./anagement accounting should be fle9ible.
ANS: - !"#: $asy %&: 1-1
'. /anagement accounting
a.is more concerned *ith the future than is financial accounting.b.is less concerned *ith segments of a company than is financial
accounting.c.is more constrained by rules and regulations than is financial accounting.d.all of the above are true.
ANS: A !"#: $asy %&: 1-1
3. /odern management accounting can be characterized by its
a.fle9ibility.b.standardization.c.comple9ity.d.precision.
ANS: A !"#: $asy %&: 1-1
5. )hich of the follo*ing is not a valid method for determining product cost,
a.arbitrary assignmentb.direct measurementc.systematic allocationd.cost-benefit measurement
ANS: ! !"#: /oderate %&: 1-1
7. roadly speaking6 cost accounting can be defined as aDnF
a.e9ternal reporting system that is based on activity-based costs.b.system used for providing the government and creditors *ith
information about a companyCs internal operations.c.internal reporting system that provides product costing and other information used by
managers in performing their functions.d.internal reporting system needed by manufacturers to be in compliance *ith -ost Accounting
Standards oard pronouncements.
ANS: - !"#: $asy %&: 1-1
8. -ost accounting is directed to*ard the needs of
a.regulatory agencies.b.e9ternal users.c.internal users.d.stockholders.
ANS: - !"#: $asy %&: 1-1
1;. -ost accounting is necessitated by
a.the high degree of conversion found in certain businesses.b.regulatory re2uirements for manufacturing companies.c.managementCs need
to be a*are of all production activities.d.managementCs need for information to be used for planning and controlling activities.
ANS: A !"#: /oderate %&: 1-1
11. 1he process of <<<<<<<<<<< causes the need for cost accounting.
a.conversionb.salesc.controllingd.allocating
ANS: A !"#: $asy %&: 1-1
1(. #inancial accounting
a.is primarily concerned *ith internal reporting.b.is more concerned *ith verifiable6 historical information than is cost
accounting.c.focuses on the parts of the organization rather than the *hole.d.is specifically directed at management decision-making
needs.
ANS: !"#: $asy %&: 1-1
1.. #inancial accounting and cost accounting are both highly concerned *ith
a.preparing budgets.b.determining product cost.c.providing managers *ith information necessary for control purposes.d.determining
performance standards.
ANS: !"#: $asy %&: 1-1
10. )hich of the follo*ing topics is of more concern to management accounting than to cost accounting,
a.generally accepted accounting principlesb.inventory valuationc.cost of goods sold valuationd.impact of economic conditions on
company operations
ANS: ! !"#: /oderate %&: 1-1
1'. -ost and management accounting
a.re2uire an entirely separate group of accounts than financial accounting uses.b.focus solely on determining ho* much it costs to
manufacture a product or provide a service.c.provide product+service cost information as *ell as information for internal decision
making.d.are re2uired for business recordkeeping as are financial and ta9 accounting.
ANS: - !"#: $asy %&: 1-1
13. )hich of the follo*ing statements is tr#e,
a./anagement accounting is a subset of cost accounting.b.-ost accounting is a subset of both management and financial
accounting.c./anagement accounting is a subset of both cost and financial accounting.d.#inancial accounting is a subset of cost
accounting.
ANS: !"#: /oderate %&: 1-1
15. )hich of the follo*ing statements is 1a!se,
a.A primary purpose of cost accounting is to determine valuations needed for e9ternal financial statements.b.A primary purpose of
management accounting is to provide information to managers for use in planning6 controlling6 and decision making.c.1he act of
converting production inputs into finished products or services necessitates cost accounting.d.1*o primary hallmarks of cost and
management accounting are standardization of procedures and use of generally accepted accounting principles.
ANS: ! !"#: /oderate %&: 1-1
17. A long-term plan that fulfills the goals and objectives of an organization is kno*n as aDnF
a.management style.b.strategy.c.mission statement.d.operational mission.
ANS: !"#: $asy %&: 1-(
18. -ore competencies are not
a.internal functions crucial to the success and survival of a company.b.attributes that keep a firm from competing.c.different for every
organization.d.considered influences on corporate strategies.
ANS: !"#: $asy %&: 1-(
(;. 1he set of processes that convert inputs into services and products that consumers use is called
a.a core competency.b.an operational plan.c.the value chain.d.the product life cycle.
ANS: - !"#: $asy %&: 1-.
(1. 1he balanced scorecard perspective that focuses on using a firmNs intellectual capital to adapt to customer needs through product or
service innovations is the:
a.learning and gro*th perspectivec.customer value perspectiveb.internal business perspectived.financial perspective
ANS: A !"#: $asy %&: 1-0
((. 1he balanced scorecard perspective that addresses things that an organization needs to do *ell to meet customer needs and e9pectations:
a.learning and gro*th perspectivec.customer value perspectiveb.internal business perspectived.financial perspective
ANS: !"#: $asy %&: 1-0
(.. 1he balanced scorecard perspective that addresses ho* *ell the organization is meeting specific customer-based criteria is the:
a.learning and gro*th perspectivec.customer value perspectiveb.internal business perspectived.financial perspective
ANS: - !"#: $asy %&: 1-0
(0. 1he balanced scorecard perspective that addresses concerns about organizational gro*th is the:
a.learning and gro*th perspectivec.customer value perspectiveb.internal business perspectived.financial perspective
ANS: ! !"#: $asy %&: 1-0
('. 1he *orld has essentially become smaller because of
a.improved technology.b.trade agreements.c.better communications systems.d.all of the above.
ANS: ! !"#: $asy %&: 1-'
(3. 1he value chain
a.reflects the production of goods *ithin an organizational conte9t.b.is concerned *ith upstream suppliers6 but not do*nstream
customers.c.results *hen all non-value-added activities are eliminated from a production process.d.is the foundation of strategic resource
management.
ANS: ! !"#: /oderate %&: 1-'
(5. "n a global economy6
a.the trade of goods and services is focused on trade bet*een or among countries on the same continent.b.the international movement of
labor is prohibited e9cept for multilingual persons.c.the international flo*s of capital and information are common.d.all of the above
happen in a global economy.
ANS: - !"#: /oderate %&: 1-'
(7. )hich of the follo*ing @.S. legislation relates to bribes being offered to foreign officials,
a.:acketeer "nfluenced and -orrupt %rganizations Actb.#oreign "llegal Activities Actc.#oreign -orrupt =ractices Actd.#ederal ribery
and -orrupt =ractices Act
ANS: - !"#: $asy %&: 1-3
(8. 1he organization *hose primary function is to provide a means to share information among cost and management accountants in the
@nited States is the
a."nternal :evenue Service.b.American "nstitute of -=As.c."nstitute of /anagement Accountants.d."nstitute of -ertified /anagement
Accountants.
ANS: - !"#: $asy %&: 1-3
.;. 1he "nstitute of /anagement Accountants issues
a.Statements on Accounting :esearch for /anagers.b.Statements on /anagement Accounting.c.Statements on /anagerial and -ost
Accounting.d.-ost Accounting Standards.
ANS: !"#: $asy %&: 1-3
.1. 1he "nstitute of /anagement AccountantsC -ode of $thics
a.is a legally enforceable contract *ith all management accountants.b.should be vie*ed as a goal for professional behavior.c.is a legally
enforceable contract *ith all -=As.d.provides *ays to measure departures from ethical behavior.
ANS: !"#: $asy %&: 1-3
.(. 1he ethical standards established for management accountants are in the areas of
a.competence6 licensing6 reporting6 and education.b.budgeting6 cost allocation6 product costing6 and insider trading.c.competence6
confidentiality6 integrity6 and objectivity.d.disclosure6 communication6 decision making6 and planning.
ANS: - !"#: /oderate %&: 1-3
... 1he #oreign -orrupt =ractices Act is directed at
a.@.S. businesses operating overseas.b.foreign businesses operating in the @.S.c.all businesses dealing *ith @.S. consumers.d.@.S.
businesses operating in developed nations.
ANS: A !"#: /oderate %&: 1-3
.0. A managerial accountant *ho communicates information objectively is e9ercising *hich of the follo*ing standards,
a.objectivityc.competenceb.integrityd.confidentiality
ANS: A !"#: /oderate %&: 1-5
.'. A managerial accountant *ho prepares clear reports and recommendations after analyzing relevant facts is e9ercising *hich of the
follo*ing standards,
a.objectivityc.competenceb.integrityd.confidentiality
ANS: - !"#: /oderate %&: 1-5
.3. -ost accounting standards
a.are legal standards set by the "nstitute of /anagement Accountants for use in all manufacturing and professional businesses.b.are set by
the -ost Accounting Standards oard and are legally binding on all manufacturers6 but not service organizations.c.do not e9ist e9cept for
those legal pronouncements for companies bidding or pricing cost-related contracts *ith the government.d.are developed by the -ost
Accounting Standards oard6 issued by the "nstitute of /anagement Accountants6 and are legally binding on -/As.
ANS: - !"#: /oderate %&: 1-5
%H2T A3%4E2
1. %n *hat needs do D1F management accounting and D(F financial accounting focus,
ANS:
/anagement accounting focuses on the needs of users inside an organization. /anagers need information related to planning6 controlling6
decision making6 and performance evaluation. 1heir needs are satisfied through the providing of information designed for their particular
uses. #inancial accounting focuses on the needs of users outside the organization6 such as stockholders6 creditors6 and regulatory agencies.
1hese users re2uire information that is in conformity *ith generally accepted accounting principles and6 thus6 is standardized in the form
of general purpose financial statements.
!"#: /oderate %&: 1-1
(. !efine value chain and provide a graphic of the interacting flo*s of information *ithin the value chain.
ANS:
1he value chain is the set of processes that convert inputs into products and services for a firmCs customers. "t includes both internal and
e9ternal processes. "t encompasses both upstream and do*nstream entities. A depiction of the value chain and its information flo*s is
sho*n in $9hibit 1-3.
!"#: /oderate %&: 1-'
.. 4ist and e9plain the four perspectives of the balanced scorecard DS-F.
ANS:
4earning and gro*th perspective--#ocuses on using an organizationNs intellectual capital to adapt to or influence changing customer
needs.
"nternal business perspective--Addresses those things that an organization needs to do *ell to meet customer needs and e9pectations.
-ustomer value perspective--Addresses ho* *ell the organization is doing relative to important customer criteria.
#inancial perspective--Addresses the concerns of stakeholders about profitability and organizational gro*th.
!"#: /oderate %&: 1-0
0. !istinguish bet*een lead indicators and lag indicators6 and provide an e9ample of each. )hich of these indicators is a better guide for
strategic planning,
ANS:
A lag indicator is an outcome that has resulted from past actions. A common lag indicator is profitability. %ther similar performance
measures are also acceptable ans*ers.
A lead indicator reflects future financial and nonfinancial outcomes. An good e9ample *ould be the number of employees trained on a
ne* transaction processing system. 4ead indicators are better guides for strategic planning6 because they provide information on
outcomes more 2uickly than do lag indicators.
!"#: /oderate %&: 1-0
'. )hat four areas are covered by the Standards of $thical -onduct for -ertified /anagement Accountants, ?o* are these areas defined,
ANS:
1he four areas covered by the Standards of $thical -onduct for -ertified /anagement Accountants are: competence6 confidentiality6
integrity6 and objectivity. -ompetence means having the capacity to function in a particular manner.
-onfidentiality means having the ability to maintain or keep information undisclosed. "ntegrity is defined as adherence to a code of moral
values. %bjectivity is defined as e9pressing or using facts *ithout distortion by personal feelings or prejudices.
!"#: /oderate %&: 1-3
Chapter .+--Inventory and Prod#ction Management
MULTIPLE CHICE
1. )hich of the follo*ing is not an ordering cost,
a.cost of receiving inventoryb.cost of preparing the orderc.cost of the merchandise orderedd.cost of storing the inventory
ANS: ! !"#: $asy %&: 15-(
(. 1he cost of receiving inventory is regarded as
a.an ordering cost.b.a carrying cost.c.a purchasing cost.d.a cost of not carrying goods in stock.
ANS: A !"#: $asy %&: 15-(
.. A <<<<<<<<<<<<< system of production control is paced by product demand.
a.$%Jb.A-c.pushd.pull
ANS: ! !"#: $asy %&: 15-.
0. )hich of the follo*ing statements is 1a!se concerning electronic data interchange,
a.$lectronic data interchange D$!"F is essential in a pull system.b.%ne of the benefits realized by $!" organizations is a faster processing
of transactions.c.$lectronic data interchange is essential in a push system.d.$lectronic data interchange refers to computer-to-computer
e9change of information.
ANS: - !"#: /oderate %&: 15-3
'. <<<<<<<<<<<<< is a BpullB system of production and inventory control.
a.$!"b.$%Jc.&"1d.A-
ANS: - !"#: $asy %&: 15-3
3. "n a &"1 system6 the 2uality of each product begins *ith
a.a companyCs vendors.b.employees.c.inspection of finished goods inventory.d.a good product *arranty.
ANS: A !"#: $asy %&: 15-3
5. :educing setup time is a major aspect of
a.all push inventory systems.b.the determination of safety stock 2uantities.c.a &"1 system.d.an $%J system.
ANS: - !"#: $asy %&: 15-3
7. :educing inventory to the lo*est possible levels is a major focus of
a.&"1.b.push inventory systems.c.$%J.d.A-.
ANS: A !"#: $asy %&: 15-3
8. &"1 is a philosophy concerned *ith
a.*hen to do something.b.ho* to do something.c.*here to do something.d.ho* much of something should be done.
ANS: A !"#: $asy %&: 15-3
1;. )hen &"1 is implemented6 *hich of the follo*ing changes in the accounting system *ould not be e9pected,
a.fe*er cost allocationsb.elimination of standard costsc.combining labor and overhead into one product cost categoryd.combing ra*
material and materials in *ork-in-process into one product cost category
ANS: !"#: /oderate %&: 15-3
11. Striving for fle9ibility in the number of products that can be produced in a short period of time is characteristic of
a.$%J systems.b.push systems in general.c.&"1.d.pull systems in general.
ANS: - !"#: $asy %&: 15-3
1(. &ust-in-time D&"1F inventory systems
a.result in a greater number of suppliers for each production process.b.focus on a BpushB type of production system.c.can only be used
*ith automated production processes.d.result in inventories being either greatly reduced or eliminated.
ANS: ! !"#: $asy %&: 15-3
1.. 1he &"1 philosophy does not focus on
a.standardizing parts used in products.b.eliminating *aste in the production process.c.finding the absolute lo*est price for purchased
parts.d.improving 2uality of output.
ANS: - !"#: $asy %&: 15-3
10. "n a &"1 manufacturing environment6 product costing information is !east important for use in
a.*ork in process inventory valuation.b.pricing decisions.c.product profitability analysis.d.make-or-buy decisions.
ANS: A !"#: /oderate %&: 15-3
1'. )ith &"1 manufacturing6 *hich of the follo*ing costs *ould be considered an indirect product cost,
a.cost of specific-purpose e2uipmentb.cost of e2uipment maintenancec.property ta9es on the plantd.salary of a manufacturing cell *orker
ANS: - !"#: $asy %&: 15-3
13. )ith &"1 manufacturing6 *hich of the follo*ing costs *ould be considered a direct product cost,
a.insurance on the plantb.repair parts for machineryc.janitorsC salariesd.salary of the plant supervisor
ANS: !"#: /oderate %&: 15-3
15. )hich of the follo*ing statements is not tr#e,
a.&"1 manufacturing strives for zero inventories.b.&"1 manufacturing strives for zero defects.c.&"1 manufacturing uses manufacturing
cells.d.&"1 manufacturing utilizes long lead time and fe* deliveries.
ANS: ! !"#: $asy %&: 15-3
17. 1he &"1 environment has caused a reassessment of product costing techni2ues. )hich of the follo*ing statements is tr#e *ith respect to
this reassessment,
a.1raditional cost allocations based on direct labor are being 2uestioned and criticized.b.1he federal government6 through the S$-6 is
responsible for the reassessment.c.1he reassessment is caused by the replacement of machine hours *ith labor hours.d.None of the above
is true.
ANS: A !"#: /oderate %&: 15-3
18. )hen a firm adopts the just-in-time method of management6
a.employees are retrained on different e2uipment6 but the plant layout generally remains unchanged.b.ne* machinery and e2uipment must
be purchased from franchised &"1 dealers.c.machinery and e2uipment are moved into small autonomous production lines called islands or
cells.d.ne*6 more efficient machinery and e2uipment are purchased and installed in the original plant layout.
ANS: - !"#: /oderate %&: 15-3
(;. )hich of the follo*ing describes the effect on direct labor *hen management adopts the &"1 philosophy,
a.$ach direct labor person performs a single task6 thereby allo*ing that person to reach his or her theoretical potential.b.ecause each
person runs a single machine in a &"1 environment6 there are more employees classified as direct labor.c.1he environment becomes more
labor-intensive.d./achine operators are e9pected to run several different types of machines6 help set up for production runs6 and identify
and repair machinery needing maintenance.
ANS: ! !"#: /oderate %&: 15-3
(1. &"1 concepts
a.can be effectively implemented in organizations that are only partially automated.b.are only appropriate for use *ith -"/
systems.c.involve shifting from a capital-intensive to a labor-intensive process.d.re2uire full computerization of the &"1 manufacturing
process.
ANS: A !"#: $asy %&: 15-3
((. According to &"1 philosophy6
a.inventories of finished goods al*ays should be available to meet customer demand.b.push-through manufacturing flo*s are the most
efficient.c.maintaining inventories *astes resources and fre2uently covers up poor *ork or other problems.d.long production runs and
large production lot sizes take advantage of economies of scale.
ANS: - !"#: /oderate %&: 15-3
(.. Accounting for product costs in a &"1 environment
a.uses a job order costing system.b.classifies processing costs as ra* Dor directF material6 direct labor6 and overhead.c.is more comple9
than in other types of manufacturing environments.d.follo*s process costing procedures *hereby costs are accumulated by the process
DcellF and attached to units processed for the period.
ANS: ! !"#: /oderate %&: 15-3
(0. An implication of the demand-pull nature of the &"1 production process is that
a.finished goods inventories must be available to meet customer demand6 although ra* material is delivered on an as-needed basis.b.more
storage space for inventories is necessary.c.finished products are packaged and shipped to customers immediately6 thus re2uiring minimal
finished goods inventories.d.problem areas become less visible as inventories are reduced.
ANS: - !"#: /oderate %&: 15-3
('. "n accounting for &"1 operations6 the :a* /aterial "nventory account
a.is closely monitored to ensure that materials are al*ays on hand in time.b.can be e9pected to have a larger balance than *ith traditional
manufacturing methods.c.is combined *ith the )ork "n =rocess "nventory account.d.is combined *ith the #inished Aoods "nventory
account.
ANS: - !"#: $asy %&: 15-3
(3. A kanban plays an important role in
a.&"1.b.$%J.c.A-.d.-=/.
ANS: A !"#: $asy %&: 15-3
(5. <<<<<<<<<<<<<<<<<<<< may involve relocation or plant modernization by a vendor.
a.#ocused factory arrangementsb.$conomic order 2uantityc./ultiprocess handlingd.Activity-based management
ANS: !"#: /oderate %&: 15-8
(7. 1he term BcellB is used to describe
a.a grouping of one or more automated machines *ithin a company.b.a storage bin for B-B type inventory in an A- inventory
system.c.files in a -A!+-A/ system.d.a factoryCs area of conversion activity.
ANS: A !"#: $asy %&: 15-3
(8. "n a production cell6
a.an individual *orker may be e9pected to operate several different machines6 do setups6 and perform preventive maintenance on the
e2uipment.b.each *orker becomes an e9pert in the operation of a single piece of e2uipment.c.machines are arranged so that similar
machines are grouped together.d.clear separation is maintained bet*een those *orkers *ho operate the machinery and those *orkers *ho
set up and maintain the machinery.
ANS: A !"#: /oderate %&: 15-3
.;. @-shaped groupings of *orkers and machines that improve materials handling and flo* are kno*n as
a.manufacturing cells.b.efficiency stations.c.multi-flo* modules.d.productivity islands.
ANS: A !"#: $asy %&: 15-3
.1. #or *orkers in a multiprocess handling situation6 *hich of the follo*ing happens,
/ore fle9ibility4ess process involvement
a.no nob.no yesc.yes yesd.yes
no
ANS: ! !"#: $asy %&: 15-3
.(. 1he process of <<<<<<<<< occurs *hen e2uipment is programmed to stop *hen a certain situation arises.
a.throughputb.automationc.backflushingd.information sharing
ANS: !"#: $asy %&: 15-3
... 1he connection of t*o or more fle9ible manufacturing systems via a host computer and a net*orking information system is kno*n as
computer integratedelectronic datamanufacturinginterchange
a.yes yesb.yes noc.no nod.no yes
ANS: !"#: $asy %&: 15-5
.0. A key element of &apanCs success in *orld markets is
a.the elimination of *aste in all operations.b.automation of the billing function.c.inefficient labor forces in competing countries.d.the
verification procedures incorporated into computer programs.
ANS: A !"#: $asy %&: 15-5
.'. ackflush costing is concerned *ith *hich of the follo*ing,
Standard costs/inimal variances from standards
a.yes nob.no noc.yes yesd.no
yes
ANS: - !"#: $asy %&: 15-3
.3. )hich of the follo*ing areas offers an opportunity to eliminate *aste,
a.ra* material and laborb.space and production timec.recordkeeping and *orking capitald.all of the above
ANS: ! !"#: $asy %&: 15-5
.5. #le9ible manufacturing systems are
a.designed to provide more fle9ibility in a firmCs manufacturing process by using computer-aided machinery.b.the same as computer-aided
design systems.c.commonly used by firms that need to make large 2uantities of one product.d.are very complicated and cause increased
defect rates in output.
ANS: A !"#: $asy %&: 15-5
.7. Vaizen means
a.doing it the &apanese *ay.b.continuous improvement.c.employee empo*erment.d.implementation of a centralized organizational
structure.
ANS: !"#: $asy %&: 15-'
.8. 1he process that determines an allo*able product cost *hile setting market price and allo*ing for an acceptable profit margin is kno*n as
a.target costing.b.product life cycle costing.c.activity-based costing.d.responsibility costing.
ANS: A !"#: $asy %&: 15-'
0;. 1he peak level of unit sales *ill occur in *hich stage of the product life cycle,
a.gro*thb.maturityc.declined.introduction
ANS: !"#: $asy %&: 15-0
01. #or product life cycle costing6 :>! costs are
a.e9pensed as incurred.b.capitalized and allocated over the life cycle.c.deducted as period costs.d.charged to specific departments as
incurred.
ANS: !"#: $asy %&: 15-0
0(. An important focus in product life cycle costing is
a.the activity base.b.the target cost.c.the cost driver.d.variable costs.
ANS: !"#: $asy %&: 15-0
0.. =rojected sales price minus a reasonable profit e2uals
a.the standard cost.b.contribution margin.c.projected -ost of Aoods Sold.d.target cost.
ANS: ! !"#: $asy %&: 15-'
00. Appro9imately *hat percentage of future product costs is determined in the development stage of the product life cycle,
a..;Pb.';Pc.5;Pd.8;P
ANS: ! !"#: $asy %&: 15-0
0'. )hich of the follo*ing fluctuate over the product life cycle,
a.sales price per unitb.the types of costs that are incurredc.product profitabilityd.all of the above
ANS: ! !"#: $asy %&: 15-0
03. "n *hich of the follo*ing stages of the product life cycle *ould operating losses not be e9pected,
a.gro*thb.developmentc.introductiond.decline
ANS: A !"#: $asy %&: 15-0
05. !uring *hich stage of the product life cycle *ill a company *itness the highest profit,
a.developmentb.maturityc.gro*thd.decline
ANS: - !"#: $asy %&: 15-0
07. -ost tables are databases that provide information on *hich of the follo*ing,
a.design specificationsb.manufacturing processesc.impact on product costs *hen different inputs resources are usedd.all of the above
ANS: ! !"#: $asy %&: 15-'
08. %ngoing efforts to reduce costs6 increase product 2uality6 and+or improve production process once manufacturing has begun is kno*n as
a.cost management.b.kaizen costing.c.target costing.d.life-cycle costing.
ANS: !"#: $asy %&: 15-'
';. Vaizen costing is used for *hich of the follo*ing types of products,
Ne* products$9isting products
a.yes yesb.no yesc.no nod.yes no
ANS: !"#: $asy %&: 15-'
'1. A mandate to reduce costs6 increase product 2uality6 and+or improve production processes through continuous improvement is kno*n as
a.kaizen costing.b.activity-based costing.c.the theory of constraints.d.mass customization.
ANS: A !"#: $asy %&: 15-'
'(. "f life-cycle costs e9ceed the target cost of a product6 managers *ill strive to reduce
a.the cost of special orders.b.the level of activities that are non-value-added.c.product variety.d.period costs.
ANS: !"#: $asy %&: 15-'
'.. 1he projected sales price for a ne* product D*hich is still in the development stage of the product life cycleF is G';. 1he company has
estimated the life-cycle cost to be G.; and the first-year cost to be G3;. %n this type of product6 the company re2uires a G1( per unit
profit. )hat is the target cost of the ne* product,
a.G3;b.G.;c.G.7d.G0(
ANS: - !"#: $asy %&: 15-'
'0. 1he theory of constraints can
a.identify *hat limitations e9ist *ith ra* material suppliers.b.follo*s a methodology similar to linear programming.c.be ignored since it
assumes too many estimates in the production cycle.d.sho* *here bottlenecks e9ist and sets the limit of output to these bottlenecks.
ANS: ! !"#: $asy %&: 15-7
''. =lacing 2uality inspection points ahead of bottlenecks *ill reduce
a.product flo*.b.the number of defective products.c.the influence of constraints on production flo*.d.the critical path time.
ANS: - !"#: /oderate %&: 15-7
'3. Juality inspection points should
a.precede bottlenecks.b.follo* bottlenecks.c.be placed at the end of all production processes.d.be placed at random points in the
manufacturing process.
ANS: A !"#: $asy %&: 15-7
'5. 1he flo* of goods through a production process cannot be at a faster rate than the slo*est bottleneck is the definition for
a.mass customization.b.business process reengineering.c.the theory of constraints.d.the =areto principle.
ANS: - !"#: $asy %&: 15-7
'7. ottlenecks are
a.machine constraints in the production line.b.machine constraints that restrict the production cycle so idle time at other processes
occurs.c.useful for identifying any production spot slo*do*n.d.restrictions on ra* material sources but not the 2uantity of output.
ANS: !"#: $asy %&: 15-7
'8. "n analyzing production flo*6 a bottleneck is
a.an intermediate inventory.b.al*ays off the critical path.c.a capacity constraint.d.related to a non-value-adding activity.
ANS: - !"#: $asy %&: 15-7
3;. =roduct profit margins are typically judged on a
=eriod-by-period basis4ife-cycle basis
a.yes yesb.yes noc.no yesd.no
no
ANS: !"#: $asy %&: 15-0
31. )hich approaches to costing should be associated *ith each of the follo*ing life-cycle stages,
!evelopment"ntroduction/aturity
a.50+6en 7018e, -,0n#01#b.7018e, -,0n#01# 50+6enc.7018e, 50+6en
-,0n#01#d.50+6en -,0n#01# 7018e,
ANS: - !"#: /oderate %&: 15-'
3(. "n the introduction stage of a productCs life-cycle6 *hich of the follo*ing type of costs typically may create losses rather than profits,
a.advertisingb.assemblyc.designd.overhead
ANS: A !"#: /oderate %&: 15-0
3.. /ost studies have indicated that *hat percent of a productCs total life-cycle costs are determined in the development+design stage,
a.3;P-5;Pb.5;P-7;Pc.7;P-8;Pd.8;P-8'P
ANS: - !"#: $asy %&: 15-0
30. )hich of the follo*ing costing methods is the most effective in controlling a productCs total life-cycle cost,
a.kaizen costingb.target costingc.standard costingd.process costing
ANS: !"#: /oderate %&: 15-'
3'. )hich of the follo*ing formulas is the best representation of the concept of target costing,
a.target cost O profit margin L selling priceb.selling price - target cost L profit marginc.selling price - profit margin L target costd.target
cost - standard cost L profit margin
ANS: - !"#: $asy %&: 15-'
33. Successful product development should include
a.kaizen costing.b.value engineering.c.kanban implementation.d.all of the above.
ANS: !"#: /oderate %&: 15-'
35. Ealue engineering seeks to obtain increased
a.product life-cycle and reduced direct labor inputs.b.planning team membership and reduced time-to-market.c.product performance ratio
and reduced substitute goods.d.product functionality and reduced costs.
ANS: ! !"#: !ifficult %&: 15-'
37. 1arget costing
a.can be applied to services if they are sufficiently uniform.b.can be applied to services only if they are automated.c.can be applied to
services that are performed in a manufacturing environment.d.cannot be applied to services.
ANS: A !"#: /oderate %&: 15-'
38. Vaizen costing helps to
a.reduce product costs of products in the design and development stage.b.keep the target cost as the primary focus after a product enters
production.c.keep profit margin relatively stable as product price declines over the product life cycle.d.reduce the cost of engineering
change orders during each stage of the product life cycle.
ANS: - !"#: !ifficult %&: 15-'
5;. "n *hich life-cycle stage are product 2uality improvements and stable selling prices likely to occur,
a.introductionb.gro*thc.maturityd.decline
ANS: !"#: /oderate %&: 15-0
51. #rom a cost management vie*6 research and development cost represents
a.a life-cycle investmentb.a period e9pense.c.an unearned revenue.d.a risk reserve.
ANS: A !"#: /oderate %&: 15-0
5(. 4ife-cycle costing is especially important in *hich of the follo*ing types of companies,
-omputers#urniture1e9tbooksAutomobiles
a.yes yes yes yesb.no yes yes noc.yes no
no yesd.yes no yes yes
ANS: - !"#: /oderate %&: 15-0
5.. Kanban is the &apanese *ord for
a.production.b.just-in-time.c.card.d.target costing.
ANS: - !"#: $asy %&: 15-3
50. &"1 seeks to
a.reduce production cost *hile increasing 2uality.b.radically redesign the production process for effectiveness.c.modify all non-value-
added activities.d.all of the above.
ANS: A !"#: !ifficult %&: 15-3
5'. 1he &"1 philosophy indicates that inventory6 as *ell as *hich of the follo*ing6 should be eliminated,
Suppliers
Storage
$mployeesusiness-Ealue-
Added Activities
a.yes yes yes yesb.yes yes no noc.no no yes
nod.no yes no yes
ANS: ! !"#: /oderate %&: 15-3
53. -ompanies have often produced significant amounts of un*anted inventory because of
a.variable overhead allocation methodologies.b.fi9ed overhead allocation methodologies.c.variable and fi9ed overhead allocation
methodologies.d.the financial accounting re2uirement to e9pense research and development as incurred.
ANS: !"#: /oderate %&: 15-3
55. Aoods *ill flo* through a production process at the rate of the
a.slo*est part of the process.b.fastest part of the process.c.average of all the parts of the process.d.time standards set using e9ternally
calibrated benchmarks.
ANS: A !"#: /oderate %&: 15-7
57. A machine constraint creates
a.an autonomation.b.a bottleneck.c.a push inventory system.d.the need for third-party logistics.
ANS: !"#: $asy %&: 15-7
58. "n a production process *ith a machine constraint6 if a 2uality control point is to be established6 it should be set up
a.*ithin the machineCs processes.b.directly after the machine has performed its functions.c.immediately before the machine.d.at the end of
the production process.
ANS: - !"#: $asy %&: 15-7
7;. /anaging constraints is a process of
a.backflush costing.b.design for manufacturability.c.just-in-time redesign.d.continuous improvement.
ANS: ! !"#: /oderate %&: 15-7
71. =recious &e*els -orporation produces 2uality je*elry items for various retailers. #or the coming year6 it has estimated it *ill consume
';; ounces of gold. "ts carrying costs for a year are G( per ounce. No safety stock is maintained. "f the $%J is 1;; ounces6 *hat is the
cost per order,
a.G0;b.G(;c.G'd.G('
ANS:
$%J L 1;; L
1;6;;; L ';;9
G(; L 9
!"#: /oderate %&: 15-8
7(. =recious &e*els -orporation produces 2uality je*elry items for various retailers. #or the coming year6 it has estimated it *ill consume
';; ounces of gold. "ts carrying costs for a year are G( per ounce. No safety stock is maintained. "f the $%J is 1;; ounces6 *hat *ould be
the estimate for =recious &e*elsN total carrying costs for the coming year,
a.G(;;b.G(';c.G1;;d.G16;;;
ANS: -

';; oz+1;; oz L ' orders per year M G(; per order cost L G1;;
!"#: /oderate %&: 15-8
7.. A firm estimates that its annual carrying cost for material Q is G..; per lb. "f the firm re2uires ';6;;; lbs. per year6 and ordering costs are
G1;; per order6 *hat is the $%J Drounded to the nearest poundF,
a.'6550 lbs.b.06;7( lbs.c.165.( lbs.d.16((' lbs.
ANS: A
$%J L
$%J L '6550 lbs.
!"#: /oderate %&: 15-8
Fed!ar Corporation
Kedlar -orporationCs $%J for /aterial A is ';; units. 1his $%J is based on:
Annual demand'6;;; units%rdering costsG1(.';
70. :efer to Kedlar -orporation. )hat is the annual carrying cost per unit for /aterial A,
a.G;.';b.G(.;;c.G(.';d.G'.;;
ANS: A
$%J L ';; units L
-- L G;.';
!"#: /oderate %&: 15-8
7'. :efer to Kedlar -orporation. )hat are KedlarNs -orp.Cs total annual ordering costs for /aterial A,
a.G36;;;b.G3;;c.G1('d.G16;;;
ANS: -
I of orders per year L '6;;;+';; L 1; orders per year
1; orders per year M G1(.'; L G1('.;;
!"#: /oderate %&: 15-8
C!ear Gay Corporation
-lear !ay -orporation manufactures various glass products including a car *indo*. 1he setup cost to produce the car *indo* is G16(;;.
1he cost to carry a *indo* in inventory is G. per year. Annual demand for the car *indo* is 1(6;;; units.
73. :efer to -lear !ay -orporation. )hat is the most economical production run Drounded to the nearest unitF,
a.36;;; unitsb..6;;; unitsc.86(8' unitsd..6;87 units
ANS: !
$%J L
$%J L .6;87 units
!"#: /oderate %&: 15-8
75. :efer to -lear !ay -orporation. "f the annual demand for the car *indo* *as to increase to 1'6;;; units6
a.the number of setups *ould decrease.b.the total carrying costs *ould increase.c.the economic order 2uantity *ould decline.d.all of the
above *ould occur.
ANS: !"#: $asy %&: 15-8
77. A company has estimated its economic order 2uantity for =art A at (60;; units for the coming year. "f ordering costs are G(;; and carrying
costs are G.'; per unit per year6 *hat is the estimated total annual usage,
a.36;;; unitsb.(767;; unitsc.56(;; unitsd.(60;; units
ANS: -
$%J L (60;; units L
A@ L 56(;; units
!"#: /oderate %&: 15-8
78. A company annually consumes 1;6;;; units of =art -. 1he carrying cost of this part is G( per year and the ordering costs are G1;;. 1he
company uses an order 2uantity of ';; units. y ho* much could the company reduce its total costs if it purchased the economic order
2uantity instead of ';; units,
a.G';;b.G(6;;;c.G(6';;d.G;
ANS: A
$%J L
$%J L 16;;; units
At present6 (; orders are placed for a total annual cost of G(6;;;. "f the $%J is used6 1; orders *ill be placed at a cost of G16;;;
ecause an average of an additional ('; units *ill be on hand6 carrying costs *ill increase by G';;. 1he net difference is a savings of
G';;.
!"#: /oderate %&: 15-8
8;. A company annually consumes 1;6;;; units of =art -. 1he carrying cost of this part is G( per year and the ordering costs are G1;;. 1he
company uses an order 2uantity of ';; units. "f the company operates (;; days per year6 and the lead time for ordering =art - is ' days6
*hat is the order point,
a.('; unitsb.16;;; unitsc.';; unitsd.(6;;; units
ANS: A
%rder point L !aily use M 4ead time
L D1;6;;;+(;;F M '
L ('; units
!"#: /oderate %&: 15-8
81. )hich of the follo*ing tells management B*henB to order,
a.safety stock levelb.order pointc.the economic order 2uantityd.the =areto inventory analysis
ANS: !"#: $asy %&: 15-8
8(. )hich of the follo*ing affects the order point,
a.daily usageb.lead timec.safety stockd.all of the above
ANS: ! !"#: $asy %&: 15-8
8.. A decrease in the lead time *ould reduce the
a.order point.b.safety stock.c.economic order 2uantity.d.ordering costs.
ANS: A !"#: $asy %&: 15-8
80. 1he size of the safety stock is directly affected by all of the follo*ing6 e"cept the
a.cost of a stockout.b.probability of a stockout.c.carrying cost of stock.d.economic order 2uantity.
ANS: ! !"#: $asy %&: 15-8
8'. "f no safety stock is carried6 the average inventory is e2ual to the
a.order point+(.b.order point 9 (.c.economic order 2uantity+(.d.economic order 2uantity 9 (.
ANS: - !"#: $asy %&: 15-8
83. 1he role of safety stock in an organization is to
a.reduce the lead time for an order to be received.b.reduce the probability of a stockout.c.reduce the order point.d.decrease the economic
order 2uantity.
ANS: !"#: $asy %&: 15-8
85. 1he optimal size of the safety stock is defined by the point *here the
a.costs of carrying the safety stock e2ual stockout costs.b.setup costs e2ual stockout costs.c.ordering costs e2ual stockout costs.d.reorder
point e2uals safety stock.
ANS: A !"#: /oderate %&: 15-8
87. "f a company carries safety stock and its annual carrying costs per unit are G;..;6 *hat formula yields the total annual carrying costs,
a.G;..; 9 TD$%J+(F O Safety stockFUb.G;..; 9 D$%J O Safety stockFc.G;..; 9 TD$%J 9 (F O Safety stockFUd.G;..; 9 D$%J - Safety stockF
ANS: A !"#: $asy %&: 15-8
Go#g!as Corporation
!ouglas -orporation operates its factory .;; days per year. "ts annual consumption of /aterial R is 16(;;6;;; gallons. "t carries a 1;6;;;
gallon safety stock of /aterial R and its lead time is 1( business days.
88. :efer to !ouglas -orporation. )hat is the order point for /aterial R,
a.1;6;;; gallonsb..76;;; gallonsc.076;;; gallonsd.'76;;; gallons
ANS: !
%rder point L D!aily use M 4ead timeF O Safety Stock
L D06;;; M 1(F O 1;6;;;
L '76;;; gallons
!"#: /oderate %&: 15-8
1;;. :efer to !ouglas -orporation. "f the $%J for /aterial R is .;6;;; gallons6 and the carrying cost per gallon per year is G.('6 *hat is the
total annual carrying cost for /aterial R,
a.G.65';b.G56';;c.G36(';d.G1;6;;;
ANS: -
Annual carrying cost L TD$%J+(F O Safety stockU M per unit carrying cost
L D1'6;;; O 1;6;;;F M G;.('
L G36(';
!"#: /oderate %&: 15-8
1;1. Atkins -orporation consumes 16(;;6;;; gallons of /aterial R per year. "ts order 2uantity is .;6;;; gallons. "t maintains a safety stock of
1;6;;; gallons and its annual carrying costs are G;.(' per gallon per year. "f the ordering cost is G(; per order6 *hat are the total annual
ordering costs,
a.G3;;b.G7;;c.G76.;;d.G16(;;
ANS:
Annual ordering costs L D16(;;6;;;+.;6;;;F M G(;
L 0; orders M G(;
L G7;;
!"#: /oderate %&: 15-8
2a@son Corporation
:a*son -orporationNs order 2uantity for /aterial 1 is '6;;; lbs. "f the company maintains a safety stock of 1 at ';; lbs.6 and its order
point is 16';; lbs.
1;(. :efer to :a*son -orporation. )hat is the lead time assuming daily usage is '; lbs.,
a..; daysb.1;; daysc.1; daysd.(; days
ANS: !
%rder point L D!aily use M 4ead timeF O Safety Stock
16';; L D'; M 41F O ';;
16;;; L D'; M 41F
(; L 41
!"#: /oderate %&: 15-8
1;.. :efer to :a*son -orporation. )hat *ould be the total annual carrying costs assuming the carrying cost per unit is G;.(;,
a.G16;;;b.G3;;c.G1;;d.G161;;
ANS:
D'6;;;units+(F O ';; units L .6;;; units MG;.(;+unit L G3;;
!"#: /oderate %&: 15-8
1;0. #or :a* /aterial 6 a company maintains a safety stock of '6;;; pounds. "ts average inventory Dtaking into account the safety stockF is
76;;; pounds. )hat is the apparent order 2uantity,
a.136;;; lbs.b.36;;; lbs.c.1;6;;; lbs.d.(16;;; lbs.
ANS:
D76;;; - '6;;;F lbs M ( L 36;;; lbs.
!"#: /oderate %&: 15-8
1;'. "n an =areto inventory analysis6 the items that are most !i:e!y to be controlled *ith a red-line system are the
a.A items.b. items.c.- items.d.items on a perpetual inventory.
ANS: - !"#: $asy %&: 15-8
1;3. )hich of the follo*ing might be appropriate for items in the B-B category of an =areto inventory analysis,
a.a red-line systemb.a t*o-bin systemc.a periodic inventory systemd.all of the above
ANS: ! !"#: /oderate %&: 15-8
1;5. 1he <<<<<<<<<<<<<<<<<< *ould not affect the economic order 2uantity.
a.companyCs *eighted average cost of capitalb.cost of purchase re2uisition formsc.cost of insuring inventoryd.cost of a stockout
ANS: ! !"#: /oderate %&: 15-8
1;7. All other factors e2ual6 a decrease in the order 2uantity *ill
a.decrease the annual carrying costs.b.decrease the annual ordering costs.c.increase the lead time.d.reduce the safety stock.
ANS: A !"#: $asy %&: 15-8
1;8. 1he economic order 2uantity is not affected by the
a.estimate of the annual material consumption.b.cost of insuring a unit of inventory for a year.c.cost of purchase-order forms.d.safety
stock level.
ANS: ! !"#: $asy %&: 15-8
11;. A decrease in the price of a ra* material could result in aDnF
a.increase in the lead time.b.increase in the $%J.c.decrease in the order point.d.increase in the setup costs.
ANS: !"#: /oderate %&: 15-8
111. 1he number of orders that *ill be submitted each year for ra* material is given by *hich formula,
a.$conomic order 2uantity 9 order pointb.1otal annual material needs+economic order 2uantityc.%rder point+economic order
2uantityd.1otal annual material needs+safety stock
ANS: !"#: $asy %&: 15-8
11(. 1he economic production run 2uantity directly affects the
a.order point for ra* material inventories.b.safety stock for finished goods inventory.c.level of finished goods inventory.d.lead time for
producing finished goods inventory.
ANS: - !"#: /oderate %&: 15-8
%H2T A3%4E2
1. )hy may a &"1 control system be useful in disclosing a firmCs inefficiencies and problems,
ANS:
1he &"1 control system is based on a philosophy that inventory is undesirable. Subscribers to the &"1 philosophy believe inventory
reductions e9pose organizational problems and inefficiencies. 1hese problems and inefficiencies may not be brought to managementCs
attention if inventories are not pushed to lo*er and lo*er levels. 1hey *ould remain hidden and undetectable at higher levels of
inventory.
!"#: /oderate %&: 15-3
(. )hat is the purpose of the $%J model,
ANS:
1he purpose of the $%J model is to identify the least cost 2uantity of a material to be purchased at each order point. 1he model e9plicitly
considers the carrying and ordering costs and identifies the purchase 2uantity that minimizes the total of these costs.
!"#: /oderate %&: 15-8
.. )hy does a BpushB based inventory control system generate larger inventory levels than a BpullB system,
ANS:
4arger levels of inventory e9ist by design in push production control systems. 1he inventory buffers permit lo*er levels of
communication bet*een business segments6 permit longer production runs6 and protect the firm from environmental uncertainties and
unforeseen interruptions in production or supplies.
!"#: /oderate %&: 15-.
0. )hat does the term BpullB mean in the conte9t of production control,
ANS:
=ull simply refers to the fact that the pace and level of production are geared to product demand. $ach *ork center sets the pace for the
ne9t upstream *ork center. -ustomer demand paces the final do*nstream *ork center.
!"#: /oderate %&: 15-.
'. "dentify and discuss ho* sales and costs are affected during the five stages of the product life cycle.
ANS:
1he five stages of the product life cycle are D1F development6 D(F introduction6 D.F gro*th6 D0F maturity6 and D'F decline. "n the
development stage6 no production costs or sales e9ist6 but : > ! costs are e9tremely high. !uring the introduction stage lo* unit sales
e9ist *hile high advertising costs are evident. 1he gro*th stage sees increasing unit sales and decreasing production costs per unit. 1he
maturity stage *itnesses peak unit sales and a stabilization of production costs per unit. !uring the decline stage unit sales decrease *hile
production costs per unit increase.
!"#: /oderate %&: 15-0
3. !iscuss differences in approach and potential usage bet*een target and kaizen costing.
ANS:
1arget costing is considered a procedural approach that is used to determine a ma9imum allo*able cost for a product6 *hile kaizen
costing is a mandate to reduce costs6 increase product 2uality6 and+or improve production process through continuous improvement.
1arget costing has a large potential for cost reduction in life-long product cost because these costs are embedded in the product during
design and development. Vaizen costing has limited potential in cost reduction of e9isting products6 but may be useful in target costing in
the future.
!"#: /oderate %&: 15-'
5. ?o* does adopting a &"1 system affect the firmCs relationship *ith suppliers and ho* must suppliers change their *ay of doing business,
ANS:
1he &"1 manufacturer *ill limit the number of suppliers to a fe*. 4ong-term contracts are entered into *ith suppliers. SuppliersC ra*
material must be top 2uality *ith no defects.
Small 2uantities of ra* material are delivered fre2uently and little or no ra* material is maintained by the buyer.
Suppliers must be located close enough to the &"1 buyer to deliver small 2uantities very 2uickly. 1he supplier must agree to providing a
top-2uality product to its &"1 customer.
!"#: /oderate %&: 15-3
7. )hy is it important for a company to be DgeographicallyF close to its suppliers to implement a &"1 inventory control system,
ANS:
1he geographical pro9imity is important to minimize shipping and handling costs of supplies and materials. Aeographical pro9imity also
facilitates fre2uent communication and joint planning bet*een a supplier and customer.
!"#: /oderate %&: 15-3
8. )hy might it be necessary to make adjustments to the accounting system in a firm that adopts &"1,
ANS:
&"1 production control systems foster automation and reduced levels of inventory. -onse2uently6 ra* material inventories and direct labor
costs may be too small to *arrant separate cost pools-they can be combined *ith other cost pools.
Additional adjustments may be necessary to accommodate standard costs6 *hich are constantly adjusted to reflect the latest technological
changes in production methods. Also6 more costs could be traced to specific products and fe*er costs *ould have to be allocated.
!"#: /oderate %&: 15-3
1;. )hat is the relationship bet*een *arehouse space and the length of production runs,
ANS:
4onger production runs increase the levels of specific inventories. 1o accommodate long production runs6 significant *arehouse space
needs to be available for storing intermediate and final products.
!"#: /oderate %&: 15-8
11. )hat are the three primary goals of the just-in-time D&"1F philosophy,
ANS:
1. $limination of any production process or operation that does not add value to the product or
service.
(. -ontinuous improvement in production+performance efficiency.
.. :eduction in the total cost of production+performance *hile increasing 2uality.
!"#: /oderate %&: 15-3
1(. )hat are the principal characteristics of the "nternet business model,
ANS:
1his model refers to a business *ith fe* physical assets6 little management hierarchy6 and a direct pipeline to customers.
!"#: /oderate %&: 15-3
1.. -ompare and contrast traditional manufacturing systems *ith fle9ible manufacturing systems on the follo*ing factors:
;actorTraditiona! Man#1act#ring;!e"i$!e
Man#1act#ring %ystem=roduct Eariety:esponse time to market needs)orker tasks=roduction runs4ot sizesSetups"nformation
re2uirements=roduction activity
ANS:
;actorTraditiona! Man#1act#ring;!e"i$!e
Man#1act#ring %ystem=roduct Eariety4imited$9tensive:esponse time to market needsSlo*:apid)orker
tasksSpecialized!iverse=roduction runs4ongShort4ot sizes4argeSmallSetupsSlo* and e9pensive#ast and ine9pensive"nformation
re2uirementsatch-oriented%n-line real time=roduction activity4abor intensive1echnology intensive
!"#: !ifficult %&: 15-5
P2BLEM
1. Sprint /anufacturing -ompany estimates that it *ill consume 0;;6;;; units of =art 1;1 in the coming year. 1he ordering cost for this
unit is G..(;. )hat *ould be the carrying costs per unit if the $%J model indicates that it is optimal to place e9actly '; orders for the
upcoming year,
ANS:
"f projected usage for the year is 0;;6;;; units6 the $%J *ould be 76;;; units D0;;6;;;+';F. 1o determine the carrying costs per unit6 the
follo*ing e2uation is solved:
!"#: /oderate %&: 15-8
(. %range -orporation estimates that it *ill consume 0;;6;;; units of =art .;. in the coming year. 1he ordering cost for this unit is G..(;.
%range -orporation *ants to maintain a safety stock of 16;;; units6 and its factory operates (;; days per year. )hat is the order point if
the lead time is ( days,
ANS:
1he order point L Ddaily usage 9 lead timeF O safety stock daily usage L 0;;6;;;+(;; L (6;;;H lead time L ( days6 safety stock L 16;;;
%rder point L D(6;;; 9 (F O 16;;; L '6;;; units
!"#: /oderate %&: 15-8
.. Scrumptious Spices manufactures a special blend of beef marinade. 1he company buys one of the spices used in the marinade in 1;-
pound bags that cost G' each. 1he company uses ';6;;; of the bags per year6 and usage occurs evenly throughout the year.
1he average cost to carry a 1;-pound bag in inventory per year is G1. 1he cost to place an order is G1(.
1. !etermine the economic order 2uantity for the spice in terms of 1; pound bags.
(. "f the company *orks ('; days per year6 on average ho* many bags of spice are used
per *orking day,
.. "f the lead time for an order is normally five *orking days6 determine the reorder point.
0. "f the company normally carries '; bags as safety stock6 determine the reorder point for the spice.
ANS:
1. $%J L
*here $%J L $conomic order 2uantity
= L -ost of placing and receiving an order
! L Annual demand in units
- L annual cost of carrying one unit in stock for one year
$%J L
L 16;8' bags
(. ags used per day L ';6;;;+('; L (;; bags per *orking day.
.. :eorder point L :ate of usage 9 4ead time L (;; bags 9 ' *orking days L 16;;; bags
0. :eorder point L DAverage rate of usage 9 4ead timeF O Safety stock
L D(;; bags 9 ' daysF O '; days L 16;'; bags
!"#: /oderate %&: 15-8
0. enoit -orporation produces la*n chairs. "n order to produce the frames for the furniture6 special e2uipment must be set up. 1he setup
cost per frame is G';. 1he cost of carrying frames in inventory is G0 per frame per year. 1he company produces 1;6;;; la*n chairs per
year.
1. -ompute the number of frames that should be produced per setup in order to minimize total
setup and carrying costs.
(. -ompute the total setup and carrying costs associated *ith the economic order 2uantity,
ANS:
1. $%J L
$%J L ';; frames should be produced per setup.
(. 1otal setup costs L DG';FD1;6;;;+';;F
G16;;;
1otal carrying costs L DG0FD';;+(F
L G16;;;
!"#: /oderate %&: 15-8
CHAPTE2 /--5o$ rder Costing
MULTIPLE CHICE
1. )hich of the follo*ing organizations *ould be most !i:e!y to use a job order costing system,
a.the loan department of a bankb.the check clearing department of a bankc.a manufacturer of processed cheese foodd.a manufacturer of
video cassette tapes
ANS: A !"#: /oderate %&: 0-1
(. )hen job order costing is used6 the primary focal point of cost accumulation is the
a.department.b.supervisor.c.item.d.job.
ANS: ! !"#: $asy %&: 0-1
.. "n a job order costing system6
a.standards cannot be used.b.an average cost per unit *ithin a job cannot be computed.c.costs are accumulated by departments and
averaged among all jobs.d.overhead is typically assigned to jobs on the basis of some cost driver.
ANS: ! !"#: $asy %&: 0-1
0. )hat is the best cost accumulation procedure to use *hen many batches6 each differing as to product specifications6 are produced,
a.job orderb.processc.actuald.standard
ANS: A !"#: $asy %&: 0-1
'. )hich of the follo*ing could not be used in job order costing,
a.standardsb.an average cost per unit for all jobsc.normal costingd.overhead allocation based on the jobCs direct labor hours
ANS: !"#: $asy %&: 0-1
3. )hich of the follo*ing costing methods of valuation are acceptable in a job order costing system,
Actual
/aterial
-ostStandard
/aterial
-ostActual
4abor
-ost=redetermined
%verhead
-ost
a.yes yes no yesb.yes no yes noc.no
yes yes yesd.yes yes yes yes
ANS: ! !"#: $asy %&: 0-1
5. )hich of the follo*ing costing systems allo*s management to 2uickly recognize materials6 labor6 and overhead variances and take
measures to correct them,
Actual -ost SystemNormal -ost System
a. yes yesb. yes noc. no yesd. no
no
ANS: ! !"#: $asy %&: 0-1
7. "n a normal cost system6 a debit to )ork in =rocess "nventory *ould not be made for
a.actual overhead.b.applied overhead.c.actual direct material.d.actual direct labor.
ANS: A !"#: $asy %&: 0-1
8. )hich of the follo*ing are dra*backs to applying actual overhead to production,
a.A delay occurs in assigning costs to jobs or products.b.#luctuations in 2uantities produced during a period could cause varying per-unit
charges for fi9ed overhead.c.Seasonality of overhead costs may cause distortions in job or product costs.d.all ans*ers are correct.
ANS: ! !"#: $asy %&: 0-0
1;. &ob order costing and process costing have *hich of the follo*ing characteristics,
&ob %rder -osting =rocess -osting
a.4o9o8eneo"s !1o#":,s 4e,e1o8eneo"s !1o#":,s
0n# (018e ;"0n,+,+es 0n# s90(( ;"0n,+,+esb.4o9o8eneo"s !1o#":,s 4e,e1o8eneo"s
!1o#":,s
0n# s90(( ;"0n,+,+es 0n# (018e ;"0n,+,+esc.4e,e1o8eneo"s !1o#":,s 4o9o8eneo"s
!1o#":,s
0n# (018e ;"0n,+,+es 0n# s90(( ;"0n,+,+esd.4e,e1o8eneo"s !1o#":,s 4o9o8eneo"s
!1o#":,s
0n# s90(( ;"0n,+,+es 0n# (018e ;"0n,+,+es
ANS: ! !"#: $asy %&: 0-1
11. A credit to )ork in =rocess "nventory represents
a.*ork still in process.b.ra* material put into production.c.the application of overhead to production.d.the transfer of completed items to
#inished Aoods "nventory.
ANS: ! !"#: $asy %&: 0-0
1(. "n a job order costing system6 the dollar amount of the entry that debits #inished Aoods "nventory and credits )ork in =rocess "nventory
is the sum of the costs charged to all jobs
a.started in process during the period.b.in process during the period.c.completed and sold during the period.d.completed during the period.
ANS: ! !"#: $asy %&: 0-0
1.. 1otal manufacturing costs for the year plus beginning )ork in =rocess "nventory cost e2uals
a.cost of goods manufactured in the year.b.ending )ork in =rocess "nventory.c.total manufacturing costs to account for.d.cost of goods
available for sale.
ANS: - !"#: $asy %&: 0-0
10. )hich of the follo*ing *ould be !east likely to be supported by subsidiary accounts or ledgers in a company that employs a job order
costing system,
a.)ork in =rocess "nventoryb.:a* /aterial "nventoryc.Accounts =ayabled.Supplies "nventory
ANS: ! !"#: $asy %&: 0-0
1'. A journal entry includes a debit to )ork in =rocess "nventory and a credit to :a* /aterial "nventory. 1he e9planation for this *ould be
that
a.indirect material *as placed into production.b.ra* material *as purchased on account.c.direct material *as placed into
production.d.direct labor *as used for production.
ANS: - !"#: $asy %&: 0-0
13. 1he source document that records the amount of ra* material that has been re2uested by production is the
a.job order cost sheet.b.bill of lading.c.interoffice memo.d.material re2uisition.
ANS: ! !"#: $asy %&: 0-.
15. A material re2uisition form should sho* all of the follo*ing information e"cept
a.job number.b.2uantity re2uired.c.unit cost.d.purchase order number.
ANS: ! !"#: $asy %&: 0-.
17. )hich of the follo*ing statements about job order cost sheets is tr#e,
a.All job order cost sheets serve as the general ledger control account for )ork in =rocess "nventory.b.&ob order cost sheets can serve as
subsidiary ledger information for both )ork in =rocess "nventory and #inished Aoods "nventory.c."f material re2uisition forms are used6
job order cost sheets do not need to be maintained.d.&ob order cost sheets sho* costs for direct material and direct labor6 but not for
manufacturing overhead since it is an applied amount.
ANS: !"#: $asy %&: 0-.
18. 1he primary accounting document in a job order costing system is aDnF
a.bill of materials.b.job order cost sheet.c.employee time sheet.d.materials re2uisition.
ANS: !"#: $asy %&: 0-.
(;. 1he cost sheets for incomplete jobs at the end of the period comprise the subsidiary ledger for
a.#inished Aoods "nventory.b.:a* /aterial "nventory.c.)ork in =rocess "nventory.d.Supplies "nventory.
ANS: - !"#: $asy %&: 0-.
(1. 1he <<<<<<<<<< provides management *ith a historical summation of total costs for a given product.
a.job order cost sheetb.employee time sheetc.material re2uisition formd.bill of lading
ANS: A !"#: $asy %&: 0-.
((. 1he source document that records the amount of time an employee *orked on a job and his+her pay rate is the
a.job order cost sheet.b.employee time sheet.c.interoffice memo.d.labor re2uisition form.
ANS: !"#: $asy %&: 0-.
(.. )hich of the follo*ing journal entries records the accrual of the cost of indirect labor used in production,
a.debit )ork in =rocess "nventory6 credit )ages =ayableb.debit )ork in =rocess "nventory6 credit /anufacturing %verheadc.debit
/anufacturing %verhead6 credit )ork in =rocess "nventoryd.debit /anufacturing %verhead6 credit )ages =ayable
ANS: ! !"#: $asy %&: 0-0
(0. "n job order costing6 payroll ta9es paid by the employer for factory employees are commonly accounted for as
a.direct labor cost.b.manufacturing overhead cost.c.indirect labor cost.d.administrative cost.
ANS: !"#: $asy %&: 0-0
('. 1he logical e9planation for an entry that includes a debit to /anufacturing %verhead control and a credit to =repaid "nsurance is
a.the insurance company sent the company a refund of its policy premium.b.overhead for insurance *as applied to production.c.insurance
for production e2uipment e9pired.d.insurance *as paid on production e2uipment.
ANS: - !"#: $asy %&: 0-0
(3. 1he journal entry to apply overhead to production includes a credit to /anufacturing %verhead control and a debit to
a.#inished Aoods "nventory.b.)ork in =rocess "nventory.c.-ost of Aoods Sold.d.:a* /aterial "nventory.
ANS: !"#: $asy %&: 0-0
(5. =roduction overhead does not include the costs of
a.factory depreciation and supplies.b.factory employeesC cafeteria departments.c.production line labor.d.the maintenance department for
the factory.
ANS: - !"#: $asy %&: 0-0
(7. "n a job order costing system6 the use of indirect material *ould usually be reflected in the general ledger as an increase in
a.stores control.b.*ork in process control.c.manufacturing overhead applied.d.manufacturing overhead control.
ANS: ! !"#: $asy %&: 0-0
(8. A credit to the /anufacturing %verhead control account represents the
a.actual cost of overhead incurred.b.actual cost of overhead paid this period.c.amount of overhead applied to production.d.amount of
indirect material and labor used during the period.
ANS: - !"#: $asy %&: 0-0
.;. 1he journal entry to record the incurrence and payment of overhead costs for factory insurance re2uires a debit to
a.-ash and a credit to /anufacturing %verhead.b./anufacturing %verhead and a credit to Accounts =ayable.c./anufacturing %verhead
and a credit to -ash.d.)ork in =rocess "nventory and a credit to -ash.
ANS: - !"#: $asy %&: 0-0
.1. %verhead is applied to jobs in a job order costing system
a.at the end of a period.b.as jobs are completed.c.at the end of a period or as jobs are completed6 *hichever is earlier.d.at the end of a
period or as jobs are completed6 *hichever is later.
ANS: - !"#: $asy %&: 0-0
.(. "n a job order costing system6 the subsidiary ledger for #inished Aoods "nventory is comprised of
a.all job order cost sheets.b.job order cost sheets for all uncompleted jobs.c.job order cost sheets for all completed jobs not yet sold.d.job
order cost sheets for all ordered6 uncompleted6 and completed jobs.
ANS: - !"#: $asy %&: 0-0
... @nderapplied overhead resulting from unanticipated and immaterial price increases for overhead items should be *ritten off by
a.decreasing -ost of Aoods Sold.b.increasing -ost of Aoods Sold.c.decreasing -ost of Aoods Sold6 )ork in =rocess "nventory6 and
#inished Aoods "nventory.d.increasing -ost of Aoods Sold6 )ork in =rocess "nventory6 and #inished Aoods "nventory.
ANS: !"#: $asy %&: 0-0
.0. %verapplied overhead *ould result if
a.the plant *ere operated at less than normal capacity.b.overhead costs incurred *ere less than costs charged to production.c.overhead
costs incurred *ere unreasonably small in relation to units produced.d.overhead costs incurred *ere greater than costs charged to
production.
ANS: !"#: $asy %&: 0-0
.'. !ebits to -ost of Aoods Sold typically represent the
a.transfer of completed items to #inished Aoods "nventory.b.costs of items sold.c.selling price of items sold.d.the cost of goods
manufactured.
ANS: !"#: $asy %&: 0-0
.3. "n a perpetual inventory system6 a transaction that re2uires t*o journal entries Dor one compound entryF is needed *hen
a.ra* materials are purchased on account.b.goods are sold for either cash or on account.c.goods are finished and transferred out of )ork
in =rocess "nventory.d.overhead is applied to )ork in =rocess "nventory.
ANS: !"#: $asy %&: 0-0
.5. )hich of the follo*ing statements is 1a!se,
a.)hile the use of standard costing is acceptable for job order costing systems6 actual cost records should still be maintained.b."t is
normally more time-consuming for a company to use standard costs in a job order costing system.c.Standards can be used in a job order
costing system6 if the company usually produces items that are similar in nature.d.Standard costs may be used for material6 labor6 or both
material and labor in a job order costing environment.
ANS: !"#: $asy %&: 0-3
.7. 1he trend in job order costing is to
a.eliminate the data entry function for the accounting system.b.automate the data collection and data entry functions.c.use accounting
soft*are to change the focal point of the job order system.d.create an "ntranet to share information bet*een competitors.
ANS: !"#: $asy %&: 0-'
.8. As data input functions are automated6 "ntranet data becomes more
a.complicated to access.b.manufacturing6 but not accounting6 oriented.c.real-time accessible.d.e9pensive to install6 but easier to use.
ANS: - !"#: $asy %&: 0-'
0;. 1he use of standard material or labor costs in job order costing
a.is similar to the use of predetermined overhead rates in a normal costing system.b.*ill keep actual costs of jobs from fluctuating due to
changes in component costs.c.is appropriate for any company making a units to customer specification.d.all ans*ers are correct.
ANS: A !"#: $asy %&: 0-3
01. After the completion of production6 standard and actual costs are compared to determine the <<<<<< of the production process.
a.effectivenessb.comple9ityc.homogeneityd.efficiency
ANS: ! !"#: $asy %&: 0-1
0(. A company producing *hich of the follo*ing *ould be most likely to use a price standard for material,
a.furnitureb.N#4-logo jacketsc.picture framesd.none of the above
ANS: !"#: /oderate %&: 0-1
0.. A company producing *hich of the follo*ing *ould be most likely to use a time standard for labor,
a.mattressesb.picture framesc.floral arrangementsd.stained-glass *indo*s
ANS: A !"#: /oderate %&: 0-1
00. A service organization *ould be most likely to use a predetermined overhead rate based on
a.machine hours.b.standard material cost.c.direct labor.d.number of complaints.
ANS: - !"#: $asy %&: 0-5
0'. Vno*ing specific job costs enables managers to effectively perform *hich of the follo*ing tasks,
a.estimate costs of future jobs.b.establish realistic job selling prices.c.evaluate job performance.d.all ans*ers are correct.
ANS: ! !"#: $asy %&: 0-1
03. A job order costing system is likely to provide better
D1Finventory valuations for financial statements.D(Fcontrol over inventory.D.Finformation about ability to accept additional production
*ork.
D1FD(FD.F
a.yes no nob.no yes yesc.no no nod.yes yes yes
ANS: ! !"#: !ifficult %&: 0-1
05. "n a production environment that manufactures goods to customer specifications6 a job order costing system
a.can be used only if standard costs are used for materials and labor.b.*ill provide reasonable product cost information only *hen all jobs
utilize appro9imately the same 2uantities of material and labor.c.may be maintained using either actual or predetermined overhead
rates.d.emphasizes that large customers create the most costs even though they also provide the most revenues.
ANS: - !"#: !ifficult %&: 0-3
07. A unit that is rejected at a 2uality control inspection point6 but that can be re*orked and sold6 is referred to as a
a.spoiled unit.b.scrap unit.c.abnormal unit.d.defective unit.
ANS: ! !"#: $asy %&: 0-7
08. 1he cost of abnormal losses Dnet of disposal costsF should be *ritten off as
=roduct cost=eriod cost
a.yes nob.yes yesc.no yesd.no no
ANS: - !"#: $asy %&: 0-7
';. "n a job order costing system6 the net cost of normal spoilage is e2ual to
a.estimated disposal value plus the cost of spoiled *ork.b.the cost of spoiled *ork minus estimated spoilage cost.c.the units of spoiled
*ork times the predetermined overhead rate.d.the cost of spoiled *ork minus the estimated disposal value.
ANS: ! !"#: /oderate %&: 0-7
'1. "f abnormal spoilage occurs in a job order costing system6 has a material dollar value6 and is related to a specific job6 the recovery value of
the spoiled goods should be
debited tocredited to
a.0 s:10! +n3en,o1y 0::o"n, ,4e s!e:+<+: =o) +n !1o:essb.,4e s!e:+<+: =o) +n !1o:ess
o3e14e0#c.0 (oss 0::o"n, ,4e s!e:+<+: =o) +n !1o:essd.<0:,o1y o3e14e0#
s0(es
ANS: A !"#: /oderate %&: 0-7
'(. "n a job order costing system6 the net cost of normal spoilage is e2ual to
a.estimated disposal value plus the cost of spoiled *ork.b.the cost of spoiled *ork minus estimated spoilage cost.c.the units of spoiled
*ork times the predetermined overhead rate.d.the cost of spoiled *ork minus the estimated disposal value.
ANS: ! !"#: /oderate %&: 0-7
'.. Shrinkage should be treated as
a.defective units.b.spoiled units.c.miscellaneous e9pense.d.a reduction of overhead.
ANS: !"#: $asy %&: 0-7
'0. Spoiled units are
a.units that cannot be economically re*orked to bring them up to standard.b.units that can be economically re*orked to bring them up to
standard.c.the same as defective units.d.considered abnormal losses.
ANS: A !"#: $asy %&: 0-7
''. Abnormal spoilage is
a.spoilage that is forecasted or planned.b.spoilage that is in e9cess of planned.c.accounted for as a product cost.d.debited to -ost of Aoods
Sold.
ANS: !"#: $asy %&: 0-7
'3. Normal spoilage is defined as unacceptable production that
a.arises because of a special job or process.b.occurs in on-going operations.c.is caused specifically by human error.d.is in e9cess of that
*hich is e9pected.
ANS: !"#: $asy %&: 0-7
'5. )hich of the follo*ing *ould fall *ithin the range of tolerance for a production cycle,
Abnormal lossNormal loss
a.yes yesb.yes noc.no nod.no yes
ANS: ! !"#: $asy %&: 0-7
'7. 1he net cost of normal spoilage in a job order costing system in *hich spoilage is common to all jobs should be
a.assigned directly to the jobs that caused the spoilage.b.charged to manufacturing overhead during the period of the spoilage.c.charged to
a loss account during the period of the spoilage.d.allocated only to jobs that are completed during the period.
ANS: !"#: /oderate %&: 0-7
'8. -ajun -ompany. uses a job order costing system. !uring April (;Q36 the follo*ing costs appeared in the )ork in =rocess "nventory
account:
eginning balance $ 24,000!irect material used70,000!irect labor incurred60,000Applied overhead48,000-ost of goods
manufactured185,000
-ajun -ompany applies overhead on the basis of direct labor cost. 1here *as only one job left in )ork in =rocess at the end of April
*hich contained G'63;; of overhead. )hat amount of direct material *as included in this job,
a.G060;;b.G0607;c.G368(;d.G76;;;
ANS: A
Total Costs Incurred 202,000 Less: Cost of Goods Manufactured (!",000#Costs re$aining in %IP &,000
'verhead",(00)irect La*or (",(00+,!0#&,000 (2,(00#)irect Materials -,-00
!"#: /oderate %&: 0-0
3;. Juest -o. is a print shop that produces jobs to customer specifications. !uring &anuary (;Q36 &ob I.;'1 *as *orked on and the
follo*ing information is available:
!irect material used$2,500!irect labor hours *orked15/achine time used6!irect labor rate per hour$7%verhead application rate per
hour of machine time $18
)hat *as the total cost of &ob I.;'1 for &anuary,
a.G(651.b.G(655;c.G(671(d.G.6;'(
ANS: A
)irect Materials . 2,"00 )irect La*or (" hours / .&+hour# 0" 0actor1 'verhead (( hrs $achine ti$e / /
.!+$ach hr# 0! . 2,&2
!"#: $asy %&: 0-0
A!pha Company
Alpha -o. uses a job order costing system. At the beginning of &anuary6 the company had t*o jobs in process *ith the follo*ing costs:
!irect /aterial!irect 4abor%verhead&ob I0'3$3,400$510$255&ob I031 1,100 289 ?
Alpha pays its *orkers G7.'; per hour and applies overhead on a direct labor hour basis.
31. :efer to Alpha -ompany. )hat is the overhead application rate per direct labor hour,
a.G ;.';b.G (.;;c.G 0.('d.G.;.;;
ANS: -
)irect La*or 3ours: ."0+.!,"0(0 hrs'verhead 455lication 6ate:.2"" + (0 hrs . -,2"
!"#: $asy %&: 0-0
3(. :efer to Alpha -ompany. ?o* much overhead *as included in the cost of &ob I031 at the beginning of &anuary,
a.G 100.';b.G 1'..;;c.G(6(;;.;;d.G(60'3.';
ANS: A
)irect La*or 3ours: .2!7+.!,"02- hrs'verhead 455lication 6ate:.2"" + (0 hrs . -,2" 2- hrs / .-,2"+hr . --,"0
!"#: $asy %&: 0-0
3.. :efer to Alpha -ompany. !uring &anuary6 AlphaNs employees *orked on &ob I308. At the end of the month6 G510 of overhead had been
applied to this job. 1otal )ork in =rocess at the end of the month *as G367;; and all other jobs had a total cost of G.6871. )hat amount of
direct material is included in &ob I308,
a.G 355.;;b.G16.81.;;c.G(610(.;;d.G063'7.;;
ANS: A
)irect Materials889o* (-7Total %or: in Process . (,!00 'ther %or: in Process (2,7!#Costs re$aining in %IP
2,!7 'verhead&-)irect La*or ('3 ; 2# .&- / 2,-2! (2,-2#)irect Materials . (&&
!"#: !ifficult %&: 0-0
30. ro*n -orporation manufactures products on a job order basis. 1he job cost sheet for &ob I3'3 sho*s the follo*ing for /arch:
!irect material $5,000!irect labor D1;; hours X G5.('F $725/achine hours incurred 40=redetermined overhead rate per machine
hour $26
At the end of /arch6 *hat total cost appears on the job cost sheet for &ob I3'3,
a.G'65('b.G'653'c.G3653'd.G76.('
ANS: -
)irect Materials . ",000 )irect La*or (" hours / .&+hour# &2" 0actor1 'verhead (2( hrs $achine ti$e / /
.-0+$ach hr# ,0-0 . (,&("
!"#: $asy %&: 0-0
3'. =roducts at :edd /anufacturing are sent through t*o production departments: #abricating and #inishing. %verhead is applied to products
in the #abricating !epartment based on 1'; percent of direct labor cost and G17 per machine hour in #inishing. 1he follo*ing
information is available about &ob I(85:
#abricating#inishing!irect material $1,590$580!irect labor cost ? 48!irect labor hours 22 6/achine hours
5 15%verhead applied 429 ?
)hat is the total cost of &ob I(85,
a.G(6305b.G.6;;'c.G.6;8.d.G.6(;.
ANS: !
)irect La*or 0a*ricating .-27+,"0 < .2!(455lied 'verhead 0inishing " hrs / .! < .2&00a*ricating 0inishing )irect
$aterial . ,"70 . "!0 )irect la*or cost 286 -! 'verhead a55lied -27 270 Total
Costs 2,20" !7! $ 3,203
!"#: /oderate %&: 0-0
33. Eirginia -ompany applies overhead to jobs at the rate of 0; percent of direct labor cost. !irect material of G16('; and direct labor of
G160;; *ere e9pended on &ob I10' during &une. %n /ay .16 the balance of &ob I10' *as G(67;;. 1he balance on &une .; is:
a.G.6(1;.b.G0653;.c.G'60';.d.G36;1;.
ANS: !
Beginning %IP . 2,!00 )irect Materials ,2"0 )irect La*or ,-00 0actor1 'verhead (.-00 / -0=#
"(0 Ending %IP . (,00
!"#: $asy %&: 0-0
5ac:son Company)
&ackson -ompany uses a job order costing system and the follo*ing information is available from its records. 1he company has three jobs
in process: I36 I86 and I1..
:a* material used$120,000!irect labor per hour$8.50%verhead applied based on direct labor cost120%
!irect material *as re2uisitioned as follo*s for each job respectively: .; percent6 (' percent6 and (' percentH the balance of the
re2uisitions *as considered indirect. !irect labor hours per job are (6';;H .61;;H and 06(;;H respectively. "ndirect labor is G..6;;;. %ther
actual overhead costs totaled G.36;;;.
35. :efer to &ackson -ompany. )hat is the prime cost of &ob I3,
a.G0(6(';b.G'56(';c.G5.6(';d.G7(65';
ANS:
)irect Materials (20,000 / 20=# . 2(,000 )irect La*or (2"00 / .!,"0# 2,2"0 Total Pri$e Costs . "&,2"0
!"#: /oderate %&: 0-0
37. :efer to &ackson -ompany. )hat is the total amount of overhead applied to &ob I8,
a.G176(';b.G(36.';c.G.;6;;;d.G.163(;
ANS: !
)irect La*or 3ours)irect La*or 6ate'3 455lication 6ateTotal200.!,"020=.2,(20
!"#: /oderate %&: 0-0
38. :efer to &ackson -ompany. )hat is the total amount of actual overhead,
a.G.36;;;b.G386;;;c.G8.6;;;d.G88683;
ANS: -
Indirect Materials (.20,000 / 20=# . 2-,000 Indirect La*or 22,000 'ther 'verhead Costs 2(,000 Total Pri$e
Costs . 72,000
!"#: /oderate %&: 0-0
5;. :efer to &ackson -ompany. ?o* much overhead is applied to )ork in =rocess,
a.G 386;;;b.G 88683;c.G1.(683;d.G1006;;;
ANS:
)irect La*or 3ours(2"0072002-200 7,!00 )irect La*or 6ate . !,"0 'verhead 455lication 6ate20=Total
'verhead 455lied . 77,7(0
!"#: /oderate %&: 0-0
51. :efer to &ackson -ompany. "f &ob I1. is completed and transferred6 *hat is the balance in )ork in =rocess "nventory at the end of the
period if overhead is applied at the end of the period,
a.G 8365;;b.G 886;(;c.G1.86'0;d.G15;65(;
ANS: !
>te5 : )eter$ine Total Cost of 9o* 2 )M: .20,000 / ,2" . 20,000 )L: -,200 / !,"0 2",&00 0'3:
2",&00 / 20= -2,!-0 0!,"-0 >te5 2: Co$5ute Total Cost of 9o* ( )M: .20,000 / ,20 . 2(,000 )L:
2,"00 / !,"0 2,2"0 0'3: 2,2"0 / 20= 2","00 !2,&"0 >te5 2: Co$5ute Total Cost of 9o* 7 )M:
.20,000 / ,2" . 20,000 )L: 2,00 / !,"0 2(,2"0 0'3: 2(,2"0 / 20= 2,(20 !&,7&0 Total Costs
of Jobs 6 and 9 170,720
!"#: !ifficult %&: 0-0
5(. :efer to &ackson -ompany. Assume the balance in )ork in =rocess "nventory *as G176';; on &une 1 and G('6(85 on &une .;. 1he
balance on &une .; represents one job that contains direct material of G116(';. ?o* many direct labor hours have been *orked on this job
Drounded to the nearest hourF,
a. 5'1b.16.(0c.163'.d.(6853
ANS: A
>te5 : )eter$ine )L and 0'3 %IP at 9une 20: . 2",27& Less )M in %IP ,2"0 -,0-& >te5 2:
>e5arate )L and 0'3 Let ; < )L? ,2; < 0'3 ; @ ,2; < -,0-& 2,2; < -,0-& ; < .(,2!">te5 2:
Co$5ute )L 3ours .(,2!" A !,"0751 hours
!"#: /oderate %&: 0-0
Beta Company
1he follo*ing information pertains to eta -ompany for September (;Q0.
!irect /aterial!irect 4abor%verhead&ob I.(.$3,200$4,500?&ob I.('? 5,000?&ob I0;1 5,670?$5,550
eta -ompany applies overhead for &ob I.(. at 10; percent of direct labor cost and at 1'; percent of direct labor cost for &obs I.(' and
I0;1. 1he total cost of &obs I.(. and I.(' is identical.
5.. :efer to eta -o. )hat amount of overhead is applied to &ob I.(.,
a.G067;;b.G'6'';c.G36.;;d.G56';;
ANS: -
)irect La*or455lication 6ateTotal 'verhead.-,"00-0=.(,200
!"#: $asy %&: 0-0
50. :efer to eta -o. )hat amount of overhead is applied to &ob I.(',
a.G76.('b.G56';;c.G56;;;d.G'6;;;
ANS:
)irect La*or455lication 6ateTotal 'verhead.",000"0=.&,"00
!"#: $asy %&: 0-0
5'. :efer to eta -o. )hat is the amount of direct materials for &ob I.(',
a.G168';b.G16';;c.G.65;;d.G56';;
ANS:
>te5 : )eter$ine '3 for 9o*s 222 and 22"222 . (,200 22" &,"00 >te5 2: Co$5ute Total Cost of 9o* 222)M .
2,200 )L -,"00 0'3 (,200 -,000 >te5 2: Co$5ute )irect Materials for 9o* 22"(-,000 8 (",000 @ &,"00# $
1,500
!"#: /oderate %&: 0-0
53. :efer to eta -o. Assume that &obs I.(. and I0;1 are incomplete at the end of September. )hat is the balance in )ork in =rocess
"nventory at that time,
a.G1768(;b.G((63(;c.G(768(;d.G.;61(;
ANS: -
>te5 : )eter$ine )L for 9o* -0.",""0 A "0= 2,&00 >te5 2: Co$5ute Total Cost of 9o* -0)M . ",(&0 )L
2,&00 0'3 ",""0 -,720 >te5 2: Co$5ute Total Cost of 9o* 222)M . 2,200 )L -,"00 0'3 (,200
-,000 Total Costs of 9o*s 222 and -0 28,920
!"#: /oderate %&: 0-0
Camden Company
-amden -ompany has t*o departments D=rocessing and =ackagingF and uses a job order costing system. aker applies overhead in
=rocessing based on machine hours and on direct labor cost in =ackaging. 1he follo*ing information is available for &uly:
=rocessing=ackaging/achine hours 2,500 1,000!irect labor cost$44,500$23,000Applied overhead$55,000$51,750
55. :efer to -amden -ompany. )hat is the overhead application rate per machine hour for =rocessing,
a.G ;.71b.G 1.(0c.G15.7;d.G((.;;
ANS: !
Total 455lied 'verheadMachine 3ours6ate 5er 3our."",0002,"00.22,00
!"#: $asy %&: 0-0
57. :efer to -amden -o. )hat is the overhead application rate for =ackaging,
a.G ;.00b.G (.('c.G(..;;d.G'1.5'
ANS:
Total 455lied 'verheadTotal )irect La*or 6ate 5er 3our.",&"0.22,000.2,2"
!"#: $asy %&: 0-0
Tiger Company
1iger -ompany has a job order costing system and an overhead application rate of 1(; percent of direct labor cost. &ob I3. is charged
*ith direct material of G1(6;;; and overhead of G56(;;. &ob I30 has direct material of G(6;;; and direct labor of G86;;;.
58. :efer to 1iger -o. )hat amount of direct labor cost has been charged to &ob I3.,
a.G 36;;;b.G 56(;;c.G 7630;d.G1060;;
ANS: A
Total 455lied 'verhead'verhead 455lication 6ate)irect La*or Charged.&,20020=.(,000
!"#: $asy %&: 0-0
7;. :efer to 1iger -ompany. )hat is the total cost of &ob I30,
a.G1;67;;b.G116;;;c.G(167;;d.G.;6(;;
ANS: -
)irect Materials 2,000 )irect La*or 7,000 0actor1 'verhead (.7,000 / 20=# 0,!00 Total Cost of
9o* (- 2,!00
!"#: $asy %&: 0-0
Brad!ey Company
radley -ompany uses a job order costing system. Assume that &ob I';0 is the only one in process. 1he follo*ing information is
available:
udgeted direct labor hours 65,000udgeted machine hours 9,000udgeted overhead$350,000!irect
material$110,500!irect labor cost $70,000
71. :efer to radley -ompany. )hat is the overhead application rate if radley uses a predetermined overhead application rate based on
direct labor hours Drounded to the nearest *hole dollarF,
a.G ;.(;b.G '.;;c.G '..7d.G.7.78
ANS: -
Budgeted 'verheadBudgeted )irect La*or 3ours'verhead 455lication 6ate.2"0,000 (",000.",2!
!"#: $asy %&: 0-0
7(. :efer to radley -ompany. )hat is the total cost of &ob I';0 assuming that overhead is applied at the rate of 1.'P of direct labor cost
Drounded to the nearest *hole dollarF,
a.G18(63';b.G(376(';c.G(5'6;;;d.G.(8635'
ANS: -
)irect Materials 0,"00 )irect La*or &0,000 0actor1 'verhead (.&0,000 / 2"=# 7-,"00 Total Cost of 9o*
B"0- 2&",000
!"#: $asy %&: 0-0
7.. At the end of the last fiscal year6 :oberts -ompany had the follo*ing account balances:
%verapplied overhead$ 6,000-ost of Aoods Sold$980,000)ork in =rocess "nventory$ 38,000#inished Aoods "nventory$
82,000
"f the most common treatment of assigning overapplied overhead *ere used6 the final balance in -ost of Aoods Sold is:
a.G8506;;;.b.G850633;.c.G87'6.0;.d.G8736;;;.
ANS: A
CnadDusted C'G>less: 'vera55lied '34dDusted C'G>.7!0,000.(,000.7&-,000
!"#: $asy %&: 0-0
70. Strong =roducts has no )ork in =rocess or #inished Aoods inventories at the close of business on !ecember .16 (;Q0. 1he balances of
Strong =roductsN accounts as of !ecember .16 (;Q06 are as follo*s:
-ost of goods sold--unadjusted$2,040,000Selling > administrative e9penses900,000Sales3,600,000/anufacturing overhead
control700,000/anufacturing overhead applied648,000
=reta9 income for (;Q0 is:
a.G3;76;;;.b.G33;6;;;.c.G51(6;;;.d.undeterminable from the information given.
ANS: A
>ales . 2,(00,000 Cost of Goods >old2,0-0,0000actor1 'verhead Cndera55lied (&00,0008(-!,000#"2,000
(2,072,000#>elling, General and 4d$inistrative E;5enses (700,000# Preta; Inco$e . (0!,000
!"#: /oderate %&: 0-0
4i!son Man#1act#ring Company
)ilson /anufacturing -ompany produces beach chairs. -hair frames are all the same size6 but can be made from plastic6 *ood6 or
aluminum. :egardless of frame choice6 the same sailcloth is used for the seat on all chairs. )ilson has set a standard for sailcloth of G8.8;
per s2uare yard and each chair re2uires 1 s2uare yard of material. )ilson produced ';; plastic chairs6 1;; *ooden chairs6 and (';
aluminum chairs during &une. 1he total cost for 16;;; s2uare yards of sailcloth during the month *as G1;6;;;. At the end of the month6 ';
s2uare yards of sailcloth remained in inventory.
7'. :efer to )ilson /anufacturing -ompany. 1he unfavorable material price variance for sailcloth purchases for the month *as
a.G 1;;.b.G 08'.c.G16;8;.d.G16'7'.
ANS: A
.0,000 A ,000.0,00 5er 1ard
.(7,70 8 0,00# / ,000 1ards$100
!"#: /oderate %&: 0-3
73. :efer to )ilson /anufacturing -ompany. Assuming that there *as no sailcloth in inventory at the beginning of &une6 the unfavorable
material 2uantity variance for the month *as
a.G 08'.b.G ';;.c.G 88;.d.G16;;;.
ANS: -
!"0 chairs / 1ard 5er chair!"0 1ards4ctual usage (,000 8 "0#7"0 1ardsCnfavora*le usage variance00 1ards7,70+1ard .
770
!"#: /oderate %&: 0-3
75. :efer to )ilson /anufacturing -ompany. )ilson could set a standard cost for *hich of the follo*ing,
#rame
cost=redetermined
%? rate4abor
rate
a.yes yes yesb.no no noc.yes no nod.no
yes yes
ANS: ! !"#: !ifficult %&: 0-3
%H2T A3%4E2
1. -ompare and contrast job order and process costing systems.
ANS:
&ob order costing is characterized by the production of small 2uantities of heterogeneous distinct or uni2ue items. "tems are produced
according to customer specifications and6 at a minimum6 direct material and direct labor costs can be traced to specific jobs. =rocess
costing is characterized by the production of large 2uantities of homogeneous Dalike or similar in natureF items. Specific items cannot be
identified *ith specific costs during the production process.
!"#: /oderate %&: 0-1
(. !iscuss actual costing6 normal costing6 and standard costing.
ANS:
Actual costing6 normal costing6 or standard costing may be used in either a job order costing or process costing system. Actual costing
assigns the actual cost of all direct material6 direct labor6 and overhead to the units produced. Normal costing uses actual direct material
and direct labor cost and a predetermined overhead application rate to cost products. Standard costing establishes BnormsB for direct
material and direct labor 2uantities and+or costs and uses a predetermined DstandardF overhead rate for the application of overhead to
determine product cost.
!"#: /oderate %&: 0-1
.. )hat is a BjobB as defined in a job order costing system,
ANS:
A job is a single unit or a group of like items that is produced to customer specifications. A job is separately identifiable from other jobs.
$ach job is treated as a cost object6 and costs Dtypically actual direct material6 actual direct labor6 and overhead applied using a
predetermined rateF are attached to each job as it flo*s through the production process.
!"#: /oderate %&: 0-(
0. )hat information should be contained in a subsidiary ledger for )ork in =rocess "nventory in a job order costing system,
ANS:
1he )ork in =rocess "nventory subsidiary ledger should contain information on all incomplete jobs. 1his information *ill include the
amount of direct material and direct labor costs in production6 as *ell as the amount of overhead applied to each job. 1he subsidiary
ledger for )ork in =rocess "nventory is composed of all job cost sheets for uncompleted jobs and substantiates the balance in the general
ledger )ork in =rocess "nventory control account.
!"#: /oderate %&: 0-.
'. !iscuss the basic forms used in a job order costing system.
ANS:
1he forms used in a job order costing system include D1F a job order cost sheet *hich records all the financial and significant production
data Dactual or standard6 and possibly budgetedF relating to a particular jobH D(F a material re2uisition form *hich records the costs and
2uantities of material that has been re2uisitioned for a particular jobH and D.F an employee time sheet *hich records the jobs *orked on by
an employee and the amount of time spent on each job.
!"#: /oderate %&: 0-.
3. -an standard costing be used in job order costing, "f so6 *hat conditions must e9ist, "f not6 e9plain *hy.
ANS:
Res. #irms that use job order costing can also base their costs on standards. $ach job must be fairly similar to each other job. Standards
may be used for the prices of material and labor if the jobs use basically the same kind of material and labor. "f jobs are homogeneous
enough6 standards can also be used for materials and labor 2uantities. Some companies may choose to only use price standards6 others
only 2uantity standards6 and others may use both price and 2uantity standards.
!"#: /oderate %&: 0-3
5. !iscuss the accounting treatment of spoilage in a job order costing system.
ANS:
"f the spoilage is common to all jobs6 is normal6 and can be estimated6 the net cost is applied to production using a predetermined
overhead rate that *as set by including the spoilage estimate in estimated overhead. "f spoilage pertains to a particular job and is normal6
the disposal value of the spoiled goods should be removed from that particular job. "f the spoilage is abnormal6 the net cost should be
charged to a loss account and credited to the particular )ork in =rocess job that created the spoilage.
!"#: /oderate %&: 0-7
P2BLEM
1. =repare the necessary journal entries from the follo*ing information for Anderson -ompany6 *hich uses a perpetual inventory system.
a.=urchased ra* material on account6 G'365;;.b.:e2uisitioned ra* material for production as follo*s: direct material-7; percent of
purchasesH indirect material-1' percent of purchases.c.!irect labor *ages of G..61;; are accrued as are indirect labor *ages of
G1(6';;.d.%verhead incurred and paid for is G3368;;.e.%verhead is applied to production based on 11; percent of direct labor
cost.f.Aoods costing G8563;; *ere completed during the period.g.Aoods costing G'16.(; *ere sold on account for G5563;;.
ANS:
a.:a* /aterial "nventory56,700 Accounts =ayable56,700b.)ork in =rocess "nventory 45,360/anufacturing %verhead8,505
:a* /aterial "nventory 53,865c.)ork in =rocess "nventory 33,100 /anufacturing %verhead12,500 )ages =ayable
45,600d./anufacturing %verhead66,900 -ash66,900e.)ork in =rocess "nventory 36,410 /anufacturing
%verhead36,410f.#inished Aoods "nventory 97,600 )ork in =rocess "nventory 97,600g.-ost of Aoods Sold 51,320 #inished
Aoods "nventory 51,320Accounts :eceivable 77,600 Sales77,600
!"#: $asy %&: 0-0
(. :ichards -ompany employs a job order costing system. %nly three jobs-&ob I(;'6 &ob I(;36 and &ob I(;5-*ere *orked on during
&anuary and #ebruary. &ob I(;' *as completed #ebruary 1;H the other t*o jobs *ere still in production on #ebruary (76 the end of the
companyCs operating year. &ob cost sheets on the three jobs follo*:
&ob -ost Sheet&ob I(;'&ob I(;3&ob I(;5&anuary costs incurred: !irect material$16,500$ 9,300$ > !irect
labor 13,000 7,000 > /anufacturing overhead 20,800 11,200 >#ebruary costs incurred: !irect materials
> 8,20021,300 !irect labor 4,000 6,00010,000 /anufacturing overhead???
1he follo*ing additional information is available:
a./anufacturing overhead is assigned to jobs on the basis of direct labor cost.
b.alances in the inventory accounts at &anuary .1 *ere as follo*s:
:a* /aterial$40,000)ork in =rocess?#inished Aoods85,000
2e8#ired9
a.=repare 1-accounts for :a* /aterial6 )ork in =rocess "nventory6 #inished Aoods "nventory6 and /anufacturing %verhead -ontrol.
$nter the &anuary .1 inventory balances given previouslyH in the case of )ork in =rocess "nventory6 compute the &anuary .1 balance and
enter it into the )ork in =rocess "nventory 1-account.
b.=repare journal entries for ;e$r#ary as follo*s:
1.=repare an entry to record the issue of materials into production and post the entry to appropriate 1-accounts. D"n the case of direct
material6 it is not necessary to make a separate entry for each job.F "ndirect materials used during #ebruary totaled G06;;;.
(.=repare an entry to record the incurrence of labor cost and post the entry to appropriate 1-accounts. D"n the case of direct labor6 it is not
necessary to make a separate entry for each job.F "ndirect labor cost totaled G76;;; for #ebruary.
..=repare an entry to record the incurrence of G186;;; in various actual manufacturing overhead costs for #ebruary Dcredit Accounts
=ayableF.
c.)hat apparent predetermined overhead rate does the company use to assign overhead cost to jobs, @sing this rate6 prepare a journal
entry to record the application of overhead cost to jobs for #ebruary Dit is not necessary to make a separate entry for each jobF. =ost this
entry to appropriate 1-accounts.
d.As stated earlier6 &ob I(;' *as completed during #ebruary. =repare a journal entry to sho* the transfer of this job off of the production
line and into the finished good *arehouse. =ost the entry to appropriate 1-accounts.
e.!etermine the balance at #ebruary (7 in the )ork in =rocess inventory account. ?o* much of this balance consists of the cost of &ob
I(;3, &ob I(;5,
ANS:
a.
?0@ M0,e1+0(s In3en,o1yAo1B +n .1o:ess In3en,o1yBB 40,000BB
77,80029,50060,70031,50020,00032,00098,600
C+n+s4e# Doo#s In3en,o1yM0n"<0:,"1+n8 E3e14e0# Con,1o(BB 85,0004,00060,7008,00032,00019,000
b.1.)ork in =rocess "nventory29,500 /anufacturing %verhead -ontrol4,000 :a* /aterials "nventory33,500(.)ork in =rocess
"nventory20,000/anufacturing %verhead -ontrol8,000 =ayroll28,000../anufacturing %verhead -ontrol19,000 Accounts
=ayable19,000
c.13;P+!4 -%S1 G(;6;;; L G.(6;;;)ork in =rocess "nventory32,000 /anufacturing %verhead -ontrol32,000
d.#inished Aoods "nventory60,700 )ork in =rocess "nventory60,700
e.)"= "NE98,600 &ob (;3 L G'16.;; &ob (;5 L G056.;;
&% I(;'&% I(;3&% I(;5eg )"=$50,300$27,500 -!irect /at 0 8,200$21,300!irect
4abor 4,000 6,000 10,000#actory %verhead 6,400 9,600 16,000$60,700$51,300$47,300
!"#: /oderate %&: 0-0
.. 1he =ittman -ompany manufactures special purpose machines to order. %n &anuary 16 there *ere t*o jobs in process6 I5;' and I5;3.
1he follo*ing costs *ere applied to these jobs in the prior year:
&ob No.5;'5;3!irect material$ 5,000$ 8,000!irect labor 4,000 3,000%verhead 4,400 3,300
1otal$13,400$14,300
!uring &anuary6 the follo*ing transactions took place:
M:a* material costing G0;6;;; *as purchased on account.M&obs I5;56 I5;76 and I5;8 *ere started and the follo*ing costs *ere applied
to them:
&%5;55;75;8!irect materials $3,000$10,000$7,000!irect labor 5,000 6,000 4,000
M &ob I5;' and &ob I5;3 *ere completed after incurring additional direct labor costs of G(6;;; and G06;;;6 respectivelyM )ages paid to
production employees during &anuary totaled G('6;;;.M !epreciation for the month of &anuary totaled G1;6;;;.M @tilities bills in the
amount of G1;6;;; *ere paid for operations during !ecember.M@tilities bills totaling G1(6;;; *ere received for &anuary operations.M
Supplies costing G(6;;; *ere used.M /iscellaneous overhead e9penses totaled G(06;;; for &anuary.
Actual overhead is applied to individual jobs at the end of each month using a rate based on actual direct labor costs.
2e8#ired9
a.!etermine the &anuary overhead rate.
b.!etermine the cost of each job.
c.=repare a statement of cost of goods manufactured.
ANS:
a./%? G06;;; O G1;6;;; O G1(6;;; O G(6;;; O G(06;;; LG'(6;;; L G(.053(+dl costG(16;;; dl cost
b.&%
I5;'&%
I5;3&%
I5;5&%
I5;7&%
I5;8!/--$ 3,000$10,000$ 1,000=$ 20,000!4$ 2,000$
4,0005,0006,0004,000=21,000/%?4,9529,90512,38114,8579,905=52,000eg
)"= 13,400 14,300 - - -= 27,700$20,352$28,205$20,381$30,857$20,905$120,700
c.eg )"=$27,700O !/20,000O !421,000O /%? 52,000- $nd )"= 72,143$48,557
!"#: /oderate %&: 0-0
0. 1he )estern -orporation6 began operations on %ctober 1. "t employs a job order costing system. %verhead is charged at a normal rate of
G(.'; per direct labor hour. 1he actual operations for the month of %ctober are summarized as follo*s:
a.=urchases of ra* material6 ('6;;; pieces X G1.(;+piece.
b./aterial and labor costs charged to production:
&ob No.
@nits
/aterial!irect
labor cost!irect
labor
hours10110,000$4,000$6,0003,000102 8,800 3,600 5,4002,70010316,000 7,000 9,0004,500104 8,000
3,200 4,8002,40010520,000 8,000 3,6001,800
c.Actual overhead costs incurred:
Eariable$18,500#i9ed15,000
d.-ompleted jobs: 1;16 1;(6 1;.6 and 1;0
e.Sales-G1;'6;;;. All units produced on &obs 1;16 1;(6 and 1;. *ere sold.
2e8#ired9 -ompute the follo*ing balances on %ctober .1:
a./aterial inventory
b.)ork in process inventory
c.#inished goods inventory
d.-ost of goods sold
e.@nder- or overapplied overhead
ANS:
a.G.;6;;; - DG06;;; O G.63;; O G56;;; O G.6(;; O G76;;;F L G06(;;b.&ob I1;'G76;;; O G.63;; O DG167;; (.';F L G1361;;c.&ob
I1;0G.6(;; O G067;; O DG(60;; (.';F L G106;;;d.&ob I1;1G06;;; O G36;;; O DG.6;;; (.';F L $17,5001;(G.63;; O G'60;; O
DG(65;; (.';F L15,7501;.G56;;; O G86;;; O DG06';; (.';F L 27,250$60,500e.Applied 1060;; G(.'; L $36,000Actual
33,500%verapplied$ 2,500
!"#: /oderate %&: 0-0
%tee! Company)
Steel -ompany uses a job order costing system and develops its predetermined overhead rate based on machine hours. 1he company has
t*o jobs in process at the end of the cycle6 &obs I155 and I158.
udgeted overhead$100,300udgeted machine hours85,000:a* material$ 63,0004abor cost$ 50,000
'. :efer to Steel -ompany. )hat amount of overhead is charged to &obs I155 and I158, /achine hours are split bet*een &obs I155 and
I158-3' percent and .' percent6 respectively. Actual machine hours e2ual budgeted machine hours.
ANS:
%? Applied L /? -ost =%?:
&ob I155: 7'6;;; /? 3'PL ''6('; G1.17 L G3'618'
&ob I158: 7'6;;; /? .'PL (865'; G1.17 L G.'61;'
!"#: $asy %&: 0-0
3. :efer to Steel -ompany. #ifty-four percent of ra* material belongs to &ob 15 and .7 percent belongs to &ob 1586 and the balance is
considered indirect material. )hat amount of ra* material used *as allocated to overhead as indirect material,
ANS:
'0P O .7P L 8(PH this means that 7P is indirect or G'6;0;
D.;7 G3.6;;;F.
!"#: $asy %&: 0-0
5. :efer to Steel -o. 4abor cost *as split (' percent and 5; percent6 respectively6 bet*een &obs I155 and I158 for direct labor. 1he
remainder *as indirect labor cost. )hat are the total costs of &obs I155 and I158,
ANS:
&ob I155 &ob I158 !/$ 34,020$23,940!412,50035,000/%? 65,195 35,105$111,715$94,045
!"#: /oderate %&: 0-0
7. Sanderson -ompany manufactures custom-built conveyor systems for factory and commercial operations. $rin Smith is the cost
accountant for Sanderson and she is in the process of educating a ne* employee6 ?eather #ontenot about the job order costing system that
Sanderson uses. D1he system is based on normal costsH overhead is applied based on direct labor cost and rounded to the ne9t *hole
dollar.F 4isa gathers the follo*ing job order cost records for &uly:
!irect!irect1otal&ob No./aterials4aborApplied %?-ost667$ 5,901$1,730$ 1,990$
9,621669 18,312 1,810 2,082 22,204670 406 500 575 1,481671 51,405 9,500 10,925 71,
830672 9,615 550 633 10,798
1o e9plain the missing job number6 $rin informed ?eather that &ob I337 had been completed in &une. She also told her that &ob I335 *as
the only job in process at the beginning of &uly. At that time6 the job had been assigned G06.;; for direct material and G8;; for direct
labor. At the end of &uly6 &ob I351 had not been completedH all others had. $rin asked ?eather several 2uestions to determine *hether she
understood the job order system.
2e8#ired9 ?elp ?eather ans*er the follo*ing 2uestions:
a.)hat is the predetermined overhead rate used by A- -ompany,
b.)hat *as the total cost of beginning )ork in =rocess inventory,
c.)hat *as total prime cost incurred for the month of &uly,
d.)hat *as cost of goods manufactured for &uly,
ANS:
a.@se any job started in &uly:?0,e = MEF GEB $670$575= 115%/HI Cos, HI
CE-7$500b.HM$4,300HI900CEF 1,035%$900 115%&$6,235c..1+9e Cos, =HM ' HIHM = $85,639 - 4,300 =
$81,339HI = 14,090 - 900 = 13,190 $94,529d.CEDM = $9,621 ' 22,204
' 1,481 ' 10,798 = $44,104
!"#: $asy %&: 0-0
8. =erry -ompany uses a job order costing system and has the follo*ing information for the first *eek of &une:
1.!irect labor and direct materials used:
&ob No.!irect /aterial!irect 4abor
?ours498$1,500116506 960 16507 415 18508 345 42509 652 24511 308 10512 835 307o,0
($5,015256
(.1he direct labor *age rate is G0 per hour.
..1he overhead rate is G' per direct labor hour.
0.Actual overhead costs for the *eek6 G1607;.
'.&obs completed: Nos. 0876 ';36 and ';8.
3.1he factory had no *ork in process at the beginning of the *eek.
2e8#ired9
a.=repare a summary that *ill sho* the total cost assigned to each job.
b.-ompute the amount of overhead over- or underapplied during the *eek.
c.-alculate the cost of the *ork in process at the end of the *eek.
ANS:
a.&ob No.!/!4%?1otal 498$1,500$ 464$ 580$2,544 506 960 64 80 1,104
507 415 72 90 577 508 345 168 210 723 509 652 96 120 868
511 308 40 50 398 512 835 120 150 1,105$5,015
$1,024
$1,280
$7,319
b.Actual /%?$1,480Applied /%? 1,280@nderapplied$ 200
c.&%';5$ 577';7 723'11 398'1( 1,105$nding )"=$2,803
!"#: $asy %&: 0-0
1;. Rou are asked to bring the follo*ing incomplete accounts of Andrepont =rinting6 "nc. up to date through &anuary .16(;Q'. -onsider the
data that appear in the 1-accounts as *ell as additional information given in items DaF through DiF.
AndrepontNs job order costing system has t*o direct cost categories Ddirect material and direct manufacturing laborF and one indirect cost
pool Dmanufacturing overhead6 *hich is allocated using direct manufacturing labor costsF.
Materia!s Inventory Contro!4ages Paya$!e Contro!1(+.1+(;Q01+.1+(;Q' alance 1'6;;;alance .6;;;
Man#1act#ring Gepartment4or: in Process Inventory Contro!verhead Contro!&anuary (;Q' -harges '56;;;
Man#1act#ring verhead Contro!
;inished 6oods Inventory Contro!Cost o1 6oods %o!d1(+.1+(;Q0 alance (;6;;;
Additional Information:
a./anufacturing department overhead is allocated using a budgeted rate set every !ecember. /anagement forecasts ne9t yearCs overhead
and ne9t yearCs direct manufacturing labor costs. 1he budget for (;Q' is G0;;6;;; of direct manufacturing labor and G3;;6;;; of
manufacturing overhead.b.1he only job unfinished on &anuary .16 (;Q' is No. 0186 on *hich direct manufacturing labor costs are G(6;;;
D1(' direct manufacturing labor hoursF and direct material costs are G76;;;.c.1otal material placed into production during &anuary is
G8;6;;;.d.-ost of goods completed during &anuary is G17;6;;;.e./aterial inventory as of &anuary .16 (;Q' is G(;6;;;.f.#inished goods
inventory as of &anuary .16 (;Q' is G1'6;;;.g.All plant *orkers earn the same *age rate. !irect manufacturing labor hours for &anuary
totals (6';;. %ther labor and supervision totals G1;6;;;.h.1he gross plant payroll on &anuary paydays totals G'(6;;;. "gnore *ithholdings.
All personnel are paid on a *eekly basis.i.All BactualB manufacturing department overhead incurred during &anuary has already been
posted.
:e2uired:
a./aterial purchased during &anuaryb.-ost of Aoods Sold during &anuaryc.!irect /anufacturing 4abor -osts incurred during
&anuaryd./anufacturing %verhead Allocated during &anuarye.alance6 )ages =ayable -ontrol6 !ecember .16 (;Q0f.alance6 )ork in
=rocess "nventory -ontrol6 &anuary .16 (;Q'g.alance6 )ork in =rocess "nventory -ontrol6 !ecember .16 (;Q0h.alance6 #inished
Aoods "nventory -ontrol6 &anuary .16 (;Q'i./anufacturing %verhead underapplied or overapplied for &anuary
ANS:
a.G1'6;;; O =urchases - G(;6;;; L G8;6;;;. =urchases L G8'6;;;
b.G(;6;;; O G17;6;;; - G1'6;;; L G17'6;;;
c.!4 L G(6;;; L G13+?: (6';; ?:S L G0;6;;; 1('
d.G3;;6;;; L 1';P !4 cost G0;6;;; L G3;6;;;G0;;6;;;
e.$A"N O G';6;;; - G'(6;;; L G.6;;; $A"N L G'6;;;
f.G(6;;; O DG(6;;; 1';PF O G76;;; L G1.6;;;
g.$A"N O G8;6;;; O G0;6;;; O G3;6;;; - G17;6;;; L G1.6;;; $A"N L G.6;;;
h.G(;6;;; O G17;6;;; - G17'6;;; L $N! L G1'6;;;
i.A==4"$!G3;6;;;A-1@A4 '56;;;G .6;;; overapplied
!"#: /oderate %&: 0-0
11. eauty -ompany manufactures picture frames of all sizes and shapes and uses a job order costing system. 1here is al*ays some spoilage
in each production run. 1he follo*ing costs relate to the current run:
$stimated overhead De9clusive of spoilageF$160,000Spoilage DestimatedF$ 25,000Sales value of spoiled frames$ 11,5004abor
hours100,000
1he actual cost of a spoiled picture frame is G5.;;. !uring the year 15; frames are considered spoiled. $ach spoiled frame can be sold for
G0. 1he spoilage is considered a part of all jobs.
a.4abor hours are used to determine the predetermined overhead rate. )hat is the predetermined overhead rate per direct labor hour,
b.=repare the journal entry needed to record the spoilage.c.=repare the journal entry if the spoilage relates only to &ob I1( rather than
being a part of all production runs.
ANS:
a.G13;6;;; O G('6;;; - G116';; L G15.6';;G15.6';;+1;;6;;; L G1.5.' per !4?b.!isposal Ealue of Spoiled )ork680/anufacturing
%verhead510)ork in =rocess "nventory1,190c.!isposal Ealue of Spoiled )ork680)ork in =rocess "nventory-&ob I1(680
!"#: /oderate %&: 0-7
Chapter .5--Managing Costs and Uncertainty
MULTIPLE CHICE
1. A logical structure of activities designed to analyze and evaluate management of e9penditures is a cost
a.consciousness system.b.understanding system.c.avoidance system.d.control system.
ANS: ! !"#: $asy %&: 1'-1
(. #or cost control purposes6 actual costs should be compared to
a.the original budget.b.actual costs for the prior period.c.a fle9ible budget.d.a static budget.
ANS: - !"#: $asy %&: 1'-.
.. )hen the organizational output is difficult to define6 management may rely on <<<<<<<<<<< for cost control.
a.2ualitative measuresb.program budgetingc.surrogate measures of outputd.all of the above
ANS: ! !"#: $asy %&: 1'-1
0. Setting organizational goals and objectives and preparing a budget are aspects of control
a.during an event.b.before an event.c.after an event.d.before6 during6 and after an event.
ANS: !"#: $asy %&: 1'-(
'. )hich of the follo*ing does not create a specific price level change,
a.change in production technologyb.change in the rate of inflationc.changes due to supply and demandd.changes in the number of
competing suppliers
ANS: !"#: $asy %&: 1'-.
3. As the economy becomes more and more depressed6 a companyCs management decides to slash spending on research and development.
)hat is the likely effect of this action on net income, Net income *ill be
a.higher this period and lo*er in future periods.b.higher this period and higher in future periods.c.lo*er this period and higher in future
periods.d.lo*er this period and lo*er in future periods.
ANS: A !"#: $asy %&: 1'-.
5. Spending levels in prior years are often the basis of
a.traditional budgets.b.Kero-base budgets.c.variance targets.d.engineered cost analyses.
ANS: A !"#: $asy %&: 1'-.
7. /inimizing period-by-period increases in unit variable costs and total fi9ed costs defines efforts of cost
a.control.b.avoidance.c.containment.d.reduction.
ANS: - !"#: $asy %&: 1'-.
8. -ost containment practices by a firm *ould not be effective for cost increases caused by
a.inflation.b.a reduction in the 2uantity of an input purchased.c.normal seasonality.d.a reduction in the number of suppliers.
ANS: A !"#: $asy %&: 1'-.
1;. All of the follo*ing are e9planations of cost changes. )hich of these influences can be substantially affected by cost containment
measures,
a.inflation+deflationb.changes in 2uantities purchasedc.technological changed.changes in supply chain costs
ANS: !"#: /oderate %&: 1'-.
11. 1he greatest degree of control for committed fi9ed costs is e9erted
a.in the post-investment audit.b.during the life of the investment.c.prior to ac2uisition.d.by e2uipment operators.
ANS: - !"#: $asy %&: 1'-0
1(. -areful analysis of the capital budget is an important control activity for
a.variable costs.b.discretionary costs.c.committed costs.d.period costs.
ANS: - !"#: $asy %&: 1'-0
1.. An effective control system functions before6 during6 and after an event. ?o*ever6 little control is possible during the event for most
a.variable manufacturing costs.b.variable period costs.c.discretionary fi9ed costs.d.committed fi9ed costs.
ANS: ! !"#: $asy %&: 1'-0
10. 1he term Bcommitted costsB refers to costs that
a.management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by
customers.b.are likely to respond to the amount of attention devoted to them by a specified manager.c.are governed mainly by past
decisions that established the present levels of operating and organizational capacity and that only change slo*ly in response to small
changes in capacity.d.fluctuate in total in response to small changes in the rate of utilization of capacity.
ANS: - !"#: $asy %&: 1'-0
1'. A committed fi9ed cost can
a.never be eliminated.b.be eliminated in the short term and in the long term.c.be eliminated in the long term but not in the short term.d.be
eliminated in the short term but not in the long term.
ANS: - !"#: $asy %&: 1'-0
13. )hich of the follo*ing is an e9ample of a committed fi9ed cost,
a.investment in production facilitiesb.advertisingc.preventive maintenanced.employee training programs
ANS: A !"#: $asy %&: 1'-0
15. A company *ould be reducing its discretionary costs if it
a.fired a production supervisor.b.closed its research and development department.c.successfully negotiated a reduction in its factory
rent.d.reduced its direct labor costs by hiring temporary *orkers.
ANS: !"#: /oderate %&: 1'-'
17. "f a discretionary cost can be treated like an engineered cost6 cost control may be achieved through the use of
a.program budgeting.b.zero-base budgeting.c.capital budgeting.d.fle9ible budgeting.
ANS: ! !"#: /oderate %&: 1'-'
18. /ost discretionary costs relate to
a.plant and e2uipment ac2uisitions.b.long-term investments.c.basic personnel costs.d.service activities.
ANS: ! !"#: $asy %&: 1'-'
(;. "f a cost can be reduced to zero in the short run *ithout significantly harming the organization6 the cost is a
a.variable cost.b.committed cost.c.discretionary cost.d.product cost.
ANS: - !"#: $asy %&: 1'-'
(1. !iscretionary costs are often difficult to control because
a.it is difficult to measure the cost.b.they cannot be changed in the short run.c.they cannot be changed from period to period.d.it is
difficult to measure the benefits of discretionary activities.
ANS: ! !"#: /oderate %&: 1'-'
((. )hich of the follo*ing is likely to be a discretionary cost in most organizations,
a.managerial training programsb.managerial labor costsc.factory utilitiesd.factory rent
ANS: A !"#: $asy %&: 1'-'
(.. 1he level of discretionary costs
a.are set by management for one period at a time.b.cannot be changed in the short run.c.are determined *hen capital investment is
undertaken.d.al*ays varies *ith sales.
ANS: A !"#: $asy %&: 1'-'
(0. )hich of the follo*ing is not a factor that directly affects the budget for a discretionary cost,
a.the importance of the activity to the achievement of the organizationCs goalsb.last periodCs budgetc.the e9pected level of
operationsd.managerial negotiations in the budgeting process
ANS: !"#: $asy %&: 1'-'
('. "f an actual discretionary cost is e9actly e2ual to the budgeted level of that cost6 *hich of the follo*ing statements is tr#e,
a.#unds *ere appropriately spent.b.1he discretionary activity *as efficient.c.1he discretionary activity *as effective.d.None of the above.
ANS: ! !"#: /oderate %&: 1'-'
(3. !iscretionary activities in an organization are determined based on
a.organizational policies and managerial preferences.b.the budgeted amount from the prior period.c.the level of long-term investment.d.an
organizationCs internal control.
ANS: A !"#: /oderate %&: 1'-'
(5. 1he term Bdiscretionary costsB refers to
a.costs that management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders
placed by customers.b.costs that are likely to respond to the amount of attention devoted to them by a specified manager.c.costs that are
governed mainly by past decisions that established the present levels of operating and organizational capacity and that only change slo*ly
in response to small changes in capacity.d.amortization of costs that *ere capitalized in previous periods.
ANS: A !"#: $asy %&: 1'-'
(7. Avoidable costs are usually
a.committed.b.common.c.discretionary.d.joint.
ANS: - !"#: $asy %&: 1'-'
(8. )hich of the follo*ing is !east likely to be a discretionary cost,
a.salaries of salespeopleb.advertisingc.maintenanced.insurance
ANS: A !"#: $asy %&: 1'-'
.;. #or cost control purposes6 fi9ed costs are classified as
a.product or period costs.b.discretionary or committed.c.direct or common.d.sunk or avoidable.
ANS: !"#: $asy %&: 1'-'
.1. "f economic activity slo*s do*n6 total costs could easily decline in *hich of the follo*ing categories,
a.variable costs and committed fi9ed costsb.variable costs and discretionary fi9ed costsc.variable costs onlyd.committed fi9ed costs only
ANS: !"#: $asy %&: 1'-'
.(. @sually6 *ith respect to a variable cost6 optimal control is e9erted *hen the cost
a.can be controlled prior to incurrence.b.is compared to its budget amount.c.increases steadily over time.d.is closely monitored.
ANS: ! !"#: $asy %&: 1'-'
... )hich kind of costs could be eliminated by closing a sales office,
!irect!iscretionary-ommitted
a.yes yes nob.yes no yesc.yes no
nod.no no yes
ANS: A !"#: /oderate %&: 1'-'
.0. A major difference bet*een committed and discretionary fi9ed costs is that
a.incurring committed fi9ed costs is less risky than using discretionary costs.b.managers are usually responsible for committed fi9ed costs
but not for discretionary fi9ed costs.c.incurring discretionary fi9ed costs rather than committed fi9ed costs gives a company more
fle9ibility in controlling costs.d.companies are using more discretionary fi9ed costs because labor is easier to BremoveB than technology.
ANS: - !"#: $asy %&: 1'-'
.'. 1he distinction bet*een avoidable and unavoidable costs is similar to the distinction bet*een
a.variable costs and fi9ed costs.b.variable costs and mi9ed costs.c.step-variable costs and fi9ed costs.d.discretionary costs and committed
costs.
ANS: ! !"#: /oderate %&: 1'-'
.3. 1he ma9imum allo*able e9penditure is the
a.appropriation.b.allo*ance.c.allocation.d.committed fi9ed cost.
ANS: A !"#: $asy %&: 1'-'
.5. "f a firm is successful in meeting its output goal for a period6 the firm has been
a.efficient.b.effective.c.profitable.d.e9ercising cost containment measures.
ANS: !"#: $asy %&: 1'-'
.7. A reasonable measure of efficiency relies on
a.2ualitative measures of inputs and outputs.b.a match of inputs in one period *ith outputs in subse2uent periods.c.a causal relationship
bet*een inputs and outputs.d.a ratio of planned output to actual output.
ANS: - !"#: $asy %&: 1'-'
.8. A ratio of outputs to inputs is aDnF
a.effectiveness measure.b.efficiency measure.c.2ualitative measure.d.cost reduction measure.
ANS: !"#: $asy %&: 1'-'
0;. A small manufacturing company recently stated its sales goal for a period *as G1;;6;;;. At this level of activity6 its budgeted e9penses
*ere G7;6;;;. "ts actual sales *ere G1;;6;;;6 but its actual e9penses *ere G7'6;;;. 1his company operated
a.effectively and efficiently.b.neither effectively nor efficiently.c.effectively but not efficiently.d.efficiently but not effectively.
ANS: - !"#: $asy %&: 1'-'
01. =roficient -orporation has a sales goal of G';;6;;; for the coming year. ased on this level of activity6 =roficient budgets its total
e9penses at G0';6;;;. Actual sales are G07;6;;; and actual costs are G03;6;;;. =roficient -orporationNs operations *ere
a.both efficient and effective.b.neither efficient nor effective.c.efficient but not effective.d.effective but not efficient.
ANS: !"#: $asy %&: 1'-'
0(. 1he difference bet*een actual sales and budgeted sales is
a.a fle9ible budget variance.b.an efficiency measure.c.re2uired in program budgeting.d.an effectiveness measure.
ANS: ! !"#: $asy %&: 1'-'
0.. A cost that is found to bear an observable and kno*n relationship to a 2uantifiable activity base is aDnF
a.discretionary cost.b.product cost.c.period cost.d.engineered cost.
ANS: ! !"#: $asy %&: 1'-'
00. -ontrol of engineered costs is fre2uently achieved through the use of
a.zero-base budgeting.b.program budgeting.c.standards.d.cash budgeting.
ANS: - !"#: $asy %&: 1'-'
0'. A variance represents the difference bet*een a budgeted and an actual cost. 1hus6 the variance measures
a.only controllable cost differences.b.only uncontrollable cost differences.c.both uncontrollable and controllable cost differences.d.the
effectiveness of management.
ANS: - !"#: $asy %&: 1'-'
03. Assume actual output e9ceeds the level of output in the original budget. Rou *ould e9pect costs in *hich of the follo*ing categories to
e9ceed the original budget,
a.total variable costsb.committed fi9ed costsc.discretionary fi9ed costsd.all of the above
ANS: A !"#: $asy %&: 1'-'
05. An organization plans to produce and sell ';6;;; units. "t actually produces and sells 0'6;;; units. 1otal costs *ould be e9pected to be
belo* the planned level due to cost
a.consciousness.b.control.c.reductions.d.behavior.
ANS: ! !"#: $asy %&: 1'-'
Ed@ards Company
1he follo*ing information is provided for $d*ards -ompany for the month of &une
ActualStandard167;; units' !4?s per unit X G1;.;; per !4?768;; !4?s X G1;.'; per !4?E%? rate per !4? G .5'Eariable %?
G360;;#%? rate per !4? G1.8;#i9ed %? G156';;udgeted #%? G13681;
07. :efer to $d*ards -ompany. )hat is the price variance,
a.G060'; #b.G060'; @c.G16;;; #d.G16;;; @
ANS:
AJMDA= - S=F L =rice Eariance
768;; !4? M DG1;.';+!4? - G1;.;;+!4?F L G060'; @
!"#: /oderate %&: 1'-'
08. :efer to $d*ards -ompany. )hat is the efficiency variance,
a.G060'; #b.G060'; @c.G16;;; #d.G16;;; @
ANS: -
S=MDAJ - SJF L =rice Eariance
G1;+!4? M D768;; !4? - 86;;; !4?F L G16;;; #
!"#: /oderate %&: 1'-'
';. :efer to $d*ards -ompany. )hat is the spending variance,
a.G'8; @b.G'8; #c.G18; #d.G18; @
ANS: A
Spending Eariance L Actual -ost - udgeted #i9ed -ost
L GD156';; - G13681;F
L G'8; @
!"#: /oderate %&: 1'-'
'1. :efer to $d*ards -ompany. )hat is the volume variance,
a.G'8; @b.G'8; #c.G18; #d.G18; @
ANS: -
Eolume Eariance L udgeted #i9ed -ost - DStandard #i9ed :ate M Standard ?ours Allo*edF
L G13681; - DG1.8;+!4? M 86;;; !4?F
L GD13681; - 1561;;F
L G18; #
!"#: /oderate %&: 1'-'
'(. )hich of the follo*ing strategies is used to deal *ith uncertainty related to a specific event,
a.Statistical analysisb.-ost restructuringc.?edgingd."nsurance
ANS: ! !"#: $asy %&: 1'-8
'.. )hich of the follo*ing strategies is used to deal *ith uncertainty related to price risk,
a.Statistical analysisb.-ost restructuringc.?edgingd."nsurance
ANS: - !"#: $asy %&: 1'-8
'0. )hich of the follo*ing strategies is used to deal *ith uncertainty related to estimating future costs,
a.Statistical analysisb.-ost restructuringc.?edgingd."nsurance
ANS: A !"#: $asy %&: 1'-8
''. "n the least-s2uares e2uation6 y = a + bQ6 a represents
a.the coefficient of determination.b.the level of activity.c.the fi9ed component of a cost.d.the variable cost per unit.
ANS: - !"#: /oderate %&: 1'-8
%H2T A3%4E2
1. )hat factors make discretionary costs difficult to control,
ANS:
!iscretionary costs are difficult to control because it is difficult to identify the e9act benefits of discretionary activities and the
relationship of these activities to the organizationCs output and goals. 1hus6 it is difficult to decide at *hat level a discretionary activity
should be funded or if it should be funded at all based on the lack of a definite causal relationship bet*een the discretionary activity and
the firmCs output and goals.
!"#: /oderate %&: 1'-'
(. )hat are the differences bet*een committed fi9ed costs and discretionary fi9ed costs,
ANS:
-ommitted fi9ed costs are those costs that flo* from the basic e9istence of the organization. 1hese are the direct costs of the
organizationCs long-term investments Dsuch as plant and e2uipmentF and the costs of essential personnel. 1hese costs can only be changed
in the long run *ithout significantly affecting the organization. !iscretionary fi9ed costs are all fi9ed costs that do not fit into the
committed category. 1his includes the costs of au9iliary service activities including activities that could be discontinued in the short run
*ithout adversely affecting the long-run viability of the organization.
!"#: /oderate %&: 1'-0
.. )hen can a discretionary fi9ed cost be subjected to control methods that are used for engineered costs,
ANS:
)hen a discretionary cost is repetitive and can be related to some fundamental activity measure Dsuch as machine hours or units of
outputF6 it may be treated like an engineered cost. )ith a repetitive cost that can be related to an activity base6 performance standards can
be developed and fle9ible budget variances can be computed and used as cost control tools.
!"#: /oderate %&: 1'-'
0. )hat factors influence the total level of discretionary costs in an organization,
ANS:
%rganizations tend to fund discretionary activities at different levels depending on the state of the economy and the original profit level.
)hen management anticipates unfavorable economic conditions or do*nturns in profitability6 discretionary costs may be reduced.
4ike*ise6 they may be increased as economic conditions improve. 1otal discretionary e9penditures *ill also vary as certain activities lose
their funding and ne* discretionary activities are initiated.
!"#: /oderate %&: 1'-'
'. ?o* does strategic staffing fit in *ith departmental staffing,
ANS:
Strategic staffing is based on a departmentCs needs related to its long-range objectives and those of the overall company. 1he department
looks at its needs to see ho* a combination of temporary and permanent personnel fills the bill. y using temporary personnel6 fle9ible
staffing is provided that helps insulate the jobs of permanent personnel. Also6 *hen temporary personnel are used by a department6 the
overall cost of organizational fringe benefits is reduced6 thereby saving funds for other needs.
!"#: /oderate %&: 1'-'
3. !iscuss the various elements of the cost control process.
ANS:
-ost understanding is one element of a cost control system. An organization needs to understand that costs may change from one period to
the ne9t or understand *hy costs differ from budgeted amounts. 1otal variable costs *ill increase+decrease *ith different levels of
activity. -osts can also change due to inflation+deflation creating general price-level changes. -osts also change because of
supply+supplier cost adjustments. 4astly6 costs may change because of 2uantity purchased by the organization.
-ost containment is another element of the cost control process. -ost containment is defined as the practice of minimizing6 to the e9tent
possible6 period-to-period increases in per-unit variable and total fi9ed costs. -ost containment is possible for costs that rise due to
competition6 seasonal variations6 and 2uantities purchased.
A third element of the cost control process is cost avoidance. -ost avoidance is defined as the practice of finding acceptable alternatives to
high-cost products and+or not spending money for unnecessary goods+services.
A final element of the cost control process is cost reduction. -ost reduction means lo*ering current costs especially for goods+services
that may not be needed currently.
!"#: /oderate %&: 1'-(
5. )hat are the five steps in implementing a system of cost control,
ANS:
1. "nvestigate and understand the types of costs incurred by the organization.
(. -ommunicate the need for cost consciousness to all employees.
.. /otivate employees through education and incentives.
0. -ompare actual results to budgets and analyze for future methods of improvement.
'. Eie* cost control as a long-run process not a short-term solution.
!"#: /oderate %&: 1'-.
7. )hat are the usual sources for cash in an organization,
ANS:
1. Sale of e2uity or debt securities or other short-term instruments.
(. Sale of assets that are no longer necessary or productive.
.. Sale of goods for a profit in the normal production+sales cycle.
0. 4oans from banks or other financial institutions.
!"#: $asy %&: 1'-3
8. )hat are four generic strategies that may be used in cost management to deal *ith uncertainty,
ANS:
1. $9plicitly considering uncertainty *hen estimating future costs by using statistical tools
such as least s2uares regression.
(. Structuring costs to adjust to uncertain outcomes.
.. @sing options and for*ard contracts to mitigate price risk through hedging.
0. "nsuring against occurrences of specific events.
!"#: /oderate %&: 1'-8
1;. )hat are the t*o main sources of uncertainty in cost management,
ANS:
1. 4ack of identification or understanding of cost drivers. Some portion of a cost is not
predictable based on the cost driver.
(. @nforeseen events that cannot be fully planned for. "t is not possible to fully eliminate
uncertaintyH ho*ever management should make every effort to minimize its impact.
!"#: /oderate %&: 13-7
P2BLEM
1. ertrand -ompany has made the follo*ing information available for the month of &anuary:
ActualStandards16';; units produced( !4? per unit X G1;(60;; !4? used X G1;.(' per !4?
Assume that ertrand hires part-time employees for production of these units.
-ompute the price and efficiency variances.
ANS:
(60;; G1;.('$24,600(60;; G1;.;; 24,000=rice variance$ 600@(60;; G1;.;;$24,000D16';; (F
G1;.;; 30,000$fficiency variance$ 6,000#
!"#: /oderate %&: 1'-'
(. :omano -ompany has provided the follo*ing information for the month of &uly:
ActualStandards7;; units produced( !4? per unit X G'.;;Actual !4 cost G365';G1 fi9ed overhead per !4?
Assume that :omano hires full-time employees *ho are paid a total of G36';; per month.
-ompute the spending and volume variances.
ANS:
Actual labor cost$6,750udgeted labor cost 6,500Spending variance$ 250@udgeted labor cost$6,500D7;; (F
G' 8,000Eolume variance$1,500#
!"#: /oderate %&: 1'-'
.. :oach and Associates provided the follo*ing information relative to the times and costs to prepare a simple last *ill and testament:
StandardsActual( !4? X G'; per !4?';; simple *ills *ere prepared during the year161;; !4?s utilized during the year X G'( per
!4?
-ompute the price and efficiency variances.
ANS:
161;; G'($57,200161;; G'; 55,000=rice variance$ 2,200@161;; G';$55,000D';; (F G'; 50,000$fficiency
variance$ 5,000@
!"#: /oderate %&: 1'-'
Han:s Corporation
?anks -orporation manufactures and sells baseball bats. #or a recent period6 its production and sales objectives *ere each set at (;6;;;
units. Also6 for this period the firm had estimated costs as follo*s:
Eariable production costsG. per unitEariable selling costs G( per unit-ommitted fi9ed costs G.;6;;; per period!iscretionary fi9ed costs
G0;6;;; per period
0. :efer to ?anks -orporation. #or this 2uestion only6 assume that ?anks -orporation actually produced and sold 176;;; bats. ?anks
-orporationCs operations for the period *ould Don an overall basisF be regarded as efficient if total costs *ere belo* *hat amount,
ANS:
#irst6 remember ho* fi9ed and variable costs change *hen volume changes. #i9ed costs remain constant in total and variable costs
remain constant on a per-unit basis. 1o be regarded as efficient6 the companyCs costs *ould need to be at or belo* the fle9ible budget for
176;;; units. 1he fle9ible budget for all costs *ould be:
T176;;; DG. O G(FU O G.;6;;; O G0;6;;; L G8;6;;; O G5;6;;; L G13;6;;;
!"#: /oderate
'. :efer to ?anks -orporation. #or this 2uestion only6 assume ?anks -orporation actually produced and sold 186;;; bats. At this level of
operation6 ?anks -orporationCs total costs *ere G15;6;;;. $valuate ?anks -orporationCs success in terms of effectiveness and efficiency.
ANS:
?anks -orporation *as not entirely effective in reaching its goal because its objective *as to produce and sell (;6;;; bats. "t only
produced and sold 186;;;. "ts operations *ould still be regarded as efficient if it contained costs belo* the fle9ible budget for 186;;;
units6 *hich *ould be:
T186;;; DG. O G(FU O G.;6;;; O G0;6;;; L G8'6;;; O G5;6;;; L G13'6;;;.
Since its actual costs *ere G15;6;;;6 the company *as neither effective nor efficient in achieving its operating objectives.
!"#: /oderate
3. :efer to ?anks -orporation. Note that the budget for discretionary fi9ed costs is G0;6;;;. "f actual discretionary fi9ed costs *ere
G';6;;;6 could cost control have still been effective, $9plain.
ANS:
Res6 cost control could have been effective. -ompany managers may have deliberately and consciously overspent on certain items
because of opportunities or challenges that emerged during the period. #or e9ample6 advertising e9penses may have been increased
because ne* competitors entered the baseball bat market6 or research and development e9penditures may have been boosted because of
the discovery of a ne* metal alloy that could revolutionize the baseball bat market. Another e9planation *ould be that cost control *as
effective6 but costs increased dramatically for uncontrollable reasons Dsevere inflationF.
!"#: $asy
Chapter *The Master B#dget
MULTIPLE CHICE
1. A budget aids in
a.communication.b.motivation.c.coordination.d.all of the above.
ANS: ! !"#: $asy %&: 7-1
(. /easuring the firmCs performance against established objectives is part of *hich of the follo*ing functions,
a.=lanningb.-ontrollingc.%rganizingd.Staffing
ANS: !"#: $asy %&: 7-1
.. 1he preparation of an organizationCs budget
a.forces management to look ahead and try to see the future of the organization.b.re2uires that the entire management team *ork together
to make and carry out the yearly plan.c.makes performance revie* possible at all levels of management.d.all of the above.
ANS: ! !"#: $asy %&: 7-1
0. )hich of the follo*ing is a basic element of effective budgetary control,
a.cost behavior patternsb.cost-volume-profit analysisc.standard costingd.all of the above
ANS: A !"#: $asy %&: 7-1
'. )hen actual performance varies from the budgeted performance6 managers *ill be more likely to revise future budgets if the variances
*ere
a.controllable rather than uncontrollable.b.uncontrollable rather than controllable.c.favorable rather than unfavorable.d.small.
ANS: !"#: /oderate %&: 7-1
3. $9ternal factors that cause the achievement of company goals are the
a.annual budget.b.industry price and cost structure.c.talents possessed by its managers.d.board of directors.
ANS: !"#: $asy %&: 7-1
5. A budget is
a.a planning tool.b.a control tool.c.a means of communicating goals to the firmCs divisions.d.all of the above.
ANS: ! !"#: $asy %&: 7-1
7. "neffective budgets and+or control systems are characterized by the use of
a.budgets as a planning tool only and disregarding them for control purposes.b.budgets for motivation.c.budgets for coordination.d.the
budget for communication.
ANS: A !"#: $asy %&: 7-1
8. Strategic planning is
a.planning activities for promoting products for the future.b.planning for appropriate assignments of resources.c.setting standards for the
use of important but hard-to-find materials.d.stating and establishing long-term plans.
ANS: ! !"#: $asy %&: 7-(
1;. Vey variables that are identified in strategic planning are
a.normally controllable if they are internal.b.seldom if ever controllable.c.normally controllable if they occur in a domestic
market.d.normally uncontrollable if they are internal.
ANS: A !"#: $asy %&: 7-(
11. 1actical planning usually involves *hich level of management,
a.middleb.topc.middle and topd.operational
ANS: - !"#: $asy %&: 7-(
1(. )hich of the follo*ing statements is tr#e,
a.All organizations have the same set of budgets.b.All organizations are re2uired to budget.c.udgets are a 2uantitative e9pression of an
organizationCs goals and objectives.d.udgets should never be used to evaluate performance.
ANS: - !"#: $asy %&: 7-1
1.. )hich of the follo*ing is not an BoperatingB budget,
a.sales budgetb.production budgetc.purchases budgetd.capital budget
ANS: ! !"#: $asy %&: 7-.
10. 1he master budget is a static budget because it
a.is geared to only one level of production and sales.b.never changes from one year to the ne9t.c.covers a preset period of time.d.al*ays
contains the same operating and financial budgets.
ANS: A !"#: $asy %&: 7-.
1'. 1he master budget is a
a.static budget.b.fle9ible budget.c.2ualitative e9pression of a prior goal.d.2ualitative e9pression of a future goal.
ANS: A !"#: $asy %&: 7-.
13. 1he master budget usually includes
a.an operating budget.b.a capital budget.c.pro forma financial statements.d.all of the above.
ANS: ! !"#: $asy %&: 7-.
15. )hich of the follo*ing is usually perceived as being the master budgetCs greatest advantage to management,
a.performance analysisb.increased communicationc.increased coordinationd.re2uired planning
ANS: ! !"#: $asy %&: 7-.
17. -hronologically6 the first part of the master budget to be prepared *ould be the
a.sales budget.b.production budget.c.cash budget.d.pro forma financial statements.
ANS: A !"#: $asy %&: 7-.
18. An e9ample of a recurring short-term plan is
a.a probable product line change.b.e9pansion of plant and facilities.c.a unit sales forecast.d.a change in marketing strategies.
ANS: - !"#: $asy %&: 7-(
(;. "f the chief accountant of a firm has to prepare an operating budget for the coming year6 the first budget to be prepared is the
a.sales budget.b.cash budget.c.purchases budget.d.capital budget.
ANS: A !"#: $asy %&: 7-.
(1. "t is !east likely that a production budget revision *ould cause a revision in the
a.capital budget.b.cash budget.c.purchases budget.d.pro forma balance sheet.
ANS: A !"#: $asy %&: 7-0
((. udgeted production for a period is e2ual to
a.the beginning inventory O sales - the ending inventory.b.the ending inventory O sales - the beginning inventory.c.the ending inventory O
the beginning inventory - sales.d.sales - the beginning inventory O purchases.
ANS: !"#: $asy %&: 7-0
(.. -hronologically6 in *hat order are the sales6 purchases6 and production budgets prepared,
a.sales6 purchases6 productionb.sales6 production6 purchasesc.production6 sales6 purchasesd.purchases6 sales6 production
ANS: !"#: $asy %&: 7-0
(0. 1he material purchases budget tells a manager all of the follo*ing e"cept the
a.2uantity of material to be purchased each period.b.2uantity of material to be consumed each period.c.cost of material to be purchased
each period.d.cash payment for material each period.
ANS: ! !"#: $asy %&: 7-0
('. %f the follo*ing budgets6 *hich one is !east likely to be determined by the dictates of top management,
a.salesb.material usagec.revenuesd.general and administrative
ANS: !"#: $asy %&: 7-0
(3. 1he amount of ra* material purchased in a period may be different than the amount of material used that period because
a.the number of units sold may be different from the number of units produced.b.finished goods inventory may fluctuate during the
period.c.the ra* material inventory may increase+decrease during the period.d.companies often pay for material in the period after it is
purchased.
ANS: - !"#: /oderate %&: 7-0
(5. A purchases budget is
a.not affected by the firmCs policy of granting credit to customers.b.the same thing as a production budget.c.needed only if a firm does not
pay for its merchandise in the same period as it is purchased.d.affected by a firmCs inventory policy only if the firm purchases on credit.
ANS: A !"#: $asy %&: 7-0
(7. )hich of the follo*ing e2uations can be used to budget purchases,
D" L beginning inventory6 $" L ending inventory desired6 -AS L budgeted cost of goods sold6 = L budgeted purchasesF
a.= L -AS O " - $"b.= L -AS O "c.= L -AS O $" O "d.= L -AS O $" - "
ANS: ! !"#: $asy %&: 7-0
(8. oth the budgeted 2uantity of material to be purchased and the budgeted 2uantity of material to be consumed can be found in the
a.material purchases budget.b.production budget.c.pro forma income statement.d.cash budget.
ANS: A !"#: $asy %&: 7-0
.;. A company that maintains a ra* material inventory6 *hich is based on the follo*ing monthCs production needs6 *ill purchase less material
than it uses in a month *here
a.sales e9ceed production.b.production e9ceeds sales.c.planned production e9ceeds the ne9t monthCs planned production.d.planned
production is less than the ne9t monthCs planned production.
ANS: - !"#: /oderate %&: 7-0
.1. "f a company has a policy of maintaining an inventory of finished goods at a specified percentage of the ne9t monthCs budgeted sales6
budgeted production for &anuary *ill e9ceed budgeted sales for &anuary *hen budgeted
a.#ebruary sales e9ceed budgeted &anuary sales.b.&anuary sales e9ceed budgeted !ecember sales.c.&anuary sales e9ceed budgeted
#ebruary sales.d.!ecember sales e9ceed budgeted &anuary sales.
ANS: A !"#: /oderate %&: 7-0
.(. !epreciation on the production e2uipment *ould appear in *hich of the follo*ing budgets,
a.cash budgetb.production budgetc.selling and administrative e9pense budgetd.manufacturing overhead budget
ANS: ! !"#: $asy %&: 7-0
... 1he selling6 general6 and administrative e9pense budget is based on the <<<<<<<<<<<<<<< budget.
a.productionb.salesc.cashd.purchases
ANS: !"#: $asy %&: 7-0
.0. 1he budgeted amount of selling and administrative e9pense for a period can be found in the
a.sales budget.b.cash budget.c.pro forma income statement.d.pro forma balance sheet.
ANS: - !"#: $asy %&: 7-0
.'. )hich of the follo*ing represents a proper se2uencing in *hich the budgets belo* are prepared,
a.!irect /aterial =urchases6 -ash6 Salesb.=roduction6 Sales6 "ncome Statementc.Sales6 alance Sheet6 !irect 4abord.Sales6 =roduction6
/anufacturing %verhead
ANS: ! !"#: $asy %&: 7-0
.3. 1he detailed plan for the ac2uisition and replacement of major portions of property6 plant6 and e2uipment is kno*n as the
a.capital budget.b.purchases budget.c.commitments budget.d.treasury budget.
ANS: A !"#: $asy %&: 7-0
.5. 1he budgeted payment for labor cost each period *ould be found in the
a.labor budget.b.pro forma income statement.c.selling6 general6 and administrative e9pense budget.d.cash budget.
ANS: ! !"#: $asy %&: 7-0
.7. 1he cash budget ignores all
a.dividend payments.b.sales of capital assets.c.noncash accounting accruals.d.sales of common stock.
ANS: - !"#: $asy %&: 7-'
.8. )hich of the follo*ing items *ould not be found in the financing section of the cash budget,
a.cash payments for debt retirementb.cash payments for interestc.dividend paymentsd.payment of accounts payable
ANS: ! !"#: $asy %&: 7-'
0;. 1he primary reason that managers impose a minimum cash balance in the cash budget is
a.because management needs discretionary cash for unforeseen business opportunities.b.managers lack discipline to control their
spending.c.that it protects the organization from the uncertainty of the budgeting process.d.that it makes the financial statements look
more appealing to creditors.
ANS: - !"#: $asy %&: 7-'
01. -hronologically6 the last part of the master budget to be prepared *ould be the
a.pro forma financial statements.b.cash budget.c.capital budgetd.production budget.
ANS: A !"#: $asy %&: 7-0
0(. 1he pro forma income statement is not a component of the
a.master budget.b.financial budgets.c.operating budgets.d.capital budget.
ANS: - !"#: $asy %&: 7-0
0.. A pro forma financial statement is
a.a financial statement for past periods.b.a projected or budgeted financial statement.c.presented for the form but contains no dollar
amounts.d.a statement of planned production.
ANS: !"#: $asy %&: 7-0
00. A master budget contains *hich of the follo*ing,
Sales=roduction=ro forma statements
a.yes yes yesb.no no yesc.no no
nod.yes no yes
ANS: A !"#: $asy %&: 7-.
0'. 1he budgeted cost of products to be sold in a future period *ould be found in the
a.production budget.b.sales budget.c.purchases budget.d.pro forma income statement.
ANS: ! !"#: $asy %&: 7-0
03. A budget that includes a 1(-month planning period at all times is called a <<<<<<<<<<<< budget.
a.pro formab.fle9iblec.masterd.continuous
ANS: ! !"#: $asy %&: 7-3
05. 1he method of budgeting that adds one monthCs budget to the end of the plan *hen the current monthCs budget is dropped from the plan is
called <<<<<<<<<<<< budgeting.
a.long-termb.operationsc.incrementald.continuous
ANS: ! !"#: $asy %&: 7-3
07. Slack in operating budgets
a.results from unintentional managerial acts.b.makes an organization more efficient and effective.c.re2uires managers to *ork harder to
achieve the budget.d.is greater *hen managers are allo*ed to participate in the budgeting process.
ANS: ! !"#: $asy %&: 7-3
08. udget slack is a condition in *hich
a.demand is lo* at various times of the year.b.e9cess machine capacity e9ists in some areas of the plant.c.there is an intentional
overestimate of e9penses or an underestimate of revenues.d.managers grant favored employees e9tra time off.
ANS: - !"#: $asy %&: 7-3
';. $bony -ompany has the follo*ing e9pected pattern of collections on credit sales: 5; percent collected in the month of sale6 1' percent in
the month after the month of sale6 and 10 percent in the second month after the month of sale. 1he remaining 1 percent is never collected.
At the end of /ay6 $bony -ompany has the follo*ing accounts receivable balances:
#rom April sales$21,000#rom /ay sales48,000
$bonyCs e9pected sales for &une are G1';6;;;. )hat *ere total sales for April,
a.G1';6;;;b.G5(6010c.G5;6;;;d.G10;6;;;
ANS: !
alance in A+: from April sales: G(16;;;+;.1' L G10;6;;;
1'P represents the amount of April receivables uncollected at the end of /ay.
!"#: /oderate %&: 7-0
'1. all -ompany has a policy of maintaining an inventory of finished goods e2ual to .; percent of the follo*ing monthCs sales. #or the
forthcoming month of /arch6 all has budgeted the beginning inventory at .;6;;; units and the ending inventory at ..6;;; units. 1his
suggests that
a.#ebruary sales are budgeted at 1;6;;; units less than /arch sales.b./arch sales are budgeted at 1;6;;; units less than April
sales.c.#ebruary sales are budgeted at .6;;; units less than /arch sales.d./arch sales are budgeted at .6;;; units less than April sales.
ANS:
"ncrease in inventory L .6;;; units
.6;;;+;..; L 1;6;;; increase for April over /arch.
!"#: /oderate %&: 7-0
'(. udgeted sales for the first si9 months for =orter -orp. are listed belo*:
&AN@A:R#$:@A:R/A:-?A=:"4/AR&@N$@N"1S:36;;;56;;;76;;;56;;;'6;;;06;;;
=orter -orp. has a policy of maintaining an inventory of finished goods e2ual to 0; percent of the ne9t monthCs budgeted sales. "f =orter
-orp. plans to produce 36;;; units in &une6 *hat are budgeted sales for &uly,
a..63;; unitsb.16;;; unitsc.86;;; unitsd.76;;; units
ANS: -
eginning "nventory for &une 163;; units D06;;; M 0;PF
=roduced in &une 36;;; units
!educt: &une sales D06;;;F units
$nding inventory for &une .63;; units
.63;;+;.0; L 86;;; units
!"#: !ifficult %&: 7-0
'.. )eaver -o. manufactures card tables. 1he company has a policy of maintaining a finished goods inventory e2ual to 0; percent of the ne9t
monthCs planned sales. $ach card table re2uires . hours of labor. 1he budgeted labor rate for the coming year is G1. per hour. =lanned
sales for the months of April6 /ay6 and &une are respectively 06;;;H '6;;;H and .6;;; units. 1he budgeted direct labor cost for &une for
)eaver -o. is G1.36';;. )hat are budgeted sales for &uly for )eaver -o.,
a..6';; unitsb.06('; unitsc.06;;; unitsd..65'; units
ANS:
-ard tables to be produced in &une:
G1.36';; + G1. L 1;6';; hours 1;6';; hrs+. hrs+table L .6';; card tables
eginning "nventory for &uly 16(;; units D.6;;; M 0;PF
=roduced in &une .6';; units
!educt: &une sales D.6;;;F units
$nding inventory for &une 165;; units
165;;+;.0; L 06('; units
!"#: !ifficult %&: 7-0
'0. udgeted sales for Vno9 "nc. for the first 2uarter the year are sho*n belo*:
&AN@A:R#$:@A:R/A:-?@N"1S:.'6;;;('6;;;.(6;;;
1he company has a policy that re2uires the ending inventory in each period to be 1; percent of the follo*ing periodCs sales. Assuming that
the company follo*s this policy6 *hat 2uantity of production should be scheduled for #ebruary,
a.(06.;; unitsb.(065;; unitsc.('6;;; unitsd.('65;; units
ANS: !
$nding "nventory6 #ebruary .6(;; units#ebruary Sales('6;;; units:e2uirements for /onth(76(;; units4ess eginning "nventory6
#ebruaryD(6';;F units=roduction scheduled for #ebruary('65;; units
!"#: /oderate %&: 7-0
''. udgeted sales for the first si9 months the year for Aibson -orporation are listed belo*:
&AN@A:R#$:@A:R/A:-?A=:"4/AR&@N$@N"1S:36;;;56;;;76;;;56;;;'6;;;06;;;
Aibson -orporation has a policy of maintaining an inventory of finished goods e2ual to 0; percent of the ne9t monthCs budgeted sales.
?o* many units has Aibson -orporation budgeted to produce in the first 2uarter of the year,
a.(160;; unitsb.(;63;; unitsc.186;;; unitsd.(.6;;; units
ANS: A
!esired ending inventory /arch .1(67;; unitsSales: 1st 2uarter(16;;; units"nventory needs (.67;; unitseginning inventory6
&anuary 1 D(60;;F units=roduction(160;; units
!"#: !ifficult %&: 7-0
'3. =roduction of =roduct Q has been budgeted at (;;6;;; units for /ay. %ne unit of Q re2uires ( lbs. of ra* material. 1he projected
beginning and ending materials inventory for /ay are:
eginning inventory: (6;;; lbs.
$nding inventory: 1;6;;; lbs.
?o* many lbs. of material should be purchased during /ay,
a.18(6;;;b.(;76;;;c.0;76;;;d.0136;;;
ANS: -
$nding inventory--/ay1;6;;; lbs.=roduction needs: (;;6;;; units M ( lbs+unit0;;6;;; lbs. "nventory needed01;6;;; lbs.eginning
inventory--/ayD(6;;;F lbs.1otal purchase re2uirements0;76;;; lbs.
!"#: /oderate %&: 7-0
Qanadu -ompany manufactures toy airplanes. "nformation on Qanadu -ompanyCs labor costs follo*:
Sales commissionsG' per planeAdministrationG1;6;;; per month"ndirect factory laborG. per plane!irect factory laborG' per plane
1he follo*ing information applies to the upcoming month of &uly for Qanadu -ompany:
udgeted production16(;; unitsudget sales16;;; units
'5. :efer to Qanadu -ompany. )hat amount of budgeted labor cost *ould appear in the &uly selling6 general6 and administrative e9pense
budget,
a.G1;6;;;b.G136;;;c.G1'6;;;d.G(.6;;;
ANS: -
Sales -ommissions D16;;; units M G'+planeG '6;;;AdministrationG1;6;;;4abor in SA>AG1'6;;;
!"#: /oderate %&: 7-0
'7. :efer to Qanadu -ompany. )hat is QanaduNs budgeted factory labor cost for &uly,
a.G76;;;b.G1'63;;c.G('63;;d.G863;;
ANS: !
!irect labor per unitG'.;;+unit"ndirect labor per unit ..;;+unit 7.;;+unit@nits produced16(;; units1otal budgeted labor costG863;;
!"#: /oderate %&: 7-0
'8. ?arrison -ompany manufactures card tables. 1he company has a policy of maintaining a finished goods inventory e2ual to 0; percent of
the ne9t monthCs planned sales. $ach card table re2uires . hours of labor. 1he budgeted labor rate for the coming year is G1. per hour.
=lanned sales for the months of April6 /ay6 and &une are respectively 06;;;H '6;;;H and .6;;; units. )hat is ?arrison -ompanyNs
budgeted direct labor cost for /ay,
a.G'063;;b.G13.67;;c.G((36(;;d.G15860;;
ANS: !
$nding "nventory6 /ay16(;; unitsSales: /ay'6;;; units:e2uirements for /ay36(;; units4ess: eginning "nventory6 /ay163;;
units@nits to be produced063;; units. hrs+unit M G1.+hrG15860;;
!"#: !ifficult %&: 7-0
3;. $d*ards -ompany has the follo*ing e9pected pattern of collections on credit sales: 5; percent collected in the month of sale6 1' percent
in the month after the month of sale6 and 10 percent in the second month after the month of sale. 1he remaining 1 percent is never
collected.
At the end of /ay6 $d*ards -ompany has the follo*ing accounts receivable balances:
#rom April sales$21,000#rom /ay sales48,000
$d*ards e9pected sales for &une are G1';6;;;. ?o* much cash *ill $d*ards -ompany e9pect to collect in &une,
a.G1(560;;b.G1(86;;;c.G10763;;d.G1'(6'(;
ANS: -
&une sales DG1';6;;; M 5;PFG1;'6;;;/ay sales D13;6;;; M 1'PF (06;;;April sales D10;6;;; M 10PF
1863;;1otal cash collections--&uneG10763;;
!"#: !ifficult %&: 7-'
31. #or the month of %ctober6 = -orp. predicts total cash collections to be G1 million. Also for %ctober6 = -orp. estimates that its beginning
cash balance *ill be G';6;;; and that it *ill borro* cash in the amount of G5;6;;;. "f = -orp. estimates an ending cash balance of
G.;6;;; for %ctober6 *hat must its projected cash disbursements be,
a.G16;8;6;;;b.G161(;6;;;c.G16;5;6;;;d.G16;(;6;;;
ANS: A
eginning -ash alanceG ';6;;;-ash -ollections16;;;6;;;orro*ings5;6;;;-ash Available161(;6;;;4ess: $nding -ash
alance.;6;;;=rojected -ash !isbursementsG16;8;6;;;
!"#: /oderate %&: 7-0
3(. $ster*ood ?ospital has provided you *ith the follo*ing budget information for April:
-ash collections$876,000April 1 cash balance23,000-ash disbursements978,600
$ster*ood has a policy of maintaining a minimum cash balance of G(;6;;; and borro*s only in G16;;; increments. ?o* much *ill
$ster*ood borro* in April,
a.G7;6;;;b.G5863;;c.G886;;;d.G1;;6;;;
ANS: !
April 1 balanceG (.6;;;Add: -ash -ollections7536;;;G7886;;;!educt: -ash !isbursements 85763;;-ash !eficitGD5863;;F/inimum
-ash alance (;6;;;Amount to orro*G 8863;;
rounded up to G1;;6;;;
!"#: /oderate %&: 7-'
Trip!e P Companies
-AS? @!A$1-ompany A-ompany -ompany -eginning cash balance $100$300$700-ash collections ? 400 ?-ash
disbursements 500 ? 600-ash e9cess DshortageF ? ? 400orro*ing DrepaymentsF 300 100 ?$nding cash
200 200 100
3.. :efer to 1riple = -ompanies. #or -ompany A6 *hat are the budgeted cash collections,
a.G5;;b.G';;c.G.;;d.G0;;
ANS: -
$nding -ashG (;;!educt orro*ings D.;;F-ash ShortageGD1;;FAdd !isbursements ';;!educt eginning cash D1;;Fudgeted cash
collectionsG .;;
!"#: /oderate %&: 7-'
30. :efer to 1riple = -ompanies. #or -ompany 6 *hat are the budgeted cash disbursements,
a.G3;;b.G5;;c.G';;d.G0;;
ANS: A
$nding -ashG (;;!educt orro*ings D1;;F-ash alanceG 1;;!educt collections D0;;F!educt eginning cash D.;;Fudgeted cash
disbursementsGD3;;F
!"#: /oderate %&: 7-'
3'. :efer to 1riple = -ompanies. #or -ompany -6 *hat are the budgeted cash collections,
a.G(;;b.G.;;c.G0;;d.G';;
ANS:
$nding -ashG 1;;Add :epayments .;;-ash alanceG 0;;Add disbursements 3;;!educt eginning cash D5;;Fudgeted cash
collectionsG .;;
!"#: /oderate %&: 7-'
33. /anagers may be more *illing to accept a budget if
a.it is continuous.b.it is imposed.c.it is very hard to attain.d.they can participate in its development.
ANS: ! !"#: $asy %&: 7-3
35. A budget manual should include *hich of the follo*ing,
a.a list of specific budgetary activities to be performedb.original6 revised6 and approved budgetsc.a calendar of scheduled budgetary
activitiesd.all of the above
ANS: ! !"#: $asy %&: 7-5
37. )hich of the follo*ing is not tr#e about an imposed budget,
a."t reduces the budgeting process time frame.b."t uses the kno*ledge of top management as it relates to resource availability.c."t
enhances coordination.d."t increases the feeling of team*ork.
ANS: ! !"#: $asy %&: 7-3
38. A disadvantage of participatory budgets is that
a.there is a high degree of acceptance of the goals and objectives by operating management.b.they are usually more realistic.c.they lead to
better morale and higher motivation.d.they usually re2uire more time to prepare.
ANS: ! !"#: $asy %&: 7-3
5;. 1he master budget
a.reflects the determination of an organizationCs cost of capital.b.serves as a managerial tool for the organization.c.includes only an
organizationCs pro forma financial statements.d.utilizes only information from the financial accounting system.
ANS: !"#: $asy %&: 7-.
51. )hich of the follo*ing items should N%1 be included in a companyNs budget manual,
a.sample budgetary formsb.a statement of desired results of the budgetc.a listing of budgetary activities to be performedd.financial
statements for the upcoming fiscal year
ANS: ! !"#: $asy %&: 7-5
Are$s Company
Vrebs -ompany is preparing its /anufacturing %verhead budget for the second 2uarter of the year. udgeted variable factory overhead
is G..;; per unit producedH budgeted fi9ed factory overhead is G5'6;;; per month6 *ith G136;;; of this amount being factory
depreciation.
5(. :efer to Vrebs -ompany. "f the budgeted production for April is 36;;; units6 then the total budgeted factory overhead for April is:
a.G556;;;b.G7(6;;;c.G7'6;;;d.G8.6;;;
ANS: !
D36;;; units M G..;;+unitF O G5'6;;; L G8.6;;;
Eariable #i9ed
!"#: $asy %&: 7-0
5.. :efer to Vrebs -ompany. "f the budgeted production for /ay is '6;;; units6 then the total budgeted factory overhead per unit:
a.G1'b.G17c.G(;d.G((
ANS:
G..;;+unit O DG5'6;;;+'6;;; unitsF L G17+unit
Eariable #i9ed
!"#: $asy %&: 7-0
50. :efer to Vrebs -ompany. "f the budgeted cash disbursements for factory overhead for &une are G7;6;;;6 then the budgeted production for
&une must be:
a.560;; unitsb.36(;; unitsc.36';; unitsd.56;;; units
ANS: !
G7;6;;; O G136;;; L G836;;; udgeted #actory %verhead
G836;;; - G5'6;;; L G(16;;; udgeted Eariable %verhead+G..;; per unit L 56;;; units
!"#: /oderate %&: 7-0
Evita Company
$vita -ompany6 a reseller of *omenNs fashions6 has budgeted its activity for /arch. 1he budget information is presented belo*:
". Sales are G'';6;;;. All sales are cash.
"". /erchandise inventory on #ebruary (7 is G.;;6;;;
""". udgeted depreciation for /arch is G.'6;;;.
"E. -ash in bank on /arch 1 is G('6;;;.
E. Selling and administrative e9penses are budgeted at G3;6;;; for /arch and are paid in
cash.
E". 1he planned merchandise inventory on /arch .1 is G(5;6;;;.
E"". 1he invoice cost for merchandise purchases represents 5'P of sales price. All
purchases are paid for in cash.
5'. :efer to $vita -ompany. 1he budgeted cash receipts for /arch are:
a.G01(6';;c.G'7'6;;;b.G1.56';;d.G'';6;;;
ANS: !
-ash sales L G'';6;;;
!"#: $asy %&: 7-'
53. :efer to $vita -ompany. 1he budgeted cash disbursements for /arch are:
a.G.7(6';;c.G05(6';;b.G00(6';;d.G0556';;
ANS:
-ost of Aoods Sold L DG'';6;;; M .5'F L G01(6';;
=urchases L GD(5;6;;; O 01(6';; - .;;6;;;F L G.7(6';;
S>A $9penses L G3;6;;;
-ash disbursements L G.7(6';; O G3;6;;; L G00(6';;.
!"#: !ifficult %&: 7-'
55. :efer to $vita -ompany. 1he budgeted net income for !ecember is:
a.G1;56';;c.G 0(6';;b.G1.56';;d.G 556';;
ANS: -
Net "ncome L Sales - -ost of Aoods Sold - S>A $9penses - !epreciation
L GD'';6;;; - 01(6';; - 3;6;;; - .'6;;;F
L G0(6';;
!"#: !ifficult %&: 7-'
6!eason Company
Aleason -ompany prepared a cash budget by 2uarters for the upcoming year. /issing data amounts are indicated *ith 2uestion marks or
lo*er case lettersH these lo*er case letters *ill be referred to in the 2uestions that follo*.
Aleason re2uires a minimum balance of G1;6;;; to start a 2uarter.
All data are in thousands.
Aleason -orporation
-ash udget
J1: 1J1: (J1: .J1: 0-ash balance6 beginningG13G eG1.G1;Add collections from customers a 5; 35 7;1otal cash available
,,7;8;4ess disbursements: =urchase of inventory.1 c0;.' %perating e9penses.'((,1' $2uipment purchases1;1018 ;
!ividends ; 3 ; '1otal disbursements33,f''$9cess DdeficiencyF of cash available
over disbursements
5
15
D(F
.'#inancing: orro*ings:b--1(-- :epayments Dincluding interestF--d--D(1F 1otal financing,,1(D(1F-ash balance6 endingG1;
G,G1;G10LLLLLLLLLLLLLLLL
57. :efer to Aleason -ompany. 1he collections from customers during the first 2uarter Ditem aF are:
a.G';c.G'5b.G3;d.G5.
ANS: -
1otal cash available L $9cess of cash available over disbursements O 1otal disbursements
L GD5 O 33F
L G5.
1otal cash collections from customers L 1otal cash available - eginning cash balance
L GD5. - 13F
L G'5
!"#: /oderate %&: 7-'
58. :efer to Aleason -ompany. 1he borro*ing re2uired during the first 2uarter to meet the minimum cash balance Ditem bF is:
a.G;c.G1;b.G5d.G .
ANS: !
orro*ings re2uired L $nding cash balance - $9cess of cash over disbursements
L GD1; - 5F
L G.
!"#: $asy %&: 7-'
7;. :efer to Aleason -ompany. 1he cash disbursed for purchases during the second 2uarter Ditem cF is:
a.G1.c.G 8b.G''d.G(1
ANS: !
1otal cash available L G7;
$9cess of cash available over disbursements L G15
1herefore6 disbursements L G3.
GD9 O (( O 10 O 3F L G3.
9 L G(1
71. :efer to Aleason -ompany. 1he repayment Dincluding interestF of financing during the second 2uarter Ditem dF is:
a.G 0c.G15b.G ;d.G 5
ANS: A
$nding balance of cash L G1. Dsame as beginning balance of .rd 2uarterF
$9cess of cash available over disbursements L G15
:epayments L G0
!"#: /oderate %&: 7-'
7(. :efer to Aleason -ompany. 1he cash balance at the beginning of the second 2uarter Ditem eF is:
a.G1;c.G ;b.G10d.G 5
ANS: A
eginning cash balance for second 2uarter is the same as ending balance for first 2uarter: G1;.
!"#: $asy %&: 7-'
7.. :efer to Aleason -ompany. 1he total disbursements during the third 2uarter Ditem fF is:
a.G70c.G7(b.G57d.G'8
ANS: -
!eficiency of cash disbursements over cash available L GD(F
-ash available LG7;
-ash disbursements LG7(
!"#: $asy %&: 7-'
%H2T A3%4E2
1. $9plain *hy managers might *ant to build slack into a budget.
ANS:
uilding slack into the budget allo*s managers to achieve the budgeted level of performance *ith less effort. 1hus6 they have a higher
probability of achieving the budget and any bonus or compensation that may be tied to that performance standard.
!"#: /oderate %&: 7-3
(. )hat role does the budgeting activity play in managerial compensation and performance evaluation,
ANS:
%nce set6 the budget is not only a plan for the organization6 but it becomes a standard against *hich actual performance may be
compared. :ecognizing the budget as a performance standard6 organizations may base employee compensation Dto some e9tentF on ho*
*ell actual performance compares to the budgeted performance. Such a compensatory arrangement fre2uently involves a bonus plan that
permits bonuses to go up as performance relative to the budget goes up.
!"#: /oderate %&: 7-3
.. )hy *ill there fre2uently be a difference bet*een the budgeted cost of material in the material purchases budget and the budgeted cash
disbursement for material in the cash budget,
ANS:
ecause firms do not necessarily pay for material in the same period in *hich they are purchased6 the amounts in these t*o budgets *ill
fre2uently differ. 1he material purchases budget is based on the cost of material purchased in a period *hile the cash budget only reflects
e9pected actual payments for material in the period.
!"#: /oderate %&: 7-0
0. $9plain *hy different types of organizations *ill have different sets of budgets.
ANS:
)e may think of the set of budgets as the plan for producing outputs and ac2uiring inputs. As different organizations have different inputs
and outputs6 *e *ould naturally e9pect them to have different budgets. #or e9ample6 a retailing firm *ould find no need for a production
budget because it does not manufacture anything. %n the other hand6 the need for a production budget in a manufacturing organization is
obvious. 4ike*ise6 governmental organizations *ill have budgets that are different than private organizations.
!"#: /oderate %&: 7-.
'. )hy have many managers in recent years moved to*ard emphasizing employee participation in the budgeting process rather than simply
imposing the budget on the employees,
ANS:
/any managers believe that the 2uality of the budget is enhanced through employee participation. 1his is attributable in part to the fact
that many employees possess technical information that management does not have. 1hrough the budgeting process this technical
information is imparted to management. #urther6 participation in the budgeting process may lead employees to be more attentive to the
budget and feel like a more important part of the organizational team. $mployees feel more committed to meeting a budget they helped
prepare. =reparing a budget gives the preparer management training6 *hich makes him or her better prepared for advancement in the
company.
!"#: /oderate %&: 7-3
3. )hat are some of the benefits of a *ell-prepared budget,
ANS:
1. 1he budget help managers align activities and resource allocations *ith organizational
goals.
(. 1he budget can help promote employee participation6 cooperation6 and departmental
coordination.
.. 1he budget enhances conduct of the managerial functions of planning6 controlling6 problem
solving6 and performance evaluation.
0. 1he budget can sharpen managementNs responsiveness to changes in both e9ternal and
internal factors.
'. 1he budget is a model of future performance of a business in time to consider alternative
measures.
!"#: /oderate %&: 7-3
P2BLEM
1. -line -ompany has the follo*ing collection pattern for its accounts receivable:
0; percent in the month of sale
'; percent in the month follo*ing the sale
7 percent in the second month follo*ing the sale
( percent uncollectible
1he company has recent credit sales as follo*s:
April:$200,000/ay:420,000&une:350,000
?o* much should the company e9pect to collect on its receivables in &une,
ANS:
&@N$ -%44$-1"%NS#rom April sales:$200,000 .08$ 16,000#rom /ay sales: 420,000 .50210,000#rom &une
sales: 350,000 .40 140,0001otal $366,000
!"#: /oderate %&: 7-0
a:@ood M#sic< Inc)
%ak*ood /usic6 "nc. sells ald*in pianos. 1he follo*ing information regarding operating costs has been e9tracted from budgets of
%ak*ood /usic for !ecember of this year and the first fe* months of ne9t year:
!ec.&an.#eb./ar.=ayroll$12,000 $13,000 $22,000 $16,000 "nsurance4,0004,0004,0004,000:ent
6,0006,0006,0006,000!epreciation2,0002,0002,0002,0001a9es1,2001,4002,3002,000
"n addition to the above operating costs6 enough pianos are purchased each month to maintain the inventory at 0; percent of the projected
ne9t monthCs sales. 1he firm is e9pected to be in compliance *ith this policy on !ecember 1. udgeted sales are:
!ec.&an.#eb./ar.Apr.udgeted sales in units:4045605040
(. :efer to %ak*ood /usic6 "nc. 1he average cost of a piano is G';;. /erchandise is paid for in the month follo*ing its purchase. All other
e9penses are paid in the month in *hich they are incurred. %n average6 a piano sells for G16';;. %f each sale6 0; percent of the sales price
is collected in the month of sale. 1he balance is collected in the month follo*ing the sale. =repare a cash budget for the first three months
of ne9t year. 1he beginning cash balance on &anuary 1 is budgeted to be G';6;;;.
ANS:
-AS? @!A$1
%ak*ood /usic6 "nc.&an. #eb. /ar. eginning cash $ 50,000 $ 67,600 $ 84,300 -ash collections: !ec. sales
36,000 &an. sales 27,000 40,500 #eb. sales 36,000 54,000 /ar. sales 30,000 -ash
available 113,000 144,100 168,300 4ess cash disb. %45,400& %59,800& %56,000&$nding cash $ 67,600 $
84,300 $112,300
!"#: /oderate %&: 7-0
.. :efer to %ak*ood /usic6 "nc. 1he average cost of a piano is G';;. /erchandise is paid for in the month follo*ing its purchase. All other
e9penses are paid in the month in *hich they are incurred. =repare a budget of the cash disbursements for %ak*ood /usic6 "nc. for the
first three months of ne9t year.
#irst6 prepare a purchases budget for !ecember through /arch for the pianos.
ANS:
!ec.&an.#eb./ar.:e2uired ending inventory 18 24 20 16 =rojected sales 40 45 60 50 1otal
pianos needed 58 69 80 66 4ess the beginning inventory %16& %18& %24& %20&=ianos to be purchased
42 51 56 46 9 the cost of the piano 2 $500 2 $500 2 $500 2 $500 udgeted purchases
$21,000 $25,500 $28,000 $23,000 udgeted cash
disbursements&an. #eb. /ar. =ayroll$13,000 $22,000 $16,000 "nsurance4,000 4,000 4,000 :ent6,000 6,000
6,000 1a9es1,400 2,300 2,000 /erchandise
purchases 21,000 25,500 28,000 1otal$45,400 $59,800 $56,000
!"#: /oderate %&: 7-0
4ent@orth Company
)ent*orth -ompany manufactures three products DA6 6 and -F from three ra* materials DQ6 R6 and KF. 1he follo*ing table indicates the
number of pounds of each material that is re2uired to manufacture each type of product:
=roduct/aterial Q/aterial R/aterial KA(.((1(-.((
1he company has a policy of maintaining an inventory of finished goods on all three products e2ual to (' percent of the ne9t monthCs
budgeted sales. 4isted belo* is the sales budget for the first 2uarter of (;;1:
/onth=roduct A=roduct =roduct -&an.10,00011,00012,000#eb. 9,00012,000 8,000/ar.11,00010,00010,000
0. :efer to )ent*orth -ompany. Assuming that the company meets its re2uired inventory policy6 prepare a production budget for the first (
months of (;;1 for each of the three products.
ANS:
=roduct A&anuary#ebruary:e2uired ending inventory 2,2502,750=rojected sales 10,000 9,000 1otal production needs
12,25011,750 4ess the beginning inventory %2,500&%2,250&udgeted production 9,7509,500=roduct
&anuary#ebruary:e2uired ending inventory 3,0002,500=rojected sales 11,00012,000 1otal production needs
14,00014,500 4ess the beginning inventory %2,750&%3,000&udgeted production 11,25011,500 =roduct
-&anuary#ebruary:e2uired ending inventory 2,0002,500=rojected sales 12,000 8,000 1otal production needs
14,00010,500 4ess the beginning inventory %3,000&%2,000&udgeted production 11,0008,500
!"#: /oderate %&: 7-0
'. :efer to )ent*orth -ompany. @nit costs of materials Q6 R6 and K are respectively G06 G.6 and G'. 1he )ent*orth -ompany has a policy
of maintaining its ra* material inventories at '; percent of the ne9t monthCs production needs. Assuming that this policy is satisfied6
prepare a material purchases budget for all three materials in both pounds and dollars for &anuary.
ANS:
/aterial Q =urchases=roduct A=roduct =roduct -&an.#eb.&an.#eb.&an.#eb.=rod.
9,750 9,50011,25011,50011,000 8,500 lbs. 2 22 22 22 22 3 2 31ot.
19,50019,00022,50023,00033,000 25,500:e2uired $" D186;;; O (.6;;; O ('6';;F .'; L33,750 Needed: D186';; O
((6';; O ..6;;;F L 75,000 1otal ra* material Q needed: 108,750 4ess: " D5'6;;; .';F %37,500&/aterial Q to be
purchased in &anuary DpoundsF: 71,250 /ultiply by cost of /aterial Q per lb.: 2 $4 udgeted -ost of /aterial Q for &anuary:
$285,000 /aterial R =urchases=roduct A=roduct =roduct -&an.#eb.&an.#eb.&an.#eb. =rod.
9,7509,50011,25011,50011,000 8,500 lbs. 2 32 32 12 12 2 2 2 1ot.
29,25028,50011,25011,50022,000 17,000:e2uired $" D(76';; O 116';; O 156;;;F .'; L 28,500 Needed: D(86('; O
116('; O ((6;;;F L 62,500 1otal ra* material R needed: 91,000 4ess " D3(6';; .';F %31,250&/aterial R to be purchased
in &anuary DpoundsF: 59,750 /ultiply by cost of /aterial R per lb.:2 $3 udgeted -ost of /aterial R for &anuary:
$179,250 /aterial K =urchases=roduct A=roduct =roduct -&an.#eb.&an.#eb.&an.#eb.=rod.
9,7509,50011,25011,50011,000 8,5009 lbs. 2 22 22 22 22 2 2 21ot.
19,50019,00022,50023,00022,000 17,000:e2uired $" D186;;; O (.6;;; O 156;;;F .'; L 29,500 Needed: D186';; O
((6';; O ((6;;;F L 64,000 1otal ra* material K needed: 93,500 4ess " D306;;; .';F %32,000&/aterial K to be purchased
in &anuary DpoundsF: 61,500 /ultiply by cost of /aterial K per lb.: 2 5 udgeted -ost of /aterial K for &anuary:
$307,500 1he budgeted cost of all materials to be purchased in &an. *ould be G(7'6;;; O G1586('; O G.;56';; L $771,750
!"#: !ifficult %&: 7-0
3. Sho*n belo* are the totals from period budgets of /iller -orporation for the current year:
:evenue budget $100,000/aterials usage from production budget 15,0004abor cost budget20,000/anufacturing overhead budget
20,000Aeneral and administrative budget30,000-apital e9penditure budget20,0004or: in Progress Inventories:eginning of
Rear10,000$nd of Rear5,000;inished 6oods Inventory:eginning of Rear15,000$nd of Rear10,0001a9 :ate 40%
2e8#ired9 =repare a forecasted "ncome Statement for the current year:
ANS:
:evenue$100,000 4ess: -%AS-%A/:/ used Dproduction budgetF$ 15,000 !4 Dlabor budgetF20,000 /fg. %? D%?
budgetF 20,000 -urrent /fg. costs$ 55,000 =lus: eg. )"= 10,000 1otal "n-=rocess$ 65,000 4ess: $nd
)"= %5,000&-%A/$ 60,000 =lus: eg. #A 15,000 Aoods Avail. for Sale$ 75,000 4ess: $nd
#A %10,000&-%AS 65,000 Aross /argin$ 35,000 4ess: A > A e9pense budget %30,000&"ncome before income ta9es $
5,000 4ess: ta9es X 0;P %2,000&Net "ncome$ 3,000
!"#: /oderate %&: 7-0
5. 1he follo*ing are forecasts of sales and purchases for -hina Arove -ompany:
Sales=urchasesApril$80,000 $30,000 /ay90,00040,000&une85,00030,000
All sales are on credit. :ecords sho* that 5; percent of the customers pay the month of the sale6 (; percent pay the month after the sale6
and the remaining 1; percent pay the second month after the sale. =urchases are all paid the follo*ing month at a ( percent discount. -ash
disbursements for operating e9penses in &une *ere G'6;;;.
2e8#ired9 =repare a schedule of cash receipts and disbursements for &une.
ANS:
Schedules of -ash :eceipts and !isbursements for &une
Cash 2eceipts9#rom current month sale D&uneFD.5 7'6;;;F $59,500#rom 1 month prior sale D/ayF D.( 8;6;;;F 18,000#rom (
month prior sale DAprilFD.1 7;6;;;F 8,0001otal cash receipts $85,500Cash Gis$#rsements9/ay purchases X 87P Dless
discountFD.87 0;6;;;F$39,200%perating e9penses 5,0001otal cash disbursements $44,200Net increase in cash for &une
$41,300
!"#: /oderate %&: 7-0
7. Allen uilders in the building construction business. "n Rear (6 it is e9pected that 0; percent of a monthCs sales *ill be collected in cash6
*ith the balance being collected the follo*ing month. %f the purchases6 '; percent are paid the follo*ing month6 .; percent are paid in
t*o months6 and the remaining (; percent are paid during the month of purchase. 1he sales force receives G(6;;; a month base pay plus a
( percent commission. 4abor e9penses are e9pected to be G06;;; a month. %ther operating e9penses are e9pected to run about G(6;;; a
month6 including G';; for depreciation. 1he ending cash balance for Rear 1 *as G06';;.
Sales =urchasesHear .-Act#a!November$80,000$70,000!ecember 90,00080,000Hear '-B#dgeted&anuary
70,00070,000#ebruary90,00060,000/arch30,00050,000
2e8#ired9
a.=repare a cash budget and determine the projected ending cash balances for the first three months of Rear (.b.!etermine the months that
the company *ould either borro* or invest cash.
ANS:
a.
Rear 1Rear (Nov.!ec.&an.#eb./ar.Sales$80,000$90,000$70,000$90,000$30,000 =urchases
70,00080,00070,00060,00050,000
Cash 2eceipts9&an.#eb./ar.eginning cash balance$ 4,500$ 2,600$ 300 #rom current month sales
$28,000$36,000$12,000 #rom prior month sales 54,000 42,000 54,000 1otal cash receipts
$82,000$78,000$66,000 1otal cash available$86,500$80,600$66,300 Cash Gis$#rsements9#rom =urchases:-urrent
month X (;P $14,000$12,000$10,000 #rom 1 mo. prior purchases X ';P 40,00035,00030,000 #rom ( mo. prior
purchases X .;P 21,000 24,000 21,000 1otal payments on purchases $75,000$71,000$61,000 4abor e9pense
4,0004,0004,000 Sales salaries 2,0002,0002,000 -ommissions X (P of sales 1,4001,800600 %ther e9penses e9clude
depr. DG';;F 1,500 1,500 1,500 1otal cash disbursements$83,900$80,300$69,100 $nding cash balance$
2,600$ 300$%2,800&
b.orro*-/archH invest-&anuary and #ebruary
!"#: !ifficult %&: 7-0
Chapter .-Per1ormance Meas#rement< Ba!anced %corecards< and Per1ormance 2e@ards
MULTIPLE CHICE
1. Eariance analysis *ould be appropriate to measure performance in
a.profit centers.b.investment centers.c.cost centers.d.all of the above.
ANS: ! !"#: $asy %&: 18-0
(. )hich of the follo*ing responsibility centers may be evaluated on the basis of residual income,
a.investment centerb.revenue centerc.profit centerd.cost center
ANS: A !"#: $asy %&: 18-0
.. Net cash flo* could be used to measure performance in
a.cost centers and investment centers.b.revenue centers and profit centers.c.revenue centers and investment centers.d.profit and
investment centers.
ANS: ! !"#: $asy %&: 18-0
0. @sing a single performance evaluation criterion for an investment center
a.is most effective because a manager can concentrate on a single goal.b.can result in manipulation of the performance measure.c.allo*s
multinational investment centersC performances to be e2uitably compared.d.is only appropriate if the criterion is non-monetary.
ANS: !"#: $asy %&: 18-.618-5
'. A company has set a target rate of return of 13P for its investment center. An investment center manager in this company *ould
a.ac2uire assets that *ould increase divisional income by more than 13P.b.sell all assets that do not generate divisional income of more
than 13P.c.ac2uire assets that *ould increase sales by more than 13P.d.ac2uire any technologically advanced assets that *ould cause
costs to be reduced by 13P or more.
ANS: A !"#: $asy %&: 18-0
3. "n evaluating the performance of a profit center manager6 the manager
a.and the sub-unit should be evaluated on the basis of the same costs and revenues.b.should only be evaluated on the basis of variable
costs and revenues of the sub-unit.c.should be evaluated on all costs and revenues that are controllable by the managerd.should be
evaluated on all costs and revenues that can be directly traced to the sub-unit.
ANS: - !"#: $asy %&: 18-0
5. 1he Statement of -ash #lo*s may be superior to the cash budget as a performance evaluation measure because
a.cash flo*s are sho*n on the accrual basis on the cash budget.b.the cash budget does not include capital investments.c.cash flo*s are
arranged by activity.d.of all the above reasons.
ANS: - !"#: /oderate %&: 18-0
7. 1he Statement of -ash #lo*s indicates the cash inflo*s and outflo*s from
a.investing6 financing6 and borro*ing activities.b.operating6 investing6 and sending activities.c.merchandising6 financing6 and investing
activities.d.operating6 investing6 and financing activities.
ANS: ! !"#: $asy %&: 18-0
8. !ivision ACs investment in a ne* project *ill raise the overall organizationCs return on investment if
a.the return on investment on the ne* project e9ceeds the target return of the overall organization.b.the return on investment on the ne*
project e9ceeds the return on investment of !ivision A.c.the return on investment on the ne* project e9ceeds the overall organizationCs
return on investment.d.!ivision ACs return on investment e9ceeds the return on investment of the overall organization.
ANS: - !"#: $asy %&: 18-0
1;. "f sales and e9penses both rise by G1;;6;;;
a.residual income *ill increase.b.return on investment *ill increase.c.return on investment *ill be unchanged.d.asset turnover *ill
decrease
ANS: - !"#: $asy %&: 18-0
11. A- -orp. is composed of three operating divisions. %verall6 the A- -orp. has a return on investment of (;P. A !ivision has a return
on investment of ('P. "f A- -orp. evaluates its managers on the basis of return on investment6 ho* *ould the A !ivision manager and
the A- -orp. president react to a ne* investment that has an estimated return on investment of (.P,
A !ivision managerA- -orp. president
a.accept acceptb.accept rejectc.reject acceptd.reject reject
ANS: - !"#: $asy %&: 18-0
1(. A companyCs return on investment is affected by a change in
=rofit /arginAsset 1urnoveron Sales
a.Jes Jesb.Jes Noc.No Nod.No Jes
ANS: A !"#: $asy %&: 18-0
1.. 1he return on investment D:%"F ratio measures
a.only asset turnover.b.only earnings as a percent of sales.c.both asset turnover and earnings as a percent of sales.d.asset turnover and
earnings as a percent of sales6 correcting for the effects of differing depreciation methods.
ANS: - !"#: $asy %&: 18-0
10. :eturn on investment D:%"F is a term most often used to e9press income earned on assets invested in a business unit. A companyCs return
on investment *ould increase if sales
a.increased by the same dollar amount as e9penses and total assets increased.b.remained the same and e9penses *ere reduced by the same
dollar amount that total assets increased.c.decreased by the same dollar amount that e9penses increased.d.and e9penses increased by the
same percentage that total assets increased.
ANS: !"#: /oderate %&: 18-0
1'. A sub-unit of an organization is evaluated on the basis of its :%". "f this sub-unitCs sales and e9penses both increase by G.;6;;;6 ho*
*ill the follo*ing measures be affected,
:%"Assert turnover=rofit margin
a.increase increase increaseb.indeterminate increase decreasec.no change increase decreased.no
change decrease no change
ANS: - !"#: /oderate %&: 18-0
13. )hich of the follo*ing *ould be an appropriate alternative to the use of :%" in evaluating the performance of an investment center,
:esidualNet cash-ost and revenueincomeflo*variance analysis
a.yes yes yesb.no yes noc.yes no nod.yes no
yes
ANS: - !"#: $asy %&: 18-0
15. :eturn on investment is computed by dividing income by
a.contribution margin.b.inventory turnover.c.assets invested.d.average assets employed.
ANS: - !"#: $asy %&: 18-0
17. =resently6 the -lassic ook !ivision of Ariffin =ublishing -orporation has a profit margin of .;P. "f total sales rise by G1;;6;;;6 the net
result *ill be
a.an increase in the profit margin ratio to above .;P.b.a decrease in the profit margin ratio to belo* .;P.c.no change in the profit margin
ratio.d.a change in the profit margin ratio that cannot be determined from this information.
ANS: - !"#: /oderate %&: 18-0
18. =rofit margin indicates the portion of sales that
a.covers fi9ed e9penses.b.is not used to cover e9penses.c.e2uals contribution margin.d.e2uals product contribution margin.
ANS: !"#: $asy %&: 18-0
(;. =rofit margin e2uals
a.income divided by sales.b.incomes divided by average inventory.c.income divided by average assets.d.income divided by average
stockholderCs e2uity.
ANS: A !"#: $asy %&: 18-0
(1. 1he !u =ont model measures
a.residual income.b.return on investment.c.throughput.d.profit.
ANS: !"#: $asy %&: 18-0
((. "n the !u =ont model6 profit margin is a ratio of
a.income to sales.b.income to assets.c.sales to income.d.sales to assets.
ANS: A !"#: $asy %&: 18-0
(.. 1he !u =ont model measures :%" as it is affected by
a.contribution margin and asset turnover.b.profit margin and asset turnover.c.asset turnover.d.profit margin.
ANS: !"#: $asy %&: 18-0
(0. :esidual income is used as a performance measure in
a.profit centers.b.cost centers.c.investment centers.d.revenue centers.
ANS: - !"#: $asy %&: 18-0
('. "f a ne* project generates a positive residual income6 the
a.projectCs return on investment is less than the target rate.b.projectCs return on investment is greater than the target rate.c.projectCs return
on investment is e2ual to the target rate.d.relationship bet*een the projectCs return on investment and the target rate cannot necessarily be
determined.
ANS: !"#: $asy %&: 18-0
(3. A prospective project under consideration by the 1elephone !ivision of -ommunications -orporation. has an estimated residual income
of GD(;6;;;F. "f the project re2uires an investment of G0;;6;;;6 the
a.project generates a negative return on investment.b.projectCs return on investment is zero.c.projectCs return on investment is 'P less than
the companyCs target rate.d.companyCs target rate is 1'P
ANS: - !"#: /oderate %&: 18-0
(5. :esidual income is the
a.contribution margin of an investment center6 less the imputed interest on the invested capital used by the center.b.contribution margin of
an investment center6 plus the imputed interest on the invested capital used by the center.c.income of an investment center6 less the
imputed interest on the invested capital used by the center.d.income of an investment center6 plus the imputed interest on the invested
capital used by the center.
ANS: - !"#: $asy %&: 18-0
(7. :esidual income is an e9ample of a <<<<<<<<<<<< performance measurement.
a.long-termb.short-termc.2ualitatived.profit center
ANS: !"#: $asy %&: 18-0
(8. "f a division generates a positive residual income then the divisionCs
a.asset turnover *as very high.b.profitability *as greater than that of other divisions in the company.c.performance *as above
e9pectations.d.actual return on investment e9ceeds the divisionCs target return.
ANS: ! !"#: $asy %&: 18-0
.;. :esidual income is determined as
a.income times the asset turnover rate.b.income times the inventory turnover rate.c.income minus Dasset base times target rate of
returnF.d.sales minus Dasset base times target rate of returnF.
ANS: - !"#: $asy %&: 18-0
.1. :esidual income is used as a performance measure in *hich of the follo*ing types of centers,
:evenue"nvestment=rofit
a.yes no yesb.yes yes yesc.no yes yesd.no yes no
ANS: ! !"#: $asy %&: 18-0
.(. An increase in a corporationCs target rate *ould result in aDnF
a.increase in residual income.b.decrease in return on investment.c.decrease in residual income.d.decrease in both residual income and
return on investment.
ANS: - !"#: $asy %&: 18-0
... All other things being e2ual6 an increase in sales price *ould increase
a.asset turnover.b.profit margin.c.residual income.d.all of the above.
ANS: ! !"#: $asy %&: 18-0
.0. "f sales and e9penses both rise by G1;;6;;;6 profit margin *ill
a.decrease and asset turnover *ill decrease.b.increase and asset turnover *ill decrease.c.decrease and asset turnover *ill
increase.d.increase and asset turnover *ill increase.
ANS: - !"#: /oderate %&: 18-0
.'. Asset turnover e2uals
a.income divided by average assets.b.sales divided by assets.c.sales divided by average assets.d.assets divided by sales.
ANS: - !"#: $asy %&: 18-0
.3. 1he information belo* relates to costs6 revenues6 and assets anticipated in the oot !ivision of E! #oot*ear -orporation:
Sales$ 4,000,000Eariable costs75% o< s0(esAverage assets employed$12,000,000#i9ed costs0
?o* *ould each of the follo*ing measures be affected if sales rise by G'6;;; in the oot !ivision,
:%"Asset turnover=rofit margin
a.increase increase increaseb.increase no change increasec.increase increase no changed.no
change no change increase
ANS: - !"#: $asy %&: 18-0
.5. A division of 4achman -orporation reported a return on investment of (;P for a recent period. "f the divisionCs asset turnover *as '6 its
profit margin must have been
a.1;;Pb.0Pc.('Pd.(P
ANS:
:%" L =rofit /argin 9 Asset 1urnover
.(; L =/ 9 '
=/ L :%"+Asset 1urnover
=/ L .;0 or 0P
!"#: $asy %&: 18-0
.7. )hich measure is limited by the fact that it uses accounting income,
a.:%"b.:"c.$EAd.All of the above
ANS: ! !"#: $asy %&: 18-0
.8. 1he -ake !ivision of akery -orporation has the follo*ing segment information:
Assets available for use$1,800,0001arget rate of return10%:esidual income$ 270,000
)hat *as -ake !ivisionCs return on investment,
a.1'Pb.1;Pc.('Pd.(;P
ANS: -
:%" L "ncome + Assets "nvested
"ncome L :esidual "ncome O D1arget :ate M AssetsF
L G(5;6;;; O D.1; M G167;;6;;;F
L G0';6;;;
:%" L GD0';6;;;+167;;6;;;F
L '5I
!"#: /oderate %&: 18-0
United Toy Company
1he !oll !ivision of @nited 1oy -ompany had the follo*ing financial data for the year:
Assets available for useG16;;;6;;; ook EalueG16';;6;;; /arket Ealue:esidual incomeG1;;6;;;:eturn on investment1'P
0;. :efer to @nited 1oy -ompany. )hat *as the !oll !ivisionNs segment income,
a.G1';6;;;b.G1;;6;;;c.G(';6;;;d.G ';6;;;
ANS: A
Segment "ncome L :%" M E of 1otal Assets
L ;.1' M G16;;;6;;;
L &.5(<(((
!"#: /oderate %&: 18-0
01. :efer to @nited 1oy -ompany. )hat *as the target rate of return for @nited 1oy -ompany,
a.1;Pb.1'Pc.('Pd.'P
ANS: !
Net "ncome - D1arget :ate 9 Asset aseF L :esidual "ncome
G1';6;;; - D1arget :ate 9 G16;;;6;;;F L G1;;6;;;
D1arget :ate 9 G16;;;6;;;F L G';6;;;
1arget :ate L 5)(I
!"#: /oderate %&: 18-0
0(. :efer to @nited 1oy -ompany. "f the manager of the !oll !ivision is evaluated based on return on investment6 ho* much *ould she be
*illing to pay for an investment that promises to increase net segment income by G';6;;;,
a.G ';6;;;b.G ...6...c.G16;;;6;;;d.G ';;6;;;
ANS:
G';6;;; + ;.1' L G...6...
!"#: /oderate %&: 18-0
0.. :efer to @nited 1oy -ompany. "f e9penses increased by G(;6;;; in Apple !ivision6
a.return on investment *ould decrease.b.residual income *ould increase.c.the target rate of return *ould decrease.d.asset turnover *ould
decrease.
ANS: A !"#: $asy %&: 18-0
Ho#ston Company
1e9as !ivision of the ?ouston -ompany has the follo*ing statistics for its most recent operations:
Assets available for use D/arket EalueF$3,600,000Assets available for use Dook EalueF$2,000,0001e9as !ivisionCs return on
investment25%1e9as !ivisionCs residual income200,000:eturn on investment Dentire ?ouston -ompanyF20%
00. :efer to ?ouston -ompany. -ompute $EA assuming the cost of capital is 1;P and the ta9 rate is 0;P.
a.G 8;6;;;b.G 1';6;;;c.G;d.G D3;6;;;F
ANS: !
$EA L After 1a9 Net "ncome - D-ost of -apital 9 /arket Ealue of AssetsF
$EA L DDG(6;;;6;;; M .('F 9 .3;F - D.1; 9 G.63;;6;;;F
$EA L GD.;;6;;; - .3;6;;;F
$EA L GD3;6;;;F
!"#: /oderate %&: 18-0
0'. :efer to ?ouston -ompany. )hat is the target rate of return in ?ouston -ompany,
a.('Pb.(;Pc.1'Pd.1;P
ANS: -
Net "ncome - D1arget :ate of :eturn 9 1otal assetsF L :esidual "ncome
G';;6;;; - D1arget :ate of :eturn M G(6;;;6;;;F L G(;;6;;;
1arget :ate of :eturn M G(6;;;6;;; L G.;;6;;;
1arget :ate of :eturn L .5I
!"#: /oderate %&: 18-0
03. :efer to ?ouston -ompany. "f ?ouston -ompany evaluates its managers on the basis of return on investment6 the manager of 1e9as
!ivision *ould invest in a project costing G1;;6;;; only if it increased net segment income by at least
a.G1;6;;;.b.G1'6;;;.c.G(;6;;;.d.G('6;;;.
ANS: !
G1;;6;;; M .(' L G('6;;;
!"#: /oderate %&: 18-0
05. Andersen -orporation has a target return of 1'P. "f a prospective investment has an estimated return on investment of (;P6 and a
residual income of G1;6;;;6 *hat is the estimated cost of the investment,
a.G(;;6;;;b.G 336335c.G ';6;;;d.1he ans*er canCt be determined from this information.
ANS: A
;.(; - ;.1' L ;.;' residual income
G1;6;;; + ;.;' L &'((<(((
!"#: /oderate %&: 18-0
07. 1he Steelrod !ivision of /etal =roducts -ompany is considering an investment in a ne* project. 1he project has an estimated cost of
G16;;;6;;;. "f /etal =roducts -ompany has a target rate of return of 1(P6 ho* large does the return on investment on this project need to
be to generate G1';6;;; of residual income,
a.1'Pb.1(Pc.('Pd.(5P
ANS: !
D:%" 9 1otal AssetsF - D1arget :ate 9 1otal AssetsF L :esidual "ncome
D:%" 9 G16;;;6;;;F - D;.1( 9 G16;;;6;;;F L G1';6;;;
D:%" 9 G16;;;6;;;F L G(5;6;;;
:%" L '+I
!"#: /oderate %&: 18-0
08. "n the South !ivision of %ccident -ompany6 segment income for the most recent year e9ceeded residual income by G1'6;;;. Also6 return
on investment e9ceeded the target rate of return by 1;P. )hat *as the level of investment in the Q !ivision for the most recent year,
a.G 1'6;;;b.G1;;6;;;c.G1';6;;;d.An ans*er canCt be determined from this information.
ANS: -
G1'6;;;+;.1; L &.5(<(((
!"#: !ifficult %&: 18-0
2AG Company
:A! -o. has established a target rate of return of 13P for all divisions. #or the most recent year6 !ivision ! generated sales of
G1;6;;;6;;; and e9penses of G56';;6;;;. 1otal assets at the beginning of the year *ere G'6;;;6;;; and total assets at the end of the year
*ere G56;;;6;;;.
';. :efer to :A! -ompany. "n the most recent year6 *hat *as !ivision !Cs residual income,
a.G 83;6;;;b.G16.7;6;;;c.G1.'0;6;;;d.G165;;6;;;
ANS: -
:esidual "ncome L GD1;6;;;6;;; - 56';;6;;;F - DD.13F M G36;;;6;;;F
L GD(6';;6;;; - 83;6;;;F
L&.<5/(<(((
!"#: /oderate %&: 18-0
'1. :efer to :A! -ompany. #or the most recent year6 *hat *as !ivision !Cs return on investment ,
a.(;.7. Pb..'.51 Pc.01.35 Pd.';.;; P
ANS: -
:%" L Net "ncome+Average 1otal Assets
L GD(6';;6;;;+36;;;6;;;F
L /.),+I
!"#: /oderate %&: 18-0
'(. 1he -ard !ivision of =arty -ompany reported the follo*ing results for a recent year
Sales$8,000,000$9penses6,250,0001otal assets D1+1F5,000,0001otal assets D1(+.1F5,400,000
)hat *as the profit margin for the -ard !ivision,
a.37Pb..'Pc..(Pd.((P
ANS: !
=rofit /argin L Aross /argin+Sales
LGD165';6;;;+76;;;6;;;F
L''I
!"#: /oderate %&: 18-0
'.. 1he -ard !ivision of =arty -ompany reported the follo*ing results for a recent year
Sales$8,000,000$9penses6,250,0001otal assets D1+1F5,000,0001otal assets D1(+.1F5,400,000
)hat *as the asset turnover ratio of the -ard !ivision,
a.1.'.7b.(.85c.;.3';d.1.(;
ANS: A
G76;;;6;;;+DGDD'6;;;6;;; O '60;;6;;;F+(F L .)50*
!"#: /oderate %&: 18-0
'0. $mpire !ivision of Ne* Rork !elights6 is evaluated based on residual income generated. "n the most recent year6 the $mpire !ivision
generated a residual income of G(6;;;6;;; and net income of G'6;;;6;;;. 1he target rate of return for all divisions of Ne* Rork !elights
is (;P. )hat *as the return on investment for the $mpire !ivision,
a.0;Pb.1.Pc.(;Pd...P
ANS: !
DNet "ncomeF - D1arget :ate 9 1otal AssetsF L :esidual "ncome
DG'6;;;6;;;F - D;.(; 9 1otal AssetsF L G(6;;;6;;;
D;.(; 9 1otal AssetsF L G.6;;;6;;;
1otal Assets L G1'6;;;6;;;
:%" L D'6;;;6;;;+1'6;;;6;;;F
:%" L 00I
!"#: /oderate %&: 18-0
''. Jualitative non-financial performance measures
a.are usually the most *ell-received by managers.b.often reflect long-term organizational goals better than financial performance
measures.c.can only be developed in the production area of an organization.d.is limited by the number of critical success factors defined
by the organization.
ANS: !"#: $asy %&: 18-3
'3. :elative to 2ualitative performance measures6 2uantitative performance measures are less
a.subject to manipulation.b.dependent on accounting information.c.effective in the pursuit of organizational goals.d.subjective.
ANS: ! !"#: $asy %&: 18-3
'5. "mproved effectiveness and efficiency of a product is considered a <<<<<< performance measurement,
a.non-financialb.financialc.2uantitatived.2ualitative
ANS: ! !"#: $asy %&: 18-3
'7. Non-financial performance measures DN#=/sF are better than financial measures in that N#=/s
a.provide a better indication of customer satisfaction.b.may better predict the direction of future cash flo*s.c.directly measure ho* *ell
an organization does those things that create shareholder value.d.all of the above
ANS: ! !"#: $asy %&: 18-3
'8. "n selecting non-financial performance measures managers should choose measures that reflect
a.2ualitative characteristics that point out sub-optimization activities and throughput bottlenecks.b.both short-term and long-term
measures related to critical success factors.c.long-term supplier satisfaction levels.d.short-term financial viability.
ANS: !"#: $asy %&: 18-3
3;. )hich of the follo*ing *ould be considered a non-financial performance measurement,
a.increase in market shareb.variances from standardsc.number of customer complaintsd.cost of engineering changes
ANS: - !"#: $asy %&: 18-3
31. )hich type of financial measure better predicts the direction of future cash flo*s,
Non-financial /easures#inancial /easures
a.yes yesb.yes noc.no nod.no
yes
ANS: ! !"#: $asy %&: 18-3
3(. )hich of the follo*ing *ould be classified as a non-financial critical success factor,
1echnical/anufacturing/anufacturingJuality$9cellence$fficiency$ffectiveness
a.no no no yesb.yes no no noc.yes yes
yes yesd.yes yes no yes
ANS: - !"#: $asy %&: 18-'
3.. )hich of the follo*ing is necessary for any valid performance measurement,
a."t must be part of the financial accounting system in use.b."t must be 2uantifiable.c.Aoal congruence must be promoted by its use.d."t
must be financial in nature.
ANS: - !"#: $asy %&: 18-.
30. =rocess 2uality yield is used in the measurement of
a.throughput.b.cash flo*s.c.asset turnover.d.profit margin.
ANS: A !"#: $asy %&: 18-5
3'. An increase in productive processing time *ill increase
a.throughput.b.process yield.c.return on investment.d.productive capacity.
ANS: A !"#: $asy %&: 18-5
33. )hich of the follo*ing is the throughput measure,
a.=rocessing time+1otal timeb.Aood units+1otal timec.Aood units+=rocessing timed.1otal units+1otal time
ANS: !"#: $asy %&: 18-5
35. =roductive capacity is a measure used in computing
a.residual income.b.net cash flo*.c.return on investment.d.throughput.
ANS: ! !"#: $asy %&: 18-5
37. =rocess 2uality yield reflects the proportion of
a.good units to bad units.b.time re2uired to produce a good unit.c.total units manufactured that are good.d.total time spent to time
available.
ANS: - !"#: $asy %&: 18-5
38. )hen inventory sits idle in a department6 this *ould not affect the departmentCs
a.processing time.b.throughput.c.process 2uality yield.d.dollar days.
ANS: - !"#: $asy %&: 18-5
5;. =rocess 2uality yield reflects the proportion of
a.time it takes to make a good unit.b.good units to defective units.c.total time spent to total time available.d.total units produced that are
good units.
ANS: ! !"#: $asy %&: 18-5
51. ?olding total production in units constant6 as the proportion of defective units to total units declines6 all of the follo*ing measures *ill be
affected6 e9cept
a.total unit sales.b.throughput.c.process 2uality yield.d.process productivity.
ANS: ! !"#: $asy %&: 18-5
5(. =rocess productivity is calculated as
a.total units divided by non-value-added processing time.b.total units divided by value-added processing time.c.value-added processing
time divided by total units.d.value-added processing divided by total time.
ANS: !"#: $asy %&: 18-5
5.. )hich of the follo*ing *ould not be an appropriate cost driver to measure internal failure,
a.design errorb.product failurec.machine reliabilityd.operator error
ANS: !"#: $asy %&: 18-5
50. )hen assessing performance6 one *ay to compensate for differences among divisions of a multinational organization *ould be for the
parent company to
a.use different target rates of return to compute residual incomes.b.modify the return on investment calculation so that foreign currency
fluctuations are removed from all financial statement figures.c.classify all domestic divisions as investment centers and all foreign
divisions as profit centers.d.use financial performance measures for units *hose records are kept in the domestic currency and non-
financial measures for units *hose records are kept in a foreign currency.
ANS: A !"#: /oderate %&: 18-8
5'. "f performance measures are perfect pro9ies for organizational goals6
a.sub-optimization *ill be enhanced.b.sub-unit managers *ill strive to achieve organizational goals.c.sub-units can all be
decentralized.d.residual income *ill rise.
ANS: !"#: $asy %&: 18-5
2io Hondo Company
:io ?ondo -ompany is a manufacturer of electronic components. 1he follo*ing manufacturing information is available for the month of
/ay:
Aood units manufactured40,000Ealue-added hours of manufacturing time20,0001otal units manufactured50,0001otal hours of
manufacturing time30,000
53. :efer to :io ?ondo -ompany. )hat is the throughput per hour,
a.1.. units DroundedFb.(.; unitsc.1.7 unitsd..7 units
ANS: A
9 9 L .) #nits
!"#: $asy %&: 18-5
55. :efer to :io ?ondo -ompany. )hat is the process 2uality yield,
a.';Pb.5'Pc.7;Pd.1('P
ANS: -
L *(I
!"#: $asy %&: 18-5
McA!!en Company
%ne of the products manufactured by /cAllen -ompany is a plastic disk. 1he information belo* relates to the !isk =roduction
!epartment:
Aood units produced200,000@nits started in production250,000=rocessing time Dbudgeted hoursF425=rocessing time Dtotal
hoursF400Ealue-added processing time300
57. :efer to /cAllen -ompany. )hat is the process 2uality yield in the !isk =roduction !epartment,
a.5'Pb.00Pc.7;Pd.1('P
ANS: -
L *(I
!"#: $asy %&: 18-5
58. :efer to /cAllen -ompany. )hat is the throughput per hour in the !isk =roduction !epartment,
a.05; unitsb.';; unitsc.3(' unitsd.335 units
ANS:
9 9 L 5(( #nits
!"#: /oderate %&: 18-5
7;. :efer to /cAllen -ompany. )hat is the process productivity in the !isk =roduction !epartment,
a.'77b.3('c.335d.7..
ANS: !
L *00 #nits
!"#: /oderate %&: 18-5
71. )hich of the follo*ing is not a balanced scorecard category,
a.financial measuresb.environmental measuresc.business process measuresd.personnel measures
ANS: !"#: $asy %&: 18-7
7(. A primary purpose of a balanced scorecard is to give
a.managers a *ay to judge past performance.b.stockholders a *ay to judge current performance.c.managers a *ay to forecast future
performance.d.stockholders a *ay to tie strategy to profitability.
ANS: - !"#: /oderate %&: 18-7
7.. "n a balanced scorecard6 measurements should be directly linked to
a.organizational strategy and values.b.the cost management system.c.current organizational profitability.d.activity-based management
concepts.
ANS: A !"#: $asy %&: 18-7
70. -ustomer measures on the balanced scorecard should be
"nternal$9ternal/onetaryNon-monetary
a.yes no no yesb.no yes yes noc.no yes no
yesd.yes yes yes yes
ANS: ! !"#: /oderate %&: 18-7
7'. A balanced scorecard
a.records the variances bet*een budgeted and actual revenues and e9penses.b.can be used at multiple organizational levels by redefining
the categories and measurements.c.is most concerned *ith organizational financial solvency and business processes.d.all of the above.
ANS: !"#: /oderate %&: 18-7
73. %n a balanced scorecard6 *hich of the follo*ing *ould be most appropriate to measure customer service,
a.:apid time-to-market of ne* productsb.-orporate financial profitsc.%n-time deliveryd.!ecrease in re*orked products
ANS: - !"#: $asy %&: 18-7
75. %n a balanced scorecard6 *hich of the follo*ing *ould be most appropriate to measure production process integrity,
a.:apid time-to-market of ne* productsb.-orporate financial profitsc.4o* employee turnoverd.!ecrease in re*orked products
ANS: ! !"#: $asy %&: 18-7
77. %n a balanced scorecard6 *hich of the follo*ing *ould be most appropriate to measure innovation:
a.:apid time-to-market of ne* productsb.-orporate financial profitsc.%n-time deliveryd./anufacturing cycle efficiency
ANS: A !"#: $asy %&: 18-7
78. %n a balanced scorecard6 *hich of the follo*ing *ould be most appropriate to measure financial performance,
a./arket shareb.-ustomer retentionc.=ercentage of sales from ne* productsd."nvestment in intellectual capital
ANS: A !"#: $asy %&: 18-7
8;. A primary characteristic of a performance management system is
a.consistency at all levels in the organization.b.adaptability to differing situations in the organization.c.efficiency of application to all
individuals in the organization.d.fle9ibility to delay re*ards although performance objectives have been met.
ANS: !"#: /oderate %&: 18-1;
81. )hich of the follo*ing *ould not normally affect the compensation strategy of a firm,
a.organizational goalsb.location of firmc.competitiond.number of subsidiaries
ANS: ! !"#: $asy %&: 18-1;
8(. /anagers should be paid
a.on a periodic basis.b.based on results achieved.c.using $S%=s.d.on a piece rate basis.
ANS: !"#: $asy %&: 18-1;
8.. #inancial incentives are
a.different from monetary re*ardsb.the same thing as a salary elementc.provided to all employee groups.d.available to top management
*hose performance e9ceeds targeted objectives
ANS: ! !"#: $asy %&: 18-1;
80. )hich of the follo*ing steps in the performance re*ard plan model comes before the others listed,
a.set performance re*ardsb.identify performance measuresc.determine re*ardd.identify critical success factors
ANS: ! !"#: $asy %&: 18-1;
8'. %bjectives for a pay plan
a.are not needed in a performance-based plan.b.must be stated for a performance-based plan to *ork.c.are essential for a periodic
compensation plan to be successful.d.are unnecessary for a merit pay plan.
ANS: !"#: $asy %&: 18-1;
83. /erit pay is
a.a contingent amount of pay that is earned by managers *hose subunits meet a target rate of return.b.al*ays for a limited period of time
and must be re-earned each period.c.any pay earned *hen the company is profitable.d.a pay increment received *hen a specific
performance level is achieved.
ANS: ! !"#: $asy %&: 18-1;
85. -ontingent pay
a.is al*ays paid in stock options.b.is the sole source of pay an employee receives from his+her employer.c.is received in addition to the
basic *age and is dependent upon performance e9ceeding some performance objective.d.can only apply to individual performance.
ANS: - !"#: $asy %&: 18-1;
87. =iece rate pay
a.is a suitable pay plan for lo*-"J *orkers.b.involves a salary plus pay for each unit produced or carried out.c.encourages 2uality
output.d.does not encourage *orkers to look at the companyCs *ell being.
ANS: ! !"#: $asy %&: 18-1;
88. )hich of the follo*ing pay plans encourages the improvement of the overall companyCs *ell-being,
a.monthly salaryb.cafeteria planc.profit sharingd.pensions
ANS: - !"#: $asy %&: 18-1;
1;;. )hich performance plan is most tied to company objectives,
a.profit sharingb.pensionsc.piece rated.merit pay
ANS: A !"#: $asy %&: 18-1;
1;1. )hich performance plan best promotes 2uality of the product or service,
a.piece rateb.health insurancec.pensionsd.profit sharing
ANS: ! !"#: $asy %&: 18-1;
1;(. $mployee stock o*nership in the employeesC firm
a.*ill encourage short term earnings gro*th patterns.b.*ill encourage employees to take a longer term perspective regarding their
performance in the company.c.is not suitable for hourly or salaried employees.d.is common for management in American firms.
ANS: !"#: /oderate %&: 18-1;
1;.. A pay plan that gives an employee cash or stock e2ual to the difference bet*een some specified stock price and the 2uoted market price at
some future time period is
a.stock appreciation rights.b.an $S%=.c.profit sharing.d.merit pay.
ANS: A !"#: $asy %&: 18-1;
1;0. )hich of the follo*ing types of employee compensation are ta9-e9empt,
a.contingent payb.profit sharingc.cafeteria plansd.stock appreciation rights
ANS: ! !"#: /oderate %&: 18-1;
1;'. 1he traditional compensation package provides
a.fi9ed monthly or *eekly salaries.b.the same salary structure for all groups of employees.c.no incentive for non-top management to
improve performance.d.no need to include incentive compensation.
ANS: - !"#: $asy %&: 18-1;
1;3. -ompensation packages for e9ecutives of American firms
a.are beginning to emphasize the long-term commitment e9ecutives should have in the firm.b.are considered comparable to packages
earned by $uropean and Asian e9ecutives.c.are shifting to*ards lo*er percentages of annual incentives.d.are shifting a*ay from long-
term a*ards.
ANS: A !"#: $asy %&: 18-1;
1;5. A pay plan that does not encourage the overall company good is
a.profit sharing.b.an employee stock option plan.c.contingent pay.d.monthly salary.
ANS: ! !"#: $asy %&: 18-1;
1;7. )hich performance plan is most motivating,
a.health insuranceb.piece ratec.hourly *agesd.pensions
ANS: ! !"#: /oderate %&: 18-1;
1;8. $9patriate employees
a.should be paid a base comparable to *hat he+she *as earning domestically.b.*ill be paid more than corresponding managers in their
home country.c.*ill al*ays pay ta9es in the country in *hich they are based.d.should receive retirement benefits based on local
currencies.
ANS: A !"#: /oderate %&: 18-1;
11;. )hich of the follo*ing statements is true about the values statement of an organization,
a."t is used to formulate the mission statement.b."t reflects the organizationNs culture by identifying beliefs about *hat is important to the
organization.c."t focuses on long-range plans for the organization.d.1he values contained in the statement must be 2uantifiable.
ANS: !"#: $asy %&: 18-1
111. )hich of the follo*ing statements about an organizationNs mission statement is true,
a.1he mission statement should e9press an organizationNs purpose.b.1he mission statement should identify ho* an organization *ill meet
the needs of its targeted customers.c.1he mission statement must be communicated throughout the organization.d.All of the statements are
true.
ANS: A !"#: $asy %&: 18-1
%H2T A3%4E2
1. Ans*er the follo*ing 2uestions regarding economic value added D$EAF:
a.)hat is it intended to do,b.?o* is it measured,c.?o* is the measurement different than that of :",d.)hy is $EA a better performance
measure of :",e.)hat is the major problem *ith using $EA as a long-term performance measure,
ANS:
a.1he purpose of $EA is to more directly align the interests of common shareholders and managers.b.$EA L A+1a9 profit - Dmarket value
of invested capital 9 cost of capital PF.c.$EA uses after-ta9 profit6 cost of capital and market value of assets invested. :" uses segment
income6 target rate of return and book value of assets invested.d.ecause it recognizes that there may be a significant difference bet*een
book value and market value of assets. 1he market value of a company is reflected in stock prices *hich are another measure of
performance evaluation.e.$EA includes the increased investment immediately even though significant income may not occur until
sometime in the future. /ost investments *ill sho* decreased short-term performance D$EAF and may cause a company to refuse
projects that are profitable in the long-term Dsimilar to shortcomings of the payback methodF.
!"#: /oderate %&: 18-0
(. )hat items affect comparability of different divisions *ithin the same company on the basis of $EA6 :%" and :",
ANS:
a.$ach measure is based on accounting income *hich can be manipulated in the short-term by accounting methods used6 *hich can differ
bet*een investment centers.b.1he measurement of the asset base is affected by the choice of *hat to include6 and may include items that
relate to decisions made by prior managers.c.All measures focus primarily on ho* *ell the segments do in isolation *ith results
compared to prior years for the same segment6 rather than relative company-*ide objectives.
!"#: /oderate %&: 18-0
.. )hy is it likely that a subordinate manager *ould be more attentive to certain performance measures than overall corporate objectives to
guide his decision making,
ANS:
/anagers are evaluated based on ho* their actual results compare to specific measures of performance. 1hese performance measures are
intended to be surrogates for the overall corporate goals as they apply to specific managers. 1hus performance measures are selected by
the e9tent to *hich they are good pro9ies for corporate goals Dthat is the e9tent to *hich they operationally define6 and are consistent *ith6
corporate goalsF and are intended to be major focal points for managers.
!"#: /oderate %&: 18-'
0. )hat are some of the major problems associated *ith accrual-based accounting performance measures,
ANS:
1here are t*o major problems *ith accrual-based accounting numbers. 1he first problem is that they can be easily manipulated by
managers. #or e9ample6 the timing of end of period transactions can be accelerated or delayed to affect performance measures. Secondly6
accounting measures cannot capture all corporate goals. Accounting measures are particularly inappropriate to measure 2ualitative
changes in the *orkforce6 2ualitative changes in products6 and achievement of social and non-monetary objectives. Additionally6
accounting measures reflect only a short-term perspective of operations rather than a long-range goal orientation.
!"#: /oderate %&: 18-'
'. )hat distinct advantage does a return on investment measure have over a residual income measure, $9plain.
ANS:
1he advantage of :%" measure over :" is that :%" facilitates a comparison of organizational sub-units of differing sizes. ecause :%" is
a performance measure that automatically scales for size6 large and small sub-units can be compared to each other Dsubject to all the
factors that should be considered *hen t*o units in different industries6 different geographical areas6 etc. are comparedF.
!"#: /oderate %&: 18-0
3. ?o* can return on investment result in sub-optimization *hen it is used as a performance measure,
ANS:
ecause performance measures are used to re*ard performance6 managers use them as decision criteria *hen they evaluate alternative
courses of action. #or e9ample6 if :%" is the performance criterion6 a division manager *ill only invest in ne* projects that *ill result in
an increase in his+her divisionCs :%". 1his is sub-optimal if the overall organization *ould be better off by the division managerCs
investment in available projects *ith lo*er :%"s.
!"#: /oderate %&: 18-0
5. !efine residual income. $valuate residual income as a measure of performance.
ANS:
:esidual income is the remainder of net profit once a target cost of capital has been taken into consideration. :esidual income is
determined by deducting from net income a prescribed or imputed interest charge on assets. 1his method allo*s an organization to use
different rates of interest for various organizational assets. A main advantage of using :" is that it overcomes some limitations of :%"
Dsub-optimizationF.
!"#: /oderate %&: 18-0
7. )hat are some common problems encountered in determining :%",
ANS:
Net income and investment involved can both be calculated several *ays. /ultiple calculations are often presented to sho* the different
factors that affect :%"6 changes in sales6 e9penses6 and capital investments.
!"#: /oderate %&: 18-0
8. !iscuss the *ays in *hich management uses fle9ible budgets.
ANS:
#le9ible budgets are important to managers in performing a variety of functions. #ormulating budgets commits certain activities agreed to
during the planning process to specific monetary amounts. 1he fle9ible budget provides the means to estimate costs at various levels of
activity. 1he control function is undertaken to assure that actual operations meet planned operations. 1hrough this function6 deviations are
determined and variances can be ascertained. /anagers also use fle9ible budgets in performance evaluation. $valuation is more
meaningful *ith valid and accurate data to make the process of evaluation beneficial to all involved.
!"#: /oderate %&: 18-0
1;. "dentify the steps to follo* in establishing the performance re*ard system for a company.
ANS:
1he steps are in the follo*ing order:
1.set strategic goals(.identify the critical success factors..set the compensation strategy0.identify performance measures'.set performance
re*ards3.measure+monitor performance5.determine re*ards
!"#: /oderate %&: 18-1;
11. !iscuss pay-for-performance plans.
ANS:
$mployees should be encouraged by compensation plans to perform and be loyal to the organization. =erformance measures should be
related to a companyCs operational targets. 1hese performance measures do not have to be evenly *eighted. /anagement can assign
higher *eights to more important performance measures as they are related to the corporate goals.
!"#: /oderate %&: 18-1;
1(. !iscuss the rethinking taking place regarding the time frame used in American business performance systems.
ANS:
?istorically6 American time frames for performance has been short term6 often only one year. =resumably management tries to do *hat is
best for the firm and its o*ners. 1hus6 shareholder *ealth ma9imization should be the primary focus of management. Short term profit
ma9imization doesnCt necessarily result in long-run shareholder *ealth ma9imization.
1o encourage this different attitude6 employees and management are being asked to take a longer run perspective. 1his is enhanced *ith
employee stock o*nership in their firm.
!"#: /oderate %&: 18-1;
1.. !eferred compensation techni2ues are currently used in the American *ork place. )hat are they and ho* do they benefit the employer
and the employee,
ANS:
!eferred compensation is pay that *as earned on current performance but is paid later to the employee. 1he compensation may include
profit sharing plans6 pensions6 and stock-based plans like $S%=s. 1he payment by the employer can be deducted currently for ta9
purposes but the employee doesnCt recognize it as income until it is received. "n stock option plans6 earnings in the plan are not ta9able to
the employee until the plan is distributed. Size of the plans are affected by the firmCs stock value and encourage employees to take a more
positive attitude about the companyCs future.
!"#: /oderate %&: 18-1;
10. 4ist the five general criteria that should be considered *hen designing a performance measurement system.
ANS:
1. 1he measures should be established to assess progress to*ard the organizational mission
and its related goals and objectives.
(. 1he persons being evaluated should be a*are of the measurements used and have some
input in developing them.
.. 1he persons being evaluated should have the appropriate skills6 e2uipment6 information6 and
authority to be successful under the measurement system.
0. #eedback of accomplishment should be provided in a timely and useful manner.
'. 1he system should be fle9ible to adapt to ne* conditions in the organizational environment.
!"#: /oderate %&: 18-.
1'. )hat are five advantages that nonfinancial performance measures have over financial performance measures
ANS:
Ans*ers *ill vary on this. 1he major advantages are listed belo*:
-ompared to financial measures6 nonfinancial performance measures are more:
Y re!evant to nonmanagement employees *ho are generally more familiar *ith nonfinancial items
Dsuch as times and 2uantitiesF than financial items Dsuch as costs or profitsF
Y time!y than historical financial data and6 thus6 more apt to indicate *here problems lie or *here
benefits can be obtained
Y re1!ective of the leading indicators of activities that create shareholder *ealth6 such as
manufacturing and delivering 2uality goods and services and providing service for the customer
Y ca#sative of goal-congruent behavior Drather than suboptimizationF because they promote
long-term success rather than the short-term success promoted by financial measures
Y integrated *ith organizational effectiveness because they can be designed to focus on
processes rather than simply outputs
Y indicative of productive activity and the direction of future cash flo*s
Y appropriate for gauging team*ork because they can focus on outputs that result from
organizational effort Dsuch as 2ualityF rather than inputs Dsuch as costsF
Y cross 1#nctiona! than financial measures6 *hich are generally related to one function
Y compara$!e for benchmarking e9ternally than financial measures D*hich can be dramatically
affected by differences in accounting methodsF
Y a!igned *ith the re*ard system because they are more likely to be under the control of
lo*er-level employees than are financial measures
!"#: /oderate %&: 18-3
P2BLEM
Entertainment Givision
1he $ntertainment !ivision is one of the operating units of Soft*are Solutions6 "nc. 1he follo*ing operating data of the division is
presented belo*:

Sales$3,000,000=rofit margin10%1arget return15%:esidual income$ 60,000
1. :efer to the $ntertainment !ivision. )hat *as the segment income of the $ntertainment !ivision for the year,
ANS:
Segment income L =rofit /argin M Sales L .1; M G.6;;;6;;; L G.;;6;;;
!"#: $asy %&: 18-0
(. :efer to $ntertainment !ivision. )hat *as the return on investment for the $ntertainment !ivision,
ANS:
:%" L Segment "ncome+Assets
Segment "ncome L G.6;;;6;;; M .1; L G.;;6;;;
Assets L DG.;;6;;; - G3;6;;;F+.1' L G163;;6;;;
:%" L G.;;6;;;+G163;;6;;; L 17.5'P
!"#: /oderate %&: 18-0
Eastern Givision
1he $astern !ivision of 1e9as -hemical -o. produced the follo*ing operating results for the previous year:
Sales$10,000,000Segment income1,500,000Assets6,000,000
1he $astern !ivision is considering a G16;;;6;;; investment in a ne* project. 1he $astern !ivision estimates that its return on
investment Dfor all of its operationsF *ould be at ((P *ith the ne* investment.
.. :efer to $astern !ivision. ?o* much net segment income is the ne* project e9pected to produce,
ANS:
the total of the ne* segment income L .((DG36;;;6;;;OG16;;;6;;;F L
.((DG56;;;6;;;F L G16'0;6;;;
the portion of the total segment income that is produced by the ne* project L
G16'0;6;;; - G16';;6;;; L G0;6;;;
!"#: /oderate %&: 18-0
0. :efer to $astern !ivision. "f the manager of the $astern !ivision is evaluated on return on investment alone6 *ill the manager invest in
the ne* project, $9plain.
ANS:
1he manager *ould not invest in the ne* project because the ne* project *ould lo*er the !ivisionCs :%" from the current ('P
DG16';;6;;;+G36;;;6;;;F to ((P. 1he ne* project only generates an :%" of 0P DG0;6;;;+G16;;;6;;;F
!"#: /oderate %&: 18-0
'. 1he manager of the )aco !ivision of National -hurch 1ours is preparing the budget for the upcoming year. At this point6 he has
determined that average total assets for the upcoming year *ill e2ual G06;;;6;;;. 1he manager is evaluated on the amount of residual
income generated by the division. Assume variable costs in the )aco !ivision are e9pected to e2ual 3;P of total sales and fi9ed costs are
e9pected to e2ual G0;;6;;;.
a.-ompute the sales level that *ould generate a (;P return on investment.b.Assuming the rate of return is 1'P6 determine the level of
sales that *ould generate G(;;6;;; of residual income.
ANS:
a. 1he re2uired net income L (;P 9 G06;;;6;;; L G7;;6;;;.
sales L net income O fi9ed costs O variable costs
sales L G7;;6;;; OZ G0;;6;;; O D.3; 9 salesF
sales 9 0;P L G16(;;6;;;
sales L G.6;;;6;;;
b. sales L fi9ed costs O variable costs O re2uired return O residual income
sales L G0;;6;;; O D.3; 9 salesF O D.1' 9 salesF O G(;;6;;;
sales L G(60;;6;;;
!"#: /oderate %&: 18-0
3. 1he follo*ing information is given for Alpha and eta !ivisions of #raternity -orporation.
AlphaetaSales$600,000$300,000Ear. cost of goods sold200,000150,000#i9ed manufacturing costs50,00040,000Eariable
selling30,0005,000#i9ed admin. D';P allocatedF20,0004,000#i9ed selling D(;P allocatedF50,00030,000Assets at
cost800,000600,000Accumulated depreciation200,000100,000
a."f #raternity -orporation uses income to evaluate division managers6 compute net income that should be used for that purpose given the
limited data above.b."f #raternity -orporation uses :%" to evaluate division managers and uses historical cost as the investment base6
compute the :%" for Alpha and eta.
ANS:
a.AlphaetaSales$600,000 $300,000 -AS%250,000&%190,000&Aross /argin$350,000 $110,000 Eariable
selling%30,000&%5,000&#i9ed admin%10,000&%2,000&#i9ed selling %40,000& %24,000&-ontrollable
income$270,000 $ 79,000
b.Alphaeta$270,000 2 $800,000$79,000 2 $600,000= 33.75%= 13.17%
!"#: /oderate %&: 18-0
5. "nformation for t*o divisions of -harming -onfections -ompany is given belo*:
=eanut=lainNet income$ 60,000$100,000-apital investment$400,000$500,000
a."f -harming -onfections -ompany charges each division 1(P for capital employed6 compute residual income for the =eanut and =lain
divisions.b.-ompute the :%" for each division.
ANS:
a.=eanut=lainNet income$60,000 $100,000 "nterest charge%48,000& %60,000&:esidual income$12,000 $ 40,000
b.:%"G3;6;;; 9 G0;;6;;;G1;;6;;; 9 G';;6;;;L 1'PL (;P
!"#: /oderate %&: 18-0
7. "nnovative #urnishing Solutions D"#SF6 a division of Steelman -orporation buys and installs modular office components. #or the most
recent year6 the division had the follo*ing performance targets:
Asset turnover2.5=rofit margin6%1arget rate of return on investments for :"13%-ost of capital10%"ncome ta9 rate40%
Actual information concerning the companyCs performance for last year follo*s:
1otal assets at beginning of year$3,600,0001otal assets at end of year5,300,0001otal invested capital Dannual
averageF8,000,000Sales9,000,000Eariable operating costs3,650,000!irect fi9ed costs4,770,000Allocated fi9ed
costs675,000
:e2uired:
a.#or "#S6 compute the segment margin and the average assets for the year.b.ased on segment margin and average assets6 compute the
profit margin6 asset turnover and :%".c.$valuate the :%" performance of "#S.d.@sing your ans*ers from part b.6 compute the residual
income of "#S.e.-ompute the $EA of "#S. )hy are the $EA and :" levels different,f.ased on the data given in the problem6 discuss
*hy :%"6 $EA and :" may be inappropriate measures of performance for "#S.
ANS:
a.Sales$9,000,000 Eariable costs%3,650,000&!irect fi9ed costs%4,770,000&Segment margin$ 580,000
Average assets L DG.63;;6;;; O G'6.;;6;;;F + ( L G060';6;;;
b.=rofit margin L G'7;6;;; + G86;;;6;;; L 3.00PAsset turnover L G86;;;6;;; + G060';6;;; L (.;(:%" L G'7;6;;; + G060';6;;; L 1.P
c.1he target :%" for the division *as (.' 9 3 L 1'P. 1he division generated an :%" of only 1.P. 1hus the division did not achieve its
target rate of return. 1he poor performance resulted from the divisions failure to achieve its targeted asset turnover.
d.:" L G'7;6;;; - D1.P 9 G060';6;;;F
L G'7;6;;; - G'576';; L G1';;
e.After-ta9 profits L preta9 income - ta9es
L G'7;6;;; - DG'7;6;;; 9 0;PF L G.076;;;
$EA L G.076;;; - DG76;;;6;;; 9 1;PF L GD0'(6;;;F
$EA and :" differ for three reasons. #irst6 :" is based on pre-ta9 rather than after-ta9 income. Second6 :" is based on the book value of
investment6 *hereas $EA is based on the market value of investment. 1hird6 the target rates of return differ bet*een the methods.
f.:%"6 :" and $EA are measures of short-term performance. 1hese measures may be particularly inappropriate for divisions that have
long-term missions Dsuch as high gro*thF. "n this case6 the relatively large gro*th and assets of "#S from the beginning of the period to
the end of the period may indicate this division is oriented to gro*th. "f so6 the :%"6 :" and $EA measures *ill provide an incentive
contrary to the gro*th mission.
!"#: !ifficult %&: 18-0
8. 1he -uddly -reations -ompany produces small plastic dolls in its Aeorgia manufacturing plant. 1he company is currently evaluating
*ays to improve productivity. 1he accountant of the firmCs parent organization suggested that management implement a ne*
compensation plan based on throughput performance measure as an incentive to increase productivity. 1o demonstrate ho* such a
measure might *ork6 the accountant gathered the follo*ing production data for a recent month:
1otal units attempted6,000,000Aood units manufactured4,800,000=rocessing time Dtotal hoursF800Ealue-added processing
time600
a.?o* many defective units *ere produced,b.-ompute manufacturing cycle
efficiency.c.-ompute process productivity.d.-ompute process 2uality yield.e.-ompute hourly throughput.
ANS:
a.!efective units L 36;;;6;;; - 067;;6;;; L 16(;;6;;;b./-$ L 3;; D 7;; L 5'Pc.=rocess productivity L 36;;;6;;; D 3;; L 1;6;;; units
per hourd.=rocess 2uality yield L 067;;6;;; D 36;;;6;;; L 7;Pe.1hroughput L 1;6;;; 9 .5' 9 .7 L 36;;; dolls per hour
!"#: /oderate %&: 18-5
Chapter 0Predetermined verhead 2ates< ;!e"i$!e B#dgets< and A$sorption=7aria$!e Costing
MULTIPLE CHICE
1. Since overhead costs are indirect costs6
a.they re2uire some process of allocation.b.they can be easily traced to production.c.a predetermined overhead rate is not
advantageous.d.they cannot be allocated.
ANS: A !"#: $asy %&: .-1
(. -ost allocation is the assignment of <<<<<< costs to one or more products using a reasonable basis.
directindirect
a.yes yesb.yes noc.no nod.no yes
ANS: ! !"#: $asy %&: .-1
.. An actual cost system differs from a normal cost system in that an actual cost system
a.assigns overhead as it occurs during the manufacturing cycle.b.assigns overhead at the end of the manufacturing process.c.does not
assign overhead at all.d.does not use an %verhead -ontrol account.
ANS: !"#: $asy %&: .-(
0. "n a normal cost system6 *hich of the follo*ing is used,
Actual direct materialsActual direct laborActual overhead
a.yes no yesb.yes yes yesc.yes
yes nod.no yes no
ANS: - !"#: $asy %&: .-(
'. =redetermined overhead rates are computed based on
estimated overhead costsestimated level of activity
a.yes yesb.yes noc.no
yesd.no no
ANS: A !"#: $asy %&: .-1
3. %ne reason annual overhead application rates are used is
a.because of seasonal variability of overhead costs.b.to help budget overhead costs.c.to minimize the overhead cost assigned to
products.d.to ma9imize the overhead cost assigned to products.
ANS: A !"#: $asy %&: .-1
5. )hich of the follo*ing is not a reason to use predetermined overhead rates,
a.to overcome the problems of assigning overhead to diverse types of productsb.to compensate for fluctuations in monthly overhead
costsc.to provide a means for assigning overhead during the period rather than at the end of the periodd.to smooth out the amount of
overhead cost assigned to products *hen monthly production activity differs
ANS: A !"#: /oderate %&: .-1
7. )hen a manufacturing company has a highly automated manufacturing plant producing many different products6 *hich of the follo*ing
is the more appropriate basis of applying manufacturing overhead costs to *ork in process,
a.direct labor hoursb.direct labor dollarsc.machine hoursd.cost of materials used
ANS: - !"#: $asy %&: .-1
8. A mi9ed cost has *hich of the follo*ing components,
Eariable component#i9ed component
a.yes nob.yes yesc.no nod.no
yes
ANS: !"#: $asy %&: .-0
1;. "n the formula y L a O bQ6 y represents
a.fi9ed costs.b.total cost.c.variable costs.d.mi9ed costs.
ANS: !"#: $asy %&: .-0
11. "n the formula y L a O bQ6 a represents
a.mi9ed cost.b.variable cost.c.total cost.d.fi9ed cost.
ANS: ! !"#: $asy %&: .-0
1(. "n relationship to changes in activity6 variable overhead changes
in totalper unit
a.no nob.no yesc.yes yesd.yes no
ANS: ! !"#: $asy %&: .-0
1.. "n relationship to changes in activity6 fi9ed overhead changes
in totalper unit
a.yes yesb.no noc.no yesd.yes no
ANS: - !"#: $asy %&: .-0
10. "f the level of activity increases6
a.variable cost per unit and total fi9ed costs increase.b.fi9ed cost per unit and total variable cost increase.c.total cost *ill increase and
fi9ed cost per unit *ill decrease.d.variable cost per unit and total cost increase.
ANS: - !"#: $asy %&: .-0
1'. )eaknesses of the high-lo* method include all of the follo*ing e"cept
a.only t*o observations are used to develop the cost function.b.the high and lo* activity levels may not be representative.c.the method
does not detect if the cost behavior is nonlinear.d.the mathematical calculations are relatively comple9.
ANS: ! !"#: $asy %&: .-0
13. "f there is no BaB value in a linear cost e2uation6 this is an indication that the cost is
a.fi9ed.b.mi9ed.c.variable.d.either fi9ed or mi9ed.
ANS: - !"#: $asy %&: .-0
15. An outlier is
a.something that happens outside the organization that does not affect production.b.al*ays used in analyzing a mi9ed cost.c.something
that happens inside the organization that does not affect production.d.never used in analyzing a mi9ed cost.
ANS: ! !"#: $asy %&: .-0
17. Applied overhead consists of *hich of the follo*ing,
a.actual activity times predetermined overhead rateb.estimated activity times predetermined overhead ratec.actual activity times actual
overhead rated.estimated activity times actual overhead rate
ANS: A !"#: $asy %&: .-(
18. "f a company used t*o overhead accounts Dactual overhead and applied overheadF6 the one that *ould receive the most debits *ould be
a.actual overhead.b.applied overhead.c.both *ould receive an e2ual number of debits.d.impossible to determine *ithout additional
information.
ANS: A !"#: $asy %&: .-(
(;. "f underapplied overhead is considered to be immateria!6 it is closed to *hich of the follo*ing accounts,
)ork in =rocess#inished Aoods-ost of Aoods Sold
a.yes yes yesb.no yes yesc.yes no
nod.no no yes
ANS: ! !"#: $asy %&: .-(
(1. All other things being e2ual6 if actual cost per unit is greater than budgeted cost per unit6 variable overhead *ill be
a.overapplied.b.the same as fi9ed overhead.c.underapplied.d.applied to #inished Aoods.
ANS: - !"#: $asy %&: .-(
((. %verapplied overhead *ill result if
a.the plant is operated at less than e9pected capacity.b.overhead costs incurred *ere greater than estimated overhead costs.c.overhead
costs incurred *ere less than overhead costs charged to production.d.overhead costs incurred *ere greater than overhead charged to
production.
ANS: - !"#: $asy %&: .-(
(.. Actual overhead e9ceeds applied overhead and the amount is immateria!. )hich of the follo*ing *ill be tr#eJ @pon closing6
%verhead is-ost of Aoods Sold *ill
a.underapplied increaseb.overapplied decreasec.overapplied increased.underapplied decrease
ANS: A !"#: $asy %&: .-(
(0. "f actual overhead is less than applied overhead6 *hich of the follo*ing *ill be tr#e, @pon closing6
%verhead is-ost of Aoods Sold is
a.underapplied creditedb.underapplied debitedc.overapplied debitedd.overapplied credited
ANS: ! !"#: $asy %&: .-(
('. 1he estimated ma9imum potential activity for a specified time is:
a.theoretical capacityc.normal capacityb.practical capacityd.e9pected capacity
ANS: A !"#: /oderate %&: .-.
(3. 1he measure of activity that allo*s for routine variations in manufacturing activity is:
a.theoretical capacityc.normal capacityb.practical capacityd.e9pected capacity
ANS: !"#: /oderate %&: .-.
(5. 1he measure of production that considers historical and estimated future production levels and cyclical fluctuations is referred to as:
a.theoretical capacityc.normal capacityb.practical capacityd.e9pected capacity
ANS: - !"#: /oderate %&: .-.
(7. A short-run measure of activity that represents a firmNs anticipated activity level for an upcoming period based upon e9pected demand is
referred to as:
a.theoretical capacityc.normal capacityb.practical capacityd.e9pected capacity
ANS: ! !"#: /oderate %&: .-.
(8. An item or event that has a cause-effect relationship *ith the incurrence of a variable cost is called a
a.mi9ed cost.b.predictor.c.direct cost.d.cost driver.
ANS: ! !"#: $asy %&: .-(
.;. #urman 1ailors has gathered information on utility costs for the past year. 1he controller has decided that utilities are a function of the
hours *orked during the month. 1he follo*ing information is available and representative of the companyNs utility costs:
?ours *orked@tility cost incurred4o* point1,300$ 903?igh point1,6801,074
"f 160(' hours are *orked in a month6 total utility cost Drounded to the nearest dollarF using the high-lo* method should be
a.G805.b.G8'0.c.G8'8.d.G853.
ANS: -
Eariable portion:
#i9ed =ortion
8;. - ;.0' D 16.;;F L G.17
R L G.17 O G;.0'D160('F L G8'8
!"#: /oderate %&: .-0
.1. :eno -orporation uses a predetermined overhead application rate of G..; per direct labor hour. !uring the year it incurred G.0'6;;;
dollars of actual overhead6 but it planned to incur G.3;6;;; of overhead. 1he company applied G.3.6;;; of overhead during the year.
?o* many direct labor hours did the company plan to incur,
a.161';6;;;b.1618;6;;;c.16(;;6;;;d.16(1;6;;;
ANS: -
G.3;6;;; + ..; L 16(;;6;;; direct labor hours
!"#: $asy %&: .-0
.(. irmingham /achine )orks had the follo*ing data regarding monthly po*er costs:
/onth/achine hours=o*er cost&un300$680&ul600720Aug400695Sept.200640
Assume that management e9pects ';; machine hours in %ctober. @sing the high-lo* method6 calculate %ctoberNs po*er cost using
machine hours as the basis for prediction.
a.G5;;b.G5;'c.G51;d.G16.(;
ANS: A
Eariable portion:
#i9ed portion:
G30; - D(;; MG; .(;F L G3;;
G3;; O D';;MG;.(;F L G5;;
!"#: $asy %&: .-0
... Aary -orporation has developed the follo*ing fle9ible budget formula for monthly overhead:
#or output of less than (;;6;;; units:G.363;; O G.7;DunitsF#or output of (;;6;;; units or more:G0.6;;; O G.7;DunitsF
?o* much overhead should Aary e9pect if the firm plans to produce (;;6;;; units,
a.G'(63;;b.G'86;;;c.G18363;;d.G(;.6;;;
ANS: !
G0.6;;; O G;.7;D(;;6;;;F L G0.6;;; O G13;6;;; L G(;.6;;;
!"#: $asy %&: .-'
.0. )alton -orporation *ishes to develop a single predetermined overhead rate. 1he companyCs e9pected annual fi9ed overhead is G.0;6;;;
and its variable overhead cost per machine hour is G(. 1he companyCs relevant range is from (;;6;;; to 3;;6;;; machine hours. )alton
e9pects to operate at 0('6;;; machine hours for the coming year. 1he plantCs theoretical capacity is 7';6;;;. 1he predetermined overhead
rate per machine hour should be
a.G(.0;.b.G(.'5.c.G(.7;.d.G(.7'.
ANS: -
#i9ed component:
Eariable component L G(.;; per unit
1otal predetermined overhead L G(.7; per unit
!"#: $asy %&: .-0
B#r:e Corporation
urke -orporation has the follo*ing data for use of its machinery
/onth@sage-ost&un600$750&ul650775Aug420550Sept500650%ct450570
.'. :efer to urke -orporation. @sing the high-lo* method6 compute the variable cost element.
a.G1.;(b.G.87c.G1..1d.G1.18
ANS:
!"#: $asy %&: .-0
.3. :efer to urke -orporation. @sing the high-lo* method6 compute the fi9ed cost element Dto the nearest *hole dollarF.
a.G(('b.G1.7c.G011d.G.30
ANS:
G55' - 3';D.87F L G55' - 3.5 L G1.7
!"#: $asy %&: .-0
Fenith Corporation
1he records of Kenith -orporation revealed the follo*ing data for the current year.
)ork in =rocess$ 73,150#inished Aoods115,000-ost of Aoods Sold133,650!irect 4abor111,600!irect /aterial84,200
.5. :efer to Kenith -orporation. Assume6 for this 2uestion only6 actual overhead is G8765;; and applied overhead is G8.6(';. /anufacturing
overhead is:
a.overapplied by G1(68;;.b.underapplied by G176.';.c.overapplied by G'60';.d.underapplied by G'60';.
ANS: !
G8765;; - G8.6('; L G'60'; underapplied
!"#: $asy %&: .-(
.7. :efer to Kenith -orporation. Assume that Kenith has underapplied overhead of G.56(;; and that this amount is material. )hat journal
entry is needed to close the overhead account, D:ound decimals to nearest *hole percent.F
a.!ebit )ork in =rocess G760'3H #inished Aoods G1.6(80H -ost of Aoods Sold G1'60'; and credit %verhead G.56(;;b.!ebit %verhead
G.56(;; and credit )ork in =rocess G760'3H #inished Aoods G1.6(80H -ost of Aoods Sold G1'60';c.!ebit )ork in =rocess G.56(;; and
credit %verhead G.56(;;d.!ebit -ost of Aoods Sold G.56(;; and credit %verhead G.56(;;
ANS: A
)"=: 5.61';+.(167;; L G 760'3
#A: 11'6;;;+.(167;; L G1.6(80
$": 1..63';+.(167;; L G1'60';
!"#: /oderate %&: .-(
.8. :efer to Kenith -orporation. Assume that Kenith has underapplied overhead of G1;6;;; and that this amount is immateria!. )hat is the
balance in -ost of Aoods Sold after the underapplied overhead is closed,
a.G1..63';b.G1(.63';c.G10.63';d.G1.567;.
ANS: -
-%AS O @nderapplied %verhead L Adjusted -%AS
G1..63'; O G 1;6;;; L G10.63';
!"#: $asy %&: .-(
0;. :efer to Kenith -orporation. Assume that Kenith has overapplied overhead of G('6;;; and that this amount is materia!. )hat is the
balance in -ost of Aoods Sold after the overapplied overhead is closed,
a.G1(.6(35b.G1006;..c.G1'763';d.G1;763';
ANS: A
G1..63';+G.(167;; M G('6;;; L G1;6.7.

G1..63';-G1;6.7. L G1(.6(35
!"#: /oderate %&: .-(
01. Aztec -ompany is relocating its facilities. 1he company estimates that it *ill take three trucks to move office contents. "f the per truck
rental charge is G16;;; plus (' cents per mile6 *hat is the e9pected cost to move 7;; miles,
a.G16;;;b.G16(;;c.G(60;;d.G.63;;
ANS: !
. trucks M DG16;;; O G;.('D7;;FF L . M G16(;; L G.63;;
!"#: $asy %&: .-(
0(. A2uatic /otor -ompany is e9ploring different prediction models that can be used to forecast indirect labor costs. %ne independent
variable under consideration is machine hours. #ollo*ing are matching observations on indirect labor costs and machine hours for the
past si9 months:
/onth/achine hours"ndirect labor costs1.;;G(;6;;;(0;;G(06;;;.(0;G156;;;0.5;G((6;;;'(;;G1.6;;;3(('G106;;;
"n a high-lo* model6 *hich monthsC observations *ould be used to compute the modelCs parameters,
a.( and 'b.1 and 3c.( and 3d.0 and '
ANS: A !"#: $asy %&: .-0
0.. -onsider the follo*ing three product costing alternatives: process costing6 job order costing6 and standard costing. )hich of these can be
used in conjunction *ith absorption costing,
a.job order costingb.standard costingc.process costingd.all of the above
ANS: ! !"#: $asy %&: .-3
00. Another name for absorption costing is
a.full costing.b.direct costing.c.job order costing.d.fi9ed costing.
ANS: A !"#: $asy %&: .-3
0'. "f a firm produces more units than it sells6 absorption costing6 relative to variable costing6 *ill result in
a.higher income and assets.b.higher income but lo*er assets.c.lo*er income but higher assets.d.lo*er income and assets.
ANS: A !"#: /oderate %&: .-3
03. @nder absorption costing6 fi9ed manufacturing overhead could be found in all of the follo*ing e"cept the
a.*ork-in-process account.b.finished goods inventory account.c.-ost of Aoods Sold.d.period costs.
ANS: ! !"#: $asy %&: .-3
05. "f a firm uses absorption costing6 fi9ed manufacturing overhead *ill be included
a.only on the balance sheet.b.only on the income statement.c.on both the balance sheet and income statement.d.on neither the balance
sheet nor income statement.
ANS: - !"#: $asy %&: .-3
07. @nder absorption costing6 if sales remain constant from period 1 to period (6 the company *ill report a larger income in period ( *hen
a.period ( production e9ceeds period 1 production.b.period 1 production e9ceeds period ( production.c.variable production costs are
larger in period ( than period 1.d.fi9ed production costs are larger in period ( than period 1.
ANS: A !"#: /oderate %&: .-5
08. 1he #AS re2uires *hich of the follo*ing to be used in preparation of e9ternal financial statements,
a.variable costingb.standard costingc.activity-based costingd.absorption costing
ANS: ! !"#: $asy %&: .-3
';. An ending inventory valuation on an absorption costing balance sheet *ould
a.sometimes be less than the ending inventory valuation under variable costing.b.al*ays be less than the ending inventory valuation under
variable costing.c.al*ays be the same as the ending inventory valuation under variable costing.d.al*ays be greater than or e2ual to the
ending inventory valuation under variable costing.
ANS: ! !"#: $asy %&: .-3
'1. Absorption costing differs from variable costing in all of the follo*ing e"cept
a.treatment of fi9ed manufacturing overhead.b.treatment of variable production costs.c.acceptability for e9ternal reporting.d.arrangement
of the income statement.
ANS: !"#: $asy %&: .-3
'(. )hich of the follo*ing is not associated *ith absorption costing,
a.functional formatb.gross marginc.period costsd.contribution margin
ANS: ! !"#: $asy %&: .-3
'.. @nabsorbed fi9ed overhead costs in an absorption costing system are
a.fi9ed manufacturing costs not allocated to units produced.b.variable overhead costs not allocated to units produced.c.e9cess variable
overhead costs.d.costs that cannot be controlled.
ANS: A !"#: $asy %&: .-3
'0. =rofit under absorption costing may differ from profit determined under variable costing. ?o* is this difference calculated,
a.-hange in the 2uantity of all units in inventory times the relevant fi9ed costs per unit.b.-hange in the 2uantity of all units produced
times the relevant fi9ed costs per unit.c.-hange in the 2uantity of all units in inventory times the relevant variable cost per unit.d.-hange
in the 2uantity of all units produced times the relevant variable cost per unit.
ANS: A !"#: $asy %&: .-3
''. )hat factor6 related to manufacturing costs6 causes the difference in net earnings computed using absorption costing and net earnings
computed using variable costing,
a.Absorption costing considers all costs in the determination of net earnings6 *hereas variable costing considers fi9ed costs to be period
costs.b.Absorption costing allocates fi9ed overhead costs bet*een cost of goods sold and inventories6 and variable costing considers all
fi9ed costs to be period costs.c.Absorption costing BinventoriesB all direct costs6 but variable costing considers direct costs to be period
costs.d.Absorption costing BinventoriesB all fi9ed costs for the period in ending finished goods inventory6 but variable costing e9penses all
fi9ed costs.
ANS: !"#: $asy %&: .-5
'3. 1he costing system that classifies costs by functional group only is
a.standard costing.b.job order costing.c.variable costing.d.absorption costing.
ANS: ! !"#: $asy %&: .-3
'5. A functional classification of costs *ould classify Bdepreciation on office e2uipmentB
as a
a.product cost.b.general and administrative e9pense.c.selling e9pense.d.variable cost.
ANS: !"#: $asy %&: .-3
'7. 1he costing system that classifies costs by both functional group and behavior is
a.process costing.b.job order costing.c.variable costing.d.absorption costing.
ANS: - !"#: $asy %&: .-3
'8. @nder variable costing6 *hich of the follo*ing are costs that can be inventoried,
a.variable selling and administrative e9penseb.variable manufacturing overheadc.fi9ed manufacturing overheadd.fi9ed selling and
administrative e9pense
ANS: !"#: $asy %&: .-3
3;. -onsider the follo*ing three product costing alternatives: process costing6 job order costing6 and standard costing. )hich of these can be
used in conjunction *ith variable costing,
a.job order costingb.standard costingc.process costingd.all of them
ANS: ! !"#: $asy %&: .-3
31. Another name for variable costing is
a.full costing.b.direct costing.c.standard costing.d.adjustable costing.
ANS: !"#: $asy %&: .-3
3(. "f a firm uses variable costing6 fi9ed manufacturing overhead *ill be included
a.only on the balance sheet.b.only on the income statement.c.on both the balance sheet and income statement.d.on neither the balance
sheet nor income statement.
ANS: !"#: $asy %&: .-3
3.. @nder variable costing6
a.all product costs are variable.b.all period costs are variable.c.all product costs are fi9ed.d.product costs are both fi9ed and variable.
ANS: A !"#: $asy %&: .-3
30. ?o* *ill a favorable volume variance affect net income under each of the follo*ing methods,
AbsorptionEariable
a.1e#":e no e<<e:,b.1e#":e +n:1e0sec.+n:1e0se no e<<e:,d.+n:1e0se 1e#":e
ANS: - !"#: $asy %&: .-5
3'. Eariable costing considers *hich of the follo*ing to be product costs,
#i9ed
/fg. -osts#i9ed
Selling > Adm.Eariable
/fg. -ostsEariable
Selling > Adm.
a.yes no yes nob.yes no yes
yesc.no no yes yesd.no no yes
no
ANS: ! !"#: $asy %&: .-3
33. 1he variable costing format is often more useful to managers than the absorption costing format because
a.costs are classified by their behavior.b.costs are al*ays lo*er.c.it is re2uired for e9ternal reporting.d.it justifies higher product prices.
ANS: A !"#: $asy %&: .-3
35. 1he difference bet*een the reported income under absorption and variable costing is attributable to the difference in the
a.income statement formats.b.treatment of fi9ed manufacturing overhead.c.treatment of variable manufacturing overhead.d.treatment of
variable selling6 general6 and administrative e9penses.
ANS: !"#: $asy %&: .-5
37. )hich of the follo*ing costs *ill vary directly *ith the level of production,
a.total manufacturing costsb.total period costsc.variable period costsd.variable product costs
ANS: ! !"#: $asy %&: .-3
38. %n the variable costing income statement6 the difference bet*een the Bcontribution marginB and Bincome before income ta9esB is e2ual to
a.the total variable costs.b.the -ost of Aoods Sold.c.total fi9ed costs.d.the gross margin.
ANS: - !"#: $asy %&: .-5
5;. #or financial reporting to the ":S and other e9ternal users6 manufacturing overhead costs are
a.deducted in the period that they are incurred.b.inventoried until the related products are sold.c.treated like period costs.d.inventoried
until the related products have been completed.
ANS: !"#: $asy %&: .-3
51. "n the application of Bvariable costingB as a cost-allocation process in manufacturing6
a.variable direct costs are treated as period costs.b.nonvariable indirect manufacturing costs are treated as product costs.c.variable indirect
manufacturing costs are treated as product costs.d.nonvariable direct costs are treated as product costs.
ANS: - !"#: $asy %&: .-3
5(. A basic tenet of variable costing is that period costs should be currently e9pensed. )hat is the rationale behind this procedure,
a.=eriod costs are uncontrollable and should not be charged to a specific product.b.=eriod costs are generally immaterial in amount and
the cost of assigning the amounts to specific products *ould out*eigh the benefits.c.Allocation of period costs is arbitrary at best and
could lead to erroneous decision by management.d.ecause period costs *ill occur *hether production occurs6 it is improper to allocate
these costs to production and defer a current cost of doing business.
ANS: ! !"#: /oderate %&: .-3
5.. )hich of the follo*ing is a term more descriptive of the term Bdirect costingB,
a.out-of-pocket costingb.variable costingc.relevant costingd.prime costing
ANS: !"#: $asy %&: .-3
50. )hat costs are treated as product costs under variable DdirectF costing,
a.only direct costsb.only variable production costsc.all variable costsd.all variable and fi9ed manufacturing costs
ANS: !"#: $asy %&: .-3
5'. )hich of the follo*ing must be kno*n about a production process in order to institute a variable costing system,
a.the variable and fi9ed components of all costs related to productionb.the controllable and non-controllable components of all costs
related to productionc.standard production rates and times for all elements of productiond.contribution margin and break-even point for
all goods in production
ANS: A !"#: $asy %&: .-3
53. )hy is variable costing not in accordance *ith generally accepted accounting principles,
a.#i9ed manufacturing costs are treated as period costs under variable costing.b.Eariable costing procedures are not *ell kno*n in
industry.c.Net earnings are al*ays overstated *hen using variable costing procedures.d.Eariable costing ignores the concept of lo*er of
cost or market *hen valuing inventory.
ANS: A !"#: $asy %&: .-3
55. )hich of the follo*ing is an argument against the use of direct DvariableF costing,
a.Absorption costing overstates the balance sheet value of inventories.b.Eariable factory overhead is a period cost.c.#i9ed manufacturing
overhead is difficult to allocate properly.d.#i9ed manufacturing overhead is necessary for the production of a product.
ANS: ! !"#: $asy %&: .-3
57. )hich of the follo*ing statements is tr#e for a firm that uses variable costing,
a.1he cost of a unit of product changes because of changes in the number of units manufactured.b.=rofits fluctuate *ith sales.c.An idle
facility variation is calculated.d.None of the above.
ANS: !"#: $asy %&: .-3
58. An income statement is prepared as an internal report. @nder *hich of the follo*ing methods *ould the term contribution margin appear,
Absorption costingEariable costing
a. no nob. no yesc. yes nod. yes
yes
ANS: !"#: $asy %&: .-3
7;. "n an income statement prepared as an internal report using the variable costing method6 fi9ed manufacturing overhead *ould
a.not be used.b.be used in the computation of operating income but not in the computation of the contribution margin.c.be used in the
computation of the contribution margin.d.be treated the same as variable manufacturing overhead.
ANS: !"#: $asy %&: .-5
71. Eariable costing has an advantage over absorption costing for *hich of the follo*ing purposes,
a.analysis of profitability of products6 territories6 and other segments of a businessb.determining the -E= relationship among the major
factors of selling price6 sales mi96 and sales volumec.minimizing the effects of inventory changes on net incomed.all of the above
ANS: ! !"#: $asy %&: .-3
7(. "n the variable costing income statement6 *hich line separates the variable and fi9ed costs,
a.selling e9pensesb.general and administrative e9pensec.product contribution margind.total contribution margin
ANS: ! !"#: $asy %&: .-3
7.. A firm presently has total sales of G1;;6;;;. "f its sales rise6 its
a.net income based on variable costing *ill go up more than its net income based on absorption costing.b.net income based on absorption
costing *ill go up more than its net income based on variable costing.c.fi9ed costs *ill also rise.d.per unit variable costs *ill rise.
ANS: A !"#: /oderate %&: .-5
Lang!ey Corporation
4angley -orporation has the follo*ing standard costs associated *ith the manufacture and sale of one of its products:
!irect materialG..;; per unit!irect labor(.'; per unitEariable manufacturing overhead1.7; per unit#i9ed manufacturing overhead0.;;
per unit Dbased on an estimate of ';6;;; units per yearFEariable selling e9penses.(' per unit#i9ed SA>A e9penseG5'6;;; per
year!uring its first year of operations 4angley manufactured '16;;; units and sold 076;;;. 1he selling price per unit *as G('. All costs
*ere e2ual to standard.
70. :efer to 4angley -orporation. @nder absorption costing6 the standard production cost per unit for the current year *as
a.G11..;.b.G 5..;.c.G11.''.d.G1..;'.
ANS: A
!/ O !4 O E#%? O ##%? L Standard -ost per @nit
G..;; O G(.'; O G1.7; O G0.;; L G11..;
!"#: $asy %&: .-5
7'. :efer to 4angley -orporation. 1he volume variance under absorption costing is
a.G76;;; #.b.G06;;; #.c.G06;;; @.d.G76;;; @.
ANS:
16;;; favorable units production variance M G0.;; fi9ed factory overhead L G06;;; #
!"#: /oderate %&: .-5
73. :efer to 4angley -orporation. @nder variable costing6 the standard production cost per unit for the current year *as
a.G11..;.b.G5..;.c.G5.''.d.G11.''.
ANS:

!/ O !4 O E%? L Standard =roduction -ost per @nit
G..;; O G(.'; O G1.7; L G5..;
!"#: $asy %&: .-5
75. :efer to 4angley -orporation. ased on variable costing6 the income before income ta9es for the year *as
a.G'5;63;;.b.G'3;6;;;.c.G'3(63;;.d.G'056';;.
ANS: -
Sales:G16(;;6;;;Eariable $9penses .3(60;; -ontribution /arginG 7.563;;#i9ed $9penses %verhead G (;;6;;; 5'6;;;Net
"ncome G '3(63;;
LLLLLLLLL
!"#: /oderate %&: .-5
;ord Company
1he follo*ing information is available for #ord -ompany for its first year of operations:
Sales in units'6;;;=roduction in units76;;;/anufacturing costs: !irect laborG. per unit !irect material' per unit Eariable
overhead1 per unit #i9ed overheadG1;;6;;;Net income Dabsorption methodFG.;6;;;Sales price per unitG0;
77. :efer to #ord -ompany. "f #ord -ompany had used variable costing6 *hat amount of income before income ta9es *ould it have reported,
a.G.;6;;;b.DG56';;Fc.G356';;d.canCt be determined from the information given
ANS:

Net "ncome--Absorption -ostingG .;6;;;#i9ed %? in $nding "nventory: G1;;6;;; M D.6;;;+76;;;FDG.56';;FNet 4oss--Eariable
-ostingDG 56';;F
LLLLLLL
!"#: /oderate %&: .-5
78. :efer to #ord -ompany. )hat *as the total amount of Selling6Aeneral and Administrative e9pense incurred by #ord -ompany,
a.G.;6;;;b.G3(6';;c.G36;;;d.canCt be determined from the information given
ANS:
SalesG(;;6;;;-%AS 1;56';;Aross =rofit 8(6';;SA>A Q Net "ncomeG .;6;;;
Q L G3(6';;
!"#: /oderate %&: .-5
8;. :efer to #ord -ompany. "f #ord -ompany *ere using variable costing6 *hat *ould it sho* as the value of ending inventory,
a.G1(;6;;;b.G306';;c.G(56;;;d.G(06;;;
ANS: -
.6;;; units M G8.;;+unit L G(56;;;
!"#: $asy %&: .-5
C!inton Corporation
1he follo*ing information has been e9tracted from the financial records of -linton -orporation for its first year of operations:
@nits produced1;6;;;@nits sold56;;;Eariable costs per unit: !irect materialG7 !irect labor8 /anufacturing overhead.
SA>A0#i9ed costs: /anufacturing overheadG5;6;;; SA>A.;6;;;
81. :efer to -linton -orporation. ased on absorption costing6 -linton -orporationCs income in its first year of operations *ill be
a.G(16;;; higher than it *ould be under variable costing.b.G5;6;;; higher than it *ould be under variable costing.c.G.;6;;; higher than it
*ould be under variable costing.d.higher than it *ould be under variable costing6 but the e9act difference cannot be determined from the
information given.
ANS: A
.6;;; unsold units M G5.;; fi9ed overhead+unit L G(16;;; higher under absorption costing.
!"#: /oderate %&: .-5
8(. :efer to -linton -orporation. ased on absorption costing6 the -ost of Aoods /anufactured for -linton -orporationCs first year *ould be
a.G(;;6;;;.b.G(5;6;;;.c.G.;;6;;;.d.G(1;6;;;.
ANS:
-%A/ L Eariable %verhead O #i9ed %verhead
-%A/ L D1;;6;;; units M G(;+unitF O G5;6;;;
-%A/ L G(5;6;;;
!"#: /oderate %&: .-5
8.. :efer to -linton -orporation. ased on absorption costing6 *hat amount of period costs *ill -linton -orporation deduct,
a.G5;6;;;b.G586;;;c.G.;6;;;d.G'76;;;
ANS: !
=eriod costs L Eariable SA>A O #i9ed SA>A
G'76;;; L D56;;; M G0F O G.;6;;;
!"#: /oderate %&: .-5
80. #or its most recent fiscal year6 a firm reported that its contribution margin *as e2ual to 0; percent of sales and that its net income
amounted to 1; percent of sales. "f its fi9ed costs for the year *ere G3;6;;;6 ho* much *ere sales,
a.G1';6;;;b.G(;;6;;;c.G3;;6;;;d.canCt be determined from the information given
ANS:
4et S L Sales
4et -/ L .0;S
4et N" L .1;S

#- L ..;S
G3;6;;; L ..;S
S L G(;;6;;;
!"#: /oderate %&: .-5
8'. At its present level of operations6 a small manufacturing firm has total variable costs e2ual to 5' percent of sales and total fi9ed costs
e2ual to 1' percent of sales. ased on variable costing6 if sales change by G1.;;6 income *ill change by
a.G;.('.b.G;.1;.c.G;.5'.d.canCt be determined from the information given.
ANS: A
4et S L 1.;;
4et E- L .5'S
4et -/ L .('S
@nder variable costing every dollar of sales *ill increase net income by G;.('.
!"#: $asy %&: .-5
83. 1he follo*ing information regarding fi9ed production costs from a manufacturing firm is available for the current year:
#i9ed costs in the beginning inventory$ 16,000#i9ed costs incurred this period100,000
)hich of the follo*ing statements is not tr#e,
a.1he ma9imum amount of fi9ed production costs that this firm could deduct using absorption costs in the current year is G1136;;;.b.1he
ma9imum difference bet*een this firmCs the current year income based on absorption costing and its income based on variable costing is
G136;;;.c.@sing variable costing6 this firm *ill deduct no more than G136;;; for fi9ed production costs.d."f this firm produced
substantially more units than it sold in the current year6 variable costing *ill probably yield a lo*er income than absorption costing.
ANS: - !"#: /oderate %&: .-5
Enigma Corporation
1he follo*ing information *as e9tracted from the first year absorption-based accounting records of $nigma -orporation
1otal fi9ed costs incurred G1;;6;;;1otal variable costs incurred ';6;;;1otal period costs incurred 5;6;;;1otal variable period costs
incurred .;6;;;@nits produced (;6;;;@nits sold 1(6;;;@nit sales price G1(
85. :efer to $nigma -orporation. )hat is -ost of Aoods Sold for $nigma -orporationCs first year,
a.G7;6;;;b.G8;6;;;c.G076;;;d.canCt be determined from the information given
ANS: -
1otal variable manufacturing costs L G';6;;; - .;6;;; L G(;6;;;
1otal fi9ed period costs incurred L G5;6;;; - .;6;;; L G0;6;;;
1otal fi9ed manufacturing costs L G1;;6;;; - 0;6;;; L G3;6;;;
1otal manufacturing costs L G3;6;;; O G(;6;;; L G7;6;;;
=ercent of goods sold: 1(6;;;+(;6;;; L 3;P
G7;6;;; M 3;P L G076;;;
!"#: !ifficult %&: .-5
87. :efer to $nigma -orporation. "f $nigma -orporation had used variable costing in its first year of operations6 ho* much income DlossF
before income ta9es *ould it have reported,
a.DG36;;;Fb.G'06;;;c.G(36;;;d.G(6;;;
ANS: !
SalesG1006;;;4ess: Eariable -osts /anufacturing G(;6;;; M 3;P 1(6;;; =eriod -osts G.;6;;;
.;.;;;-ontribution /arginG1;(6;;;#i9ed -osts 1;;6;;;Eariable -osting Net "ncome (6;;;
LLLLLL
!"#: !ifficult %&: .-5
88. :efer to $nigma -orporation. ased on variable costing6 if $nigma had sold 1(6;;1 units instead of 1(6;;;6 its income before income
ta9es *ould have been
a.G8.'; higher.b.G11.;; higher.c.G7.'; higher.d.G7... higher.
ANS: -
Sales =rice per @nit: G1(.;;
Eariable -osts per @nit DG';6;;; + (;6;;;F (.';
-ontribution /argin G 7.';
LLLLLL
!"#: /oderate %&: .-5
Aing Corporation
Ving -orporation produces a single product. 1he follo*ing cost structure applied to its first year of operations:
Eariable costs: SA>AG( per unit =roductionG0 per unit#i9ed costs Dtotal cost incurred for the yearF: SA>AG106;;;
=roductionG(;6;;;
1;;. :efer to Ving -orporation. Assume for this 2uestion only that during the current year Ving -orporation manufactured '6;;; units and
sold .67;;. 1here *as no beginning or ending *ork-in-process inventory. ?o* much larger or smaller *ould Ving -orporationCs income
be if it uses absorption rather than variable costing,
a.1he absorption costing income *ould be G36;;; larger.b.1he absorption costing income *ould be G36;;; smaller.c.1he absorption
costing income *ould be G067;; larger.d.1he absorption costing income *ould be G06;;; smaller.
ANS: -
Add back fi9ed manufacturing portion of units unsold D16(;;+'6;;;F M G(;6;;; L G067;;.
!"#: /oderate %&: .-5
1;1. :efer to Ving -orporation. Assume for this 2uestion only that Ving -orporation manufactured and sold '6;;; units in the current year. At
this level of activity it had an income of G.;6;;; using variable costing. )hat *as the sales price per unit,
a.G13.;;b.G17.7;c.G1(.7;d.G10.7;
ANS:
Sales--'6;;; units M &.*)*(=#nitG806;;;Eariable -osts: /anufacturing (;6;;; S A > A 1;6;;;-ontribution /argin
G306;;;#i9ed -osts /anufacturing 106;;; S A > A (;6;;;Net "ncome G.;6;;;
LLLLL
!"#: /oderate %&: .-5
1;(. :efer to Ving -orporation. Assume for this 2uestion only that Ving -orporation produced '6;;; units and sold 06';; units in the current
year. "f Ving uses absorption costing6 it *ould deduct period costs of
a.G(06;;;.b.G.06;;;.c.G(56;;;.d.G(.6;;;.
ANS: !
Eariable SA>A -osts D06';; units M G(+unitFG 86;;;#i9ed SA>A -osts 106;;;1otal period costs to be deductedG(.6;;;
LLLLLL
!"#: /oderate %&: .-5
1;.. :efer to Ving -orporation. Assume for this 2uestion only that Ving -orporation manufactured '6;;; units and sold 06;;; in the current
year. "f Ving employs a costing system based on variable costs6 the company *ould end the current year *ith a finished goods inventory
of
a.G06;;;.b.G76;;;.c.G36;;;.d.G'6;;;.
ANS: A
16;;; units M G0.;; variable cost per unit L G06;;;
!"#: /oderate %&: .-5
Companies 2< %< and T
1hree ne* companies D:6 S6 and 1F began operations on &anuary 1 of the current year. -onsider the follo*ing operating costs that *ere
incurred by these companies during the complete calendar year:
-ompany :-ompany S-ompany 1=roduction in units 1;6;;;1;6;;;1;6;;;Sales price per unit G1;G1;G1;#i9ed production costs
G1;6;;;G(;6;;;G.;6;;;Eariable production costs G.;6;;;G(;6;;;G1;6;;;Eariable SA>A G1;6;;;G(;6;;;G.;6;;;#i9ed SA>A
G.;6;;;G(;6;;;G1;6;;;
1;0. :efer to -ompanies :6 S6 and 1. ased on sales of 56;;; units6 *hich company *ill report the greater income before income ta9es if
absorption costing is used,
a.-ompany :b.-ompany Sc.-ompany 1d.All of the companies *ill report the same income.
ANS: !
@nder absorption costing6 the net income for all three companies is the same.
!"#: /oderate %&: .-5
1;'. :efer to -ompanies :6 S6 and 1. ased on sales of 56;;; units6 *hich company *ill report the greater income before income ta9es if
variable costing is used,
a.-ompany :b.-ompany Sc.-ompany 1d.All of the companies *ill report the same income.
ANS: A
Since -ompany : has the largest variable manufacturing costs6 income *ill increase by the amount that *as held in finished goods
inventory.
!"#: /oderate %&: .-5
1;3. :efer to -ompanies :6 S6 and 1. ased on sales of 1;6;;; units6 *hich company *ill report the greater income before income ta9es if
variable costing is used,
a.-ompany :b.-ompany Sc.-ompany 1d.All of the companies *ill report the same income before income ta9es.
ANS: !
Since all the companies have the same net income and all had the same amount of sales6 all three companies *ould have the same net
income under variable costing.
!"#: /oderate %&: .-5
1;5. A firm has fi9ed costs of G(;;6;;; and variable costs per unit of G3. "t plans on selling 0;6;;; units in the coming year. 1o realize a profit
of G(;6;;;6 the firm must have a sales price per unit of at least
a.G11.;;.b.G11.';.c.G1;.;;.d.G1;.';.
ANS:
Sales--0;6;;; units M G..)5(=#nitG03;6;;;Eariable -osts: /anufacturing (0;6;;;-ontribution /argin G((;6;;;#i9ed -osts
(;;6;;;Net "ncome G (;6;;;
LLLLL
!"#: /oderate %&: .-5
Bennett Corporation
ennett -orporation produces a single product that sells for G5.;; per unit. Standard capacity is 1;;6;;; units per yearH 1;;6;;; units
*ere produced and 7;6;;; units *ere sold during the year. /anufacturing costs and selling and administrative e9penses are presented
belo*.
1here *ere no variances from the standard variable costs. Any under- or overapplied overhead is *ritten off directly at year-end as an
adjustment to cost of goods sold.
#i9ed costsEariable costs!irect materialG;G1.'; per unit produced!irect labor ;1.;; per unit produced/anufacturing
overheadG1';6;;;;.'; per unit producedSelling > Administration e9pense 7;6;;; ;.'; per unit sold
ennett -orporation had no inventory at the beginning of the year.
1;7. :efer to ennett -orporation. "n presenting inventory on the balance sheet at !ecember .16 the unit cost under absorption costing is
a.G(.';.b.G..;;.c.G..';.d.G0.';.
ANS: !
!/ O !4 O E%? O #%? L Absorption -ost per @nit
G1.'; O G1.;; O G;.'; O GD1';6;;;+1;;6;;;F L G0.'; + @nit
!"#: /oderate %&: .-5
1;8. :efer to ennett -orporation. )hat is the net income under variable costing,
a.G';6;;;b.G7;6;;;c.G8;6;;;d.G1(;6;;;
ANS: A
SalesG'3;6;;;Eariable -osts: /aterialsG1(;6;;; 4abor 7;6;;; %verhead 0;6;;; Selling and Administrative
0;6;;;-ontribution /arginG(7;6;;;#i9ed -osts %verhead 1';6;;; Selling and Administrative 7;6;;;Net "ncomeG ';6;;;
LLLLLLL
!"#: /oderate %&: .-5
11;. :efer to ennett -orporation. )hat is the net income under absorption costing,
a.G';6;;;b.G7;6;;;c.G8;6;;;d.G1(;6;;;
ANS:
SalesG'3;6;;;-ost of Aoods Sold: /aterialsG1(;6;;; 4abor 7;6;;; %verhead DEariable and #i9edF 13;6;;;Aross =rofit
G(;;6;;;#i9ed -osts: Selling and AdministrativeG1(;6;;;Net "ncomeG 7;6;;;
LLLLLLL
!"#: /oderate %&: .-5
%H2T A3%4E2
1. )hat are three reasons that overhead must be allocated to products,
ANS:
%verhead must be allocated because it is necessary to D1F determine fill cost6 D(F it can motivate managers6 and D.F it allo*s managers to
compare alternative courses of action.
!"#: /oderate %&: .-1
(. )hy should predetermined overhead rates be used,
ANS:
=redetermined overhead rates should be used for three reasons: D1F to assign overhead to )ork in =rocess during the production cycle
instead of at the end of the periodH D(F to compensate for fluctuations in actual overhead costs that have no bearing on activity levelsH and
D.F to overcome problems of fluctuations in activity levels that have no impact on actual fi9ed overhead costs.
!"#: /oderate %&: .-1
.. )hat are the primary reasons for using a predetermined overhead rate,
ANS:
1. A predetermined overhead rate allo*s overhead to be assigned during a period and therefore improves the timeliness of information.
(. A predetermined overhead rate adjusts for variations in actual overhead costs that are unrelated to activity.
.. A predetermined overhead rate overcomes the problem of fluctuations in activity levels that have no impact on actual fi9ed overhead
costs.
0. @sing a predetermined overhead rate often allo*s managers to be more a*are of individual product or product line profitability as *ell
as the profitability of doing business *ith a particular customer or vendor.
!"#: /oderate %&: .-1
0. !iscuss underapplied and overapplied overhead and its disposition at the end of the period.
ANS:
!uring the course of the production cycle6 actual overhead costs are incurred. )hen overhead is applied to )ork in =rocess6 it is
commonly applied using a predetermined rate. %verhead application at a predetermined rate may cause overhead to be under- or
overapplied. "f actual overhead is greater than applied overhead6 then underapplied overhead results and a debit balance e9ists in the
overhead account. "f applied overhead is greater than actual overhead6 then overapplied overhead results and a credit balance e9ists in the
overhead account. "f the amount of under- or overapplied overhead is immaterial6 it is closed directly to -ost of Aoods Sold. "f the
amount is material6 it must be allocated among )ork in =rocess6 #inished Aoods6 and -ost of Aoods Sold.
!"#: /oderate %&: .-(
'. 4ist and e9plain the four alternative measures of capacity.
ANS:
1heoretical capacity--1his is the estimated ma9imum potential activity for a specified time. "t assumes that all production factors are
operating perfectly. "t disregards such factors as machinery breakdo*ns and reduced plant operations.
=ractical capacity--1his measure reduces theoretical capacity by ongoing regular operating interruptions. "t represents the capacity that
could realistically be achieved during normal *orking hours.
Normal capacity--1his measure considers historical and estimated future production levels and cyclical fluctuations.
$9pected capacity--1his is a short-run capacity measure that represents the firmNs anticipated activity level for the upcoming period based
upon projected product demand.
!"#: !ifficult %&: .-.
3. !iscuss the high-lo* method.
ANS:
1he high-lo* method is a techni2ue for analyzing mi9ed costs. 1he high-lo* method analyzes changes at t*o levels of activity Dthe high
end and the lo* endF *ithin the relevant range. 1he changes in cost and activity are calculated for these t*o levels of activity. !ividing
the change in cost by the change in activity determines the variable cost element portion of the mi9ed cost. %nce this is determined6 the
fi9ed portion is computed by subtracting the variable element times either the high or lo* level of activity from respectively6 total cost at
either the high or lo* level of activity.
!"#: /oderate %&: .-0
5. )hy do managers fre2uently prefer variable costing to absorption costing for internal use,
ANS:
/anagers may prefer variable costing because it classifies costs both by their function and their behavior. )hen costs are classified by
behavior6 managers can more accurately predict ho* total costs *ill change *hen volume changes. )ith more accurate information6
managers can make better production and pricing decisions.
!"#: /oderate %&: .-3
7. )hy is variable costing not used e9tensively in e9ternal reporting,
ANS:
Eariable costing is not used e9tensively outside of the firm because absorption costing is re2uired by AAA= and the ":S.
!"#: /oderate %&: .-3
8. ?o* can a company produce both variable and absorption costing information from a single accounting system,
ANS:
#irms only have one accounting information system. 1his system *ill be based on either variable or absorption costing. "f the system
needs to provide information in both the variable and absorption formats6 the systemCs accounting information can be converted from one
format to the other. 1he conversion re2uires an adjustment to the product inventory accounts and the amount of product costs charged
against the periodCs income. 1he conversion is typically easier if standard costing is employed.
!"#: /oderate %&: .-5
1;. )hat are the major differences bet*een variable and absorption costing,
ANS:
1he major difference bet*een variable costing and absorption costing is in the *ay each defines product cost. )hile absorption costing
includes fi9ed manufacturing overhead as a product cost6 variable costing treats it as a cost of the period. A secondary difference bet*een
the t*o methods is the format of the income statement. Absorption costing utilizes the traditional income statement format that
categorizes costs by their function only. Eariable costing uses an income statement format that categorizes costs by both their function and
behavior.
!"#: /oderate %&: .-3
11. )hy is absorption costing not used for -E= analysis,
ANS:
Absorption costing is not used in break-even analysis because it presents a classification of costs by function rather than by behavior.
)ithout a behavioral classification of costs6 it is impossible to predict ho* total costs change as volume changes.
!"#: /oderate %&: .-5
1(. ?o* do differences in sales and production level affect net income computed under absorption costing and variable costing,
ANS:
"f production e2uals sales6 absorption costing net income e2uals variable costing net income.
"f production e9ceeds sales6 absorption costing net income e9ceeds variable costing net income6 because some fi9ed manufacturing
overhead is deferred as inventory cost on the balance sheet.
"f production is less than sales6 absorption costing net income is less than variable costing net income6 because some fi9ed manufacturing
overhead that had been deferred as inventory cost is no* e9pensed.
!"#: /oderate %&: .-5
P2BLEM
1. ?ume -orporation has the follo*ing data for the current year:
!irect 4abor$220,000!irect /aterial137,800Actual %verhead320,000Applied %verhead395,000:a* /aterial51,394)ork in
=rocess101,926#inished Aoods111,192-ost of Aoods Sold250,182
)hat is the amount of under- or overapplied overhead, =repare the necessary journal entry to dispose of under- or overapplied overhead.
ANS:
Applied %verhead$395,000Actual %verhead 320,000$ 75,000overapplied
)"= G1;168(3+G03.6.;;L.((9 G5'6;;; L G136';;#A G111618(+G03.6.;;L.(09 G5'6;;; L G176;;;-AS G(';617(+G03.6.;;L.'09 G5'6;;;
L G0;6';;
/anufacturing %verhead$75,000)ork in =rocess$16,500#inished Aoods18,000-ost of Aoods Sold40,500
!"#: /oderate %&: .-(
(. 4eon -orporation has the follo*ing data relating to its po*er usage for the first si9 months of the current year.
/onth@sageDV*F-ost&an.';;G0';#eb.'';0''/ar.05'.8'Apr.0('.1;/ay0';.7;&une5('070
Assume usage is *ithin the relevant range of activity.
2e8#ired9
a. @sing the high-lo* method6 compute the cost formula.
b. 4eon -orporation estimates its po*er usage for &uly at 33; *atts. -ompute the total
po*er cost for &uly.
ANS:
@sage-ost?igh725$4844o*425 310300$174
G150+.;; L G.'7 9 0(' L G(03.'; 1otal variable cost
G.1; D1-F - G(03.'; D1E-F L G3..'; #i9ed cost
1- L G3..'; O G;.'7DE-F
At 33; k*6 the total cost *ould be
1- L G3..'; O G;.'7D33; k*hF
1- L G003..;
!"#: /oderate %&: .-0
.. /iller -orporation applies overhead at the rate of 5; percent of direct labor. /iller incurred G0';6;;; of direct labor during the current
year. /iller incurred actual overhead of G.356;;;.
DaF -ompute the amount of under- or overapplied overhead for /iller -orporation for the current year
DbF =repare the necessary journal entry to dispose of the under- or overapplied overhead Dassuming that the amount is immaterialF.
ANS:
a.G0';6;;; 9 5;P LG.1'6;;; applied overhead .356;;; actual overheadG '(6;;; underapplied overhead
b.-ost of Aoods Sold$52,000/anufacturing %verhead$52,000
!"#: $asy %&: .-(
0. Action 1rainers provides a personalized training program that is popular *ith many companies. 1he number of programs offered over the
last five months6 and the costs of offering these programs are as follo*s:
=rograms %ffered-osts "ncurred&an55$15,400#eb4514,050/ar6018,000April5014,700/ay7519,000
a.@sing the high-lo* method6 compute the variable cost per program and the total fi9ed cost per month.b.@sing the least s2uares
regression method6 compute the variable cost per program and the total fi9ed cost per month.
ANS:
a.Eariable cost per program:
-hange in costs G186;;; - G106;'; L G13' per program
-hange in activity 5' - 0'
#i9ed cost:
At high activity L G186;;; - D5' 9 G13'F L G363(' per month
At lo* activity L G106;'; - D0' 9 G13'F L G363(' per month
b.9y9y9
(
55$15,400$
847,0003,0254514,050632,2502,0256018,0001,080,0003,6005014,700735,0002,500 75 19,000 1,425,0
00 5,625285$81,150$4,719,25016,775
L '5
L 136(.;
b L 065186('; - D' '5 136(.;F D13655' - D' '5 F
b L 153.58
a L 136(.; - D153.58 '5F
a L 361'(.85
!"#: /oderate %&: .-0
'. 1he facility manager of ello -orporation asked the systems analyst for information to help in forecasting handling costs. 1he follo*ing
printout *as generated using the least s2uares regression method.
#i9ed costG('';Eariable cost per unit1.7'Activity variable units of production volume
a.@sing the information from the printout6 develop a cost function that can be used to estimate handling costs at different volume
levels.b.$stimate handling costs if e9pected production for ne9t month is (;6;;; units.
ANS:
a.1otal handling costs L G(6''; O G1.7' Dunit productionF
b.1otal handling costs L G(6''; O DG1.7' 9 (;6;;;F L G.86'';
!"#: /oderate %&: .-0
3. 1he /cAlister -o. has the follo*ing information available regarding costs and revenues for t*o recent months. Selling price is G(;.
/archAprilSales revenue$60,000$100,000-ost of goods sold-36,000- 60,000Aross profit$24,000$ 40,0004ess other
e9penses:Advertising$ 600$ 600@tilities4,2005,600Salaries and commissions 3,2004,000Supplies Dbags6 cleaning
supplies etc.F 320400!epreciation 2,3002,300Administrative costs 1,900 1,9001otal-12,520-14,800Net
income$11,480$25,200
2e8#ired9
a."dentify each of the companyCs e9penses Dincluding cost of goods soldF as being either variable6 fi9ed6 or mi9ed.b.y use of the high-lo*
method6 separate each mi9ed e9pense into variable and fi9ed elements. State the cost formula for each mi9ed e9pense.c.)hat is the total
cost e2uation,d.$stimate total cost if sales L G5'6;;;.
ANS:
a.-ostApril/ayehavior-%AS36,000/60,000=60%60,000/100,000=60%KAdvertising600600C@tilities4,200/60,000=
7%5,600/100,000=5.6%MSalaries6 $tc. .6(;;+3;6;;;L'..P4,000/100,000=4%MSupplies320/60,000 .
53%400/100,000=.4%M!epreciation2,3002,300CAdministration1,9001,900C
b.@tilities G160;; L ..'P SalesG0;6;;;
#- L G06(;; - D..'P 9 3;6;;;F L G(61;;
SalariesG7;;+G0;6;;; L (P Sales
#- L G.6(;; - D(P 9 3;6;;;F L G(6;;;
SuppliesG7;+G0;6;;; L .(P sales
#- L G.(; - D.(P 9 G3;6;;;F L G(;;
c.1otal #- L G3;; O G(6.;; O G168;; O G(61;; O G(6;;; O G(;; L G861;;1otal E- L 3;P O ..'P O (P O .(P L 3'.5P sales1- L G861;;
O 3'.5P sales
d.1- L G81;; O D3'.5P 9 G5'6;;;F L G'76.5'
!"#: /oderate %&: .-0
5. ro*ning -ompany o*ns t*o lu9ury automobiles that are used by employees on company business. /ileage and e9penses6 e9cluding
depreciation6 by 2uarters for the most recent year are presented belo*:
Juarter/ileage$9penses#irst3,000$ 550Second3,5005601hird2,000450#ourth 3,500 600 12,000$2,160
2e8#ired9 !etermine the variable cost per mile Dnearest tenth of a centF and the fi9ed costs per 2uarter6 using the method of least s2uares.
ANS:
QRQRQ
(
1
S1
3,000$550$1,650,0009,000,000(
N!
3,5005601,960,00012,250,000.
:!
2,000450900,0004,000,0000
1?
3,500 600 2,100,00012,250,00012,000$2,160$6,610,00037,500,000
<
Q L 1(6;;;+0 L .6;;;+miles per 2uarter
<
R L G(613;+0 L G'0;
b L G3631;6;;; - 0 D.6;;;F DG'0;F L G1.;6;;; L G.;75+mile
G.56';;6;;; - 0 D.6;;;F D.6;;;F G16';;6;;;
a L G'0; - DG.;75F D.6;;;F L G(58
1- L G(58 O .;75+mile
!"#: /oderate %&: .-0
7. %n !ecember .;6 a fire destroyed most of the accounting records of the Adams !ivision6 a small one-product manufacturing division that
uses standard costs and fle9ible budgets. All variances are *ritten off as additions to Dor deductions fromF incomeH none are pro-rated to
inventories. Rou have the task of reconstructing the records for the year. 1he general manager informs you that the accountant has been
e9perimenting *ith both absorption costing and variable costing.
1he follo*ing information is available for the current year:
a.-ash on hand6 !ecember .1$10b.Sales$128,000c.Actual fi9ed indirect manufacturing costs21,000d.Accounts receivable6
!ecember .120,000e.Standard variable manufacturing costs per unit1f.Eariances from standard of all variable manufacturing
costs$5,000@g.%perating income6 absorption-costing basis$14,400h.Accounts payable6 !ecember .118,000i.Aross profit6
absorption costing at standard Dbefore deducting variancesF
22,400j.1otal liabilities100,000k.@nfavorable budget variance6 fi9ed manufacturing costs1,000@l.Notes receivable from chief
accountant4,000m.-ontribution margin6 at standard Dbefore deducting variancesF48,000n.!irect-material purchases6 at standard
prices50,000o.Actual selling and administrative costs Dall fi9edF6,000
2e8#ired9
-ompute the follo*ing items Dignore income ta9 effectsF.
1.%perating income on a variable-costing basis.(.Number of units sold...Number of units produced.0.Number of units used as the
denominator to obtain fi9ed indirect cost application rate per unit on absorption-costing basis.'.!id inventory Din unitsF increase or
decrease, $9plain.3.y ho* much in dollars did the inventory level change DaF under absorption costing6 DbF under variable costing,
5.Eariable manufacturing cost of goods sold6 at standard prices.7./anufacturing cost of goods sold at standard prices6 absorption costing.
ANS:
1.-/48,000 Actual fi9 mfg$21,000 - #-%26,000&- unfavorable EA: %1,000&%perating "ncome DS1!F$22,000 fi9 cost
XS1!$20,000 - unfavorable variances%6,000&%perating "ncome DactualF$16,000 (.Sales $128,000 - -/ %48,000&L
E- $ 80,000 /$1 LNI7 = 80,000 "n+,s so(#..Sales $128,000 - A/ %22,400&-%AS $105,600 /80,000 =
$1.32!ifference in %" L D= - SF fi9 mfg+unitGD163;;F L D= - 7;6;;;F G..( = L 5'6;;;0.%" - absorption cost L G((60;; - G36;;;
L$ 16,400 %" S1! %14,400&%" A-1variances$ 2,000 @N#- other EA: 6,000 @N#E%4 EA:$
4,000 #AEG06;;; # L D5'6;;; - QF G..(Q L 3(6';; units produced'."nventory decreased. %" absorption is less than %"
variable.3.Absorption cost '6;;; units G1..( L G363;;Eariable cost '6;;; units G1 L G'6;;;5.7;6;;; units G1 L G7;6;;;7.7;6;;;
G1..( L G1;'63;;
!"#: !ifficult %&: .-5
8. Sports "nnovators has developed a ne* design to produce hurdles that are used in track and field competition. 1he companyCs hurdle
design is innovative in that the hurdle yields *hen hit by a runner and its height is e9traordinarily easy to adjust. /anagement estimates
e9pected annual capacity to be 8;6;;; unitsH overhead is applied using e9pected annual capacity. 1he companyCs cost accountant predicts
the follo*ing (;;1 activities and related costs:
Standard unit variable manufacturing costsG1(Eariable unit selling e9penseG'#i9ed manufacturing overheadG07;6;;;#i9ed selling and
administrative e9pensesG1.36;;;Selling price per unitG.'@nits of sales7;6;;;@nits of production7'6;;;@nits in beginning
inventory1;6;;;
%ther than any possible under- or overapplied fi9ed overhead6 management e9pects no variances from the previous manufacturing costs.
@nder- or overapplied fi9ed overhead is to be *ritten off to -ost of Aoods Sold.
2e8#ired9
1.!etermine the amount of under- or overapplied fi9ed overhead using DaF variable costing and DbF absorption costing.
(.=repare projected income statements using DaF variable costing and DbF absorption costing.
..:econcile the incomes derived in part (.
ANS:
1.a.G;b.D8;6;;; - 7'6;;;F G'... L G(363'; @(.a.Sales D7;6;;; G.'F L$2,800,000 - E- D7;6;;; G15F L
%1,360,000&-/$1,440,000 - #- %616,000&"ncome before income ta9es$ 824,000 b.Sales D7;6;;;
G.'F$2,800,000 - -%AS DG15... 7;6;;;F%1,386,400&A/$1,413,600 - S>A %536,000&"ncome before income DS1!F
$ 877,600 - E%4 EA: %26,650&"ncome before income ta9es$ 850,950 ..'6;;; G'... L G(363';.
!"#: /oderate %&: .-5
1;. Sherrill -orporation produces a single product. 1he follo*ing is a cost structure applied to its first year of operations.
Sales priceG1' per unitEariable costs: SA>AG( per unit =roductionG0 per unit#i9ed costs Dtotal cost incurred for the yearF:
SA>AG106;;; =roductionG(;6;;;
!uring the first year6 Sherrill -orporation manufactured '6;;; units and sold .67;;. 1here *as no beginning or ending *ork-in-process
inventory.
a.?o* much income before income ta9es *ould be reported if Stanley uses absorption costing,b.?o* much income before income ta9es
*ould be reported if variable costing *as used,c.Sho* *hy the t*o costing methods give different income amounts.
ANS:
a."ncome under absorption costing is: Sales G1' .67;; L $57,000 -%AS .67;; DG0 O G(;6;;;+'6;;;F 30,400 A/
$26,600 %per. $9p. ES$ G( .67;; L $ 7,600 #S$ 14,000%21,600& Absorption income before income ta9es $
5,000 b."ncome under variable costing: -/@ L S= - E=rod.-ost - ESAA L G1' - G0 - G( L G8 Eol. sold .67;; -/ $34,200
4ess: #- - =roduction %20,000& SA>A %14,000& Eariable costing income before income ta9es $ 200 c.:eason for
difference in income: #i9ed costs e9pensed under absorp. costing -%AS .67;; G(;6;;;+'6;;; units$15,200 #i9ed SA>A
14,000 1otal $29,200 #i9ed costs e9pensed under variable costing #i9ed SA>A $14,000 #i9ed =roduction 20,000
1otal #- $34,000 !ifference in #- e9pensed under t*o methods $ 4,800
1his is also the difference in income amounts.
!"#: /oderate %&: .-5
11. 1rent &ohnson -ompany used least s2uares regression analysis to obtain the follo*ing
output:
=ersonnel !epartment -ost
$9plained by Number of
$mployees
-onstant G'67;;
Standard error of R estimate G3.;
: - s2uared ;.78(0
No. of observations (;
!egrees of freedom 17
Q coefficientDsF 1.8;(
Standard error of coefficientDsF ;.;833
a. )hat is the total fi9ed cost,
b. )hat is the variable cost per employee,
c. =repare the linear cost function.
d. )hat is the coefficient of determination, -omment on the goodness
of fit.
ANS:
a. 1he constant or intercept is the total fi9ed cost of G'67;;.
b. 1he variable cost per employee is the Q coefficient of G1.8;(.
c. =ersonnel department cost L G'67;; O G1.8;( M Dnumber of employeesF.
d. 1he coefficient of determination is the : - s2uared of ;.78(0. 1his
represents a very high goodness of fit. 1he closer to 1.;6 the
better the cost driver e9plains the dependent variable. 1herefore6 the
conclusion can be dra*n that there is a significant relationship
bet*een the cost of the personnel department and the number of
employees.
!"#: !ifficult %&: .-5
Chapter ,Process Costing
MULTIPLE CHICE
1. )hich cost accumulation procedure is most applicable in continuous mass-production manufacturing environments,
a.standardb.actualc.processd.job order
ANS: - !"#: $asy %&: 3-1
(. =rocess costing is used in companies that
a.engage in road and bridge construction.b.produce sailboats made to customer specifications.c.produce bricks for sale to the
public.d.construct houses according to customer plans.
ANS: - !"#: $asy %&: 3-1
.. A producer of <<<<<<<< *ould not use a process costing system.
a.gasolineb.potato chipsc.blank videotapesd.stained glass *indo*s
ANS: ! !"#: $asy %&: 3-1
0. A process costing system is used by a company that
a.produces heterogeneous products.b.produces items by special re2uest of customers.c.produces homogeneous products.d.accumulates
costs by job.
ANS: - !"#: $asy %&: 3-1
'. )hich is the best cost accumulation procedure to use for continuous mass production of like units,
a.actualb.standardc.job orderd.process
ANS: ! !"#: $asy %&: 3-1
3. $2uivalent units of production are e2ual to the
a.units completed by a production department in the period.b.number of units *orked on during the period by a production
department.c.number of *hole units that could have been completed if all *ork of the period had been used to produce *hole
units.d.identifiable units e9isting at the end of the period in a production department.
ANS: - !"#: /oderate %&: 3-(
5. "n a process costing system using the *eighted average method6 cost per e2uivalent unit for a given cost component is found by dividing
*hich of the follo*ing by $@=,
a.only current period costb.current period cost plus the cost of beginning inventoryc.current period cost less the cost of beginning
inventoryd.current period cost plus the cost of ending inventory
ANS: !"#: $asy %&: 3-(
7. 1he *eighted average method is thought by some accountants to be inferior to the #"#% method because it
a.is more difficult to apply.b.only considers the last units *orked on.c.ignores *ork performed in subse2uent periods.d.commingles costs
of t*o periods.
ANS: ! !"#: /oderate %&: 3-.
8. 1he first step in determining the cost per $@= per cost component under the *eighted average method is to
a.add the beginning )ork in =rocess "nventory cost to the current periodCs production cost.b.divide the current periodCs production cost by
the e2uivalent units.c.subtract the beginning )ork in =rocess "nventory cost from the current periodCs production cost.d.divide the current
periodCs production cost into the $@=.
ANS: A !"#: /oderate %&: 3-.
1;. 1he difference bet*een $@= calculated using #"#% and $@= calculated using *eighted average is the e2uivalent units
a.started and completed during the period.b.residing in beginning )ork in =rocess "nventory.c.residing in ending )ork in =rocess
"nventory.d.uncompleted in )ork in =rocess "nventory.
ANS: !"#: /oderate %&: 3-.63-0
11. $@= calculations for standard process costing are the same as
a.the $@= calculations for *eighted average process costing.b.the $@= calculations for #"#% process costing.c.4"#% inventory costing
for merchandise.d.the $@= calculations for 4"#% process costing.
ANS: !"#: /oderate %&: 3-'
1(. "n a #"#% process costing system6 *hich of the follo*ing are assumed to be completed first in the current period,
a.units started this periodb.units started last periodc.units transferred outd.units still in process
ANS: !"#: $asy %&: 3-0
1.. 1o compute e2uivalent units of production using the #"#% method of process costing6 *ork for the current period must be stated in units
a.completed during the period and units in ending inventory.b.completed from beginning inventory6 units started and completed during the
period6 and units partially completed in ending inventory.c.started during the period and units transferred out during the
period.d.processed during the period and units completed during the period.
ANS: !"#: /oderate %&: 3-0
10. 1he #"#% method of process costing *ill produce the same cost of goods transferred out amount as the *eighted average method *hen
a.the goods produced are homogeneous.b.there is no beginning )ork in =rocess "nventory.c.there is no ending )ork in =rocess
"nventory.d.beginning and ending )ork in =rocess "nventories are each '; percent complete.
ANS: !"#: $asy %&: 3-0
1'. 1he primary difference bet*een the #"#% and *eighted average methods of process costing is
a.in the treatment of beginning )ork in =rocess "nventory.b.in the treatment of current period production costs.c.in the treatment of
spoiled units.d.none of the above.
ANS: A !"#: $asy %&: 3-.63-0
13. /aterial is added at the beginning of a process in a process costing system. 1he beginning )ork in =rocess "nventory for the process *as
.; percent complete as to conversion costs. @sing the #"#% method of costing6 the number of e2uivalent units of material for the process
during this period is e2ual to the
a.beginning inventory this period for the process.b.units started this period in the process.c.units started this period in the process plus the
beginning )ork in =rocess "nventory.d.units started and completed this period plus the units in ending )ork in =rocess "nventory.
ANS: ! !"#: /oderate %&: 3-.63-0
15. "n a cost of production report using process costing6 transferred-in costs are similar to the
a.cost of material added at the beginning of production.b.conversion cost added during the period.c.cost transferred out to the ne9t
department.d.cost included in beginning inventory.
ANS: A !"#: $asy %&: 3-.
17. "n a process costing system6 the journal entry to record the transfer of goods from !epartment I( to #inished Aoods "nventory is a
a.debit )ork in =rocess "nventory I(6 credit #inished Aoods "nventory.b.debit #inished Aoods "nventory6 credit )ork in =rocess
"nventory I1.c.debit #inished Aoods "nventory6 credit )ork in =rocess "nventory I(.d.debit -ost of Aoods Sold6 credit )ork in =rocess
"nventory I(.
ANS: - !"#: $asy %&: 3-.
18. 1ransferred-in cost represents the cost from
a.the last department only.b.the last production cycle.c.all prior departments.d.the current period only.
ANS: - !"#: $asy %&: 3-.
(;. )hich of the follo*ing isDareF the same bet*een the *eighted average and #"#% methods of calculating $@=s,
@nits to$@=1otal cost toaccount forcalculationsaccount for
a.no yes nob.yes yes yesc.yes no nod.yes
no yes
ANS: ! !"#: $asy %&: 3-.63-0
(1. =rocess costing techni2ues should be used in assigning costs to products
a.if a product is manufactured on the basis of each order received.b.*hen production is only partially completed during the accounting
period.c.if a product is composed of mass-produced homogeneous units.d.*henever standard-costing techni2ues should not be used.
ANS: - !"#: $asy %&: 3-1
((. Averaging the total cost of completed beginning inventory and units started and completed over all units transferred out is kno*n as
a.strict #"#%.b.modified #"#%.c.*eighted average costing.d.normal costing.
ANS: !"#: /oderate %&: 3-.
(.. A process costing system
a.cannot use standard costs.b.restates )ork in =rocess "nventory in terms of completed units.c.accumulates costs by job rather than by
department.d.assigns direct labor and manufacturing overhead costs separately to units of production.
ANS: !"#: $asy %&: 3-(
(0. A process costing system does *hich of the follo*ing,
-alculates $@=sAssigns costs to inventories
a.no nob.no yesc.yes yesd.yes no
ANS: - !"#: $asy %&: 3-.
('. A process costing system
-alculates average cost!etermines total units toper *hole unitaccount for
a.yes yesb.no noc.yes
nod.no yes
ANS: ! !"#: $asy %&: 3-(
(3. A hybrid costing system combines characteristics of
a.job order and standard costing systems.b.job order and process costing systems.c.process and standard costing systems.d.job order and
normal costing systems.
ANS: !"#: $asy %&: 3-3
(5. )hen standard costs are used in process costing6
a.variances can be measured during the production period.b.total costs rather than current production and current costs are used.c.process
costing calculations are made simpler.d.the *eighted average method of calculating $@=s makes computing transferred-out costs easier.
ANS: ! !"#: /oderate %&: 3-'
(7. )hich of the follo*ing is subtracted from *eighted average $@= to derive #"#% $@=,
a.beginning )"= $@= completed in current periodb.beginning )"= $@= produced in prior periodc.ending )"= $@= not
completedd.ending )"= $@= completed
ANS: !"#: $asy %&: 3-(63-0
(8. 1he cost of abnormal continuous losses is
a.considered a product cost.b.absorbed by all units in ending inventory and transferred out on an e2uivalent unit basis.c.*ritten off as a
loss on an e2uivalent unit basis.d.absorbed by all units past the inspection point.
ANS: - !"#: $asy %&: 3-7
.;. Abnormal spoilage can be
continuousdiscrete
a.yes nob.no noc.yes yesd.no yes
ANS: - !"#: $asy %&: 3-7
.1. )hen the cost of lost units must be assigned6 and those same units must be included in an e2uivalent unit schedule6 these units are
considered
a.normal and discrete.b.normal and continuous.c.abnormal and discrete.d.abnormal and continuous.
ANS: ! !"#: /oderate %&: 3-7
.(. A continuous loss
a.occurs unevenly throughout a process.b.never occurs during the production process.c.al*ays occurs at the same place in a production
process.d.occurs evenly throughout the production process.
ANS: ! !"#: $asy %&: 3-7
... )hich of the follo*ing *ould be considered a discrete loss in a production process,
a.adding the correct ingredients to make a bottle of ketchupb.putting the appropriate components together for a stereoc.adding the *rong
components *hen assembling a stereod.putting the appropriate pieces for a bike in the bo9
ANS: - !"#: $asy %&: 3-7
.0. 1he method of neglect handles spoilage that is
a.discrete and abnormal.b.discrete and normal.c.continuous and abnormal.d.continuous and normal.
ANS: ! !"#: /oderate %&: 3-7
.'. 1he cost of normal discrete losses is
a.absorbed by all units past the inspection point on an e2uivalent unit basis.b.absorbed by all units in ending inventory.c.considered a
period cost.d.*ritten off as a loss on an e2uivalent unit basis.
ANS: A !"#: $asy %&: 3-7
.3. 1he cost of abnormal continuous losses is
a.considered a product cost.b.absorbed by all units in ending inventory and transferred out on an e2uivalent unit basis.c.*ritten off as a
loss on an e2uivalent unit basis.d.absorbed by all units past the inspection point.
ANS: - !"#: $asy %&: 3-7
.5. Normal spoilage units resulting from a continuous process
a.are e9tended to the $@= schedule.b.result in a higher unit cost for the good units produced.c.result in a loss being incurred.d.cause
estimated overhead to increase.
ANS: !"#: $asy %&: 3-7
.7. )hen the cost of lost units must be assigned6 and those same units must be included in an e2uivalent unit schedule6 these units are
considered
a.normal and discrete.b.normal and continuous.c.abnormal and discrete.d.abnormal and continuous.
ANS: ! !"#: /oderate %&: 3-7
.8. )hich of the follo*ing accounts is credited *hen abnormal spoilage is *ritten off in an actual cost system,
a./iscellaneous :evenueb.4oss from Spoilagec.#inished Aoodsd.)ork in =rocess
ANS: ! !"#: $asy %&: 3-7
0;. 1he cost of abnormal discrete units must be assigned to
good unitslost units
a.yes yesb.no noc.yes nod.no yes
ANS: ! !"#: $asy %&: 3-7
01. )hich of the follo*ing statements is 1a!se, 1he cost of re*ork on defective units6 if
a.abnormal6 should be assigned to a loss account.b.normal and if actual costs are used6 should be assigned to material6 labor and overhead
costs of the good production.c.normal and if standard costs are used6 should be considered *hen developing the overhead application
rate.d.abnormal6 should be prorated among )ork "n =rocess6 #inished Aoods6 and -ost of Aoods Sold.
ANS: ! !"#: /oderate %&: 3-7
0(. "f normal spoilage is detected at an inspection point *ithin the process Drather than at the endF6 the cost of that spoilage should be
a.included *ith the cost of the units sold during the period.b.included *ith the cost of the units completed in that department during the
period.c.allocated to ending *ork in process units and units transferred out based on their relative values.d.allocated to the good units that
have passed the inspection point.
ANS: ! !"#: /oderate %&: 3-7
0.. 1aylor -o. has a production process in *hich the inspection point is at 3' percent of conversion. 1he beginning inventory for &uly *as .'
percent complete and ending inventory *as 7; percent complete. Normal spoilage costs *ould be assigned to *hich of the follo*ing
groups of units6 using #"#% costing,
eginning$nding@nits Started"nventory"nventory> -ompleted
a.no yes yesb.yes yes yesc.no no yesd.yes no
no
ANS: !"#: /oderate %&: 3-7
00. )hich of the follo*ing is not a 2uestion that needs to be ans*ered *ith regard to 2uality control,
a.)hat happens to the spoiled units,b.)hat is the actual cost of spoilage,c.?o* can spoilage be controlled,d.)hy does spoilage happen,
ANS: A !"#: /oderate %&: 3-7
0'. Normal spoilage units resulting from a continuous process
a.are e9tended to the $@= schedule.b.result in a higher unit cost for the good units produced.c.result in a loss being incurred.d.cause
estimated overhead to increase.
ANS: !"#: $asy %&: 3-7
03. 1he addition of material in a successor department that causes an increase in volume is called
a.accretion.b.re*orked units.c.comple9 procedure.d.undetected spoilage.
ANS: A !"#: $asy %&: 3-7
05. 4ong -ompany transferred '6';; units to #inished Aoods "nventory during September. %n September 16 the company had .;; units on
hand D0; percent complete as to both material and conversion costsF. %n &une .;6 the company had 7;; units D1; percent complete as to
material and (; percent complete as to conversion costsF. 1he number of units started and completed during September *as:
a.'6(;;.b.'6.7;.c.'6';;.d.36.;;.
ANS: A
@nits 1ransferred %ut '6';; 4ess: @nits in eginning "nventory D.;;F @nits Started and
-ompleted '6(;;
!"#: $asy %&: 3-(
07. Areen -ompany started 86;;; units in #ebruary. 1he company transferred out 56;;; finished units and ended the period *ith .6';; units
that *ere 0; percent complete as to both material and conversion costs. eginning )ork in =rocess "nventory units *ere
a. ';;.b. 3;;.c.16';;.d.(6;;;.
ANS: -
Beginning 4or: in Process .<5(( Add: @nits Started 86;;; !educt: @nits 1ransferred %ut
56;;; $nding )ork in =rocess .6';;
!"#: $asy %&: 3-(
08. ush -ompany had beginning )ork in =rocess "nventory of '6;;; units that *ere 0; percent complete as to conversion costs. Q started
and completed 0(6;;; units this period and had ending )ork in =rocess "nventory of 1(6;;; units. ?o* many units *ere started this
period,
a.0(6;;;b.056;;;c.'06;;;d.'86;;;
ANS: -
eginning )ork in =rocess '6;;; Add9 Units %tarted 5/<((( !educt: @nits 1ransferred %ut
056;;; $nding )ork in =rocess 1(6;;;
!"#: /oderate %&: 3-(
';. !i9ie -ompany uses a *eighted average process costing system. /aterial is added at the start of production. !i9ie -ompany started
1.6;;; units into production and had 06';; units in process at the start of the period that *ere 3; percent complete as to conversion costs.
"f !i9ie transferred out 1165'; units6 ho* many units *ere in ending )ork in =rocess "nventory,
a.16(';b..6;;;c..6';;d.'65';
ANS: !
eginning )ork in =rocess 06';; Add: @nits Started 1.6;;; !educt: @nits 1ransferred %ut
1165'; Ending 4or: in Process 5<+5(
!"#: $asy %&: 3-(
'1. 1aylor -ompany uses a *eighted average process costing system and started .;6;;; units this month. 1aylor had 1(6;;; units that *ere
(; percent complete as to conversion costs in beginning )ork in =rocess "nventory and .6;;; units that *ere 0; percent complete as to
conversion costs in ending )ork in =rocess "nventory. )hat are e2uivalent units for conversion costs,
a..567;;b.0;6(;;c.0;67;;d.0(6;;;
ANS:
eginning )ork in =rocess 1(6;;; (;P (60;; O -ompletion of @nits in =rocess 1(6;;; 7;P 863;; O
@nits Started and -ompleted (56;;; 1;;P (56;;; O $nding )ork in =rocess .6;;; 0;P 16(;;
E8#iva!ent Units o1 Prod#ction /(<'((
!"#: $asy %&: 3-(63-.
'(. Verry -ompany makes small metal containers. 1he company began !ecember *ith ('; containers in process that *ere .; percent
complete as to material and 0; percent complete as to conversion costs. !uring the month6 '6;;; containers *ere started. At month end6
165;; containers *ere still in process D0' percent complete as to material and 7; percent complete as to conversion costsF. @sing the
*eighted average method6 *hat are the e2uivalent units for conversion costs,
a..60';b.06'3;c.0631;d.0681;
ANS: !
eginning )ork in =rocess ('; 0;P 1;; O -ompletion of @nits in =rocess ('; 3;P 1'; O
@nits Started and -ompleted .6.;; 1;;P .6.;; O $nding )ork in =rocess 165;; 7;P 16.3;
E8#iva!ent Units o1 Prod#ction /<-.(
!"#: /oderate %&: 3-(63-.
'.. /ehta -ompany -o. uses a #"#% process costing system. 1he company had '6;;; units that *ere 3; percent complete as to conversion
costs at the beginning of the month. 1he company started ((6;;; units this period and had 56;;; units in ending )ork in =rocess
"nventory that *ere .' percent complete as to conversion costs. )hat are e2uivalent units for material6 if material is added at the
beginning of the process,
a.176;;;b.((6;;;c.('6;;;d.(56;;;
ANS:
1he material is added at the beginning of the processH therefore there are ((6;;; e2uivalent units of material.
!"#: $asy %&: 3-(63-0
'0. &ulia -ompany makes fabric-covered hatbo9es. 1he company began September *ith ';; bo9es in process that *ere 1;; percent complete
as to cardboard6 7; percent complete as to cloth6 and 3; percent complete as to conversion costs. !uring the month6 .6.;; bo9es *ere
started. %n September .;6 .'; bo9es *ere in process D1;; percent complete as to cardboard6 5; percent complete as to cloth6 and ''
percent complete as to conversion costsF. @sing the #"#% method6 *hat are e2uivalent units for cloth,
a..6(8'b..6.8'c..60';d..6'8'
ANS: A
eginning )ork in =rocess D"gnored for #"#%F ';; ;P - O -ompletion of @nits in =rocess ';;
(;P 1;; O @nits Started and -ompleted (68'; 1;;P (68'; O $nding )ork in =rocess .'; 5;P
(0' E8#iva!ent Units o1 Prod#ction 0<'-5
!"#: /oderate %&: 3-(63-0
2eed Company
:eed -ompany. has the follo*ing information for November:
eginning )ork in =rocess "nventoryD5;P complete as to conversionF6,000 "n+,sStarted24,000 "n+,s$nding )ork in =rocess
"nventoryD1;P complete as to conversionF8,500 "n+,s
Beginning 4IP Inventory Costs9/aterial$23,400-onversion50,607
C#rrent Period Costs9/aterial$31,500-onversion76,956
All material is added at the start of the process and all finished products are transferred out.
''. :efer to :eed -ompany. ?o* many units *ere transferred out in November,
a.1'6';;b.176;;;c.(16';;d.(06;;;
ANS: -
eginning )ork in =rocess 36;;; Add9 Units %tarted '/<((( Ged#ct9 Units Trans1erred #t
'.<5(( $nding )ork in =rocess 76';;
!"#: $asy %&: 3-(
'3. :efer to :eed -ompany. Assume that *eighted average process costing is used. )hat is the cost per e2uivalent unit for material,
a.G;.''b.G1.;'c.G1..1d.G1.7.
ANS: !
/aterial -osts:eginning G (.60;; -urrent =eriod .16';; '068;; W .;6;;; L & .)*0 units
!"#: /oderate %&: 3-.
'5. :efer to :eed -ompany. Assume that #"#% process costing is used. )hat is the cost per e2uivalent unit for conversion,
a.G..00b.G0.(0c.G'.51d.G5.;.
ANS:
-onversion -osts:eginning D"gnored for #"#%F G - -urrent =eriod 5368'3 G 5368'3 $2uivalent @nits
eginning "nventory D36;;; M .;PF 167;; Started and -ompleted D1'6';;F 1'6';; $nding "nventory D76';; M 1;PF
7'; 1761'; e2uivalent units-ost per e2uivalent unit G 0.(0
!"#: /oderate %&: 3-0
Ho!iday Company
1he ?oliday -ompany makes *reaths in t*o departments: #orming and !ecorating. #orming began the month *ith ';; *reaths in
process that *ere 1;; percent complete as to material and 0; percent complete as to conversion. !uring the month6 36';; *reaths *ere
started. At month end6 #orming had (61;; *reaths that *ere still in process that *ere 1;; percent complete as to material and '; percent
complete as to conversion. Assume #orming uses the *eighted average method of process costing. -osts in the #orming !epartment are
as follo*s:
Beginning 4or: in Process Costs9/aterial$1,000-onversion1,500C#rrent Costs9/aterial$3,200-onversion5,045
1he !ecorating !epartment had 3;; *reaths in process at the beginning of the month that *ere 7; percent complete as to material and 8;
percent complete as to conversion. 1he department had .;; units in ending )ork in =rocess that *ere '; percent complete as to material
and 5' percent complete as to conversion. !ecorating uses the #"#% method of process costing6 and costs associated *ith !ecorating are:
Beginning 4IP Inventory91ransferred "n$1,170/aterial4,320-onversion6,210C#rrent Period91ransferred "n?
/aterial$67,745-onversion95,820
'7. :efer to ?oliday -ompany. ?o* many units *ere transferred to !ecorating during the month,
a. 3;;b.068;;c.'68';d.56;;;
ANS:
)reaths completed from )"=';;)reaths started and completed00;;08;;
!"#: $asy %&: 3-(
'8. :efer to ?oliday -ompany. )hat *as the cost transferred out of #orming during the month,
a.G'6.01b.G36018c.G76(0'd.G76..;
ANS: !
@nits 1ransferred %ut
-ost per $2. @nit
1otal068;;1.5;G76..;
!"#: /oderate %&: 3-.
3;. :efer to ?oliday -ompany. Assume 76;;; units *ere transferred to !ecorating. -ompute the number of e2uivalent units as to costs in
!ecorating for the transferred-in cost component.
a.560;;b.565;;c.76;;;d.763;;
ANS: -
1he transferred-in cost component is the 76;;; units that *ere transferred in.
!"#: /oderate %&: 3-0
31. :efer to ?oliday -ompany. Assume 76;;; units *ere transferred to !ecorating. -ompute the number of e2uivalent units in !ecorating
for material.
a.5685;b.76;;;c.76..;d.760';
ANS: A
Materia!s9 Gecorating9 ;I;UnitsI Comp!eteE8iv) Units
eginning )ork in =rocess
3;;
(;P 1(;
O @nits Started and -ompleted
565;;
1;;P 565;;
O $nding )ork in =rocess
.;;
';P 1';
E8#iva!ent Units o1 Prod#ction +<-+(
!"#: /oderate %&: 3-0
3(. :efer to ?oliday -ompany. Assume 76;;; units *ere transferred to !ecorating. -ompute the number of e2uivalent units in !ecorating
for conversion.
a.568('b.5687'c.76.3;d.7603'
ANS:
Conversion9 Gecorating9 ;I;UnitsI Comp!eteE8#iv)
Units
eginning )ork in =rocess
3;;
1;P 3;
O @nits Started and -ompleted
565;;
1;;P 565;;
O $nding )ork in =rocess
.;;
5'P ((' E8#iva!ent Units o1 Prod#ction +<-*5
!"#: /oderate %&: 3-0
3.. :efer to ?oliday -ompany. Assume that 76;;; units *ere transferred to !ecorating at a total cost of G136;;;. )hat is the material cost
per e2uivalent unit in !ecorating,
a.G7.'; b.G7.3'c.G7.7;d.G8.;0
ANS: A
)hen #"#% is used6 consider only current costs.
C#rrent CostsE8#iv
UnitsCost=
E8#iv UnitG35650'5685;G7.';
!"#: /oderate %&: 3-0
30. :efer to ?oliday -ompany. Assume that 76;;; units *ere transferred to !ecorating at a total cost of G136;;;. )hat is the conversion cost
per e2uivalent unit in !ecorating,
a.G11..(b.G11.03c.G1(.;;d.G1(.57
ANS: -
)hen #"#% is used6 consider only current costs.
C#rrent CostsE8#iv
UnitsCost=
E8#iv UnitG8'67(;5687'G1(.;;
!"#: /oderate %&: 3-0
3'. :efer to ?oliday -ompany. Assume the material cost per $@= is G7.;; and the conversion cost per $@= is G1' in !ecorating. )hat is the
cost of completing the units in beginning inventory,
a.G 83;b.G 16.7;c.G 1673;d.G11680;
ANS: -
Costs to Comp!ete
Beg Inv
Units
Percent to
Comp!ete
Cost per Unit
Tota!/aterials3;;(;PG7 G83; -onversion3;;1;PG1' G8;; Tota! Costs to Comp!ete&.<*,(
!"#: /oderate %&: 3-0
2yan Company
:yan -ompany adds material at the start to its production process and has the follo*ing information available for /arch:
eginning )ork in =rocess "nventoryD0;P complete as to conversionF7,000unitsStarted this period32,000units$nding )ork in
=rocess "nventoryD('P complete as to conversionF2,500units1ransferred out?
33. :efer to :yan -ompany. -ompute the number of units started and completed in /arch.
a.(86';;b..06';;c..36';;d..86;;;
ANS: A
@nits started this period.(6;;;4ess: $nding )ork in =rocess(6';;@nits started and completed this period(86';;
!"#: /oderate %&: 3-(
35. :efer to :yan -ompany. -alculate e2uivalent units of production for material using #"#%.
a..(6;;;b..367;;c..561('d..86;;;
ANS: A
/aterials are added at the beginning of the process. .(6;;; units *ere started in the current periodH therefore there are .(6;;; e2uivalent
units for materials.
!"#: $asy %&: 3-(63-0
37. :efer to :yan -ompany. -alculate e2uivalent units of production for conversion using #"#%.
a..;61('b..06.('c..561(' d..86;;;
ANS:
$2uivalent @nits eginning "nventory D56;;; M 3;PF 06(;; Started and -ompleted D(86';;F (86';;
$nding "nventory D(6';; M ('PF 3(' .06.(' e2uivalent units
!"#: /oderate %&: 3-(63-0
38. :efer to :yan -ompany. -alculate e2uivalent units of production for material using *eighted average.
a..(6;;;b..06.('c..561('d..86;;;
ANS: !
$2uivalent @nits eginning "nventory D56;;; unitsF 56;;; Started this =eriod D.(6;;;F .(6;;;
.86;;; e2uivalent units
!"#: $asy %&: 3-(63-.
5;. :efer to :yan -ompany. -alculate e2uivalent units of production for conversion using *eighted average.
a..06.('b..561('c..76.5'd..868('
ANS:
$2uivalent @nits eginning "nventory D56;;; M 1;;PF 56;;; Started and -ompleted D(86';;F
(86';; $nding "nventory D(6';; M ('PF 3(' .561(' e2uivalent units
!"#: /oderate %&: 3-(63-.
Ma"@e!! Company
/a9*ell -ompany adds material at the start of production. 1he follo*ing production information is available for &une:
eginning )ork in =rocess "nventoryD0'P complete as to conversionF10,000unitsStarted this period120,000units$nding )ork in
=rocess "nventoryD7;P complete as to conversionF8,200units
Beginning 4or: in Process Inventory Costs9/aterial$24,500-onversion68,905
C#rrent Period Costs9/aterial$ 75,600-onversion130,053
51. :efer to /a9*ell -ompany. ?o* many units must be accounted for,
a.1176(;;b.1(76(;;c.1.;6;;;d.1.76(;;
ANS: -
eginning )ork in =rocess 1;6;;;@nits Started1(;6;;;Tota! Units.0(<(((
!"#: $asy %&: 3-(
5(. :efer to /a9*ell -ompany. )hat is the total cost to account for,
a.G 8.60;'b.G(;'63'.c.G(506''7d.G(886;'7
ANS: !
)"=: /aterialsG (06';;)"=: -onversion 3768;'-urrent =eriod: /aterials 5'63;;-urrent =eriod: -onversion 1.;6;'.Tota!
Costs&'--<(5*
!"#: $asy %&: 3-(
5.. :efer to /a9*ell -ompany. ?o* many units *ere started and completed in the period,
a.11167;;b.1(;6;;;c.1(167;;d.1.;6;;;
ANS: A
@nits started this period 1(;6;;; 4ess: $nding )ork in =rocess 76(;; Units started and comp!eted this period ...<*((
!"#: $asy %&: 3-(
50. :efer to /a9*ell -ompany. )hat are the e2uivalent units for material using the *eighted average method,
a.1(;6;;;b.1(.673;c.1(76.3;d.1.;6;;;
ANS: !
$2uivalent @nits eginning "nventory D1;6;;; M 1;;PF 1;6;;; Started and -ompleted D11167;;F
11167;; $nding "nventory D76(;; M ('PF 76(;; 1.;6;;; e2uivalent units
!"#: $asy %&: 3-.
5'. :efer to /a9*ell -ompany. )hat are the e2uivalent units for material using the #"#% method,
a.11167;;b.1(;6;;;c.1('6';;d.1.;6;;;
ANS:
$2uivalent @nits eginning "nventory D"gnored for #"#%F ;Started and -ompleted D11167;;F 11167;;
$nding "nventory D76(;; M ('PF 76(;; 1(;6;;; e2uivalent units
!"#: $asy %&: 3-0
53. :efer to /a9*ell -ompany. )hat are the e2uivalent units for conversion using the *eighted average method,
a.1(;6;;;b.1(.600;c.1(76.3;d.1.;6;;;
ANS: -
eginning )ork in =rocess 1;6;;; 0'P 06';; O -ompletion of @nits in =rocess 1;6;;; ''P '6';; O @nits Started
and -ompleted 11167;; 1;;P 11167;; O $nding )ork in =rocess 76(;; 7;P 36'3; E8#iva!ent Units o1 Prod#ction
.'*<0,(
!"#: /oderate %&: 3-(63-.
55. :efer to /a9*ell -ompany. )hat are the e2uivalent units for conversion using the #"#% method,
a.1176.3;b.1((673;c.1(.673;d.1(76.3;
ANS: -
eginning )ork in =rocess DignoredF 1;6;;; ;P - O -ompletion of @nits in =rocess 1;6;;; ''P '6';; O @nits
Started and -ompleted 11167;; 1;;P 11167;; O $nding )ork in =rocess 76(;; 7;P 36'3; E8#iva!ent Units o1
Prod#ction .'0<*,(
!"#: /oderate %&: 3-(63-0
57. :efer to /a9*ell -ompany. )hat is the material cost per e2uivalent unit using the *eighted average method,
a.G.'7b.G.3(c.G.55d.G.7(
ANS: -
/aterial -osts:eginning G (06';; -urrent =eriod 5'63;; 1;;61;; W 1.;6;;; L & ()++ unitsper unit
!"#: /oderate %&: 3-.
58. :efer to /a9*ell -ompany. )hat is the conversion cost per e2uivalent unit using the *eighted average method,
a.G1.;1b.G1.;'c.G1.''d.G1.31
ANS:
-onversion -osts:eginning G 3768;' -urrent =eriod 1.;6;'. 18768'7 W 1(76.3; L & .)55 unitsper unit
!"#: /oderate %&: 3-.
7;. :efer to /a9*ell -ompany. )hat is the cost of units completed using the *eighted average,
a.G(.56'1;b.G(33650(c.G(5760;; d.G(7(6'53
ANS: !
Units Comp!etedCosts per E8#iva!ent UnitTota!1(167;;D1.'' O .55F L G(..(G(7(6'53
!"#: !ifficult %&: 3-.
71. :efer to /a9*ell -ompany. )hat is the conversion cost per e2uivalent unit using the #"#% method,
a.G1.;'b.G.8'c.G1.31d.G1.''
ANS: A
-onversion -osts:eginning D"gnoredF-urrent =eriod 1.;6;'. 1.;6;'. W 1(.673; L & .)(5 units5er unit
!"#: /oderate %&: 3-0
7(. :efer to /a9*ell -ompany. )hat is the cost of all units transferred out using the #"#% method,
a.G(;063(0b.G1816(78c.G(756;;0d.G(876;(8
ANS: -
Units Comp!etedCosts per E8#iva!ent UnitTota!1(167;;D1.;' O .3.F L G1.37G(;063(0
!"#: !ifficult %&: 3-0
Cher#$ Co)
eginning inventory D.;P complete as to /aterial and 3;P complete for conversionF700unitsStarted this cycle2,000units$nding
inventory D';P complete as to /aterial and 7;P complete for conversionF 500units
Beginning inventory costs9/aterial A$14,270/aterial 5,950-onversion5,640
C#rrent Period costs9/aterial A$40,000/aterial 70,000-onversion98,100
/aterial A is added at the start of production6 *hile /aterial is added uniformly throughout the process.
7.. :efer to -herub -ompany. Assuming a *eighted average method of process costing6 compute $@= units for /aterials A and .
a.(65;; and (6(7;6 respectivelyb.(65;; and (60';6 respectivelyc.(6;;; and (6(0;6 respectivelyd.(6(0; and (65;;6 respectively
ANS:
4eighted AverageMateria! AMateria! Beginning )ork in =rocess5;;5;;@nits Started and -ompleted1';;1';;$nding )ork in
=rocess';;(';EUP Materia!s'+(('/5(
!"#: $asy %&: 3-(63-.
70. :efer to -herub -ompany Assuming a #"#% method of process costing6 compute $@= units for /aterials A and .
a.(65;; and (6(7;6 respectivelyb.(65;; and (60';6 respectivelyc.(6;;; and (6(0;6 respectivelyd.(60'; and (677;6 respectively
ANS: -
;I;Materia! AMateria! Beginning )ork in =rocess;08;@nits Started and -ompleted1';;1';;$nding )ork in =rocess';;(';
EUP Materia!s'(((''/(
!"#: /oderate %&: 3-(63-0
7'. :efer to -herub -ompany Assuming a *eighted average method of process costing6 compute $@= for conversion.
a.(63;;b.(617;c.(6;;;d.(65;;
ANS: A
4eighted Averageeginning )ork in =rocess5;;@nits Started and -ompleted1';;$nding )ork in =rocess0;;(3;;
!"#: /oderate %&: 3-(63-.
73. :efer to -herub -ompany Assuming a #"#% method of process costing6 compute $@= for conversion.
a.(6(0;b.(617;c.(6(7;d.(65;;
ANS:
;I;eginning )ork in =rocess D5;; M 0;PF(7;@nits Started and -ompleted1';;$nding )ork in =rocess D';; M 7;PF0;;(17;
!"#: /oderate %&: 3-(63-0
75. :efer to -herub -ompany Assuming a *eighted average method of process costing6 compute the average cost per unit for /aterial A.
a.G(;.1;b.G(;.;;c.G.1.('d.G.1.;;
ANS: A
4eighted Average9 Materia! Aeginning G 106(5; -urrent =eriod 0;6;;; '06(5; W (65;; L & '().( units5er unit
!"#: /oderate %&: 3-(63-.
77. :efer to -herub -ompany Assuming a #"#% method of process costing6 compute the average cost per $@= for /aterial A.
a.G.1.('b.G(;.1;c.G(;.;;d.G.1.;;
ANS: -
/aterial A -osts
D-urrent =eriodF$2uivalent @nitsAverage -ost per $@=G0;6;;;(6;;;G(;.;;
!"#: /oderate %&: 3-(63-0
78. :efer to -herub -ompany Assuming a #"#% method of process costing6 compute the average cost per $@= for /aterial .
a.G(;.1;b.G.1.('c.G(;.;;d.G.1.;;
ANS:
/aterial -osts
D-urrent =eriodF$2uivalent @nitsAverage -ost per $@=G5;6;;;(6(0;G.1.('
!"#: /oderate %&: 3-(63-0
8;. :efer to -herub -ompany Assuming a *eighted average method of process costing6 compute the average cost per $@= for /aterial .
a.G(;.;;b.G.1.('c.G(;.1;d.G.1.;;
ANS: !
/aterial -osts
Deginning "nventory and -urrent =eriodF$2uivalent @nitsAverage -ost per $@=G5'68';(60';G.1.;;
!"#: /oderate %&: 3-(63-.
81. :efer to -herub -ompany Assuming a #"#% method of process costing6 compute the average cost per $@= for conversion.
a.G0'.';b.G0'.;;c.G0..;.d.G05.'8
ANS:
-onversion -osts
D-urrent =eriodF$2uivalent @nitsAverage -ost per $@=G8761;;(617;G0'.;;
!"#: /oderate %&: 3-(63-0
8(. :efer to -herub -ompany Assuming a *eighted average method of process costing6 compute the average cost per $@= for conversion.
a.G.8.8;b.G0'.;;c.G0..;.d.G05.'8
ANS: A
-onversion -osts
Deginning )"= and -urrent =eriodF$2uivalent @nitsAverage -ost per $@=G8761;; O G'630;(63;;G.8.8;
!"#: /oderate %&: 3-(63-.
Ta!midge Company
1he follo*ing information is available for 1almidge -ompany for the current year:
eginning )ork in =rocessCosts o1 Beginning 4or: in Process9 D5'P completeF14,500 "n+,s
/aterial$25,100Started75,000 "n+,s -onversion50,000$nding )ork in =rocessC#rrent Costs9 D3;P completeF16,000
"n+,s /aterial$120,000Abnormal spoilage2,500 "n+,s -onversion300,000Normal spoilage DcontinuousF5,000
"n+,s1ransferred out66,000 "n+,s
All materials are added at the start of production.
8.. :efer to 1almidge -ompany. @sing *eighted average6 *hat are e2uivalent units for material,
a.7(6;;;b.786';;c.706';;d.5;6;;;
ANS: -
Materia!s9 4eighted AverageUnitsI Comp!eteE8) Unitseginning )ork in =rocess 106';; 1;;P 106';; O @nits Started
and -ompleted '16';; 1;;P '16';; O $nding )ork in =rocess 136;;; 1;;P 136;;; O Abnormal Spoilage
(6';; 1;;P (6';; E8#iva!ent Units o1 Prod#ction */<5((
!"#: $asy %&: 3-(63-.63-7
80. :efer to 1almidge -ompany. @sing *eighted average6 *hat are e2uivalent units for conversion costs,
a.7;63;;b.5761;;c.7.61;;d.5'63;;
ANS:
Conversion9 4eighted AverageUnitsI Comp!eteE8 Unitseginning )ork in =rocess 106';; 1;;P 106';; O @nits
Started and -ompleted '16';; 1;;P '16';; O $nding )ork in =rocess 136;;; 3;P 863;; O Abnormal
Spoilage (6';; 1;;P (6';; E8#iva!ent Units o1 Prod#ction +*<.((
!"#: $asy %&: 3-(63-.63-7
8'. :efer to 1almidge -ompany. )hat is the cost per e2uivalent unit for material using *eighted average,
a.G1.5(b.G1.3(c.G1.55d.G(.;5
ANS: A
4eighted Average9 Materia!seginning G ('61;; -urrent =eriod 1(;6;;; 10'61;; W 706';; L & .)+' units5er unit
!"#: /oderate %&: 3-(63-.
83. :efer to 1almidge -ompany. )hat is the cost per e2uivalent unit for conversion costs using *eighted average,
a.G0.3(b.G0.(1c.G0.07d.G0..0
ANS: -
4eighted Average9 Conversioneginning G ';6;;; -urrent =eriod .;;6;;; .';6;;; W 5761;; L & /)/* units5er
unit
!"#: /oderate %&: 3-(63-.
85. :efer to 1almidge -ompany. )hat is the cost assigned to normal spoilage using *eighted average,
a.G.16;;;b.G1'6';;c.G.;67';d.None of the responses are correct
ANS: !
No costs are assigned to normal6 continuous spoilage. ?igher costs are assigned to good units produced.
!"#: $asy %&: 3-7
87. :efer to 1almidge -ompany. Assume that the cost per $@= for material and conversion are G1.5' and G0.''6 respectively. )hat is the cost
assigned to ending )ork in =rocess,
a.G1;;67;;b.G7560.;c.G1;.617;d.G51637;
ANS: !
E8#iva!ent UnitsCost per E8#iva!ent UnitTota!136;;;G1.5'G(76;;;863;;G0.''G0.637;&+.<,*(
!"#: $asy %&: 3-(63-.
88. :efer to 1almidge -ompany. @sing #"#%6 *hat are e2uivalent units for material,
a.5'6;;;b.5(6';;c.706';;d.5;6;;;
ANS: !
Materia!s9 ;I;eginning )ork in =rocess - ;P - O @nits Started and -ompleted '16';; 1;;P
'16';; O $nding )ork in =rocess 136;;; 1;;P 136;;; O Abnormal Spoilage (6';; 1;;P (6';; E8#iva!ent
Units o1 Prod#ction +(<(((
!"#: $asy %&: 3-(63-063-7
1;;. :efer to 1almidge -ompany. @sing #"#%6 *hat are e2uivalent units for conversion costs,
a.5(6(('b.356(('c.3865('d.5761;;
ANS:
Conversion9 ;I;eginning )ork in =rocess 106';; ('P .63(' O @nits Started and -ompleted '16';; 1;;P
'16';; O $nding )ork in =rocess 136;;; 3;P 863;; O Abnormal Spoilage (6';; 1;;P (6';; E8#iva!ent
Units o1 Prod#ction ,+<''5
!"#: $asy %&: 3-(63-.63-7
1;1. :efer to 1almidge -ompany. @sing #"#%6 *hat is the cost per e2uivalent unit for material,
a.G1.0(b.G1.33c.G1.51d.G1.3;
ANS: -
;I;9 Materia!s-urrent =eriod G 1(;6;;; 1(;6;;; W 5;6;;; L & .)+. units5er unit
!"#: $asy %&: 3-(63-0
1;(. :efer to 1almidge -ompany. @sing #"#%6 *hat is the cost per e2uivalent unit for conversion costs,
a.G0.03b.G0.1'c.G0..;d.G..70
ANS: A
;I;9 Conversion-urrent =eriod G .;;6;;; .;;6;;; W 356((' L & /)/, units5er unit
!"#: $asy %&: 3-(63-0
1;.. :efer to 1almidge -ompany. Assume that the #"#% $@= cost for material and conversion are G1.'; and G0.5'6 respectively. @sing #"#%
*hat is the total cost assigned to the units transferred out,
a.G0106180b.G..86;80c.G00'6000d.G.83685'
ANS: A
Trans1erred #t Units9 ;I;E8#iv
UnitsCost per
E8#iv UnitTota!eginning )ork in =rocess 5'61;; O -ompletion of eginning "nventoryD106';; M ('PF .63(' 0.5' 156(18
O@nits Started and -ompleted'16';; 3.(' .(1675' E8#iva!ent Units o1 Prod#ction /./<.-/
!"#: !ifficult %&: 3-(63-0
Bo@man Company
o*man -ompany has the follo*ing information for &uly:
@nits started100,000unitseginning )ork in =rocess: D.'P completeF20,000unitsNormal spoilage DdiscreteF3,500unitsAbnormal
spoilage5,000units$nding )ork in =rocess: D5;P completeF14,500units1ransferred out97,000unitseginning )ork in =rocess
-osts:/aterial$15,000-onversion10,000
All materials are added at the start of the production process. o*man -ompany inspects goods at 5' percent completion as to
conversion.
1;0. :efer to o*man -ompany. )hat are e2uivalent units of production for material6 assuming #"#%,
a.1;;6;;;b.836';;c.8'6;;;d.1(;6;;;
ANS: A
Materia!s9 ;I;eginning )ork in =rocess - ;P - O @nits Started and -ompleted 556;;; 1;;P
556;;; O Normal Spoilage--!iscrete .6';; 1;;P .6';; O Abnormal Spoilage '6;;; 1;;P '6;;; O $nding
)ork in =rocess 106';; 1;;P 106';; E8#iva!ent Units o1 Prod#ction .((<(((
!"#: /oderate %&: 3-(63-063-7
1;'. :efer to o*man -ompany. )hat are e2uivalent units of production for conversion costs6 assuming #"#%,
a.1;768;;b.1;.68;;c.1;763';d.1;36'('
ANS: !
Conversion9 ;I;eginning )ork in =rocess (;6;;; 3'P 1.6;;; O @nits Started and -ompleted 556;;; 1;;P
556;;; ONormal Spoilage--!iscrete .6';; 5'P (63(' O Abnormal Spoilage '6;;; 5'P .65'; O $nding
)ork in =rocess 106';; 5;P 1;61'; E8#iva!ent Units o1 Prod#ction .(,<5'5
!"#: /oderate %&: 3-(63-063-7
1;3. :efer to o*man -ompany. Assume that the costs per $@= for material and conversion are G1.;; and G1.';6 respectively. )hat is the
amount of the period cost for &uly using #"#%,
a.G;b.G86.5'c.G1;63('d.G1(6';;
ANS: -
Abnormal spoilage is a period cost.
/aterials'6;;; M G1.;;+unitG'6;;;-onversion -osts.65'; M G1.';+unit'63(' 1otal Abnormal SpoilageG1;63('
!"#: /oderate %&: 3-(63-7
1;5. :efer to o*man -ompany. Assume that the costs per $@= for material and conversion are G1.;; and G1.';6 respectively. @sing #"#%6
*hat is the total cost assigned to the transferred-out units Drounded to the nearest dollarF,
a.G(0'65';b.G(0060.7c.G(.56;;;d.G((068.7
ANS:
Trans1erred #t Units9 ;I;eginning )ork in =rocess ('6;;; O -ompletion of eginning "nventoryD(;6;;; M 3'PF
1.6;;; 1.'; 186';; O @nits Started and -ompleted 556;;; (.'; 18(6';; ONormal Spoilage--!iscrete-/aterials
.6';; 1.;; .6';; ONormal Spoilage--!iscrete--onversion (63(' 1.'; .68.7 E8#iva!ent Units o1 Prod#ction
'//</0*
!"#: !ifficult %&: 3-(63-063-7
1;7. :efer to o*man -ompany. )hat are e2uivalent units of production for material assuming *eighted average is used,
a.1;56;;;b.1136';;c.1(;6;;;d.11'6;;;
ANS: -
Materia!s9 4eighted Averageeginning )ork in =rocess (;6;;; 1;;P (;6;;; O @nits Started and -ompleted
556;;; 1;;P 556;;; O Normal Spoilage--!iscrete .6';; 1;;P .6';; O Abnormal Spoilage '6;;;
1;;P '6;;; O $nding )ork in =rocess 106';; 1;;P 106';; E8#iva!ent Units o1 Prod#ction .'(<(((
!"#: $asy %&: 3-(63-.63-7
1;8. :efer to o*man -ompany. )hat are e2uivalent units of production for conversion costs assuming *eighted average is used,
a.11.6'('b.11060;;c.110655'd.11'63';
ANS: A
Conversion9 4eighted Averageeginning )ork in =rocess (;6;;; 1;;P (;6;;; O @nits Started and -ompleted
556;;; 1;;P 556;;; ONormal Spoilage--!iscrete .6';; 5'P (63(' O Abnormal Spoilage '6;;;
5'P .65'; O $nding )ork in =rocess 106';; 5;P 1;61'; E8#iva!ent Units o1 Prod#ction ..0<5'5
!"#: $asy %&: 3-(63-.63-7
11;. :efer to o*man -ompany. Assume that the costs per $@= for material and conversion are G1.;; and G1.';6 respectively. )hat is the
cost assigned to normal spoilage6 using *eighted average6 and *here is it assigned,
EalueAssigned 1o
a.G560.5.'; @nits transferred out and $nding "nventoryb.G560.5.'; @nits transferred outc.G765';.;; @nits transferred out
and $nding "nventoryd.G765';.;; @nits transferred out
ANS:
$2uivalent @nits-ost per
$2uivalent @nit1otal.6';;G1.;;G.6';;.;;(63('G1.';.68.5.';G560.5.'; 1his amount is transferred out.
!"#: $asy %&: 3-(63-.63-7
111. :efer to o*man -ompany. Assume that the costs per $@= for material and conversion are G1.;; and G1.';6 respectively. Assuming that
*eighted average is used6 *hat is the cost assigned to ending inventory,
a.G(865('.;;b.G.5613(.';c.G.7605'.;;d.G.36(';.;;
ANS: A
Ending Inventory9 4eighted Average/aterials106';; G1.;; G 106';;.;; -onversion D106';; M 5;PF1;61'; 1.';
1'6(('.;; Tota! & '-<+'5)((
!"#: $asy %&: 3-(63-.
5ones Company
1he follo*ing information is available for &ones -ompany for April:
Started this month80,000unitseginning )"=D0;P completeF7,500unitsNormal spoilage DdiscreteF1,100unitsAbnormal
spoilage900units$nding )"=D5;P completeF13,000units1ransferred out72,500units
eginning )ork in =rocess -osts:/aterial$10,400-onversion13,800-urrent -osts:/aterial$120,000-onversion350,000
All materials are added at the start of production and the inspection point is at the end of the process.
11(. :efer to &ones -ompany. )hat are e2uivalent units of production for material using #"#%,
a.7;6;;;b.5861;;c.5768;;d.756';;
ANS: A
Materia!s9 ;I;
eginning )ork in =rocess -
;P
-
O @nits Started and -ompleted 3'6;;;
1;;P
3'6;;;
O $nding )ork in =rocess 1.6;;;
1;;P
1.6;;;
O Normal Spoilage DdiscreteF 161;;
1;;P
161;;
O Abnormal Spoilage 8;;
1;;P
8;; E8#iva!ent Units o1 Prod#ction *(<(((
!"#: /oderate %&: 3-(63-063-7
11.. :efer to &ones -ompany. )hat are e2uivalent units of production for conversion costs using #"#%,
a.5865;;b.586';;c.7161;;d.7;63;;
ANS: !
Conversion9 ;I;
UnitsI Comp!ete
EUP
eginning )ork in =rocess 56';;
3;P
06';;
O @nits Started and -ompleted 3'6;;;
1;;P
3'6;;;
O $nding )ork in =rocess 1.6;;;
5;P
861;;
O Normal Spoilage DdiscreteF 161;;
1;;P
161;;
O Abnormal Spoilage 8;;
1;;P
8;; E8#iva!ent Units o1 Prod#ction *(<,((
!"#: /oderate %&: 3-(63-063-7
110. :efer to &ones -ompany. )hat are e2uivalent units of production for material using *eighted average,
a.7363;;b.756';;c.7360;;d.7'6';;
ANS:
Materia!s9 4eighted AverageUnitsI Comp!eteEUP
eginning )ork in =rocess
56';;
1;;P 56';;
O @nits Started and -ompleted 3'6;;;
1;;P
3'6;;;
O $nding )ork in =rocess 1.6;;;
1;;P
1.6;;;
O Normal Spoilage DdiscreteF 161;;
1;;P
161;;
O Abnormal Spoilage 8;;
1;;P
8;; E8#iva!ent Units o1 Prod#ction *+<5((
!"#: $asy %&: 3-(63-.63-7
11'. :efer to &ones -ompany. )hat are e2uivalent units of production for conversion costs using *eighted average,
a.7.63;;b.7(65;;c.7(6';;d.7163;;
ANS: A
Conversion9 ;I;
UnitsI Comp!ete
EUP
eginning )ork in =rocess 56';;
1;;P
56';;
O @nits Started and -ompleted 3'6;;;
1;;P
3'6;;;
O $nding )ork in =rocess 1.6;;;
5;P
861;;
O Normal Spoilage DdiscreteF 161;;
1;;P
161;;
O Abnormal Spoilage 8;;
1;;P
8;; E8#iva!ent Units o1 Prod#ction *0<,((
!"#: $asy %&: 3-(63-.63-7
113. :efer to &ones -ompany. )hat is cost per e2uivalent unit for material using #"#%,
a.G1.3.b.G1..5c.G1.';d.G1.'3
ANS: -
;I;9 Materia!s-urrent =eriod G 1(;6;;; 1(;6;;; W 7;6;;; L & .)5( units5er unit
!"#: $asy %&: 3-(63-0
115. :efer to &ones -ompany. )hat is cost per e2uivalent unit for conversion costs using #"#%,
a.G0.;;b.G0.18c.G0..0d.G0..7
ANS: -
;I;9 Conversion-urrent =eriod G .';6;;; .';6;;; W 7;63;; L & /)0/ units5er unit
!"#: $asy %&: 3-(63-0
117. :efer to &ones -ompany. )hat is cost per e2uivalent unit for material using *eighted average,
a.G1.08b.G1.3.c.G1.'3d.G1.00
ANS: A
4eighted Average9 Materia!seginning G 1;60;; -urrent =eriod 1(;6;;; 1.;60;; W 756';; L & .)/- units5er unit
!"#: $asy %&: 3-(63-.
118. :efer to &ones -ompany. )hat is cost per e2uivalent unit for conversion costs using *eighted average,
a.G0.18b.G0.01c.G0.''d.G0..'
ANS: !
4eighted Average9 Conversioneginning G 1.67;; -urrent =eriod .';6;;; .3.67;; W 7.63;; L & /)05 units5er unit
!"#: $asy %&: 3-(63-.
1(;. :efer to &ones -ompany. )hat is the cost assigned to ending inventory using #"#%,
a.G5'68(;b.G'76880c.G'360(;d.G'.6100
ANS:
Ending Inventory9 ;I;
/aterials
1.6;;;
G 1.';
G 186';;.;;
-onversion D1.6;;; M 5;PF 861;;
0..0
.86080.;; Tota! & 5*<--/)((
!"#: /oderate %&: 3-(63-0
1(1. :efer to &ones -ompany. )hat is the cost assigned to abnormal spoilage using #"#%,
a.G16.';b.G.68;3c.G'6('3d.G360(0
ANS: -
A$norma!
%poi!ed Units
Price per E8#iva!ent Unit
Tota!8;;G'.70G'6('3
!"#: /oderate %&: 3-(63-063-7
1((. :efer to &ones -ompany. )hat is the cost assigned to normal spoilage and ho* is it classified using *eighted average,
a.G3618. allocated bet*een )"= and 1ransferred %utb.G360(0 allocated bet*een )"= and 1ransferred %utc.G3618. assigned to loss
accountd.G360(0 assigned to units 1ransferred %ut
ANS: !
3orma!
%poi!ed Units
Price per E8#iva!ent Unit
Tota!161;;G'.70G360(01ransferred %ut
!"#: /oderate %&: 3-(63-063-7
1(.. :efer to &ones -ompany. )hat is the total cost assigned to goods transferred out using *eighted average,
a.G0.'6;7;b.G0(867(0c.G0(763'3d.G0(.60;;
ANS:
6oods Trans1erred #t
Price per E8#iva!ent Unit
Tota!5.63;;G'.70G0(867(0
!"#: !ifficult %&: 3-(63-.
%H2T A3%4E2
1. !iscuss ho* spoilage is treated in $@= computations.
ANS:
"f spoilage is normal and continuous6 the calculations for $@= do not include this spoilage Dmethod of neglectF6 and the good units simply
absorb the cost of such spoilage. "f spoilage is normal and discrete6 the e2uivalent units are used in the $@= calculations6 and the spoilage
cost is assigned to all units that passed through the inspection point during the current period. "f the spoilage is abnormal and either
discrete or continuous6 the e2uivalent units are used in $@= calculations and costed at the cost per $@=H the total cost is then assigned to a
loss account.
!"#: /oderate %&: 3-7
(. !iscuss the assignment of costs to transferred-out inventories in both process costing methods.
ANS:
1he assignment of costs in a process costing system first involves determining total production costs. 1hese costs are then assigned to
units completed and transferred out during the period and to the units in )ork in =rocess "nventory at the end of the period. 1o assign
costs6 the cost per e2uivalent unit must be established using either the #"#% or *eighted average method. 1he cost per $@= is then
multiplied by the number of e2uivalent units in the component being costed. 1ransferred-out costs using the *eighted average method are
computed as the number of units transferred times the total price per e2uivalent unit. )hen using #"#%6 transferred-out units are
computed as follo*s: the costs in beginning )"= are added to the current period costs to complete the units *hich sums to the total cost
of beginning )"=H the units started and completed are priced at current period costsH the total of the costs of beginning inventory and units
started and completed are then transferred out.
!"#: /oderate %&: 3-.63-0
.. !iscuss process costing in a multi-department atmosphere.
ANS:
)hen a business has more than one department in its production process6 products are transferred from !epartment A to !epartment
and so on. As the products are transferred from department to department so6 too6 must the costs be transferred. )hen products are
transferred6 the units and costs are treated as input material in the ne9t department. 1he ne* department may add additional material
or may simply add conversion costs and finish the products. 1he total cost of the products is a cumulative total from all departments
*ithin the process.
!"#: /oderate %&: 3-.
0. !iscuss standard costing as used in conjunction *ith process costing.
ANS:
)hen standard costing is used in conjunction *ith process costing6 the costing procedure is simplified. Standard costing eliminates the
calculation in each ne* period of a ne* production cost because the standards are established as on going norms for Dat leastF a one-year
period of time. Standard costing in a process costing system is essentially a #"#% system that permits variances to be recognized during
the period.
!"#: /oderate %&: 3-'
'. )hat are t*o alternative calculations that can be used to either check an e2uivalent units ans*er or to obtain the ans*er initially,
ANS:
%ne alternative method of calculating e2uivalent units for *eighted average is to determine units transferred out and add to that the
e2uivalent units of ending *ork in process. Another alternative method of calculating e2uivalent units for #"#% is to determine e2uivalent
units of production under *eighted average and subtract the beginning *ork in process e2uivalent units that *ere completed in the last
period. oth of these methods may be used to BcheckB original ans*ers.
!"#: /oderate %&: 3-5
3. !iscuss ho* spoilage is treated in $@= computations.
ANS:
"f spoilage is normal and continuous6 the calculations for $@= do not include this spoilage Dmethod of neglectF6 and the good units simply
absorb the cost of such spoilage. "f spoilage is normal and discrete6 the e2uivalent units are used in the $@= calculations6 and the spoilage
cost is assigned to all units that passed through the inspection point during the current period. "f the spoilage is abnormal and either
discrete or continuous6 the e2uivalent units are used in $@= calculations and costed at the cost per $@=H the total cost is then assigned to a
loss account.
!"#: /oderate %&: 3-7
5. !iscuss *hy units are lost during production.
ANS:
"n most production processes6 losses are anticipated to a certain degree. 4osses may be classified as normal and abnormal depending on
managementCs e9pectations. A normal loss is one that is e9pected6 *hile an abnormal loss is one that e9ceeds the normal loss. 1he losses
may result in spoiled or defective units. Spoiled units cannot be economically re*orkedH defective units can be. 4osses can occur on a
continuous or a discrete basis. Juality control points are established at the end of and+or *ithin the process to inspect goods and remove
from further processing those units that are either spoiled or defective.
!"#: /oderate %&: 3-7
P2BLEM
Landers Company
4anders -ompany has the follo*ing information available for /ay:
eginning )ork in =rocess "nventoryD('P complete as to conversionF10,000unitsStarted120,000units$nding )ork in =rocess
"nventoryD.;P complete as to conversionF30,000units
Beginning 4or: in Process Inventory Costs9/aterial$ 2,100-onversion2,030
C#rrent Period Costs9/aterial$ 33,000-onversion109,695
All material is added at the start of production and all products completed are transferred out.
1. :efer to 4anders -ompany. =repare an e2uivalent units schedule using the DaF #"#% and DbF *eighted average method.
ANS:
4anders -ompany
Schedule of $2uivalent @nits for
#ifo and )eighted Average
/ay .16 (;Q'
;I;4eighted Averageeginning )ork "n =rocess10,000eginning )ork "n =rocess10,000@nits Started120,000@nits
Started120,000@nits to Acct. #or130,000@nits to Acct. #or130,000eginning )ork "n =rocess10,0001ransferred %ut
100,000Started > -ompleted90,000$nding )ork in =rocess 30,000$nding )ork in =rocess 30,000@nits Accounted
#or130,000@nits Accounted #or130,000
DaF;I;DbF 4eighted Average/at.--/at.--)"=07,500S > -90,00090,0001%100,000100,000$)"= 30,000
9,000$" 30,000 9,000$@= 120,000106,500$@=130,000109,000
!"#: /oderate %&: 3-.63-0
(. :efer to 4anders -ompany. =repare a schedule sho*ing the computation for cost per e2uivalent unit assuming the DaF #"#% and DbF
*eighted average method.
ANS:
4anders -ompany
Schedule of Average -ost =er @nit
#"#% and )eighted Average
/ay .16 (;Q'
DaF ;I;DbF 4eighted Average/at.--/at.---osts G..6;;;G1;8638'G .'61;;G11165('$2 @nits
1(;6;;; 1;36';; 1.;6;;; 1;86;;;G.(5'+e2 unitG 1.;.+e2 unitG .(5+e2 unitG 1.;('+e2 unitTota! cost=e8) #nit& .)0(5=e8
#nit& .)'-5=e8 #nit
!"#: /oderate %&: 3-.63-0
.. :efer to 4anders -ompany. =repare a schedule sho*ing the assignment of costs assuming the DaF #"#% and DbF *eighted average method.
ANS:
4anders -ompany
Schedule of Assigned -osts
#"#% and )eighted Average
/ay .16 (;Q'
DaF #"#%eginning )ork in =rocess$ 4,1301o complete D56';; 9 G1.;.F L 7,725$ 11,855
Started and -ompleted8;6;;; 9 G1..;' L 117,4501otal costs transferred out$129,305
$nding )ork in =rocess.;6;;; 9 G .(5' L$ 8,25086;;; 9 G1.;. L 9,270$ 17,520
1otal costs accounted for$146,825DbF )eighted Average-ompleted1;;6;;; 9 G1.(8' L$129,500$nding )ork in =rocess.;6;;; 9 G .
(5 L$ 8,10086;;; 9 G1.;(' L 9,225$ 17,3251otal costs accounted for$146,825
!"#: !ifficult %&: 3-.63-0
0. 1he S*eet 1emptations -ompany has t*o processing departments6 -ooking and =ackaging. "ngredients are placed into production at the
beginning of the process in -ooking6 *here they are formed into various shapes. )hen finished6 they are transferred into =ackaging6
*here the candy is placed into heart and tu9edo bo9es and covered *ith foil. All material added in =ackaging is considered as one
material for convenience. Since the bo9es contain a variety of candies6 they are considered partially complete until filled *ith the
appropriate assortment. 1he follo*ing information relates to the t*o departments for #ebruary (;Q5:
Coo:ing Gepartment9eginning )"= D.;P complete as to conversionF4,500units@nits started this period15,000units$nding )"=
D3;P complete as to conversionF2,400unitsPac:aging Gepartment9eginning )"= D8;P complete as to material6 7;P complete as to
conversionF 1,000units@nits started during period?$nding )"= D7;P complete as to material and 7;P complete as to
conversionF500units
a. !etermine e2uivalent units of production for both departments using the *eighted average method.
b. !etermine e2uivalent units of production for both departments using the #"#% method.
ANS:
a.Coo:ing Gepartment/aterials-onversion -osts1ransferred %ut17,10017,100$nding )ork in =rocess 2,400 1,4401%1A4
$@=19,50018,540
Pac:aging Gepartment1ransferred "n/aterials.-onversion
-osts1ransferred %ut17,60017,60017,600$nding )ork in =rocess 500 400 4001%1A4
$@=18,10018,00018,000
b.Coo:ing Gepartment/aterials-onversion-ostseginning )ork in =rocess03,1501ransferred from
-ooking12,60012,600$nding )ork in =rocess 2,400 1,4401%1A4 $@=15,00017,190
Pac:aging Gepartment1ransferred "n/aterials-onversion -ostseginning )ork in =rocess01002001ransferred from
-ooking16,60016,60016,600$nding )ork in =rocess 500 400 4001%1A4 $@=17,10017,10017,200
!"#: !ifficult %&: 3-.63-0
'. 1he follo*ing costs *ere accumulated by !epartment ( of ?ughes -ompany during April:
-ost 1ransferred
from !ept. 1
/aterial
-onversion
-osts
1otaleginning "nventory$ 17,050$ 5,450$ 22,500-urrent =eriod -ost184,000$ 34,000104,000 322,000$
201,050$ 34,000$ 109,450$344,500
=roduction for April in !epartment ( Din unitsF:
)"=-April 1(6;;; 3;P complete-omplete period transferred (;6;;;)"=-April .;'6;;; 0;P complete
/aterials are not added in !epartment ( until the very end of processing !epartment (.
2e8#ired9 -ompute the cost of units completed and the value of ending )"= for:
a.)eighted average inventory assumption
b.#"#% inventory assumption
ANS:
a.)eighted average inventory assumption!ept 1/A1---omplete20,00020,00020,000$2-$nd )"= 5,000 0
2,000$=-)A25,00020,00022,000
@nit G(;16;'; L G7.;0(G.06;;; L G1.5;G1;860'; L G0.85'L G10.515-ost ('6;;;(;6;;;((6;;;
$nd )"=!ept 1 L '6;;; 9 G7.;0(= $40,210-- L (6;;; units 9 G0.85'= 9,950$50,160
-%A/ L G.006';; - G';613; L G(806.0;
b.#"#% inventory assumption
!ept 1/A1---omplete20,000 20,00020,000 $2-$nd )"=5,000 02,000 - $2-egin %2,000& 0 %1,200&$=-
)A23,000 20,00020,800
@nit G1706;;; L G7.;;G.06;;; L G1.5;G1;06;;; L G'.;;L G10.5;-ost (.6;;;(;6;;;(;67;;
$nd )"=!ept 1 L '6;;; units 9 G7.;;= $40,000-- L (6;;; units 9 G'.;;= 10,000$50,000
-%A/ L G.006';; - G';6;;; L G(806';;
!"#: /oderate %&: 3-.63-0
3. 1he formula for a chemical compound re2uires one pound of -hemical Q and one pound of -hemical R. "n the simplest sense6 one pound
of -hemical Q is processed in !epartment A and transferred to !epartment for further processing *here one pound of -hemical R is
added *hen the process is '; percent complete. )hen the processing is complete in !epartment 6 the finished compound is transferred
to finished goods. 1he process is continuous6 operating (0 hours a day.
Normal spoilage occurs in !epartment A. #ive percent of material is lost in the first fe* seconds of processing. No spoilage occurs in
!epartment .
1he follo*ing data are available for the month of August (;Q3:
!ept. A!ept. @nits in process6 August 18,00010,000Stage of completion of beginning inventory3/43/10@nits started or
transferred in50,000?@nits transferred out46,500?@nits in process6 August .1??Stage of completion of ending
inventory1/31/5@nits of -hemical R added in !epartment 44,500
2e8#ired9
a.=repare a schedule sho*ing finished e2uivalents for -hemical Q and for conversion cost for !epartment A using the #"#%
method.b.!etermine for !epartment the number of units of good product completed during August and the number of units in process
on August .1.c.=repare a schedule for !epartment sho*ing finished e2uivalents for preceding department cost6 cost of -hemical R6 and
conversion cost using the #"#% method.
ANS:
a.c./aterials-onversion-osts=!/at--46,500 46,500 44,500 44,50044,500 9,000 3,000 12,000 02,400 %8,00
0&%6,000&%10,000& 0%3,000&47,500 43,500 46,500 44,50043,900
b.Since the material in the second department goes in at the '; percent point and the ending )"= inventory is only at the (; percent point6
units complete is the same as the e2uivalents of material 006';;6 given that units started plus units in beginning )"= are e2ual to units
complete plus ending )"= 1;6;;; O 036';; - 006';; L 1(6;;; units in ending )"=.
!"#: /oderate %&: 3-.63-0
5. Juigley -ompany manufactures a specialized product. !epartment ( adds ne* material to the units received from !epartment 1 at the
end of process. A normal loss occurs early in processing. =roduction and cost data for !epartment ( for the month of September are as
follo*s:
=roduction record Din unitsF:"n process6 September 1-5'P complete for processing cost 4,000:eceived from !epartment
120,000-ompleted and transferred to finished goods16,0004ost in processing DnormalF 2,000"n process6 September .;-(+.
complete for process cost 6,000
-ost :ecord:)ork in process inventory6 September 1:=receding department cost$ 620=rocessing cost 2,000$2,620-ost from
preceding department in September 1,800/aterial cost for September 4,800=rocessing cost for September10,200
2e8#ired9 !etermine the follo*ing for !epartment ( under DaF *eighted average the method of costing and DbF the #"#% method of
costing: D1F unit costs for each cost component6 D(F cost of production transferred to finished goods6 D.F cost of *ork in process inventory
of September .;.
ANS:
$2uivalent production1"/aterial-onv. cost@nits complete16,000 16,00016,000 O $2uiv. ending )"= 6,000 0
4,000 L $2uiv. prod. average22,00016,00020,000 - $2uiv. begin. )"=%4,000& 0%3,000&L $2uiv. prod.
#"#%18,000 16,00017,000
@nit -ost Average@nit -ost #"#%7I = $620 ' 1,8007I = $1,800 22,000= $0.11 18,000= $0.10
/at L$4,800/at = $4,80016,000= $0.30 16,000= $0.30
-- L $2,000 ' 10,200-- L $10,200 20,000= $0.61 17,000= $0.60
$nd. )"=-)A$nd. )"=-#"#%=!6,000 2 $0.11 =$ 660.006,000 2 $0.10 =$ 600.00--4,000 2 $0.61 =
2,440.004,000 2 $0.60 = 2,400.00 $3,100.00$3,000.00
-ost of Aoods -omplete
)A#"#%$19,420 - 3,100 =$16,320.00$19,420 - 3,000 =$16,420.00
!"#: /oderate %&: 3-.63-0 /S-: 1'-(; min
7. -opperfield /anufacturing employs a *eighted average process costing system for its products. %ne product passes through three
departments D/olding6 Assembly6 and #inishingF during production. 1he follo*ing activity took place in the #inishing !epartment during
April (;93.
@nits in beginning inventory4,200@nits transferred in from Assembly42,000@nits spoiled2,100Aood units transferred out33,600
1he costs per e2uivalent unit of production for each cost failure area as follo*s:
-ost of prior departments$5.00:a* material1.00-onversion 3.001otal cost per $@=$9.00
:a* material is added at the beginning of the #inishing process *ithout changing the number of units being processed. )ork in process
inventory *as 0; percent complete as to conversion on April .;. All spoilage *as discovered at final inspection. %f the total units spoiled6
1637; *ere *ithin normal limits.
2e8#ired9
a. -alculate the e2uivalent units of production
b. !etermine the cost of units transferred out of #inishing
c. !etermine the cost of ending )ork in =rocess "nventory
d. 1he portion of the total transferred in cost associated *ith beginning )ork in =rocess "nventory amounted to G1768;;. )hat is the
current period cost that *as transferred in from Assembly to #inishing,
e. !etermine the cost associated *ith abnormal spoilage for the month.
ANS:
a.
1"/at---omplete33,60033,60033,600O $2uiv )"=10,50010,5004,200O Normal Sp1,6801,6801,680O Abnor Sp
420 420 42046,20046,20039,900
b. ..63;; 9 G8$302,4001- L 036(;; 9 G'$231,000 1637; 9 G8 15,120036(;; 9 G1 46,200$317,520.868;; 9 G.
119,700$396,900
c. 1;6';; 9 G' $52,500 1;6';; 9 G1 10,500 06(;; 9 G. 12,600$75,600
-%A/ L G.8368;; - 5'63;; - .657; L G.156'(;
d. G' L G1768;; O Q
036(;;
Q L G(.16;;; - 1768;; L G(1(61;;
e. AN L 0(; 9 G8 L G.657;
0(; 9 G8 L G.657;
!"#: /oderate %&: 3-.63-7
8. Ashcroft "ndustries manufactures *ood furniture. "n the 4amination !epartment6 varnish is added *hen the goods are 3; percent
complete as to overhead. 1he units that are spoiled during processing are found upon inspection at the end of production. Spoilage is
considered discrete.
Prod#ction Gata 1or May '(K*eginning inventory D7;P complete as to labor6 5;P complete as to overheadF1,000units1ransferred
in during month7,450units$nding inventory D0;P complete as to labor6 (;P complete as to overheadF1,500unitsNormal spoilage
Dfound during final 2uality inspectionF100unitsAbnormal spoilage-found at .;P completion of direct labor and 1'P of conversionH the
sanding machine *as misaligned and scarred the chairs200units
All other units *ere transferred to finished goods
Cost Gata 1or May '(K*eginning *ork in process inventory:=rior department costs$7,510Earnish950!irect labor2,194%verhead
5,522$ 16,176-urrent period costs:=rior department costs$68,540Earnish7,015!irect labor23,000%verhead 56,782
155,337
1otal costs to account for$171,513
2e8#ired9 !etermine the proper disposition of the /ay (;Q7 costs for the 4aminating !epartment using the *eighted average method.
ANS:
1"/A1!4/%?-omplete6,6506,6506,6506,650O end1,5000600300O normal100100100100O abnormal 200 0
60 30 8,450 6,750 7,410 7,080@nit -ost
$nd )"=
!43;; 9 G..0;L $ 2,040/%?.;; 9 G7.7;L 2,6401"16';; 9 G8.;;L 13,500 $18,180
Abnormal 4oss3; 9 G..0;L$ 204!4.; 9 G7.7;L264/%?(;; 9 G8.;;L 1,8001"$ 2,268
-%A/ L G1516'1. - 17617; - (6(37 L G1'16;3'
!"#: /oderate %&: 3-.63-7
1;. -onsider the follo*ing data for a cooking department for the month of &anuary:
=hysical@nits)ork in process6 beginning inventoryM11,000Started during current period74,0001o account for85,000Aood units
completed and transferred out during current period:#rom beginning *ork in process11,000Started and completed50,000Aood units
completed61,000Spoiled units8,000)ork in process6 ending inventory[16,000Accounted for85,000
M!irect material6 1;;P completeH conversion costs6 ('P complete
[!irect material6 1;;P completeH conversion costs6 5'P complete
"nspection occurs *hen production is 1;; percent completed. Normal spoilage is 11 percent of good units completed and transferred out
during the current period.
1he follo*ing cost data are available:
)ork in process6 beginning inventory:!irect material$220,000-onversion costs 30,000$ 250,000-osts added during current
period:!irect material1,480,000-onversion costs 942,000-osts to account for$2,672,000
2e8#ired9 =repare a detailed cost of production report. @se the #"#% method. !istinguish bet*een normal and abnormal spoilage.
ANS:
Normal Sp L 11P 9 316;;; L 3651; units #"#%
Abnormal Sp L 76;;; - 3651; L 16(8; units
/at--/at L$1,480,000= $22.00 67,290 -omplete61,000 61,000 O $nd16,000 12,000 O Ab Sp
1,290 1,290 -- L $942,000= 13.17- Ave78,290 74,290 71,540 $35.17- eg %11,000&
%2,750&#"#%67,290 71,540 )"=/aterial16,000 2 $22.00$352,000--12,000 2 $13.17
158,040$510,0404oss L 1,290 2 $35.1745,369
-%A/ L G(635(6;;; - '1;6;0; - 0'6.38 L G(61136'81
!"#: /oderate %&: 3-.63-7
11. 4umberton "ndustries has t*o departments. !epartment 1 uses #"#% costing and !epartment ( uses *eighted average.
@nits are introduced into the process in !epartment 1 Dthis is the only material added in !epartment 1F. Spoilage occurs continuously
through the department and normal spoilage should not e9ceed 1; percent of the units started.
!epartment ( adds material DpackagingF at the 5' percent completion pointH this material does not cause an increase in the number of
units being processed. A 2uality control inspection takes place *hen the goods are 7; percent complete. Spoilage should not e9ceed '
percent of the units transferred in from !epartment 1.
1he follo*ing production cost data are applicable for operations for August (;Q5:
Gepartment . Prod#ction Gataeginning inventory D3'P completeF1,000@nits started25,000@nits completed22,000@nits in
ending inventory D0;P completeF2,800
Gepartment . Cost Gataeginning inventory:/aterial$ 1,550-onversion 2,300$ 3,850 -urrent
period:/aterial$38,080-onversion 78,645 116,725 1otal costs to account for$120,575
Gepartment ' Prod#ction Gataeginning inventory D8;P completeF8,000@nits transferred in22,000@nits completed24,000@nits
in ending inventory D(;P completeF4,500Gepartment ' Cost Gataeginning inventory:1ransferred
in$40,800/aterial24,000-onversion 4,320$ 69,120-urrent period:1ransferred in$113,700/aterial\53,775-onversion
11,079 178,554 1otal costs to account for$247,674
M1his may not be the same amount determined for !epartment 1H ignore any difference and use this figure.
2e8#ired9
a.-ompute the e2uivalent units of production in each department.b.!etermine the cost per e2uivalent unit in each department and
compute the cost transferred out6 the cost in ending inventory6 and the cost of spoilage Dif necessaryF.
ANS:
a..
/at--/at L$38,080= $ 1.60 23,800-omplete22,000 22,000 O $nd )"= 2,800 1,120 %2,800 2 4&--
L$78,645= $ 3.5024,800 23,120 22,470- eg )"=%1,000& %650&%1,000 2 .65&$nd )"= L2,800 2
$1.60= $ 4,48023,800 22,470 1,120 2 $3.50 3.920$ 8,400-%A/ L G1(;6'5' - 760;;$112,175
b.
'
1"/at--/at L$ 77,775= $ $3.0525,500-omplete24,000 24,000 24,000O $nd )"= 4,500 0 900-- L$
15,399= $ $0.59O Normal1,100 1,120 880 26,100O Abnormal400 400 32030,000 25,500 26,100 1"
L$154,500=$ 5.1530,000
$nd )"=Abn 4oss 06';; 9 G'.1'$23,1750;; 9 G..;'$1,220 8;; 9 G;.'8 531 .(; 9 G;.'8189$23,7060;; 9 G'.1' 2,060
$3,469
-%A/ L G(056350 - (.65;3 - .6038 L G((;6088
!"#: /oderate %&: 3-.6 3-7
1(. %range -ompany manufactures a single product. All material is added at the beginning of the process.
-osts/aterial-onversion1otaleginning inventory$ 30,000$ 3,600$ 33,600-urrent period 885,120 335,088
1,220,2081otal costs$915,120$338,688$1,253,808
@N"1Seginning inventory D.;P complete-conversionF6,000unitsStarted180,000units-ompleted152,000units$nding inventory
D5;P complete-conversionF20,000unitsNormal spoilage4,800units
2e8#ired9 #ind ending )"= inventory6 abnormal loss6 and -%A/. Assume that6 for conversion costs6 abnormal shrinkage is 3; percent.
ANS:
/at--@nits -omplete152,000 152,000 O $2uivalents $nding )"=20,000 14,000 O Abnormal 4oss9,200 5,520 D86(;;
9 .3FL $2uivalent =roduction-)A181,200 171,520 L $2uivalent egin )"= %6,000&%1,800&L $2uivalent =roduction-
#"#%175,200 169,720 @nit -osts:)A#"#%/atG81'61(; L G'.;'/atG77'61(; L G'.;' 1716(;; 15'6(;;
--G..76377 L G1.85--G..'6;77 L G1.85 1516'(; 13865(;
Ending 4IP/aterial(;6;;; 9 G'.;' $101,000--106;;; 9 G1.85 27,580$128,580
A$norma! %poi!age/aterial86(;; 9 G'.;'$ 46,460--'6'(; 9 G1.85 10,874$ 57,334
Cost o1 6ood Trans1erred
16('.67;7 - 1(76'7; - '56..0 L G16;356780
!"#: /oderate %&: 3-.63-7
1.. !elightful Rogurt -ompany produces yogurt in t*o departments-/i9ing and #inishing. "n /i9ing6 all ingredients e9cept fruit are added
at the start of production. "n #inishing6 fruit is added and then the mi9ture is placed into containers. Adding the fruit to the basic yogurt
mi9ture increases the volume transferred in by the number of gallons of fruit added. Any spoilage that occurs is in the #inishing
!epartment. Spoilage is detected just before the yogurt is placed into containers or at the 87 percent completion point. All spoilage is
abnormal.
;inishing Gepartment
)"= D1;;P fruit6 ;P container6 .;P --F5,000gallonsAallons transferred in5,500Aallons of fruit added1,200$)"= D1;;P fruit6
;P container6 3;P --F1,700gallonsAallons transferred out9,000Abnormal spoilage1,000
B4IP Costs9
1ransferred "n$ 9,700#ruit10,500--15,000
C#rrent Costs9
1ransferred "n12,400#ruit54,000-ontainers11,000-- 98,0001otal -osts$ 210,600
=repare a cost of production report for %ctober (;Q'. 1he company uses *eighted average.
ANS:
!elightful Rogurt -ompany
-ost :eport
%ctober .16 (;Q')"=5,0001rans. "n5,500#ruit 1,200Acctble. #or11,7001"#ruit-ontainer--1ransferred
%ut9,0009,0009,0009,000$)"=1,7001,70001,020Abnormal Spoilage 1,000 1,000
0 98011,70011,7009,00011,000
-osts:
1"#ruit-ontainer--)"=$ 9,700$10,500$ 0$ 15,000-urrent 12,400 54,000 11,000
98,000$22,100$64,500$11,000$113,000$@=11,70011,7009,00011,000=er unit$1.89$5.51$1.22$10.27
-ost Assignment:
$)"=165;; 9 G1.78 L$ 3,213165;; 9 G'.'1 L9,36716;(; 9 G1;.(5 L 10,475$ 23,055Spoilage16;;; 9 G1.78 L$ 1,89016;;; 9
G'.'1 L5,51087; 9 G1;.(5 L 10,065 17,4651ransferred %utG(1;63;; - (.6;'' - 15603' L 170,080
1otal accounted for$210,600
!"#: /oderate %&: 3-.63-7
Hoc:ing Company
1he follo*ing information is available for ?ocking -ompany for /arch (;Q7. All materials are added at the start of production.
eginning )ork in =rocess: D7;P completeF8,000unitsStarted35,000unitsNormal spoilage DcontinuousF6,000unitsAbnormal
spoilage2,500units$nding )ork in =rocess: D''P completeF15,000units1ransferred out19,500units
eginning )ork in =rocess -osts:/aterial$ 14,000-onversion45,000-urrent -osts:/aterial
50,000-onversion 175,0001otal -osts$ 284,000
10. :efer to ?ocking -ompany. =repare a cost of production report for /arch using #"#%.
ANS:
" 76;;; O Started .'6;;; L Accountable for 0.6;;;
?ocking -ompany
-ost :eport
/arch .16 (;Q7
/aterial--)"=8,00001,600S > -11,50011,50011,500$)"=15,00015,0008,250Norm6,00000Abnorm. 2,500
2,500Acctd. #or43,00029,00023,850
/aterial: G';6;;;+(86;;; L G1.5(
-onversion -osts: G15'6;;;+(.67'; L G5..0
Cost Assignment9
$nding )ork in =rocess1'6;;; 9 G1.5( L$ 25,80076('; 9 G5..0 L 60,555$ 86,355Abnormal Spoilage(6';; 9 G8.;3 L
22,650-ost 1ransferred %utG(706;;; - 736.'' - ((63'; L 174,995
1otal costs accounted for $ 284,000
!"#: /oderate %&: 3-063-7
1'. :efer to ?ocking -ompany. =repare the cost of production report assuming the *eighted average method.
ANS:
" 76;;; O Started .'6;;; L Accountable for 0.6;;;
?ocking -ompany
-ost :eport
/arch .16 (;Q7/aterial--1ransferred %ut19,50019,50019,500$nding )ork "n =rocess15,00015,0008,250Normal
Spoilage6,00000Abnormal Spoilage (6';; 2,500 2,500Accounted #or43,00037,00030,250
/aterial: G306;;;+.56;;; L G1.5.
-onversion -osts: G((;6;;;+.;6('; L G 5.(5
Cost Assignment9
$nding )ork in =rocess1'6;;; 9 G1.5. L$25,950 76('; 9 G5.(5 L 59,978$ 85,928Abnormal Spoilage (6';; 9 G8.;; L
22,5001ransferred %utG(706;;; - 7'68(7 - ((6';; L 175,5721otal costs accounted for$ 284,000
!"#: /oderate %&: 3-.63-7
Chapter .(2e!evant In1ormation 1or Gecision-Ma:ing
MULTIPLE CHICE
1. )hich of the follo*ing is not a characteristic of relevant costing information, "t is
a.associated *ith the decision under consideration.b.significant to the decision maker.c.readily 2uantifiable.d.related to a future endeavor.
ANS: - !"#: $asy %&: 1;-1
(. A fi9ed cost is relevant if it is
a.a future cost.b.Avoidable.c.sunk.d.a product cost.
ANS: !"#: $asy %&: 1;-1
.. :elevant costs are
a.all fi9ed and variable costs.b.all costs that *ould be incurred *ithin the relevant range of production.c.past costs that are e9pected to be
different in the future.d.anticipated future costs that *ill differ among various alternatives.
ANS: ! !"#: $asy %&: 1;-1
0. )hich of the follo*ing is the !east likely to be a relevant item in deciding *hether to replace an old machine,
a.ac2uisition cost of the old machineb.outlay to be made for the ne* machinec.annual savings to be enjoyed on the ne* machined.life of
the ne* machine
ANS: A !"#: $asy %&: 1;-(
'. "f a cost is irrelevant to a decision6 the cost could not be
a.a sunk cost.b.a future cost.c.a variable cost.d.an incremental cost.
ANS: ! !"#: $asy %&: 1;-(
3. )hich of the follo*ing costs *ould be relevant in short-term decision making,
a.incremental fi9ed costsb.all costs of inventoryc.total variable costs that are the same in the considered alternativesd.the cost of a fi9ed
asset that could be used in all the considered alternatives
ANS: A !"#: $asy %&: 1;-(
5. 1he term incremental cost refers to
a.the profit foregone by selecting one choice instead of another.b.the additional cost of producing or selling another product or service.c.a
cost that continues to be incurred in the absence of activity.d.a cost common to all choices in 2uestion and not clearly or feasibly allocable
to any of them.
ANS: !"#: $asy %&: 1;-(
7. A cost is sunk if it
a.is not an incremental cost.b.is unavoidable.c.has already been incurred.d.is irrelevant to the decision at hand.
ANS: - !"#: $asy %&: 1;-(
8. /ost<<<<<<<<<<< are relevant to decisions to ac2uire capacity6 but not to short-run decisions involving the use of that capacity.
a.sunk costsb.incremental costsc.fi9ed costsd.prime costs
ANS: - !"#: $asy %&: 1;-(
1;. "rrelevant costs generally include
Sunk costs?istorical costsAllocated costs
a.yes yes nob.yes no noc.no no
yesd.yes yes yes
ANS: ! !"#: $asy %&: 1;-(
11. "n deciding *hether an organization *ill keep an old machine or purchase a ne* machine6 a manager *ould ignore the
a.estimated disposal value of the old machine.b.ac2uisition cost of the old machine.c.operating costs of the ne* machine.d.estimated
disposal value of the ne* machine.
ANS: !"#: $asy %&: 1;-(
1(. 1he potential rental value of space used for production activities
a.is a variable cost of production.b.represents an opportunity cost of production.c.is an unavoidable cost.d.is a sunk cost of production.
ANS: !"#: $asy %&: 1;-.
1.. 1he opportunity cost of making a component part in a factory *ith e9cess capacity for *hich there is no alternative use is
a.the total manufacturing cost of the component.b.the total variable cost of the component.c.the fi9ed manufacturing cost of the
component.d.zero.
ANS: ! !"#: $asy %&: 1;-.
10. )hich of the follo*ing are relevant in a make or buy decision,
Eariable
costsAvoidable fi9ed
costs@navoidable fi9ed
costs
a.no yes yesb.yes no yesc.no no
yesd.yes yes no
ANS: ! !"#: $asy %&: 1;-.
1'. "n a make or buy decision6 the opportunity cost of capacity could
a.be considered to decrease the price of units purchased from suppliers.b.be considered to decrease the cost of units manufactured by the
company.c.be considered to increase the price of units purchased from suppliers.d.not be considered since opportunity costs are not part of
the accounting records.
ANS: A !"#: $asy %&: 1;-.
13. )hich of the follo*ing are relevant in a make or buy decision,
=rime costsSunk costs"ncremental costs
a.yes yes yesb.yes no yesc.yes no
nod.no no yes
ANS: !"#: $asy %&: 1;-.
15. "n a make or buy decision6 the reliability of a potential supplier is
a.an irrelevant decision factor.b.relevant information if it can be 2uantified.c.an opportunity cost of continued production.d.a 2ualitative
decision factor.
ANS: ! !"#: $asy %&: 1;-.
17. )hich of the follo*ing 2ualitative factors favors the buy choice in a make or buy decision for a part,
a.maintaining a long-term relationship *ith suppliersb.2uality control is criticalc.utilization of idle capacityd.part is critical to product
ANS: A !"#: $asy %&: 1;-.
18. )hen a scarce resource6 such as space6 e9ists in an organization6 the criterion that should be used to determine production is
a.contribution margin per unit.b.selling price per unit.c.contribution margin per unit of scarce resource.d.total variable costs of production.
ANS: - !"#: $asy %&: 1;-0
(;. #i9ed costs are ignored in allocating scarce resources because
a.they are sunk.b.they are unaffected by the allocation of scarce resources.c.there are no fi9ed costs associated *ith scarce
resources.d.fi9ed costs only apply to long-run decisions.
ANS: !"#: $asy %&: 1;-0
(1. 1he minimum selling price that should be acceptable in a special order situation is e2ual to total
a.production cost.b.variable production cost.c.variable costs.d.production cost plus a normal profit margin.
ANS: - !"#: $asy %&: 1;-3
((. )hich of the follo*ing costs is irre!evant in making a decision about a special order price if some of the company facilities are currently
idle,
a.direct laborb.e2uipment depreciationc.variable cost of utilitiesd.opportunity cost of production
ANS: !"#: $asy %&: 1;-3
(.. 1he <<<<<<<<<<<<<<< prohibits companies from pricing products at different amounts unless these differences reflect differences in the
cost to manufacture6 sell6 or distribute the products.
a."nternal :evenue Serviceb.Aovernmental Accounting %fficec.Sherman Antitrust Actd.:obinson-=atman Act
ANS: ! !"#: $asy %&: 1;-3
(0. An ad hoc sales discount is
a.an allo*ance for an inferior 2uality of marketed goods.b.a discount that an ad hoc committee must decide on.c.brought about by
competitive pressures.d.none of the above.
ANS: - !"#: /oderate %&: 1;-3
('. A manager is attempting to determine *hether a segment of the business should be eliminated. 1he focus of attention for this decision
should be on
a.the net income sho*n on the segmentCs income statement.b.sales minus total e9penses of the segment.c.sales minus total direct e9penses
of the segment.d.sales minus total variable e9penses and avoidable fi9ed e9penses of the segment.
ANS: ! !"#: $asy %&: 1;-5
(3. Assume a company produces three products: A6 6 and -. "t can only sell up to .6;;; units of each product. =roduction capacity is
unlimited. 1he company should produce the product Dor productsF that has DhaveF the highest
a.contribution margin per hour of machine time.b.gross margin per unit.c.contribution margin per unit.d.sales price per unit.
ANS: - !"#: $asy %&: 1;-5
(5. #or a particular product in high demand6 a company decreases the sales price and increases the sales commission. 1hese changes *ill not
increase
a.sales volume.b.total selling e9penses for the product.c.the product contribution margin.d.the total variable cost per unit.
ANS: - !"#: $asy %&: 1;-5
(7. An increase in direct fi9ed costs could reduce all of the follo*ing e"cept
a.product line contribution margin.b.product line segment margin.c.product line operating income.d.corporate net income.
ANS: A !"#: $asy %&: 1;-5
(8. )hen a company discontinues a segment6 total corporate costs may decrease in all of the follo*ing categories e"cept
a.variable production costs.b.allocated common costs.c.direct fi9ed costs.d.variable period costs.
ANS: !"#: $asy %&: 1;-5
.;. "n evaluating the profitability of a specific organizational segment6 all <<<<<<<<<<<<<<< *ould be ignored.
a.segment variable costsb.segment fi9ed costsc.costs allocated to the segmentd.period costs
ANS: - !"#: $asy %&: 1;-5
.1. Vno9 -ompany uses 1;6;;; units of a part in its production process. 1he costs to make a part are: direct material6 G1(H direct labor6 G('H
variable overhead6 G1.H and applied fi9ed overhead6 G.;. Vno9 has received a 2uote of G'' from a potential supplier for this part. "f Vno9
buys the part6 5; percent of the applied fi9ed overhead *ould continue. Vno9 -ompany *ould be better off by
a.G';6;;; to manufacture the part.b.G1';6;;; to buy the part.c.G0;6;;; to buy the part.d.G13;6;;; to manufacture the part.
ANS: -
-ost to make: G''+unit M 1;6;;; units L G'';6;;;
-ost to manufacture: GD1(O('O1.O8FL G'8+unit
"ncremental difference in favor of buying: G0+unit M 1;6;;; units L &/(<(((
!"#: /oderate %&: 1;-.
.(. =aulson -ompany has only ('6;;; hours of machine time each month to manufacture its t*o products. =roduct Q has a contribution
margin of G';6 and =roduct R has a contribution margin of G30. =roduct Q re2uires ' hours of machine time6 and =roduct R re2uires 7
hours of machine time. "f =aulson -ompany *ants to dedicate 7; percent of its machine time to the product that *ill provide the most
income6 the company *ill have a total contribution margin of
a.G(';6;;;.b.G(0;6;;;.c.G(1;6;;;.d.G(;;6;;;.
ANS:
Assume 7;P of capacity applied to =roduct Q
Q: (;6;;; hrs+' hrs per unit06;;; units M G'; -/+unitG(;;6;;;R: '6;;; hrs+7 hrs per unit 3(' units M G30
-/+unit0;6;;;1otal&'/(<(((
LLLLLL
!"#: !ifficult %&: 1;-5
... !oyle -ompany has . divisions: :6 S6 and 1. !ivision :Cs income statement sho*s the follo*ing for the year ended !ecember .1:
Sales$1,000,000 -ost of goods sold %800,000&Aross profit$ 200,000 Selling e9penses$100,000Administrative
e9penses 250,000 %350,000&Net loss$ %150,000&
-ost of goods sold is 5' percent variable and (' percent fi9ed. %f the fi9ed costs6 3; percent are avoidable if the division is closed. All of
the selling e9penses relate to the division and *ould be eliminated if !ivision : *ere eliminated. %f the administrative e9penses6 8;
percent are applied from corporate costs. "f !ivision : *ere eliminated6 !oyleNs income *ould
a.increase by G1';6;;;.b.decrease by G 5'6;;;.c.decrease by G1''6;;;.d.decrease by G(1'6;;;.
ANS: -
Sales foregoneGD16;;;6;;;F-%AS avoided EariableG3;;6;;; #i9ed 1(;6;;; 5(;6;;; Selling $9pense Avoided 1;;6;;;
Administrative $9pense Avoided ('6;;; !ecrease in income&> .55<(((?
EEEEEEEEE
!"#: /oderate %&: 1;-5
.0. 1homas -ompany is currently operating at a loss of G1'6;;;. 1he sales manager has received a special order for '6;;; units of product6
*hich normally sells for G.' per unit. -osts associated *ith the product are: direct material6 G3H direct labor6 G1;H variable overhead6 G.H
applied fi9ed overhead6 G0H and variable selling e9penses6 G(. 1he special order *ould allo* the use of a slightly lo*er grade of direct
material6 thereby lo*ering the price per unit by G1.'; and selling e9penses *ould be decreased by G1. "f 1homas *ants this special order
to increase the total net income for the firm to G1;6;;;6 *hat sales price must be 2uoted for each of the '6;;; units,
a.G(..';b.G(0.';c.G(5.';d.G.0.;;
ANS: A
"n order to increase income to G1;6;;;6 there must be an increase of G('6;;; or G' per unit.
!irect materials G 0.';!irect 4abor1;.;;Eariable %verhead ..;;Eariable Selling $9p1.;;=roduction -ostsG17.';Additional profit per
unit
'.;;%a!es price=#nit&'0)5(
EEEEE
!"#: /oderate %&: 1;-3
.'. Juest -ompany produces a part that has the follo*ing costs per unit:
!irect material$ 8!irect labor3Eariable overhead 1#i9ed overhead 51otal $17
Kest -orporation can provide the part to Juest for G18 per unit. Juest -ompany has determined that 3; percent of its fi9ed overhead
*ould continue if it purchased the part. ?o*ever6 if Juest no longer produces the part6 it can rent that portion of the plant facilities for
G3;6;;; per year. Juest -ompany currently produces 1;6;;; parts per year. )hich alternative is preferable and by *hat margin,
a./ake-G(;6;;;b./ake-G';6;;;c.uy-G1;6;;;d.uy-G0;6;;;
ANS: -
=urchase price from KestGD18;6;;;F:ent :evenue :eceived 3;6;;; Eariable -osts Avoided 1(;6;;; #i9ed %verhead Avoided
(;6;;; Gi11erence in ;avor o1 B#ying& .(<(((
EEEEEEE
!"#: /oderate %&: 1;-.
.3. ro*ning -ompany has 1'6;;; units in inventory that had a production cost of G. per unit. 1hese units cannot be sold through normal
channels due to a significant technology change. 1hese units could be re*orked at a total cost of G(.6;;; and sold for G(76;;;. Another
alternative is to sell the units to a junk dealer for G76';;. 1he relevant cost for ro*ning to consider in making its decision is
a.G0'6;;; of original product costs.b.G(.6;;; for re*orking the units.c.G376;;; for re*orking the units.d.G(76;;; for selling the units to
the junk dealer.
ANS:
%nly the actual re*orking costs are relevant. %riginal purchase costs are irrelevant.
!"#: $asy %&: 1;-.
2o$ertson Corporation
:obertson -orporation sells a product for G17 per unit6 and the standard cost card for the product sho*s the follo*ing costs:
!irect material $ 1!irect labor2%verhead D7;P fi9edF 71otal $10
.5. :efer to :obertson -orporation. :obertson received a special order for 16;;; units of the product. 1he only additional cost to :obertson
*ould be foreign import ta9es of G1 per unit. "f :obertson is able to sell all of the current production domestically6 *hat *ould be the
minimum sales price that :obertson *ould consider for this special order,
a.G17.;;b.G11.;;c.G'.0;d.G18.;;
ANS: !
1he company *ould increase its minimum sales price to reflect the foreign import ta9 of G1 per unit.
!"#: $asy %&: 1;-3
.7. :efer to :obertson -orporation. Assume that :obertson has sufficient idle capacity to produce the 16;;; units. "f :obertson *ants to
increase its operating profit by G'63;;6 *hat *ould it charge as a per-unit selling price,
a.G17.;;b.G1;.;;c.G11.;;d.G13.3;
ANS: -
1he company *ould *ant to charge a price e2ual to a per unit profit of G'.3; plus variable costs per unit of G0.0; and the import ta9 per
unit of G1.;;. 1he total price is &..)(()
!"#: /oderate %&: 1;-.
.8. Alamorous Arooming -orporation makes and sells brushes and combs. "t can sell all of either product it can make. 1he follo*ing data are
pertinent to each respective product:
rushes-ombs@nits of output per machine hour820Selling price per unit$12.00$4.00=roduct cost per unit!irect
material$1.00$1.20!irect labor2.000.10Eariable overhead0.500.05
1otal fi9ed overhead is G.7;6;;;.
1he company has 0;6;;; machine hours available for production. )hat sales mi9 *ill ma9imize profits,
a..(;6;;; brushes and ; combsb.; brushes and 7;;6;;; combsc.13;6;;; brushes and 3;;6;;; combsd.('(63.; brushes and ('(63.;
combs
ANS: A
rushes have a contribution margin of G7.'; per unitH combs have a contribution margin of G(.3' per unit.
1he combination of .(;6;;; brushes and ; combs provides a net profit of G.0;6;;;.
!"#: $asy %&: 1;-'
0;. ?ouston #oot*ear -orporation has been asked to submit a bid on supplying 16;;; pairs of military combat boots to the Armed #orces.
1he companyCs costs per pair of boots are as follo*s:
!irect material $8!irect labor 6Eariable overhead 3Eariable selling cost DcommissionF 3#i9ed overhead DallocatedF 2#i9ed selling and
administrative cost 1
Assuming that there *ould be no commission on this potential sale6 the lo*est price the firm can bid is some price greater than
a.G(..b.G(;.c.G15.d.G10.
ANS: -
1he lo*est price *ould have to be greater than the sum of all variable manufacturing costs.
Eariable manufacturing costs total G15H therefore the price *ould have to be greater than G15 per pair.
!"#: $asy %&: 1;-'
01. ?olt "ndustries has t*o sales territories-$ast and )est. #inancial information for the t*o territories is presented belo*:
$ast)estSales$980,000 $750,000 !irect costs: Eariable%343,000&%225,000& #i9ed%450,000&%325,000&
Allocated common costs%275,000&%175,000& Net income DlossF$%88,000&$ 25,000
ecause the company is in a start-up stage6 corporate management feels that the $ast sales territory is creating too much of a cash drain on
the company and it should be eliminated. "f the $ast territory is discontinued6 one sales manager D*hose salary is G0;6;;; per yearF *ill
be relocated to the )est territory. y ho* much *ould ?oltCs income change if the $ast territory is eliminated,
a.increase by G776;;;b.increase by G076;;;c.decrease by G(356;;;d.decrease by G((56;;;
ANS: !
Sales foregone in $astGD87;6;;;FEariable costs avoided.0.6;;; #i9ed costs avoided 01;6;;; Gecrease in income 1rom e!iminating East
territory&>''+<(((?
EEEEEEEE
!"#: /oderate %&: 1;-5
4oodvi!!e Motors
)oodville /otors is trying to decide *hether it should keep its e9isting car *ashing machine or purchase a ne* one that has
technological advantages D*hich translate into cost savingsF over the e9isting machine. "nformation on each machine follo*s:
%ld machine Ne* machine%riginal cost $9,000$20,000Accumulated depreciation 5,0000Annual cash operating costs
9,0004,000-urrent salvage value of old machine 2,000Salvage value in 1; years 5001,000:emaining life 10 y1s.10 y1s.
0(. :efer to )oodville /otors. 1he G06;;; of annual operating costs that are common to both the old and the ne* machine are an e9ample of
aDnF
a.sunk cost.b.irrelevant cost.c.future avoidable cost.d.opportunity cost.
ANS: !"#: $asy %&: 1;-1
0.. :efer to )oodville /otors. 1he G86;;; cost of the original machine represents aDnF
a.sunk cost.b.future relevant cost.c.historical relevant cost.d.opportunity cost.
ANS: A !"#: $asy %&: 1;-(
00. :efer to )oodville /otors. 1he G(;6;;; cost of the ne* machine represents aDnF
a.sunk cost.b.future relevant cost.c.future irrelevant cost.d.opportunity cost.
ANS: !"#: $asy %&: 1;-.
0'. :efer to )oodville /otors. 1he estimated G';; salvage value of the e9isting machine in 1; years represents aDnF
a.sunk cost.b.opportunity cost of selling the e9isting machine no*.c.opportunity cost of keeping the e9isting machine for 1;
years.d.opportunity cost of keeping the e9isting machine and buying the ne* machine.
ANS: !"#: $asy %&: 1;-.
03. :efer to )oodville /otors. 1he incremental cost to purchase the ne* machine is
a.G116;;;.b.G(;6;;;.c.G1.6;;;.d.G176;;;.
ANS: !
"ncremental cost L =urchase price of ne* machine - -urrent salvage value
"ncremental cost L GD(;6;;; - (6;;;F
Incrementa! cost E &.*<(((
!"#: $asy %&: 1;-.
Entertainment %o!#tions Corporation
$ntertainment Solutions -orporation manufactures and sells #/ radios. "nformation on the prior yearCs operations Dsales and production
/odel A1F is presented belo*:
Sales price per unit$30-osts per unit:!irect material7 !irect labor4 %verhead D';P variableF6 Selling costs D0;P variableF10
=roduction in units10,000 Sales in units9,500
05. :efer to $ntertainment Solutions -orporation) 1he /odel ( radio is currently in production and it renders the /odel A1 radio obsolete.
"f the remaining ';; units of the /odel A1 radio are to be sold through regular channels6 *hat is the minimum price the company *ould
accept for the radios,
a.G.;b.G(5c.G17d.G0
ANS: !
G0 *ould cover the variable selling e9penses.
!"#: /oderate %&: 1;-'
07. :efer to $ntertainment Solutions -orporation. Assume that the remaining /odel A1 radios can be sold through normal channels or to a
foreign buyer for G3 per unit. "f sold through regular channels6 the minimum acceptable price *ill be
a.G.;.b.G...c.G1;.d.G0.
ANS: -
G1; *ill cover the price to the foreign buyer plus the G0 in variable selling e9penses.
!"#: /oderate %&: 1;-'
Chip Givision o1 Comp#ter %o!#tions< Inc)
1he -hip !ivision of -omputer Solutions6 "nc. produces a high-2uality computer chip. @nit production costs Dbased on capacity
production of 1;;6;;; units per yearF follo*:
!irect material $50!irect labor 20%verhead D(;P variableF 10%ther information:Sales price 100SA>A costs D0;P variableF 15
08. :efer to -hip !ivision of -omputer Solutions6 "nc. Assume6 for this 2uestion only6 that the -hip !ivision is producing and selling at
capacity. )hat is the minimum selling price that the division *ould consider on a Bspecial orderB of 16;;; chips on *hich no variable
period costs *ould be incurred,
a.G1;;b.G5(c.G71d.G80
ANS: !
Eariable period costs are G3 DG1' M 0;P variableF
1he minimum selling price *ould have to be greater than the manufacturing costs and fi9ed period costs.
GD1;; - 3F L &-/ per #nit
!"#: /oderate %&: 1;-3
';. :efer to -hip !ivision of -omputer Solutions6 "nc. Assume6 for this 2uestion only6 that the -hip !ivision is operating at a level of 5;6;;;
chips per year. )hat is the minimum price that the division *ould consider on a Bspecial orderB of 16;;; chips to be distributed through
normal channels,
a.G57b.G8'c.G1;;d.G71
ANS: A
1he price *ould have to cover all variable costs.
GD'; O (; O ( O 3F L &+* per #nit
!"#: /oderate %&: 1;-3
'1. :efer to -hip !ivision of -omputer Solutions6 "nc. Assume6 for this 2uestion only6 that the -hip !ivision is presently operating at a level
of 7;6;;; chips per year. Accepting a Bspecial orderB on (6;;; chips at G77 *ill
a.increase total corporate profits by G06;;;.b.increase total corporate profits by G(;6;;;.c.decrease total corporate profits by
G106;;;.d.decrease total corporate profits by G(06;;;.
ANS:
GD77 - 57F L G1; profit per unit M (6;;; units L &'(<((( pro1it increase
!"#: /oderate %&: 1;-3
2ichmond %tee! Corporation
1he capital budgeting committee of the :ichmond Steel -orporation is evaluating the possibility of replacing its old pipe-bending
machine *ith a more advanced model. "nformation on the e9isting machine and the ne* model follo*s:
$9isting machineNe* machine%riginal cost $200,000$400,000/arket value no* 80,000/arket value in year '
0 20,000Annual cash operating costs 40,000 10,000:emaining life 5 y1s. 5 y1s.
'(. :efer to :ichmond Steel -orporation. 1he major opportunity cost associated *ith the continued use of the e9isting machine is
a.G.;6;;; of annual savings in operating costs.b.G(;6;;; of salvage in ' years on the ne* machine.c.lost sales resulting from the
inefficient e9isting machine.d.G0;;6;;; cost of the ne* machine.
ANS: A !"#: $asy %&: 1;-1
'.. :efer to :ichmond Steel -orporation. 1he G7;6;;; market value of the e9isting machine is
a.a sunk cost.b.an opportunity cost of keeping the old machine.c.irrelevant to the e2uipment replacement decision.d.a historical cost.
ANS: !"#: $asy %&: 1;-1
'0. :efer to :ichmond Steel -orporation. "f the company buys the ne* machine and disposes of the e9isting machine6 corporate profit over
the five-year life of the ne* machine *ill be <<<<<<<<<<<<<<<<<<<< than the profit that *ould have been generated had the e9isting
machine been retained for five years.
a.G1';6;;; lo*erb.G15;6;;; lo*erc.G(.;6;;; lo*erd.G1';6;;; higher
ANS: A
Annual savings in operating costsG 1';6;;; =urchase of ne* machine D0;;6;;;F!isposal of e9isting machine 7;6;;; !isposal of ne*
machine in ' years (;6;;; Gi11erence in pro1it&>.5(<(((?
EEEEEEEE
!"#: /oderate %&: 1;-1
''. $merald -orporation has been manufacturing '6;;; units of =art 1;'016 *hich is used in the manufacture of one of its products. At this
level of production6 the cost per unit of manufacturing =art 1;'01 is as follo*s:
!irect material $ 2!irect labor 8Eariable overhead 4#i9ed overhead applied 61otal $20
?amilton -ompany has offered to sell $merald '6;;; units of =art 1;'01 for G18 a unit. $merald has determined that it could use the
facilities currently used to manufacture =art 1;'01 to manufacture =art :A- and generate an operating profit of G06;;;. $merald has also
determined that t*o-thirds of the fi9ed overhead applied *ill continue even if =art 1;'01 is purchased from ?amilton. 1o determine
*hether to accept ?amiltonNs offer6 the net relevant costs to make are
a.G5;6;;;.b.G706;;;.c.G8;6;;;.d.G8'6;;;.
ANS:
1he relevant costs are the variable costs per unit as *ell as the portion of fi9ed overhead that *ill be avoided for =art 1;'01.
Eariable costs L G10 per unit
#i9ed overhead L G ( per unit
'6;;; units M G13 per unit L G7;6;;; O =rofit from :A- L G 06;;;
Tota! 2e!evant Costs &*/<(((
!"#: /oderate %&: 1;-.
'3. ?arding -orporation manufactures batons. ?arding can manufacture .;;6;;; batons a year at a variable cost of G5';6;;; and a fi9ed cost
of G0';6;;;. ased on ?ardingCs predictions6 (0;6;;; batons *ill be sold at the regular price of G'.;; each. "n addition6 a special order
*as placed for 3;6;;; batons to be sold at a 0; percent discount off the regular price. 1he unit relevant cost per unit for ?ardingCs decision
is
a.G1.';.b.G(.';.c.G..;;.d.G0.;;.
ANS:
1he relevant costs *ill be the variable costs per unit.
&+5(<(((=0((<((( #nits E &')5(=#nit
!"#: /oderate %&: 1;-3
'5. 1he objective in solving the linear programming problem is to determine the optimal levels of the
a.coefficients.b.dependent variables.c.independent variables.d.slack variables.
ANS: - !"#: $asy %&: 1;-7
'7. A linear programming problem can have
a.no more than three resource constraints.b.only one objective function.c.no more than t*o dependent variables for each constraint
e2uation.d.no more than three independent variables.
ANS: !"#: $asy %&: 1;-7
'8. A linear programming model must
a.have only one objective function.b.have as many independent variables as it has constraint e2uations.c.have at least t*o dependent
variables for each e2uation.d.consider only the constraints that can be e9pressed as ine2ualities.
ANS: A !"#: $asy %&: 1;-7
3;. "n a linear programming problem6 constraints are indicated by
a.the independent variables.b.the dependent variables in the constraint e2uations.c.the coefficients of the objective function.d.iso-cost
lines.
ANS: !"#: $asy %&: 1;-7
31. 1he feasible region for an 4= solution is
a.defined only by binding constraints on the optimal solution.b.defined as the solution space that satisfies all constraints.c.identified by
iso-cost and iso-profit lines.d.identified by all of the above.
ANS: !"#: $asy %&: 1;-7
3(. A linear programming solution
a.al*ays involves more than one constraint.b.al*ays involves a corner point.c.is the one *ith the highest verte9 coordinates.d.is provided
by the input-output coefficients.
ANS: !"#: $asy %&: 1;-7
3.. 1he objective function and the resource constraints have the same
a.dependent variables.b.coefficients.c.independent variables.d.all of the above.
ANS: - !"#: $asy %&: 1;-7
30. )hich of the follo*ing items continuously checks for an improved solution from the one previously computed,
An algorithmSimple9 method
a.yes yesb.yes noc.no nod.no yes
ANS: A !"#: $asy %&: 1;-7
3'. )hich of the follo*ing variables is associated *ith the Bless than or e2ual toB constraints,
SurplusSlack
a.yes yesb.yes noc.no yesd.no no
ANS: - !"#: $asy %&: 1;-7
33. <<<<<<<<<<<<<<<<<<<< programming relates to a variety of techni2ues that are used to allocate limited resources among activities to
achieve a specific objective.
a."ntegerb."nput-outputc./athematicald.:egression
ANS: - !"#: $asy %&: 1;-7
35. 1he graphical approach to solving a linear programming problem becomes much more comple9 *hen there are more than t*o
constraintsdecision variables
a.yes nob.no yesc.yes yesd.no no
ANS: - !"#: $asy %&: 1;-7
37. 1he feasible region for a graphical solution to a profit ma9imization problem includes
a.all verte9 points.b.all points on every resource constraint line.c.the origin.d.all of the above.
ANS: - !"#: $asy %&: 1;-7
Uncommon Prod#cts Corporation
"n the t*o follo*ing constraint e2uations6 Q and R represent t*o products Din unitsF produced by the @ncommon =roducts -orporation.
-onstraint 1: .Q O 'R ] 06(;;
-onstraint (: 'Q O (R ^ .6;;;
38. :efer to @ncommon =roducts -orporation. )hat is the ma9imum number of units of =roduct Q that can be produced,
a.06(;;b..6;;;c. 3;;d.160;;
ANS: !
160;; units is the only amount that *ill not cause -onstraint 1 to be violated.
!"#: /oderate %&: 1;-7
5;. :efer to @ncommon =roducts -orporation. )hat is the feasible range for the production of R,
a.70; to 16';; unitsb.; to 70; unitsc.; to 3.1 unitsd.; to 1';; units
ANS:
70; units is the most that can be produced *ithout violating -onstraint 1.
!"#: /oderate %&: 1;-7
51. :efer to @ncommon =roducts -orporation. A solution of Q L ';; and R L 3;; *ould violate
a.-onstraint 1.b.-onstraint (.c.both constraints.d.neither constraint.
ANS: A
1his solution *ould yield a result of 06';;H this violates -onstraint 1.
!"#: $asy %&: 1;-7
5(. %ne constraint in an 4= problem is: 1(Q O 5R ^ 06;;;. "f the optimal solution is Q L 1;; and R L ';;6 this resource has
a.slack variable of 5;;.b.surplus variable of 5;;.c.output coefficient of 5;;.d.none of the above.
ANS:
1he solution to the constraint is 065;;6 a surplus variable of 5;;.
!"#: $asy %&: 1;-7
5.. -onsider the follo*ing linear programming problem and assume that non-negativity constraints apply to the independent variables:
/a9 -/ L G10Q O G(.R
Subject to
-onstraint 1: 0Q O 'R ] .6(;;
-onstraint (: (Q O 3R ] (60;;
)hich of the follo*ing are feasible solutions to the linear programming problem,
a.Q L 3;;6 R L (0;b.Q L 7;;6 R L 30;c.Q L ;6 R L 0;;d.Q L 16(;;6 R L ;
ANS: -
1his is the only solution that does not violate -onstraints 1 or (.
-onstraint 1: 0D;F O 'D0;;F L (6;;; ] .6(;;
-onstraint (: (D;F O 3D0;;F ] (60;; ] (60;;
!"#: /oderate %&: 1;-7
50. -ontracting *ith vendors outside the organization to obtain or ac2uire goods and+or services is called
a.target costing.b.insourcing.c.outsourcing.d.product harvesting.
ANS: - !"#: $asy %&: 1;-.
5'. )hich of the follo*ing activities *ithin an organization *ould be !east !i:e!y to be outsourced,
a.accountingb.data processingc.transportationd.product design
ANS: ! !"#: $asy %&: 1;-.
53. An outside firm selected to provide services to an organization is called a
a.contract vendor.b.lessee.c.net*ork organization.d.centralized insourcer.
ANS: A !"#: $asy %&: 1;-.
55. -osts forgone *hen an individual or organization chooses one option over another are
a.budgeted costs.b.sunk costs.c.historical costs.d.opportunity costs.
ANS: ! !"#: $asy %&: 1;-1
57. )hich of the follo*ing costs *ould not be accounted for in a companyCs recordkeeping system,
a.an une9pired costb.an e9pired costc.a product costd.an opportunity cost
ANS: ! !"#: $asy %&: 1;-1
%H2T A3%4E2
1. )hat are three characteristics of relevant information,
ANS:
:elevant information must be: D1F associated *ith the decision under considerationH D(F be important to the decision makerH and D.F have a
connection to or bearing on some future endeavor.
!"#: $asy %&: 1;-1
(. )hy is depreciation e9pense irrelevant to most managerial decisions6 even *hen it is a future cost,
ANS:
!epreciation e9pense is simply the systematic *rite-off of a sunk cost Dthe cost of a long-lived assetF. !epreciation e9pense is therefore
al*ays irrelevant unless it pertains to an asset that is not yet ac2uired.
!"#: /oderate %&: 1;-(
.. )hat is an opportunity cost and *hy is it a relevant cost,
ANS:
An opportunity cost is not a BcostB in the traditional out-of-pocket sense. %pportunity costs are benefits that are sacrificed to pursue one
alternative rather than another. %nce an alternative is selected6 the opportunity costs associated *ith that alternative *ill not appear
directly in the accounting records of the firm as other costs of that alternative *ill. 1hese costs are6 ho*ever6 relevant because the
company is giving up one set of benefits to accept a second set. :ational decision making assumes that the chosen alternative provides the
greater benefit.
!"#: /oderate %&: 1;-1
0. !efine segment margin and e9plain *hy it is a relevant measure of a segmentCs contribution to overall organizational profitability.
ANS:
Segment margin is the amount of income that remains after deducting all avoidable Dboth variable and fi9edF costs from sales. 1his
measure is the appropriate gauge of a segmentCs viability because it is a direct measure of ho* total organizational profits *ould change if
the segment *as discontinued.
!"#: /oderate %&: 1;-5
'. )hat is the relationship bet*een scarce resources and an organizationCs production capacity,
ANS:
"n the long run6 capacity is likely to be constrained by t*o fundamental resources: labor and machinery. ?o*ever6 in the short run6
additional constraints can push capacity to levels belo* labor and machine capacity. -onstraints can be induced by ra* material
shortages6 interruptions in distribution channels6 labor strikes in the plants of suppliers of important components6 or governmental
restrictions on markets Dgas rationing6 JuotasF.
!"#: /oderate %&: 1;-0
3. @nder *hat circumstances is the sum of variable production and selling costs the appropriate minimum price for special orders,
ANS:
Eariable costs *ould serve as the bottom price for a special order only if the special order could be produced on production capacity that
*ould other*ise be idle. )henever presently employed capacity is partially or *holly surrendered to produce a special order6 the special
order price *ould be based on both variable costs and the profit sacrificed on the best alternative use of the capacity.
!"#: /oderate %&: 1;-3
5. )hy are fi9ed costs generally more relevant in long-run decisions than short-run decisions,
ANS:
"n the long run6 all costs are relevant. "n the short run6 many costs that apply to the e9isting production technology are sunk. "n particular6
depreciation charges and lease payments on long-term assets are unavoidable. "n the long run6 these assets are replaced and6 thus their
associated costs are relevant in the replacement decision.
!"#: /oderate %&: 1;-(
7. !efine and discuss outsourcing.
ANS:
%utsourcing occurs *hen an organization Bfarms outB some of its normal business activities or processes. Several areas that are most
fre2uently outsourced by an organization include payroll6 accounting6 transportation6 and possibly legal. )hen a company outsources
some of its functions6 it is able to divert more energy to those areas that produce a firmCs core competencies or have the ability to create
revenues for the firm.
!"#: /oderate %&: 1;-.
8. )hat are some factors that a company must consider *hen deciding to raise or lo*er sales prices on products,
ANS:
Juantitative factors include the ne* contribution margin per unit of the product6 short-term and long-term changes in demand and
production volume because of the price change6 and the best use of a companyNs scarce resources.
Jualitative factors include the impact of changes on customer good*ill to*ard the company6 customer loyalty to*ard company products6
and competitorsN responses to the firmNs ne* pricing structure.
!"#: /oderate %&: 1;-'
P2BLEM
Agri-Magic Corporation
Agri-/agic -orporation gro*s corn in rural areas of the South. Agri-/agicCs costs per bushel of corn Dbased on an average yield of 1.;
bushels per acreF follo*:
!irect material $1.10!irect labor 0.40Eariable overhead 0.30#i9ed overhead 0.60Eariable selling costs 0.10#i9ed selling costs 0
Agri-/agic defines direct material costs as seed6 fertilizer6 *ater6 and other chemicals. 1he variable overhead costs represent maintenance
and repair costs of machinery. 1he fi9ed overhead costs are completely comprised of depreciation e9pense on machinery and real estate
ta9es.
1. :efer to Agri-/agic -orporation. Assume that the current date is /arch 1'. %n this date6 Agri-/agic must make a decision as to *hether
it is financially better off to plant a certain farm *ith corn or leave the land idle Dno income is derived from idle landF. -orn prices have
been severely depressed in recent years and Agri-/agicNs best guess is that corn prices *ill be around G(.;; per bushel at the time the
crop is ready for harvest. Should the company plant corn or leave the land idle, $9plain.
ANS:
1he company should make their decision by comparing the incremental income from planting the corn crop to the incremental e9penses
that *ould be incurred to gro*6 harvest6 and market the crop. 1he incremental revenue is simply the G(.;; per bushel and the incremental
costs are all variable costs DG1.1; O G;.0; O G;..; O G;.1; L G1.8;F. ased on this comparison6 the company *ould be G1. per acre better
off to plant than to let the land remain idle.
!"#: /oderate %&: 1;-.
(. :efer to Agri-/agic -orporation. Assume for this 2uestion only that the company decided to plant the corn. A local oil refiner has
approached the company about converting the crop to grain alcohol Dused to make gasoholF rather than selling the grain to the local grain
elevator. "f Agri-/agic converts the grain to alcohol6 it *ill incur additional costs of G;.3; per bushel6 and the company *ill be able to
sell the crop to the oil refiner for the e2uivalent of G(.'; per bushel. %ther*ise6 the company can sell the corn crop to the local grain
elevator for G1.7' per bushel. "f Agri-/agic elects to sell the grain to the refinery6 the company *ill not incur the variable selling costs.
)hat should the company do, Support your ans*er *ith calculations.
ANS:
1he companyNs alternatives are to sell the corn as a grain or as alcohol. 1his decision can be made by comparing the incremental costs to
convert the grain to alcohol to the increase in price he can receive for marketing the crop as alcohol rather than grain. y converting the
crop to alcohol6 the company increases total revenue by G;.5' per bushel DG(.3; - G1.7'F and it incurs additional costs of G;.'; DG;.3; for
the additional processing6 less the G;.1; savings on the variable grain marketing costsF. 1hus6 by converting the grain to alcohol6 the
company could increase net income by G;.(' per bushel.
!"#: /oderate %&: 1;-'
.. :efer to Agri-/agic -orporation. Assume that the current date is /arch 1'. %n this date6 Agri-/agic -orporation must make a decision
as to *hether it is financially better off to plant a certain farm to corn6 leave the land idle Dno income is derived from idle landF6 or rent the
land to another farmer for G'; per acre. -orn prices have been severely depressed in recent years and Agri-/agic -orporationCs best guess
is that corn prices *ill be around G(.;; per bushel at the time the crop is ready for harvest. )hat should the company do, Sho*
calculations.
ANS:
"t has already been determined Dans*er to =roblem I1F that planting corn is preferred to leaving the land idle Dby G1. per acreF. y renting
the land6 Agri-/agic -orporation is even better off. @nder the rental alternative6 Agri-/agic -orporation is G.5 per acre better off than if
he plants corn DG'; - G1.F. y renting the land6 the company avoids all costs e9cept the fi9ed production costs DG;.3; per bushel or G57
per acreF.
!"#: /oderate %&: 1;-'
0. Ne* "beria -orporation makes and sells the B1abasco /aiden_6 a *all hanging depicting a magical pepper plant. 1he 1abasco /aidens
are sold at specialty shops for G'; each. 1he capacity of the plant is 1'6;;; /aidens per year. -osts to manufacture and sell each *all
hanging are as follo*s:
!irect material$ 5.00!irect labor6.00Eariable overhead8.00#i9ed overhead10.00Eariable selling e9penses2.50
Ne* "beria -orporation has been approached by an 1e9as company about purchasing (6';; 1abasco /aidens. 1he company is currently
making and selling 1'6;;; per year. 1he 1e9as company *ants to attach its o*n 4one Star label6 *hich increases costs by G.'; each. No
selling e9penses *ould be incurred on this order. 1he corporation believes that it must make an additional G1 on each 1abasco /aiden to
accept this offer.
a.)hat is the opportunity cost per unit of selling to the 1e9as company,b.)hat is the minimum selling price that should be set,
ANS:
a.%pportunity cost L Selling price minus total variable costs G'; - DG' O G3 O G7 O G(.';F L G(7.';b.!irect material DG'.;; O G.';F$
5.50!irect labor6.00Eariable overhead8.00#i9ed overhead10.00Eariable selling0%pportunity cost Tfrom DaF less fi9ed overhead
includedU18.50$9tra amount re2uired to accept offer 1.00 /inimum price$49.00
!"#: /oderate %&: 1;-1
'. /ighty /ikeNs Accounting Service provides t*o types of services: audit and ta9. All company personnel can perform either service. "n
efforts to market its services6 /ighty /ike relies on radio and billboards for advertising. "nformation on /ighty /ikeCs projected
operations for the coming year follo*s:
Audit 1a9es :evenue per billable hour$35$30Eariable cost of professional labor2520/aterial cost per billable hour23Allocated fi9ed
costs per year100,000200,000=rojected billable hours 14,00010,000
a.)hat is /ighty /ikeNs projected profit or DlossF,b."f G1 spent on advertising could increase either audit services billable time by 1 hour
or ta9 services billable time by 1 hour6 on *hich service should the advertising dollar be spent,
ANS:
a.Audit1a91otal2even#e9 106;;; G.'$490,000 $ 490,000 1;6;;; G.;$ 300,000 300,000 7aria$!e Costs94abor:
106;;; G('%350,000&%350,000& 1;6;;; G(;%200,000&%200,000&/aterial: 106;;; G(%28,000&%28,000&
1;6;;; G. %30,000& %30,000&-ontribution margin$112,000 $ 70,000 $ 182,000 #i9ed
costs%100,000& %200,000& %300,000&=rofit DlossF$ 12,000 $%130,000&$%118,000&
b.$ach billable hour of audit services generates G7 of contribution marginDG.' - G(' - G(F6 ta9 services generates G5 of contribution
marginDG.; - G(; - G.F. 1he advertising should be spent on the audit services.
!"#: /oderate %&: 1;-'61;-5
3. 1he management of )halen "ndustries has been evaluating *hether the company should continue manufacturing a component or buy it
from an outside supplier. A G1;; cost per component *as determined as follo*s:
!irect material$ 15!irect labor40Eariable manufacturing overhead10#i9ed manufacturing overhead 35$100
)halen "ndustries uses 06;;; components per year. After )ilfert -orporation submitted a bid of G7; per component6 some members of
management felt they could reduce costs by buying from outside and discontinuing production of the component. "f the component is
obtained from )ilfert -orporation6 )halen "ndustriesC unused production facilities could be leased to another company for G';6;;; per
year.
2e8#ired9
a.!etermine the ma9imum amount per unit )halen "ndustries could pay an outside supplier.
b."ndicate if the company should make or buy the component and the total dollar difference in favor of that alternative.
c.Assume the company could eliminate one production supervisor *ith a salary of G.;6;;; if the component is purchased from an outside
supplier. "ndicate if the company should make or buy the component and the total dollar difference in favor of that alternative.
ANS:
a.-ost to makeL incremental manufacturing cost and opportunity costL !/ O !4 O E - #%? O %= -%S1G55.';L G1' O G0; O G1; O
DG';6;;;+06;;; unitsFb./ake: Save DG7;.;; - G55.';F 06;;; L G1;6;;;c."ncremental mfg. L G3' O DG.;6;;;+06;;;F LG5(.';O
opportunity cost G';6;;;+06;;; L 1(.'; 1o makeG7'.;;uy: Save DG7' - G7;F 06;;; units L G(;6;;;
!"#: /oderate %&: 1;-.
5. a9ter -orporation is *orking at full production capacity producing 1;6;;; units of a uni2ue product6 &V4. /anufacturing costs per unit
for &V4 follo*:
!irect material$ 2!irect manufacturing labor3/anufacturing overhead 5$10
1he unit manufacturing overhead cost is based on a variable cost per unit of G( and fi9ed costs of G.;6;;; Dat full capacity of 1;6;;;
unitsF. 1he non-manufacturing costs6 all variable6 are G0 per unit6 and the selling price is G(; per unit. A customer6 &acksonville -ompany6
has asked a9ter to produce (6;;; units of a modification of &V4 to be called :S1. :S1 *ould re2uire the same manufacturing processes
as &V4. &acksonville -ompany has offered to share e2ually the non-manufacturing costs *ith a9ter. :S1 *ill sell at G1' per unit.
2e8#ired9
a.)hat is the opportunity cost to a9ter of producing the (6;;; units of :S1 Dassume that no overtime is *orkedF,
b.1he Araves -ompany has offered to produce (6;;; units of &V4 for ro*n6 so ro*n can accept the &acksonville offer. Araves
-ompany *ould charge a9ter G10 per unit for the &V4. Should a9ter accept the Araves -ompany offer,
c.Suppose a9ter had been *orking at less than full capacity producing 76;;; units of &V4 at the time the :S1 offer *as made. )hat is
the minimum price a9ter should accept for :S1 under these conditions Dignoring the G1' price mentioned previouslyF,
ANS:
a.&V4S=$20 - E-%11&DG( O G. O G( O G0FL -/$ 9 (6;;; units L $18,000:S1S=$15 - E- %9&DG( O G. O G( O G(FL -/$
6 9 (6;;; units L 12,000%pportunity cost$ 6,000
b./ake DG1' - G10F L G1 (6;;; units L G(6;;; *ithout giving up any current production L !% "1.
c.1he variable cost to make and sell L G11 DG( O G. O G( O G0F *ould be the minimum. Any price over G11 *ould increase the
contribution margin.
!"#: /oderate %&: 1;-.
7. 1he Samuels -ompany normally produces 1';6;;; units of =roduct 4/ per year. !ue to an economic do*nturn6 the company has some
idle capacity. =roduct 4/ sells for G1' per unit.
1he firmCs production6 marketing6 and administration costs at its normal capacity are:
=er @nit!irect material$1.00 !irect labor2.00Eariable overhead1.50#i9ed overhead DG0';6;;;+1';6;;; unitsF3.00Eariable
marketing costs1.05#i9ed marketing and administrative costs DG(1;6;;;+1';6;;; unitsF 1.40 1otal$9.95
2e8#ired9
a.-ompute the firmCs operating income before income ta9es if the firm produced and sold 11;6;;; units.
b.#or the current year6 the firm e9pects to sell the same number of units as it sold in the prior year. ?o*ever6 in a trade ne*spap