Managerial Accounting

Version 1
Name:

Acct 2301

Summer II 2008

Exam 1

There are 25 questions on this exam. Select the best answer for each question and
fill your answer in on your scantron. Good Luck!
1. Powney Company is considering adding a new product engine oil to its
automotive division. The sales price will be $2.40 per unit. The variable cost
per unit is expected to be $1.00 and the fixed costs are $21,000. The
company expects to sell 20,000 units. What is the margin of safety in terms
of sales dollars?
Budgeted Sales Breakeven Sales
Budgeted Sales = $2.40 * 20,000 = $48,000
Breakeven Sales = $2.40X - $1.00X = $1.40X - $21,000 = 0
X = 15,000 units * $2.40 = $36,000
MOS = 48,000 36,000 = $12,000
a. $5,000
b. $7,000
c. $12,000
d. $24,000
e. None of the above
2. At the beginning of 2008, Barr Co. estimated that its total annual fixed
overhead costs would amount to $50,000. Further, Barr estimated that its
volume of production would be 2,000 units of product. Based on these
estimates, Barr computed a predetermined overhead rate that was used to
allocate overhead costs to the products made in 2008. As predicted, actual
fixed overhead costs did amount to $50,000. However, actual volume of
production amounted to only 1,800 units of product. Based on this
information alone,
Estimated = $50,000 / 2,000 units = $25
Actual = $50,000 / 1,800 = $27.78
a. Products were costed accurately in 2008.
b. Products were overcosted in 2008.
c. Products were undercosted in 2008.
d. Products were priced at half.
e. None of the above
3. Shed Industries produces two products. The products' identified costs are as
follows:

The company's overhead costs of $54,000 are allocated based on direct labor
cost. Assume 4,000 units of product A and 5,000 units of Product B are
produced. What is the cost per unit for product A?
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Overhead Allocation = Rate = $54,000 / $36,000 = 1.50

Product A = 1.50 * $12,000 = $18,000
Total Product Cost for A = $20,000 + 12,000 + 18,000 =
$50,000
Cost per Unit = $50,000 / 4,000 = $12.50
a.
b.
c.
d.
e.

$12.50
$17.00
$14.75
$10.25
None of the above

4. Which of the following should be recorded as an asset?

a. Paid for a new product advertising campaign
b. Paid rent on the warehouse used to store finished goods
c. Paid for research and development costs
d. Paid for raw materials to be used in production
e. None of the above
5. What is the effect on the financial statement model of making cash sales of
inventory to customers (assuming the product is sold at a profit)? (Ignore the
effect on cash flow.)
A s s e ts = L ia b . + E q u ity
R ev. - E xp . = N et In c.
C a s h F lo w
A )
n /a
n /a
n /a
B )
+
n /a
+
+
+
+
+ O A
C )
n /a
n /a
n /a
n /a
- O A
D )
+
n /a
+
n /a
+
n /a
a. Item A
b. Item B
c. Item C
d. Item D
e. None of the above
6.

During her first year with the company, Tiffany mistakenly accumulated
some of the companys period costs in ending inventory. Which of the
following indicates how this error affects the companys financial statements
assuming production exceeded sales during the period?
a. Cash flows from operations are understated.
b. Gross margin is understated.
c. Net income is understated.
d. Inventory is overstated.
e. None of the above

7. Medlock Company is analyzing whether its new product will be profitable.

The following data are provided for analysis.
Expected variable cost of manufacturing
$30 per unit
Expected fixed manufacturing costs
$48,000 per year
Expected sales commission
$ 6 per unit
Expected fixed administrative costs
$12,000 per year

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Medlock has decided to advertise the product heavily and has set the sales
price at $54. If sales are 9,000 units, how much can Medlock spend on
advertising and still breakeven?
Sales VC = CM FC = Profit
$54(9,000) - $30(9,000) - $6(9,000) = $162,000 - $48,000 $12,000 X = 0
X = $102,000
a. $114,000
b. $102,000
c. $168,000
d. $156,000
e. None of the above
8. Perry Copies Company provides professional copying services to customers
through the 20 copy stores it operates in the southwestern United States.
Each store employs a manager and four assistants. The manager earns
$3,500 per month plus a bonus of 3 percent of sales. The assistants earn
hourly wages. Each copy store costs $3,000 per month to lease. The
company spends $5,000 per month on corporate-level advertising and
promotion. What type of cost is the store managers salary relative to the
number of copies made for customers?
a. Fixed
b. Variable
c. Mixed
d. Inverse
e. None of the above
9. Craw Company incurs annual fixed costs of $140,000. The companys
contribution margin is 40%. The company would like to earn a profit of
$40,000. What amount of sales dollars would be needed in order to achieve
the desired profit?
Sales VC = CM FC = Profit
0.40S - $140,000 = $40,000
0.40S = $180,000
$180,000 / .40
S = $450,000
a. $450,000
b. $180,000
c. $300,000
d. $150,000
e. There is not enough information available.
10.Vanity Chairs Corporation produces ergonomically designed chairs favored by
architects. The company normally produces and sells from 5,000 to 8,000
chairs per year. The following cost data apply to various production levels.
No. of chairs
5,000
Total Costs
Incurred
Fixed
$ 84,000
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Variable
Total Costs

60,000
$144,000

What would be the companys total cost if 7,000 chairs were produced?
FC + VC = Total Cost
FC = $84,000
For VC = $60,000 / 5,000 = $12 VC per Unit
VC = $12 * 7,000 = $84,000
$84,000 + $84,000 = $168,000
a.
b.
c.
d.
e.

$201,600
$177,600
$144,000
$168,000
None of the above

11.Dade Company manufactures CD players. According to the companys

records, the variable costs, including direct labor and direct materials, are
$50 per unit. Factory depreciation and other fixed manufacturing costs are
$192,000. Dade pays its salespeople a commission of $18 per unit. Annual
fixed selling and administrative costs are $128,000. Dade has determined
they will be able to sell 10,000 units. At what price will Dade have to sell the
players in order to breakeven?
Sales VC = CM FC = Profit
10,000X - $50(10,000) - $18(10,000) - $192,000 - $128,000 = 0
10,000X = $1,000,000
$1,000,000 / 10,000
X = $100
a. $300
b. $200
c. $100
d. $ 69
e. None of the above
12.The following are the costs for the Palmer Company for 2008:
Wages paid to workers in a manufacturing plant - $50,000
Salary of the receptionist working the sales department - $20,000
Supplies used in the sales department - $8,000
Wages of janitors who clean the factory floor - $30,000
Salary of the company president - $80,000
Depreciation on administrative buildings - $3,000
Depreciation on manufacturing equipment - $5,000
Salary of an engineer who maintains all manufacturing plant equipment $40,000
What is the companys total product cost for 2008?
$50,000 + 30,000 + 5,000 + 40,000 = $125,000
a. $125,000
b. $205,000
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c. $120,000
d. $50,000
e. None of the above
13.In reviewing Quartey Companys September accounting records, Ken Helm,
the chief accountant, noted the following depreciation costs.
Factory buildings - $25,000
Computers used in manufacturing - $4,000
A building used to display finished goods - $8,000
Trucks used to deliver merchandise to customers - $14,000
Forklifts used in the factory - $22,000
Furniture used in the presidents office - $9,000
Elevators in administrative buildings - $6,000
Factory machinery - $9,000
Assume that Quartey manufactured 3,000 units of product and sold 2,000
units of product during the month of September. Determine the amount of
depreciation cost that would be included in cost of goods sold for September.
$25,000 + 4,000 + 22,000 + 9,000 = $60,000
$60,000 / 3,000 = $20 * 2,000 = $40,000
a.
b.
c.
d.
e.

$0
$40,000
$60,000
$46,000
None of the above

14.Qazi Manufacturing Company was started on January 1, 2007, when it

acquired $134,000 cash by issuing common stock. The company paid
$14,000 for salaries of administrative personnel and $18,000 for wages of
production personnel. The company paid $24,000 for raw materials that
were used to make inventory. Finally, the company paid $13,000 for factory
overhead. All inventory was started and completed during the year. Qazi
completed production of 5,500 units of product and sold 5,000 units. What
was the companys average production cost per unit?
$18,000 + 24,000 + 13,000 = $55,000 / 5,500 = $10
a. $10.00
b. $12.55
c. $ 7.64
d. $24.36
e. None of the above
15.Long Electronics Company experienced the following events during its first
accounting period.
1. Received $200,000 cash by issuing common stock.
2. Paid $30,000 cash for wages to production workers.
3. Paid $20,000 for salaries to administrative staff.
4. Purchased for cash and used $17,000 of raw materials.
5. Recognized $2,000 of depreciation on administrative offices.
6. Recognized $3,000 of depreciation on manufacturing equipment.
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7. Started and completed 5,000 units of product.

8. Sold 4,000 units at a price of $20 each.
What is the amount of Longs net income?
Sales COGS S, G & A = Net Income
Sales = 4,000 * $20 = $80,000
Total Product Cost = $30,000 + 17,000 + 3,000 = $50,000
Cost per unit = $50,000 / 5,000 = $10
COGS = $10 * 4,000 = $40,000
S, G & A = $20,000 + 2,000 = $22,000
a.
b.
c.
d.
e.

$80,000 40,000 22,000 = $18,000

$40,000
$20,000
$18,000
$10,000
None of the above

16.The Rockmart Construction Company delivers dirt and stone from local
quarries to its construction sites. A new truck that was purchased for a cost of
$117,000 at the beginning of the year was expected to deliver 200,000 tons
over its useful life. The following is a breakdown of the tons delivered during
the year to each construction site:

How much truck cost should be allocated to Site D? (round to the nearest
dollar)
Rate = $117,000 / 200,000 = 0.585
D = 0.585 * 1,500 = $877.50
a.
b.
c.
d.
e.

$15,955
$878
$1,170
$2,048
None of the above

17.Ziegler Construction Company builds warehouses that range in size from

12,000 to 100,000 square feet. Which of the following would not be a rational
base for allocating overhead costs to the warehouses?
a. Labor hours
b. Number of warehouses completed
c. Direct materials cost
d. Sizes of the warehouses.
e. None of the above
18.Hamby Company expects to incur overhead costs of $10,000 per month and
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direct production costs of $125 per unit. The estimated production activity for
the upcoming year is 1,200 units. If the company desires to earn a gross
profit of $50 per unit, the sales price per unit would be which of the following
amounts?
$10,000 * 12 = $120,000 / 1,200 = $100
SP - $100 - $125 = $50
SP = $275
a. $283
b. $175
c. $130
d. $275
e. None of the above
19.The activity director for Cedar Grove Hotel is planning an activity. She is
considering alternative ways to set up the activitys cost structure. Select the
incorrect statement from the following.
a. If the director expects a low turnout, she should use a fixed
cost structure.
b. If the director expects a large turnout, she should attempt to convert
variable costs into fixed costs.
c. If the director shifts the cost structure from fixed to variable, the level
of risk decreases.
d. If the director shifts the cost structure from fixed to variable, the
potential for profits will be reduced.
e. None of the above
20.Alcott Company has a contribution margin ratio of 20%. The company is
considering a proposal that will increase sales by $200,000. What increase in
profit can be expected assuming total fixed costs increase by $30,000?
Sales VC = CM FC = Profit
20%($200,000) - $30,000 = $10,000
a. $40,000
b. $30,000
c. $10,000
d. $0
e. None of the above
21.Payne Ice Cream Company produces various ice cream products for which
demand is highly seasonal. The company sells more ice cream in warmer
months and less in colder ones. Last year, the high point in production
activity occurred in August when Payne produced 45,000 gallons of ice cream
at a total cost of $36,000. The low point in production activity occurred in
February when the company produced 21,000 gallons of ice cream at a total
cost of $30,000. What is Paynes estimated monthly fixed cost using the
high-low method?
($36,000 30,000) / (45,000 21,000) = 0.25 VC per Unit
FC + VC = TC
FC + (0.25 * 45,000) = $36,000
FC = $24,750
a. $25,000
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b.
c.
d.
e.

$11,250
$ 5,250
$24,750
None of the above

22.Duncan Company incurred $30,000 of fixed cost and $40,000 of variable cost
when 2,000 units of product were made and sold. If volume doubles, the
companys average cost per unit will
Current cost per unit = $70,000 / 2,000 units = $35 per unit
If volume doubles = FC = $30,000 + VC = $80,000 = $110,000 /
4,000 = $27.50 per unit
a. Stay the same
b. Double
c. Increase but will not double
d. Decrease
e. None of the above
23.Peak Company, a merchandising firm, reported the following operating
results.
Income Statement
$
Sales Revenue (8,000 units * $100)
800,000
Cost of Goods Sold (8,000 units *
$60)
(480,000)
$
Gross Margin
320,000
Sales Commission (10% of Sales)

(80,000)

Administrative Salaries Expense

(60,000)

Advertising Expense

(75,000)

Depreciation Expense
Shipping & Handling (8,000 units *
$1)

(68,000)

Net Income

(8,000)
$
29,000

What is Peak Companys contribution margin for the year?

Sales VC = CM
$800,000 480,000 80,000 8,000 = $232,000
a. $320,000
b. $240,000
c. $172,000
d. $232,000
e. None of the above

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24.Michelle Welch has invested in three start-up companies. At the end of the
first year, she asks you to evaluate their operating performance. The
following operating data apply to the first year.
Hardy
Lavoy
Kyle
Variable cost per unit
$24
$12
$18
Sales revenue (25,000 *
$32)
800,000
800,000
800,000
Variable cost (25,000 units)

(600,000)

(300,000)

(450,000)

Fixed cost

(100,000)

(400,000)

(250,000)

Net income
100,000
100,000
OL = CM / NI
2
Which company is the most highly leveraged?
a. Hardy
b. Lavoy
c. Kyle
d. Michelle
e. None of the above

100,000
5

3.5

25.Hunt Corporation manufactures products that have variable costs of $6 per

unit and fixed costs that total $75,000. The company sells the product for $9
each. How many units will the company have to sell in order to breakeven?
Sales VC = CM FC = Profit
$9X - $6X = $3X - $75,000 = 0
$75,000 / 3 =
a. 20,000
b. 25,000
c. 8,333
d. 12,500
e. None of the above

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